PART
I
Important
Developments
Background
Since our
inception in 2005, we have conducted ethanol marketing operations through our
subsidiary Kinergy Marketing, LLC, or Kinergy, through which we market and sell
ethanol produced by third parties. In 2006, we began constructing the
first of our four wholly-owned ethanol production facilities and were
continuously engaged in plant construction until our fourth wholly-owned
facility was completed in 2008. We funded and operate our four
wholly-owned production facilities through a holding company and four other
indirect subsidiaries.
In 2006,
we completed our Madera, California facility and began producing ethanol and its
co-products at the facility, and also acquired a 42% interest in a fully
operational production facility in Windsor, Colorado. In 2007, we
entered into credit agreements to borrow up to $325.0 million to fund the
construction of, or refinance indebtedness in respect of, up to five ethanol
production facilities and provide working capital as each production facility
became operational. Later in 2007, the credit facility was reduced to
$250.8 million for up to four ethanol production facilities. A
portion of this indebtedness was used to refinance outstanding indebtedness in
respect of our Madera facility as well as other facilities under
construction. In 2007, we began production at our Columbia facility
in Boardman, Oregon and in 2008, we began production at our Magic Valley
facility in Burley, Idaho and another facility in Stockton,
California. See “—Production Facilities” below.
Our net
sales increased significantly from $87.6 million in 2005 to $703.9 million in
2008 as our facilities began production in 2006, 2007 and 2008, with all of our
facilities producing and selling ethanol in the last quarter of
2008. During these periods, we also sold additional volume under our
ethanol marketing arrangements with third party suppliers. However,
our net sales dropped considerably to $316.6 million in 2009 as we idled
production at three of our four wholly-owned production facilities for most of
2009, as discussed further below.
Our
average ethanol sales price peaked at $2.28 per gallon in 2006, stayed
relatively stable for 2007 and 2008, but declined to $1.80 per gallon in
2009. In 2007, our average price of corn, the primary raw material
for our ethanol production, began increasing dramatically, ultimately rising by
over 125% from $2.44 per bushel in 2006 to $5.52 per bushel in
2008. As a result, our gross margins, which peaked at 11.0% in 2006,
began declining in 2007, reaching negative 4.7% in 2008. Our average
price of corn declined to $3.98 per bushel in 2009, but lower ethanol prices and
overhead and depreciation expenses with no corresponding sales from our idled
facilities resulted in a gross margin of negative 7.0% in 2009.
From 2006
until the fourth quarter of 2008 when our fourth wholly-owned production
facility was completed, we maintained a cost structure commensurate with our
construction activities, including substantial project overhead and
staffing. Upon completion of our fourth wholly-owned production
facility, we sought to alter our cost structure to one more suitable for an
operating company. However, beginning in 2008, we began experiencing
significant financial constraints and adverse market conditions, and our working
capital lines of credit for our production facilities were insufficient given
substantially higher corn prices and other input costs in the production
process.
In late
2008 and early 2009, we idled production at three of our four wholly-owned
ethanol production facilities due to adverse market conditions and lack of
adequate working capital. Our financial constraints and adverse
market conditions continued, resulting in an inability to meet our debt service
requirements, and in May 2009, the holding company and each of our four plant
subsidiaries, who were the obligors in respect of the aggregate $250.8 million
indebtedness described above, filed voluntary petitions for relief under chapter
11 of Title 11 of the United States Code, or the Bankruptcy Code. In
March 2010, the holding company and our four plant subsidiaries filed a plan of
reorganization, as discussed further below.
Both we
and the ethanol industry experienced significant adverse conditions through most
of 2009 as a result of elevated corn prices, reduced demand for transportation
fuel and declining ethanol prices, resulting in prolonged negative operating
margins. In response to these adverse conditions, as well as severe
working capital and liquidity constraints, we reduced production significantly
and implemented many cost-saving initiatives. Market conditions improved in the
last quarter of 2009 and in response, in January 2010, we resumed operations at
our Magic Valley facility. However, margins began deteriorating in
late February 2010 and continued to deteriorate in March 2010. If
margins do not improve from current levels, we may be forced to curtail our
production at one or more of our operating facilities.
We
continue to assess market conditions and when appropriate, provided we have
adequate available working capital, we plan to resume production at our idled
facilities. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Chapter
11 Filings
On May
17, 2009, five of our indirect wholly-owned subsidiaries, collectively referred
to as the Bankrupt Debtors, each commenced a case by filing voluntary petitions
for relief under the Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware in an effort to restructure their indebtedness. We
refer to these filings as the Chapter 11 Filings. The five
subsidiaries include a holding company and four other indirect subsidiaries that
hold our wholly-owned ethanol production facilities.
Neither
Pacific Ethanol, Inc., referred to as the Parent company, nor any of its other
direct or indirect subsidiaries, including Kinergy and Pacific Ag. Products,
LLC, or PAP, have filed petitions for relief under the Bankruptcy
Code. We continue to manage the Bankrupt Debtors pursuant to asset
management agreements and Kinergy and PAP continue to market and sell their
ethanol and feed production under existing marketing agreements.
Subsequent
to the Chapter 11 Filings, the Bankrupt Debtors obtained additional financing in
the amount of up to $25.0 million to fund working capital and general corporate
needs, including the administrative costs of the Chapter 11
Filings. The term of this additional financing extends through June
2010, but may terminate earlier upon the occurrence of certain events, including
an event of default or the consummation of a formal plan of
reorganization.
On March
26, 2010, the Bankrupt Debtors filed a joint plan of reorganization with the
Bankruptcy Court, which was structured in cooperation with certain of the
Bankrupt Debtors’ secured lenders. The proposed plan contemplates
that ownership of the Bankrupt Debtors would be transferred to a new entity,
which would be wholly owned by the Bankrupt Debtors’ secured
lenders. Under the proposed plan, the Bankrupt Debtors’ existing
prepetition and postpetition secured indebtedness of approximately $293.5
million would be restructured to consist of approximately $48.0 million in
three-year term loans, $67.0 million in eight-year “PIK” term loans, and a new
three-year revolving credit facility of up to $35.0 million to fund working
capital requirements (the revolver is initially capped at $15.0 million but may
be increased to up to $35.0 million if more than two of the Bankrupt Debtors’
ethanol production facilities cease operations).
We are in
continuing discussions with the secured lenders regarding our possible
participation in the reorganization contemplated by the proposed plan, including
the potential acquisition by us of an ownership interest in the new entity that
would own the Bankrupt Debtors.
Under the
proposed plan, we would continue to manage and operate the ethanol plants under
the terms of an amended and restated asset management agreement and would
continue to market all of the ethanol and wet distillers grains produced by the
plants under the terms of amended and restated agreements with Kinergy and
PAP.
Financial
Condition
Our
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. At December 31, 2009, on a
consolidated basis, we had an aggregate of $17.6 million in cash, cash
equivalents and investments in marketable securities, which includes amounts
that were held by the Bankrupt Debtors and other consolidated
entities. Of this amount, approximately $3.6 million was unrestricted
and available to the Parent company for its operations and
obligations. Operations at two of our four wholly-owned ethanol
production facilities remain suspended due to market conditions and in an effort
to conserve capital. We have also taken and expect to take additional
steps to preserve capital and generate additional cash.
We are in
default to Lyles United, LLC and Lyles Mechanical Co., collectively, Lyles,
under promissory notes due in March 2009 in an aggregate remaining principal
amount of approximately $21.5 million, plus accrued interest and
fees. We have announced agreements designed to satisfy this
indebtedness. These agreements are between a third party and Lyles
under which Lyles may transfer its claims in respect of our indebtedness in $5.0
million tranches, which claims the third party may then settle in exchange for
shares of our common stock. Through the filing of this report, Lyles
claims in respect of an aggregate of $10.0 million of our indebtedness have been
settled through this process. However, we may be unable to settle any
further claims in respect of this indebtedness unless and until we receive
stockholder approval of this arrangement as The NASDAQ Stock Market imposes on
its listed companies certain limitations on the number of shares issuable in
certain transactions.
In
addition, a payable in the amount of $1.5 million from a judgment arising out of
litigation against us in 2008 is due on June 30, 2010. We may not
have sufficient funds to make this payment.
We have
entered into a commitment letter with Southern Counties Oil Co., a California
corporation, or SC Fuels, in respect of a $5.0 million credit facility to fund
our ongoing working capital requirements, including for the repayment of our
obligations to Lyles. SC Fuels is owned and controlled by Frank P.
Greinke, who is one of our former directors, the owner of a customer and the
trustee of the holder of a majority of our outstanding shares of Series B
Preferred Stock. The commitment letter contemplates a senior secured
credit facility with a two year term. Interest on borrowings under the
credit facility is to accrue and would be payable quarterly in arrears at the
per annum rate of LIBOR plus 4.00%. Upon any default, the credit facility
indebtedness would become immediately convertible into a new series of our
preferred stock having rights and preferences substantially the same as our
Series B Preferred Stock, except that shares of the new series of preferred
stock would not have economic anti-dilution protection and the conversion price
would be 80% of the volume weighted-average price of our common stock over the
20 trading day period preceding conversion. The credit facility is to be secured
by our ownership interest in Kinergy. The commitment letter
also contemplates other customary terms and conditions. The
consummation of the credit facility is subject to a number of significant
contingencies, including satisfactory results of due diligence, the negotiation
and preparation of definitive documentation and the repayment of our
indebtedness to Lyles United prior to or with the first draw under the credit
facility or progress satisfactory to SC Fuels in the repayment or restructuring
of the indebtedness owing to Lyles United. We cannot provide any assurance
that we will be successful in closing the credit
facility.
As a
result of these circumstances, we believe we have sufficient liquidity to meet
our anticipated working capital, debt service and other liquidity needs until
either June 30, 2010, if we are unable to timely close the SC Fuels credit
facility, or through December 31, 2010, if we are able to timely close the SC
Fuels credit facility and either pay or further defer the $1.5 million owed to
our judgment creditor on June 30, 2010. These expectations concerning
our available liquidity until June 30, 2010 or through December 31, 2010 presume
that Lyles does not pursue any action against us due to our default on an
aggregate of $21.5 million of remaining principal, plus accrued interest and
fees, and that we maintain our current levels of borrowing availability under
Kinergy’s line of credit.
Although
we are actively pursuing a number of alternatives, including seeking a confirmed
plan of reorganization with respect to the Chapter 11 Filings, seeking
stockholder approval to continue our debt for equity exchange program in respect
of the Lyles indebtedness and seeking to raise additional debt or equity
financing, or both, there can be no assurance that we will be
successful.
If we
cannot confirm a plan of reorganization with respect to the Chapter 11 Filings,
complete our debt for equity exchange program in respect of the Lyles
indebtedness, restructure our debt and raise sufficient capital, in each case in
a timely manner, we may need to seek further protection under the Bankruptcy
Code, including at the Parent company level, which could occur prior to June 30,
2010. In addition, we could be forced into bankruptcy or liquidation
by our creditors, namely, our judgment creditor or Lyles, or be forced to
substantially restructure or alter our business operations or obligations. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” below.
Business
Overview
We are
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.
Our
customers are integrated oil companies and gasoline marketers who blend ethanol
into gasoline. We supply ethanol to our customers either from our own ethanol
production facilities located within the regions we serve, or with ethanol
procured in bulk from other producers. In some cases, we have marketing
agreements with ethanol producers to market all of the output of their
facilities. Additionally, we have customers who purchase our co-products for
animal feed and other uses.
According
to the United States Department of Energy, or DOE, total annual gasoline
consumption in the United States is approximately 138 billion gallons. Total
annual ethanol consumption represented less than 8% of this amount in 2009. We
believe that the domestic ethanol industry has substantial potential for growth
to initially reach what we estimate is an achievable level of at least 10% of
the total annual gasoline consumption in the United States, or approximately 14
billion gallons of ethanol annually and thereafter up to 36 billion gallons of
ethanol annually under the new national Renewable Fuel Standards, or RFS, by
2022. See “—Governmental Regulation.”
Our four
ethanol facilities, which produce our ethanol and co-products, are as
follows:
|
|
Facility
Name
|
Facility
Location
|
Estimated Annual
Production Capacity
(gallons)
|
Current
Operating
Status
|
|
|
|
|
|
|
|
|
|
|
Magic
Valley
|
Burley, ID
|
60,000,000
|
Operating
|
|
|
|
Columbia
|
Boardman,
OR
|
40,000,000
|
Operating
|
|
|
|
Stockton
|
Stockton, CA
|
60,000,000
|
Idled
|
|
|
|
Mader
|
Madera, CA
|
40,000,000
|
Idled
|
|
In
addition, we own a 42% interest in Front Range Energy, LLC, or Front Range,
which owns a facility located in Windsor, Colorado, with annual production
capacity of up to 50 million gallons. See “—Production Facilities.”
We intend
to maintain our position as 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. Further, we may
seek to provide management services for third party ethanol production
facilities and/or other ethanol production facilities in the Western United
States.
Company
History
We are a
Delaware corporation formed in February 2005. In March 2005, we completed a
transaction, or Share Exchange Transaction, with the shareholders of Pacific
Ethanol, Inc., a California corporation, or PEI California, and the holders of
the membership interests of each of Kinergy and ReEnergy, LLC, or ReEnergy. Upon
completion of the Share Exchange Transaction, we acquired all of the issued and
outstanding shares of capital stock of PEI California and all of the outstanding
membership interests of each of Kinergy and ReEnergy. Immediately prior to the
consummation of the Share Exchange Transaction, our predecessor, Accessity
Corp., a New York corporation, or Accessity, reincorporated in the State of
Delaware under the name Pacific Ethanol, Inc.
Our main
Internet address is
http://www.pacificethanol.net
.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, amendments to those reports and other Securities and Exchange
Commission, or SEC, filings are available free of charge through our website as
soon as reasonably practicable after these reports are electronically filed
with, or furnished to, the SEC. Our common stock trades on the NASDAQ Global
Market under the symbol PEIX. The inclusion of our website address in this
Report does not include or incorporate by reference into this report any
information contained on our website.
Business
Strategy
Our
primary goal is to maintain and advance our position as the leading marketer and
producer of low carbon renewable fuels in the Western United States. Due to our
current capital and liquidity constraints, we view the key elements of our
business and growth strategy to achieve this objective in short- and long-term
perspectives, which include:
Short-Term
Strategy
●
Complete Restructuring of the
Bankrupt Debtors.
We plan to seek approval of the proposed joint plan of
reorganization filed by the Bankrupt Debtors. We are in continuing
discussions with certain secured lenders regarding our possible participation in
the reorganization contemplated by the proposed plan, including the potential
acquisition by us of an ownership interest in the new entity that would own the
Bankrupt Debtors. Under the proposed plan, we would continue to
manage and operate the ethanol plants under the terms of an amended and restated
asset management agreement and would continue to market all of the ethanol and
wet distillers grains produced by the plants under the terms of amended and
restated agreements with Kinergy and PAP.
●
Expand
ethanol
marketing
revenues,
ethanol
markets
and
distribution
infrastructure
. We plan to
increase our ethanol marketing revenues by expanding our relationships with
third-party ethanol producers to market higher volumes of ethanol throughout the
Western United States when market conditions are favorable. In addition, we plan
to expand relationships with animal feed distributors and dairy operators to
build local markets for WDG. We also plan to expand 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 ultimately as a
primary transportation fuel. In addition, we plan 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.
●
Operation of ethanol production
facilities.
We provide day-to-day operational expertise to manage our
ethanol production facilities under asset management agreements. These ethanol
production facilities are currently operating under the supervision of the
Bankrupt Debtors’ lenders and the Bankruptcy Court. We intend to continue
operating our ethanol production facilities in either an owner-operator capacity
or a manager capacity, depending on the manner in which the Bankrupt Debtors
emerge from bankruptcy. Further, as idle third party facilities become
operational, we may seek to expand our business by providing mangement services
to those facilities.
●
Focus
on
cost
efficiencies
. We operate our
ethanol production facilities in markets where we believe local characteristics
create an opportunity to capture a significant production and shipping cost
advantage over competing ethanol production facilities. We believe a combination
of factors will enable us to achieve this cost advantage,
including:
|
|
o
|
Locations
near fuel blending facilities will enable lower ethanol transportation
costs and allow timing and logistical advantages over competing locations
which require ethanol to be shipped over much longer
distances.
|
|
|
o
|
Locations
adjacent to major rail lines will enable the efficient delivery of corn in
large unit trains from major corn-producing
regions.
|
|
|
o
|
Locations
near large concentrations of dairy and/or beef cattle will enable delivery
of WDG over short distances without the need for costly drying
processes.
|
In
addition to these location-related efficiencies, we have incorporated advanced
design elements into our new production facilities to take advantage of
state-of-the-art technical and operational efficiencies.
Long-Term
Strategy
●
Explore
new
technologies and renewable
fuels
. We are
evaluating a number of technologies that may increase the efficiency of our
ethanol production facilities and reduce our use of carbon-based fuels. In
addition, we are exploring the feasibility of using different and potentially
abundant and cost-effective feedstocks, such as cellulosic plant biomass, to
supplement corn as the basic raw material used in the production of ethanol. As
capital resources become available, we intend to continue pursuing these
opportunities, including continuing our efforts to build a cellulosic ethanol
demonstration facility in the Northwest United States at our Columbia site. On
January 29, 2008, the DOE awarded us $24.3 million in matching funds to assist
in this project.
●
Evaluate
and
pursue
acquisition
opportunities
. We intend to
evaluate and pursue opportunities to acquire additional ethanol production,
storage and distribution facilities and related infrastructure as financial
resources and business prospects make the acquisition of these facilities
advisable. In addition, we may also seek to acquire facility sites under
development.
Competitive
Strengths
We
believe that our competitive strengths include the following:
●
Our
customer
and
supplier
relationships
. We have
developed extensive business relationships with our customers and suppliers. In
particular, we have developed extensive business relationships with major and
independent un-branded gasoline suppliers who collectively control the majority
of all gasoline sales in California and other Western states. In addition, we
have developed extensive business relationships with ethanol and grain suppliers
throughout the Western and Midwestern United States.
●
Our
ethanol
distribution
network
. We believe that we
have a competitive advantage due to our experience in marketing to the segment
of customers in major metropolitan and rural markets in the Western United
States. We have developed an ethanol distribution network for delivery of
ethanol by truck to virtually every significant fuel terminal as well as to
numerous smaller fuel terminals throughout California and other Western states.
Fuel terminals have limited storage capacity and we have been successful in
securing storage tanks at many of the terminals we service. In addition, we have
an extensive network of third-party delivery trucks available to deliver ethanol
throughout the Western United States.
●
Our operational expertise
. We
have managed our ethanol production facilities since our first facility began
operations in 2006. We believe that we have obtained certain operational
expertise and know-how that can be used to continue operating our existing
facilities in either an owner-operator or a manager capacity and provide
operational services to third party facilities.
●
Our
s
trategic locations
. We
believe that our focus on developing and acquiring ethanol production facilities
in markets where local characteristics create the opportunity to capture a
significant production and shipping cost advantage over competing ethanol
production facilities provides us with competitive advantages, including
transportation cost, delivery timing and logistical advantages as well as higher
margins associated with the local sale of WDG and other
co-products.
●
Our California production.
With the recent California enacted Low Carbon Fuels Standard for transportation
fuels, carbon emission standards placed on ethanol produced in California are
higher than those, if any, in other states. As a result, the ethanol we produce
and market originating from California provides added benefits to our customers
in meeting their own emission requirements.
●
Our modern technologies
. Our
existing production facilities use the latest production technologies to take
advantage of state-of-the-art technical and operational efficiencies in order to
achieve lower operating costs and more efficient production of ethanol and its
co-products and reduce our use of carbon-based fuels.
●
Our experienced management
.
Neil M. Koehler, our President and Chief Executive Officer, has over 20 years of
experience in the ethanol production, sales and marketing industry.
Mr. Koehler is a Director of the California Renewable Fuels Partnership, a
Director of the Renewable Fuels Association, or RFA, and is a frequent speaker
on the issue of renewable fuels and ethanol marketing and production. In
addition to Mr. Koehler, we have seasoned managers with many years of experience
in the ethanol, fuel and energy industries, leading our various departments. We
believe that the experience of our management over the past two decades and our
ethanol marketing operations have enabled us to establish valuable relationships
in the ethanol industry and understand the business of marketing and producing
ethanol and its co-products.
We
believe that these advantages will allow us to capture an increasing share of
the total market for ethanol and its co-products.
Industry
Overview and Market Opportunity
Overview
of Ethanol Market
The
primary applications for fuel-grade ethanol in the United States
include:
●
Octane enhancer
. On average,
regular unleaded gasoline has an octane rating of 87 and premium unleaded has an
octane rating of 91. In contrast, pure ethanol has an average octane rating of
113. Adding ethanol to gasoline enables refiners to produce greater quantities
of lower octane blend stock with an octane rating of less than 87 before
blending. In addition, ethanol is commonly added to finished regular grade
gasoline as a means of producing higher octane mid-grade and premium
gasoline.
●
Renewable fuels
. Ethanol is
blended with gasoline in order to enable gasoline refiners to comply with a
variety of governmental programs, in particular, the national RFS which was
enacted to promote alternatives to fossil fuels. See “—Governmental
Regulation.”
●
Fuel blending
. In addition to
its performance and environmental benefits, ethanol is used to extend fuel
supplies. As the need for automotive fuel in the United States increases and the
dependence on foreign crude oil and refined products grows, the United States is
increasingly seeking domestic sources of fuel. Much of the ethanol blending
throughout the United States is done for the purpose of extending the volume of
fuel sold at the gasoline pump.
The
ethanol fuel industry is greatly dependent upon tax policies and environmental
regulations that favor the use of ethanol in motor fuel blends in the United
States. See “—Governmental Regulation.” Ethanol blends have been either wholly
or partially exempt from the federal excise tax on gasoline since 1978. The
current federal excise tax on gasoline is $0.184 per gallon and is paid at the
terminal by refiners and marketers. If the fuel is blended with ethanol, the
blender may claim a $0.45 per gallon tax credit for each gallon of ethanol used
in the mixture. Federal law also requires the sale of oxygenated fuels in
certain carbon monoxide non-attainment Metropolitan Statistical Areas, or MSAs,
during at least four winter months, typically November through
February.
In
addition, the Energy Independence and Security Act of 2007, which was signed
into law in December 2007, significantly increased the prior national RFS. The
national RFS significantly increases the mandated use of renewable fuels to
12.95 billion gallons in 2010 and 13.95 billion gallons in 2011, and rises
incrementally and peaks at 36.0 billion gallons by 2022. We believe that these
increases will bolster demand for ethanol.
Effective
January 1, 2010, the State of California implemented a Low Carbon Fuels Standard
for transportation fuels. The California Governor’s office estimates that the
standard will have the effect of increasing current renewable fuels use in
California by three to five times by 2020. The State of Oregon implemented a
state-wide renewable fuels standard effective January 2008. This standard
requires a 10% ethanol blend in every gallon of gasoline and is expected to
cause the use of approximately 160 million gallons of ethanol per year in
Oregon.
According
to the RFA, the domestic ethanol industry produced approximately 10.8 billion
gallons of ethanol in 2009, an increase of approximately 20% from the
approximately 9.0 billion gallons of ethanol produced in 2008. We believe that
the ethanol market in California alone represented approximately 10% of the
national market. However, the Western United States has relatively few ethanol
facilities and local ethanol production levels are substantially below the local
demand for ethanol. The balance of ethanol is shipped via rail from the Midwest
to the Western United States. Gasoline and diesel fuel that supply the major
fuel terminals are shipped in pipelines throughout portions of the Western
United States. Unlike gasoline and diesel fuel, however, ethanol is not shipped
in these pipelines because ethanol has an affinity for mixing with water already
present in the pipelines. When mixed, water dilutes ethanol and creates
significant quality control issues. Therefore, ethanol must be trucked from rail
terminals to regional fuel terminals, or blending racks.
We
believe that approximately 90% of the ethanol produced in the United States is
made in the Midwest from corn. According to the DOE, ethanol is typically
blended at 5.7% to 10% by volume, but is also blended at up to 85% by volume for
vehicles designed to operate on 85% ethanol. The Environmental Protection
Agency, or EPA, is currently considering an increase in the allowable blend of
ethanol in gasoline from 10% to up to 15%. The EPA has indicated it may decide
on the proposal in mid-2010. Compared to gasoline, ethanol is generally
considered to be cleaner burning and contains higher octane. We anticipate that
the increasing demand for transportation fuels coupled with limited
opportunities for gasoline refinery expansions and the growing importance of
reducing CO
2
emissions
through the use of renewable fuels will generate additional growth in the demand
for ethanol in the Western United States.
Ethanol
prices, net of tax incentives offered by the federal government, are generally
positively correlated to fluctuations in gasoline prices. In addition, we
believe that ethanol prices in the Western United States are typically $0.15 to
$0.20 per gallon higher than in the Midwest due to the freight costs of
delivering ethanol from Midwest production facilities.
According
to the DOE, total annual gasoline consumption in the United States is
approximately 138 billion gallons and total annual ethanol consumption
represented less than 8% of this amount in 2009. We believe that the domestic
ethanol industry has substantial potential for growth to initially reach what we
estimate is an achievable level of at least 10% of the total annual gasoline
consumption in the United States, or approximately 14 billion gallons of ethanol
annually and thereafter up to 36 billion gallons of ethanol annually required
under the national RFS by 2022.
While we
believe that the overall national market for ethanol will grow, we believe that
the market for ethanol in certain geographic areas such as California could
experience either increases or decreases in demand depending on, among other
factors, the preferences of petroleum refiners and state policies. See “Risk
Factors.”
Overview
of Ethanol Production Process
The
production of ethanol from starch- or sugar-based feedstocks has been refined
considerably in recent years, leading to a highly-efficient process that we
believe now yields substantially more energy in the ethanol and co-products than
is required to make the products. The modern production of ethanol requires
large amounts of corn, or other high-starch grains, and water as well as
chemicals, enzymes and yeast, and denaturants such as unleaded gasoline or
liquid natural gas, in addition to natural gas and electricity.
In the
dry milling process, corn or other high-starch grains are first ground into meal
and then slurried with water to form a mash. Enzymes are then added to the mash
to convert the starch into the simple sugar, dextrose. Ammonia is also added for
acidic (pH) control and as a nutrient for the yeast. The mash is processed
through a high temperature cooking procedure, which reduces bacteria levels
prior to fermentation. The mash is then cooled and transferred to fermenters,
where yeast is added and the conversion of sugar to ethanol and CO
2
begins.
After
fermentation, the resulting “beer” is transferred to distillation, where the
ethanol is separated from the residual “stillage.” The ethanol is concentrated
to 190 proof using conventional distillation methods and then is dehydrated to
approximately 200 proof, representing 100% alcohol levels, in a molecular sieve
system. The resulting anhydrous ethanol is then blended with about 5%
denaturant, which is usually gasoline, and is then ready for shipment to
market.
The
residual stillage is separated into a coarse grain portion and a liquid portion
through a centrifugation process. The soluble liquid portion is concentrated to
about 40% dissolved solids by an evaporation process. This intermediate state is
called condensed distillers solubles, or syrup. The coarse grain and syrup
portions are then mixed to produce WDG or can be mixed and dried to produce
dried distillers grains with solubles, or DDGS. Both WDG and DDGS are
high-protein animal feed products.
Overview
of Distillers Grains Market
Most
distillers grains are produced in the Midwest, where producers dry the grains
before shipping. Successful and profitable delivery of DDGS from the Midwest to
markets in the Western United States faces a number of challenges, including
longer distance and time in route as it travels, which may reduce the quality of
the DDGS, higher handling and transportation costs and energy and related costs
to dry the DDGS prior to shipping. By not drying the distillers grains and by
shipping WDG locally, we believe that we will be able to better preserve the
feed value of this product, as the WDG retains a higher percentage of nutrients
than DDGS.
Historically,
the market price for distillers grains has generally tracked the value of corn.
We believe that the market price of DDGS is determined by a number of factors,
including the market value of corn, soybean meal and other competitive
ingredients, the performance or value of DDGS in a particular feed formulation
and general market forces of supply and demand. The market price of distillers
grains is also often influenced by nutritional models that calculate the feed
value of distillers grains by nutritional content, as well as reliability of
consistent supply.
Customers
We
produce and also purchase from third-parties and resell ethanol to various
customers in the Western United States. We also arrange for transportation,
storage and delivery of ethanol purchased by our customers through our
agreements with third-party service providers. Our revenue is obtained primarily
from sales of ethanol to large oil companies.
During
2009 and 2008, we produced or purchased from third parties and resold an
aggregate of approximately 173 million and 268 million gallons of fuel-grade
ethanol to approximately 60 and 66 customers, respectively. Sales to our two
largest customers in 2009 and 2008 represented approximately 32% of our net
sales for each of those years. These customers who accounted for 10% or more of
our net sales in 2009 and 2008 were Chevron Products USA and Valero Marketing.
Sales to each of our other customers represented less than 10% of our net sales
in each of 2009 and 2008.
Most of
the major metropolitan areas in the Western United States have fuel terminals
served by rail, but other major metropolitan areas and more remote smaller
cities and rural areas do not. We believe that we have a competitive advantage
due to our experience in marketing to the segment of customers in major
metropolitan and rural markets in the Western United States. We manage the
complicated logistics of shipping ethanol purchased from third-parties from the
Midwest by rail to intermediate storage locations throughout the Western United
States and trucking the ethanol from these storage locations to blending racks
where the ethanol is blended with gasoline. We believe that by establishing an
efficient service for truck deliveries to these more remote locations, we have
differentiated ourselves from our competitors. In addition, by producing ethanol
in the Western United States, we believe that we will benefit from our ability
to increase spot sales of ethanol from this additional supply following ethanol
price spikes caused from time to time by rail delays in delivering ethanol from
the Midwest to the Western United States. In addition to producing ethanol, we
produce ethanol co-products such as WDG. We endeavor to position WDG as the
protein feed of choice for cattle based on its nutritional composition,
consistency of quality and delivery, ease of handling and its mixing ability
with other feed ingredients. We are one of the few WDG producers with production
facilities located in the Western United States and we primarily sell our WDG to
dairy farmers in close proximity to our ethanol production
facilities.
Suppliers
Our
marketing operations are dependent upon various third-party producers of
fuel-grade ethanol. In addition, we provide ethanol transportation, storage and
delivery services through third-party service providers with whom we have
contracted to receive ethanol at agreed upon locations from our suppliers and to
store and/or deliver the ethanol to agreed upon locations on behalf of our
customers. These contracts generally run from year-to-year, subject to
termination by either party upon advance written notice before the end of the
then-current annual term.
During
2009 and 2008, we purchased fuel-grade ethanol and corn, the largest component
in producing ethanol, from our suppliers. Purchases from our three largest
suppliers in 2009 represented approximately 45% of our total ethanol and corn
purchases. Purchases from our two largest suppliers in 2008 represented
approximately 49% of our total ethanol and corn purchases. Purchases from each
of our other suppliers represented less than 10% of total ethanol and corn
purchases in each of 2009 and 2008.
Our
ethanol production operations are dependent upon various raw materials
suppliers, including suppliers of corn, natural gas, electricity and water. The
cost of corn is the most important variable cost associated with the production
of ethanol. An ethanol facility must be able to efficiently ship corn from the
Midwest via rail and cheaply and reliably truck ethanol to local markets. We
believe that our existing grain receiving facilities at our ethanol facilities
are some of the most efficient grain receiving facilities in the United States.
We source corn using standard contracts, such as spot purchase, forward purchase
and basis contracts. When we have the resources to do so, we seek to limit our
exposure to raw material price fluctuations by purchasing forward a portion of
our corn requirements on a fixed price basis and by purchasing corn and other
raw materials futures contracts. In addition, to help protect against supply
disruptions, we may maintain inventories of corn at each of our
facilities.
Production
Facilities
The table
below provides an overview of our ethanol production facilities.
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Location
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Madera,
CA
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Windsor,
CO
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Boardman,
OR
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Burley,
ID
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Stockton,
CA
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Quarter/Year
operations began
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4
th
Qtr., 2006
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2
nd
Qtr., 2006
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3
rd
Qtr., 2007
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2
nd
Qtr., 2008
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3
rd
Qtr., 2008
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Operating
status
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Idled
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Operating
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Operating
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Operating
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Idled
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Annual
design basis ethanol production capacity (in millions of
gallons)
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35
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40
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35
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50
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50
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Approximate
maximum annual ethanol production capacity (in millions of
gallons)
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40
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50
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40
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60
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60
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Ownership
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100%
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42%
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100%
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100%
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100%
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Primary
energy source
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Natural
Gas
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Natural
Gas
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Natural
Gas
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Natural
Gas
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Natural
Gas
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Estimated
annual WDG production capacity (in thousands of tons)
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293
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335
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293
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418
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418
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____________________
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(1)
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We
own 42% of Front Range, the entity that owns the facility located in
Windsor, Colorado.
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Commodity
Risk Management
We may
seek to employ one or more risk mitigation techniques when sufficient working
capital is available. We may seek to mitigate our exposure to commodity price
fluctuations by purchasing forward a portion of our corn and natural gas
requirements through fixed-price contracts with our suppliers, as well as
entering into derivative instruments to fix or establish a range of corn and
natural gas prices. To mitigate ethanol inventory price risks, we may sell a
portion of our production forward under fixed- or index-price contracts, or
both. We may hedge a portion of the price risks associated with index-price
contracts by selling exchange-traded unleaded gasoline futures contracts. Proper
execution of these risk mitigation strategies can reduce the volatility of our
gross profit margins.
Site
Location
Criteria
Our site
location criteria encompass many factors, including proximity of fuel blending
facilities and major rail lines, good road access, water and utility
availability and adequate space for equipment and truck movement. One of our
long-term business and growth strategies is to develop or acquire ethanol
production facilities in markets where local characteristics create the
opportunity to capture a significant production and shipping cost advantage over
competing ethanol production facilities. Therefore, it is critical that our
production sites are located near fuel blending facilities in the Western United
States because many of our competitors ship ethanol over long distances from the
Midwest. Also, close proximity to major rail lines to receive corn shipments
from Midwest producers is critical.
Marketing
Arrangements
We have
exclusive agreements with third-party ethanol producers, including Calgren
Renewable Fuels, LLC and Front Range, the latter of which we are a minority
owner, to market and sell their entire ethanol production volumes. Calgren
Renewable Fuels, LLC owns and operates an ethanol production facility in Pixley,
California with annual production capacity of 55 million gallons. Front Range
owns and operates an ethanol production facility in Windsor, Colorado with
annual production capacity of 50 million gallons. We intend to evaluate and
pursue opportunities to enter into marketing arrangements with other ethanol
producers as business prospects make these marketing arrangements
advisable.
Competition
We
operate in the highly competitive ethanol marketing and production industry. The
largest ethanol producer in the United States is ADM, with wet and dry mill
plants in the Midwest and a total production capacity of about 1.5 billion
gallons per year, or approximately 14% of total United States ethanol production
in 2009. In addition Valero Energy Corporation, after acquiring 10 ethanol
facilities in 2009, has a total production capacity of about 1.1 billion gallons
per year. Overall, we believe there are approximately 208 ethanol facilities
with installed capacity of approximately 13.2 billion gallons with about 2.8
billion gallons, or 21%, of that capacity idled. If margins improve, we expect
more facilities to resume operations.
We
believe that many smaller ethanol facilities rely on marketing groups such as
POET Ethanol Products, Aventine Renewable Energy, Inc., Eco Energy and Renewable
Products Marketing Group LLC to move their product to market. We believe that,
because ethanol is a commodity, many of the Midwest ethanol producers can target
the Western United States, though ethanol producers further west in states such
as Nebraska and Kansas often enjoy delivery cost advantages.
In the
second half of 2008 and through 2009 and into the first quarter of 2010, we and
our competitors reduced production and/or experienced significant working
capital deficits. The Bankrupt Debtors and some of our competitors have filed
for protection under the United States Bankruptcy Code. As a result, our
competition may change in the near term by either further declining production
or entrance by others in the marketplace, for example, through purchases of
facilities through liquidation. These competitors may even be some of our
current customers.
We
believe that our competitive strengths include our strategic locations in the
Western United States, our extensive ethanol distribution network, our extensive
customer and supplier relationships, our use of modern technologies at our
production facilities and our experienced management. We believe that these
advantages will allow us to capture an increasing share of the total market for
ethanol and its co-products and earn favorable margins on ethanol and its
co-products that we produce.
Our
strategic focus on particular geographic locations designed to exploit cost
efficiencies may nevertheless result in higher than expected costs as a result
of more expensive raw materials and related shipping costs, such as corn, which
generally must be transported from the Midwest. If the costs of producing and
shipping ethanol and its co-products over short distances are not advantageous
relative to the costs of obtaining raw materials from the Midwest, then the
planned benefits of our strategic locations may not be realized.
Governmental
Regulation
Our
business is subject to extensive and frequently changing federal, state and
local laws and regulations relating to the protection of the environment. These
laws, their underlying regulatory requirements and their enforcement, some of
which are described below, impact, or may impact, our existing and proposed
business operations by imposing:
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restrictions
on our existing and proposed business operations and/or the need to
install enhanced or additional
controls;
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the
need to obtain and comply with permits and
authorizations;
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liability
for exceeding applicable permit limits or legal requirements, in certain
cases for the remediation of contaminated soil and groundwater at our
facilities, contiguous and adjacent properties and other properties owned
and/or operated by third parties;
and
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specifications
for the ethanol we market and
produce.
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In
addition, some of the governmental regulations to which we are subject are
helpful to our ethanol marketing and production business. The ethanol fuel
industry is greatly dependent upon tax policies and environmental regulations
that favor the use of ethanol in motor fuel blends in North America. Some of the
governmental regulations applicable to our ethanol marketing and production
business are briefly described below.
Federal
Excise Tax Exemption
Ethanol
blends have been either wholly or partially exempt from the federal excise tax
on gasoline since 1978. The exemption has ranged from $0.04 to $0.06 per gallon
of gasoline during that 25-year period. The current federal excise tax on
gasoline is $0.184 per gallon, and is paid at the terminal by refiners and
marketers. If the fuel is blended with ethanol, the blender may claim a $0.45
per gallon tax credit for each gallon of ethanol used in the mixture. The
federal excise tax exemption was revised and its expiration date was extended
for the sixth time since its inception as part of the American Jobs Creation Act
of 2004. The new expiration date of the federal excise tax exemption is December
31, 2010. We believe that it is highly likely that this tax incentive will be
extended beyond 2010 if Congress deems it necessary for the continued growth and
prosperity of the ethanol industry.
Clean
Air Act Amendments of 1990
In
November 1990, a comprehensive amendment to the Clean Air Act of 1977
established a series of requirements and restrictions for gasoline content
designed to reduce air pollution in identified problem areas of the United
States. The two principal components affecting motor fuel content are the
oxygenated fuels program, which is administered by states under federal
guidelines, and a federally supervised reformulated gasoline, or RFG,
program.
Oxygenated
Fuels Program
Federal
law requires the sale of oxygenated fuels in certain carbon monoxide
non-attainment MSAs during at least four winter months, typically November
through February. Any additional MSAs not in compliance for a period of two
consecutive years in subsequent years may also be included in the program. The
Environmental Protection Agency, or EPA, Administrator is afforded flexibility
in requiring a shorter or longer period of use depending upon available supplies
of oxygenated fuels or the level of non-attainment. This law currently affects
the Los Angeles area, where over 150 million gallons of ethanol are blended with
gasoline each winter.
Reformulated
Gasoline Program
The Clean
Air Act Amendments of 1990 established special standards effective January 1,
1995 for the most polluted ozone non-attainment areas: Los Angeles Area,
Baltimore, Chicago Area, Houston Area, Milwaukee Area, New York City Area,
Hartford, Philadelphia Area and San Diego, with provisions to add other areas in
the future if conditions warrant. California’s San Joaquin Valley, the location
of both our Madera and Stockton facilities, was added in 2002. At the outset of
the RFG program there were a total of 96 MSAs not in compliance with clean air
standards for ozone, which represents approximately 60% of the national
market.
The RFG
program also includes a provision that allows individual states to “opt into”
the federal program by request of the governor, to adopt standards promulgated
by California that are stricter than federal standards, or to offer alternative
programs designed to reduce ozone levels. Nearly the entire Northeast and middle
Atlantic areas from Washington, D.C. to Boston not under the federal mandate
have “opted into” the federal standards.
These
state mandates in recent years have created a variety of gasoline grades to meet
different regional environmental requirements. The RFG program accounts for
about 30% of nationwide gasoline consumption. California refiners blend a
minimum of 2.0% oxygen by weight, which is the equivalent of 5.7% ethanol in
every gallon of gasoline, or roughly 1.0 billion gallons of ethanol per year in
California alone.
National
Energy Legislation
In
addition, the Energy Independence and Security Act of 2007, which was signed
into law in December 2007, significantly increased the prior national RFS. The
national RFS significantly increases the mandated use of renewable fuels to
12.95 billion gallons in 2010 and 13.95 billion gallons in 2011, and rises
incrementally and peaks at 36.0 billion gallons by 2022.
State
Energy Legislation and Regulations
State
energy legislation and regulations may affect the demand for ethanol. California
recently passed legislation regulating the total emissions of CO
2
from
vehicles and other sources. In 2006, the State of Washington passed a statewide
renewable fuel standard effective December 1, 2008. We believe other states may
also enact their own renewable fuel standards.
In
January 2007, California’s Governor signed an executive order directing the
California Air Resource Board to implement a Low Carbon Fuels Standard for
transportation fuels. The Governor’s office estimates that the standard will
have the effect of increasing current renewable fuels use in California by three
to five times by 2020.
The State
of Oregon implemented a state-wide renewable fuels standard effective January
2008. This standard requires a 10% ethanol blend in every gallon of gasoline and
is expected to cause the use of approximately 160 million gallons of ethanol per
year in Oregon.
Additional
Environmental Regulations
In
addition to the governmental regulations applicable to the ethanol marketing and
production industries described above, our business is subject to additional
federal, state and local environmental regulations, including regulations
established by the EPA, the Regional Water Quality Control Board, the San
Joaquin Valley Air Pollution Control District and the California Air Resources
Board. We cannot predict the manner or extent to which these regulations will
harm or help our business or the ethanol production and marketing industry in
general.
Employees
As of
March 26, 2010, we had approximately 150 full-time employees. We believe that
our employees are highly-skilled, and our success will depend in part upon our
ability to retain our employees and attract new qualified employees who are in
great demand. We have never had a work stoppage or strike, and no employees are
presently represented by a labor union or covered by a collective bargaining
agreement. We consider our relations with our employees to be good.
Risks
Related to our Business
There
continues to be substantial doubt as to our ability to continue as a going
concern. If we are unable to restructure our indebtedness and raise additional
capital in a timely manner, we may need to seek further protection under the
U.S. Bankruptcy Code at the parent-company level.
As a
result of ethanol industry conditions that have negatively affected our business
and ongoing financial difficulties, we believe we have sufficient liquidity to
meet our anticipated working capital, debt service and other liquidity needs
until either June 30, 2010, if we are unable to timely close a prospective $5.0
million credit facility, or through December 31, 2010, if we are able to timely
close the credit facility and either pay or further defer a $1.5 million payable
owed to a judgment creditor on June 30, 2010. These expectations
concerning our available liquidity until June 30, 2010 or through December 31,
2010 presume that Lyles does not pursue any action against us due to our default
on an aggregate of $21.5 million of remaining principal, plus accrued interest
and fees, and that we maintain our current levels of borrowing availability
under Kinergy’s line of credit. Accordingly, there continues to be
substantial doubt as to our ability to continue as a going
concern. We are seeking a confirmed plan of reorganization in
connection with the Chapter 11 Filings and seeking to raise additional debt or
equity financing, or both, but there can be no assurance that we will be
successful. If we cannot confirm a plan of reorganization in
connection with the Chapter 11 Filings and raise sufficient capital in a timely
manner, we may need to seek further protection under the U.S. Bankruptcy Code,
including at the Parent company level. As a result, our 2009
financial statements include an explanatory paragraph by our independent
registered public accounting firm expressing substantial doubt as to our ability
to continue as a going concern.
Our
ethanol production facility subsidiaries filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code and are subject to the risks and uncertainties
associated with the bankruptcy cases.
For the
duration of our facility subsidiaries’ bankruptcy cases, our operations and our
ability to execute our business strategy will be subject to the risks and
uncertainties associated with bankruptcy. These risks include:
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our
ability to operate our facility subsidiaries within the restrictions and
the limitations of any debtor-in-possession
financing;
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our
subsidiaries’ ability to develop, prosecute, confirm and consummate a plan
of reorganization with respect to the Chapter 11
proceedings;
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our
subsidiaries’ ability to obtain and maintain normal payment and other
terms with customers, vendors and service providers;
and
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our
subsidiaries’ ability to maintain contracts that are critical to their
operations.
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We will
also be subject to risks and uncertainties with respect to the actions and
decisions of our creditors and other third parties who have interests in the
bankruptcy cases that may be inconsistent with our plans.
These
risks and uncertainties could affect our business and operations in various
ways. Because of the risks and uncertainties associated with the bankruptcy
cases, we cannot predict or quantify the ultimate impact that events occurring
during the Chapter 11 reorganization process will have on our business,
financial condition and results of operations.
If
we seek protection under the U.S. Bankruptcy Code at the Parent company level,
all of our outstanding shares of capital stock could be cancelled and holders of
our capital stock may not be entitled to any payment in respect of their
shares.
If we
seek protection under the U.S. Bankruptcy Code at the Parent company level, it
is possible that all of our outstanding shares of capital stock could be
cancelled and holders of capital stock may not be entitled to any payment in
respect of their shares. It is also possible that our obligations to our
creditors may be satisfied by the issuance of shares of capital stock in
satisfaction of their claims. The value of any capital stock so issued may be
less than the face value of our obligations to those creditors, and the price of
any such capital stock may be volatile. In addition, in the event of a
bankruptcy filing at the Parent company level, our common stock will be
suspended from trading on and delisted from NASDAQ. Accordingly, trading in our
common stock may be limited, and our stockholders may not be able to resell
their securities for their purchase price or at all.
We
are seeking additional financing and may be unable to obtain this financing on a
timely basis, in sufficient amounts, on terms acceptable to us or at all. Any
financing we are able to obtain may be available only on burdensome terms that
may cause significant dilution to our stockholders and impose onerous financial
restrictions on our business.
We are
seeking substantial additional financing. Global economic and debt and equity
market conditions may cause prolonged declines in lender and investor confidence
in and accessibility to capital markets. Future financing may not be available
on a timely basis, in sufficient amounts, on terms acceptable to us or at all.
Any equity financing may cause significant dilution to existing stockholders.
Any debt financing or other financing of securities senior to our common stock
will likely include financial and other covenants that will restrict our
flexibility. At a minimum, we would expect these covenants to include
restrictions on our ability to pay dividends on our common stock. Any failure to
comply with these covenants could have a material adverse effect on our
business, prospects, financial condition and results of operations because we
could lose any then-existing sources of financing and our ability to secure new
financing may be impaired. In addition, any prospective debt or equity financing
transaction will be subject to the negotiation of definitive documents and any
closing under those documents will be subject to the satisfaction of numerous
conditions, many of which could be beyond our control. We may be unable to
obtain additional financing from one or more lenders or equity investors, or if
funding is available, it may be available only on burdensome terms that may
cause significant dilution to our stockholders and impose onerous financial
restrictions on our business.
We
have incurred significant losses and negative operating cash flow in the past
and we will likely incur significant losses and negative operating cash flow in
the foreseeable future. Continued losses and negative operating cash flow will
hamper our operations and prevent us from expanding our business.
We have
incurred significant losses and negative operating cash flow in the past. For
the years ended December 31, 2009 and 2008, we incurred net losses of
approximately $308.7 million and $199.2 million, respectively. For the years
ended December 31, 2009 and 2008, we incurred negative operating cash flow of
approximately $6.3 million and $55.2 million, respectively. We will likely incur
significant losses and negative operating cash flow in the foreseeable future.
We expect to rely on cash on hand, cash, if any, generated from our operations
and cash, if any, generated from our future financing activities to fund all of
the cash requirements of our business. Continued losses and negative operating
cash flow will hamper our operations and impede us from expanding our business.
Continued losses and negative operating cash flow are also likely to make our
capital raising needs more acute while limiting our ability to raise additional
financing on favorable terms.
We
recognized impairment charges in 2009 and 2008 and could recognize additional
impairment charges in the future.
For the
years ended December 31, 2009 and 2008, we recognized asset and goodwill
impairment charges in the aggregate amounts of $252.4 million and $127.9
million, respectively. We performed our forecast of expected future cash flows
of our facilities over their estimated useful lives. Such forecasts of expected
future cash flows are heavily dependent upon management’s estimates and
probability analysis of various scenarios that may arise from the restructuring
of our Bankrupt Debtors, market prices for ethanol, our primary product, and
corn, our primary production input. Both ethanol and corn costs have fluctuated
significantly in the past year, therefore these estimates are highly subjective
and are management’s best estimates at this time. These estimates may change
significantly in the future.
If
we are unable to attract and retain key personnel, our ability to operate
effectively may be impaired.
Our
ability to operate our business and implement strategies depends, in part, on
the efforts of our executive officers and other key employees. We
have made certain reductions in staffing which may have had the effect of
creating an uncertain employment environment, which may lead key employees to
seek alternative employment. In addition, our acute financial distress may cause
key employees to seek alternative employment. Our future success will depend on,
among other factors, our ability to attract and retain our current key personnel
and qualified future key personnel, particularly executive
management. Failure to attract or retain qualified key personnel
could have a material adverse effect on our business and results of
operations.
Even
if we are able to restructure our indebtedness and raise additional capital in
the very near term, various factors could result in inadequate working capital
to fully fund our operations.
If
ethanol production margins deteriorate from current levels, if our capital
requirements or cash flows otherwise vary materially and adversely from our
current projections, or if other adverse unforeseen circumstances occur, our
working capital may be inadequate to fully fund our operations even if we are
able to restructure our indebtedness and raise additional capital in the very
near term, which 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.
The
volatility in the financial and commodities markets and sustained weakening of
the economy could further significantly impact our business and financial
condition and may limit our ability to raise additional capital.
As widely
reported, financial markets in the United States and the rest of the world have
experienced extreme disruption, including, among other things, extreme
volatility in securities and commodities prices, as well as severely diminished
liquidity and credit availability. As a result, we believe that our ability to
access capital markets and raise funds required for our operations is severely
restricted at a time when we need to do so, which continues to have a material
adverse effect on our ability to meet our current and future funding
requirements and on our ability to react to changing economic and business
conditions. Significant declines in the price of crude oil have resulted in
reduced demand for our products. We are not able to predict the duration or
severity of any current or future disruption in financial markets, fluctuations
in the price of crude oil or other adverse economic conditions in the United
States. However, if economic conditions worsen, it is likely that these factors
would have a further adverse effect on our results of operations and future
prospects.
Increased
ethanol production may cause a decline in ethanol prices or prevent ethanol
prices from rising, and may have other negative effects, adversely impacting our
results of operations, cash flows and financial condition.
We
believe that the most significant factor influencing the price of ethanol has
been the substantial increase in ethanol production in recent years. Domestic
ethanol production capacity has increased steadily from an annualized rate of
1.5 billion gallons per year in January 1999 to 10.8 billion gallons in 2009
according to the RFA. See “Business—Governmental Regulation.” However, increases
in the demand for ethanol may not be commensurate with increases in the supply
of ethanol, thus leading to lower ethanol prices. Demand for ethanol could be
impaired due to a number of factors, including regulatory developments and
reduced United States gasoline consumption. Reduced gasoline consumption has
occurred in the past, and could occur in the future, as a result of increased
gasoline or oil prices. Increased ethanol production could also have other
adverse effects. For example, increased ethanol production could lead to
increased supplies of co-products generated from ethanol production, such as
WDG. Those increased supplies could lead to lower prices for those co-products.
Also, increased ethanol production could result in increased demand for corn.
Increased demand for corn could cause higher corn prices, resulting in higher
ethanol production costs and lower profit margins. Accordingly, increased
ethanol production may cause a decline in ethanol prices or prevent ethanol
prices from rising, and may have other negative effects, adversely impacting our
results of operations, cash flows and financial condition.
The
raw materials and energy necessary to produce ethanol may be unavailable or may
increase in price, adversely affecting our business, results of operations and
financial condition.
The
principal raw material we use to produce ethanol and its co-products is corn.
Changes in the price of corn can significantly affect our business. In general,
and as we experienced in 2008, rising or elevated corn prices result in lower
profit margins and, therefore, represent unfavorable market conditions. This is
especially true since market conditions generally do not allow us to pass along
increased corn prices to our customers because the price of ethanol is primarily
determined by other factors, such as the supply of ethanol and the price of oil
and gasoline. At certain levels, corn prices may even make ethanol production
uneconomical depending on the prevailing price of ethanol.
The price
of corn is influenced by general economic, market and regulatory factors. These
factors include weather conditions, crop conditions and yields, farmer planting
decisions, government policies and subsidies with respect to agriculture and
international trade and global supply and demand. The significance and relative
impact of these factors on the price of corn is difficult to predict. Any event
that tends to negatively impact the supply of corn will tend to increase prices
and potentially harm our business. Although average corn prices, as measured by
the Chicago Board of Trade, decreased 29% in 2009 as compared to 2008, average
corn prices remained elevated in 2009 as compared to 2007 and prior years. The
United States Department of Agriculture’s February 2010 World Agriculture Supply
and Demand Estimates projected that corn bought by ethanol plants in the U.S.
will represent approximately 33% of the 2009/2010 crop year’s total corn supply,
up from 30% in the prior crop year. Additional increases in ethanol production
could further boost demand for corn and result in further increases in corn
prices.
Our
business also depends on the continuing availability of rail, road, port,
storage and distribution infrastructure. In particular, due to limited storage
capacity at our production facilities and other considerations related to
production efficiencies, we depend on just-in-time delivery of corn. The
production of ethanol also requires a significant and uninterrupted supply of
other raw materials and energy, primarily water, electricity and natural gas.
The prices of electricity and natural gas have fluctuated significantly in the
past and may fluctuate significantly in the future. Local water, electricity and
gas utilities may not be able to reliably supply the water, electricity and
natural gas that our facilities will need or may not be able to supply those
resources on acceptable terms. Any disruptions in the ethanol production
infrastructure network, whether caused by labor difficulties, earthquakes,
storms, other natural disasters or human error or malfeasance or other reasons,
could prevent timely deliveries of corn or other raw materials and energy and
may require us to halt production which could have a material adverse effect on
our business, results of operations and financial condition.
We
may engage in hedging transactions and other risk mitigation strategies that
could harm our results of operations.
In an
attempt to partially offset the effects of volatility of ethanol prices and corn
and natural gas costs, we may enter into contracts to supply a portion of our
ethanol production or purchase a portion of our corn or natural gas requirements
on a forward basis. In addition, we may engage in other hedging transactions
involving exchange-traded futures contracts for corn, natural gas and unleaded
gasoline from time to time. The financial statement impact of these activities
is dependent upon, among other things, the prices involved and our ability to
sell sufficient products to use all of the corn and natural gas for which we
have futures contracts. We may also engage in hedging transactions involving
interest rate swaps related to our debt financing activities, the financial
statement impact of which is dependent upon, among other things, fluctuations in
prevailing interest rates. Hedging arrangements also expose us to the risk of
financial loss in situations where the other party to the hedging contract
defaults on its contract or, in the case of exchange-traded contracts, where
there is a change in the expected differential between the underlying price in
the hedging agreement and the actual prices paid or received by us. Hedging
activities can themselves result in losses when a position is purchased in a
declining market or a position is sold in a rising market. A hedge position for
a physical commodity is often settled in the same time frame as the physical
commodity is either purchased or sold. Certain hedging losses may be offset by a
decreased cash price for corn and natural gas and an increased cash price for
ethanol. We may also vary the amount of hedging or other risk mitigation
strategies we undertake, and from time to time we may choose not to engage in
hedging transactions at all. As a result, our results of operations and
financial position may be adversely affected by fluctuations in the price of
corn, natural gas, ethanol, unleaded gasoline and prevailing interest
rates.
The
market price of ethanol is volatile and subject to large fluctuations, which may
cause our profitability or losses to fluctuate significantly.
The
market price of ethanol is volatile and subject to large fluctuations. The
market price of ethanol is dependent upon many factors, including the supply of
ethanol and the price of gasoline, which is in turn dependent upon the price of
petroleum which is highly volatile and difficult to forecast. For example, our
average sales price of ethanol decreased by 20% in 2009, and increased by 5% in
2008 from the prior year’s average sales price per gallon. Fluctuations in the
market price of ethanol may cause our profitability or losses to fluctuate
significantly.
Operational
difficulties at our production facilities could negatively impact our sales
volumes and could cause us to incur substantial losses.
Our
operations are subject to labor disruptions, unscheduled downtimes and other
operational hazards inherent in our industry, such as equipment failures, fires,
explosions, abnormal pressures, blowouts, pipeline ruptures, transportation
accidents and natural disasters. Some of these operational hazards may cause
personal injury or loss of life, severe damage to or destruction of property and
equipment or environmental damage, and may result in suspension of operations
and the imposition of civil or criminal penalties. Our insurance may not be
adequate to fully cover the potential operational hazards described above or we
may not be able to renew this insurance on commercially reasonable terms or at
all.
Moreover,
our facilities may not operate as planned or expected. All of our facilities are
designed to operate at or above a certain production capacity. The operation of
our facilities is and will be, however, subject to various uncertainties. As a
result, our facilities may not produce ethanol and its co-products at the levels
we expect. In the event any of our facilities do not run at their expected
capacity levels, our business, results of operations and financial condition may
be materially and adversely affected.
Our
business is affected by the regulation of greenhouse gases and climate change.
New climate change regulations could impede our ability to successfully operate
our business.
Our
ethanol production facilities emit carbon dioxide as a by-product of the ethanol
production process. In 2007, the U.S. Supreme Court classified carbon dioxide as
an air pollutant under the Clean Air Act in a case seeking to require the EPA to
regulate carbon dioxide in vehicle emissions. On February 3, 2010, the EPA
released its final regulations. We believe these final regulations grandfather
our facilities at their current operating capacity. Additionally, legislation is
pending in Congress on a comprehensive carbon dioxide regulatory scheme, such as
a carbon tax or cap-and-trade system. We may be required to install carbon
dioxide mitigation equipment or take other steps unknown to us at this time in
order to comply with other future laws or regulations. Compliance with future
laws or regulations relating to emission of carbon dioxide could be costly and
may require additional working capital, which may not be available, preventing
us from operating our plants as originally designed, which may have a material
adverse impact on our operations, cash flows and financial
position.
The
United States ethanol industry is highly dependent upon a myriad of federal and
state legislation and regulation and any changes in such legislation or
regulation could have a material adverse effect on our results of operations and
financial condition.
The
elimination or reduction of federal excise tax incentives could have a material
adverse effect on our results of operations and our financial
condition.
The
amount of ethanol production capacity in the U.S. exceeds the mandated usage of
renewable biofuels. Ethanol consumption above mandated amounts is primarily
based upon the economic benefit derived by blenders, including benefits received
from federal excise tax incentives. Therefore, the production of ethanol is made
significantly more competitive by federal tax incentives. The federal excise tax
incentive program, which is scheduled to expire on December 31, 2010, allows
gasoline distributors who blend ethanol with gasoline to receive a federal
excise tax rate reduction for each blended gallon they sell regardless of the
blend rate. The current federal excise tax on gasoline is $0.184 per gallon, and
is paid at the terminal by refiners and marketers. If the fuel is blended with
ethanol, the blender may claim a $0.45 per gallon tax credit for each gallon of
ethanol used in the mixture. The 2008 Farm Bill enacted into law reduced federal
excise tax incentives from $0.51 per gallon in 2008 to $0.45 per gallon in 2009.
The federal excise tax incentive program may not be renewed prior to its
expiration in 2010, or if renewed, it may be renewed on terms significantly less
favorable than current tax incentives. The elimination or significant reduction
in the federal excise tax incentive program could reduce discretionary blending
and have a material adverse effect on our results of operations and our
financial condition.
Various
studies have criticized the efficiency of ethanol in general, and corn-based
ethanol in particular, which could lead to the reduction or repeal of incentives
and tariffs that promote the use and domestic production of ethanol or otherwise
negatively impact public perception and acceptance of ethanol as an alternative
fuel.
Although
many trade groups, academics and governmental agencies have supported ethanol as
a fuel additive that promotes a cleaner environment, others have criticized
ethanol production as consuming considerably more energy and emitting more
greenhouse gases than other biofuels and as potentially depleting water
resources. Other studies have suggested that corn-based ethanol is less
efficient than ethanol produced from switchgrass or wheat grain and that it
negatively impacts consumers by causing higher prices for dairy, meat and other
foodstuffs from livestock that consume corn. If these views gain acceptance,
support for existing measures promoting the use and domestic production of
corn-based ethanol could decline, leading to a reduction or repeal of these
measures. These views could also negatively impact public perception of the
ethanol industry and acceptance of ethanol as an alternative fuel.
Waivers
or repeal of the national RFS minimum levels of renewable fuels included in
gasoline could have a material adverse affect on our results of
operations.
Shortly
after passage of the Energy Independence and Security Act of 2007, which
increased the minimum mandated required usage of ethanol, a Congressional
sub-committee held hearings on the potential impact of the national RFS on
commodity prices. While no action was taken by the sub-committee towards repeal
of the national RFS, any attempt by Congress to re-visit, repeal or grant
waivers of the national RFS could adversely affect demand for ethanol and could
have a material adverse effect on our results of operations and financial
condition.
While
the Energy Independence and Security Act of 2007 imposes the national RFS, it
does not mandate only the use of ethanol.
The
Energy Independence and Security Act of 2007 imposes the national RFS, but does
not mandate only the use of ethanol. While the RFA expects that ethanol should
account for the largest share of renewable fuels produced and consumed under the
national RFS, the national RFS is not limited to ethanol and also includes
biodiesel and any other liquid fuel produced from biomass or
biogas.
The
ethanol production and marketing industry is extremely competitive. Many of our
significant competitors have greater production and financial resources than we
do and one or more of these competitors could use their greater resources to
gain market share at our expense. In addition, certain of our suppliers may
circumvent our marketing services, causing our sales and profitability to
decline.
The
ethanol production and marketing industry is extremely competitive. Many of our
significant competitors in the ethanol production and marketing industry, such
as ADM, Cargill, Inc., and other competitors have substantially greater
production and/or financial resources than we do. As a result, our competitors
may be able to compete more aggressively and sustain that competition over a
longer period of time than we could. Successful competition will require a
continued high level of investment in marketing and customer service and
support. Our lack of resources relative to many of our significant competitors
may cause us to fail to anticipate or respond adequately to new developments and
other competitive pressures. This failure could reduce our competitiveness and
cause a decline in our market share, sales and profitability. Even if sufficient
funds are available, we may not be able to make the modifications and
improvements necessary to compete successfully.
We also
face increasing competition from international suppliers. Currently,
international suppliers produce ethanol primarily from sugar cane and have cost
structures that are generally substantially lower than ours. Any increase in
domestic or foreign competition could cause us to reduce our prices and take
other steps to compete effectively, which could adversely affect our results of
operations and financial condition.
In
addition, some of our suppliers are potential competitors and, especially if the
price of ethanol reaches historically high levels, they may seek to capture
additional profits by circumventing our marketing services in favor of selling
directly to our customers. If one or more of our major suppliers, or numerous
smaller suppliers, circumvent our marketing services, our sales and
profitability may decline.
The
high concentration of our sales within the ethanol marketing and production
industry could result in a significant reduction in sales and negatively affect
our profitability if demand for ethanol declines.
We expect
to be completely focused on the marketing and production of ethanol and its
co-products for the foreseeable future. We may be unable to shift our business
focus away from the marketing and production of ethanol to other renewable fuels
or competing products. Accordingly, an industry shift away from ethanol or the
emergence of new competing products may reduce the demand for ethanol. A
downturn in the demand for ethanol would likely materially and adversely affect
our sales and profitability.
We
produce and sell our own ethanol but also depend on a small number of
third-party suppliers for a significant portion of the ethanol that we sell. If
any of these suppliers does not continue to supply us with ethanol in adequate
amounts, we may be unable to satisfy the demands of our customers and our sales,
profitability and relationships with our customers will be adversely
affected.
We
produce and sell our own ethanol but also depend on a small number of
third-party suppliers for a significant portion of the ethanol that we sell. We
expect to continue to depend for the foreseeable future upon a small number of
third-party suppliers for a significant portion of the ethanol that we sell. Our
third-party suppliers are primarily located in the Midwestern United States. The
delivery of ethanol from these suppliers is therefore subject to delays
resulting from inclement weather and other conditions. If any of these suppliers
is unable or declines for any reason to continue to supply us with ethanol in
adequate amounts, we may be unable to replace that supplier and source other
supplies of ethanol in a timely manner, or at all, to satisfy the demands of our
customers. If this occurs, our sales, profitability and our relationships with
our customers will be adversely affected.
We
may be adversely affected by environmental, health and safety laws, regulations
and liabilities.
We are
subject to various federal, state and local environmental laws and regulations,
including those relating to the discharge of materials into the air, water and
ground, the generation, storage, handling, use, transportation and disposal of
hazardous materials, and the health and safety of our employees. In addition,
some of these laws and regulations require our facilities to operate under
permits that are subject to renewal or modification. These laws, regulations and
permits can often require expensive pollution control equipment or operational
changes to limit actual or potential impacts to the environment. A violation of
these laws and regulations or permit conditions can result in substantial fines,
natural resource damages, criminal sanctions, permit revocations and/or facility
shutdowns. In addition, we have made, and expect to make, significant capital
expenditures on an ongoing basis to comply with increasingly stringent
environmental laws, regulations and permits.
We may be
liable for the investigation and cleanup of environmental contamination at each
of the properties that we own or operate and at off-site locations where we
arrange for the disposal of hazardous substances. If these substances have been
or are disposed of or released at sites that undergo investigation and/or
remediation by regulatory agencies, we may be responsible under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
other environmental laws for all or part of the costs of investigation and/or
remediation, and for damages to natural resources. We may also be subject to
related claims by private parties alleging property damage and personal injury
due to exposure to hazardous or other materials at or from those properties.
Some of these matters may require us to expend significant amounts for
investigation, cleanup or other costs.
In
addition, new laws, new interpretations of existing laws, increased governmental
enforcement of environmental laws or other developments could require us to make
significant additional expenditures. Continued government and public emphasis on
environmental issues can be expected to result in increased future investments
for environmental controls at our production facilities. Present and future
environmental laws and regulations (and interpretations thereof) applicable to
our operations, more vigorous enforcement policies and discovery of currently
unknown conditions may require substantial expenditures that could have a
material adverse effect on our results of operations and financial
condition.
The
hazards and risks associated with producing and transporting our products (such
as fires, natural disasters, explosions and abnormal pressures and blowouts) may
also result in personal injury claims or damage to property and third parties.
As protection against operating hazards, we maintain insurance coverage against
some, but not all, potential losses. However, we could sustain losses for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. Events that result in significant personal injury or damage to our
property or third parties or other losses that are not fully covered by
insurance could have a material adverse effect on our results of operations and
financial condition.
We
depend on a small number of customers for the majority of our sales. A reduction
in business from any of these customers could cause a significant decline in our
overall sales and profitability.
The
majority of our sales are generated from a small number of customers. During
each of 2009 and 2008, sales to our two largest customers, each of whom
accounted for 10% or more of total net sales, represented an aggregate of
approximately 32% of our total net sales for those years. We expect that we will
continue to depend for the foreseeable future upon a small number of customers
for a significant portion of our sales. Our agreements with these customers
generally do not require them to purchase any specified amount of ethanol or
dollar amount of sales or to make any purchases whatsoever. Therefore, in any
future period, our sales generated from these customers, individually or in the
aggregate, may not equal or exceed historical levels. If sales to any of these
customers cease or decline, we may be unable to replace these sales with sales
to either existing or new customers in a timely manner, or at all. A cessation
or reduction of sales to one or more of these customers could cause a
significant decline in our overall sales and profitability.
Our
lack of long-term ethanol orders and commitments by our customers could lead to
a rapid decline in our sales and profitability.
We cannot
rely on long-term ethanol orders or commitments by our customers for protection
from the negative financial effects of a decline in the demand for ethanol or a
decline in the demand for our marketing services. The limited certainty of
ethanol orders can make it difficult for us to forecast our sales and allocate
our resources in a manner consistent with our actual sales. Moreover, our
expense levels are based in part on our expectations of future sales and, if our
expectations regarding future sales are inaccurate, we may be unable to reduce
costs in a timely manner to adjust for sales shortfalls. Furthermore, because we
depend on a small number of customers for a significant portion of our sales,
the magnitude of the ramifications of these risks is greater than if our sales
were less concentrated. As a result of our lack of long-term ethanol orders and
commitments, we may experience a rapid decline in our sales and
profitability.
We
are a minority member of Front Range with limited control over that entity’s
business decisions. We are therefore dependent upon the business judgment and
conduct of the manager and majority member of that entity. As a result, our
interests may not be as well served as if we were in control of Front Range,
which could adversely affect its contribution to our results of operations and
our business prospects related to that entity.
Front
Range operates an ethanol production facility located in Windsor, Colorado. We
own approximately 42% of Front Range, which represents a minority interest in
that entity. The manager and majority member of Front Range owns approximately
54% of that entity and has control of that entity’s business decisions,
including decisions related to day-to-day operations. The manager and majority
member of Front Range has the right to set the manager’s compensation, determine
cash distributions, decide whether or not to expand the ethanol production
facility and make most other business decisions on behalf of that entity. We are
therefore largely dependent upon the business judgment and conduct of the
manager and majority member of Front Range. As a result, our interests may not
be as well served as if we were in control of Front Range. Accordingly, the
contribution by Front Range to our results of operations and our business
prospects related to that entity may be adversely affected by our lack of
control over that entity.
Risks
Related to our Common Stock
Our
common stock may be involuntarily delisted from trading on NASDAQ if we fail to
maintain a minimum closing bid price of $1.00 per share for any consecutive 30
trading day period. A notification of delisting or a delisting of our common
stock would reduce the liquidity of our common stock and inhibit or preclude our
ability to raise additional financing and may also materially and adversely
impact our credit terms with our vendors.
NASDAQ’s
quantitative listing standards require, among other things, that listed
companies maintain a minimum closing bid price of $1.00 per share. On
September 15, 2009, NASDAQ notified us that we had failed to satisfy this
threshold for 30 consecutive trading days, and as a result, our common stock may
be involuntarily delisted from trading on NASDAQ once the applicable grace
period expired. Our stock price subsequently exceeded the $1.00 per share
minimum for ten consecutive trading days and we received a notice from NASDAQ of
regained compliance with this listing requirement. Our common stock may again
fall below the $1.00 minimum closing bid price in the future. A notification of
delisting or delisting of our common stock could reduce the liquidity of our
common stock and inhibit or preclude our ability to raise additional financing
and may also materially and adversely impact our credit terms with our
vendors.
As
a result of our issuance of shares of Series B Preferred Stock, our common
stockholders may experience numerous negative effects and most of the rights of
our common stockholders will be subordinate to the rights of the holders of our
Series B Preferred Stock.
As a
result of our issuance of shares of Series B Preferred Stock, our common
stockholders may experience numerous negative effects, including dilution from
any dividends paid in preferred stock and certain antidilution adjustments. In
addition, rights in favor of the holders of our Series B Preferred Stock
include: seniority in liquidation and dividend preferences; substantial voting
rights; numerous protective provisions; and preemptive rights. Also, our
outstanding Series B Preferred Stock could have the effect of delaying,
deferring and discouraging another party from acquiring control of Pacific
Ethanol.
Our
stock price is highly volatile, which could result in substantial losses for
investors purchasing shares of our common stock and in litigation against
us.
The
market price of our common stock has fluctuated significantly in the past and
may continue to fluctuate significantly in the future. The market price of our
common stock may continue to fluctuate in response to one or more of the
following factors, many of which are beyond our control:
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our
ability to continue as a going
concern;
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our
ability to operate our subsidiaries pursuant to the terms and conditions
of our DIP financing and any cash collateral order entered by the
Bankruptcy Court in connection with the Chapter 11
Filings;
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our
ability to obtain Court approval with respect to motions in the chapter 11
proceedings prosecuted by us from time to
time;
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our
ability to develop, prosecute, confirm and consummate one or more plans of
reorganization with respect to the Chapter 11
Filings;
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our
ability to obtain and maintain normal terms with vendors and service
providers;
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our
ability to maintain contracts that are critical to our
operations;
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fluctuations
in the market price of ethanol and its
co-products;
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the
volume and timing of the receipt of orders for ethanol from major
customers;
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competitive
pricing pressures;
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our
ability to produce, sell and deliver ethanol on a cost-effective and
timely basis;
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the
introduction and announcement of one or more new alternatives to ethanol
by our competitors;
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changes
in market valuations of similar
companies;
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stock
market price and volume fluctuations
generally;
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our
stock’s relative small public
float;
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regulatory
developments or increased
enforcement;
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fluctuations
in our quarterly or annual operating
results;
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additions
or departures of key
personnel;
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our
inability to obtain financing;
and
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future
sales of our common stock or other
securities.
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Furthermore,
we believe that the economic conditions in California and other Western states,
as well as the United States as a whole, could have a negative impact on our
results of operations. Demand for ethanol could also be adversely affected by a
slow-down in overall demand for oxygenate and gasoline additive products. The
levels of our ethanol production and purchases for resale will be based upon
forecasted demand. Accordingly, any inaccuracy in forecasting anticipated
revenues and expenses could adversely affect our business. The failure to
receive anticipated orders or to complete delivery in any quarterly period could
adversely affect our results of operations for that period. Quarterly results
are not necessarily indicative of future performance for any particular period,
and we may not experience revenue growth or profitability on a quarterly or an
annual basis.
The price
at which you purchase shares of our common stock may not be indicative of the
price that will prevail in the trading market. You may be unable to sell your
shares of common stock at or above your purchase price, which may result in
substantial losses to you and which may include the complete loss of your
investment. In the past, securities class action litigation has often been
brought against a company following periods of high stock price volatility. We
may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management’s attention and our
resources away from our business.
Any of
the risks described above could have a material adverse effect on our sales and
profitability and the price of our common stock.
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Unresolved
Staff Comments.
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None.
Our
corporate headquarters, located in Sacramento, California, consists of a 10,000
square foot office under a lease expiring in 2013. Our ethanol production
facilities are located in Madera, California, at which a 137 acre facility is
located; Boardman, Oregon, at which a 25 acre facility is located; Burley,
Idaho, at which a 160 acre facility is located; Stockton, California, at which a
30 acre facility is located; and Windsor, Colorado, at which a 40 acre facility
is located. We own our properties in Madera, California and Burley, Idaho. We
lease our properties in Boardman, Oregon and Stockton, California under leases
expiring in 2026 and 2022, respectively. We are a minority owner of the entity
that owns the Windsor, Colorado facility. See “Business—Production
Facilities.”
We are
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 our quarterly or
annual operating results or cash flows when resolved in a future period.
However, based on facts currently available, management believes such matters
will not materially and adversely affect our financial position, results of
operations or cash flows.
In
re Pacific Ethanol Holding Co. LLC, et al.
On May
17, 2009, Pacific Ethanol Holding Co. LLC, an indirect subsidiary of Pacific
Ethanol, Inc., and four of Pacific Ethanol Holding Co. LLC’s direct
subsidiaries, namely, Pacific Ethanol Stockton LLC, Pacific Ethanol Columbia,
LLC, Pacific Ethanol Madera LLC, and Pacific Ethanol Magic Valley, LLC
(collectively, the “Bankrupt Debtors”), each commenced a case by filing a
petition for chapter 11 relief in the Bankruptcy Court for the District of
Delaware. The Bankrupt Debtors continue to operate their businesses and manage
their properties as debtors and debtors-in-possession.
On June
3, 2009, the Bankruptcy Court for the District of Delaware approved the Bankrupt
Debtors’ postpetition financing facility provided by WestLB, AG, New York Branch
and the banks and financial institutions that are from time to time lender
parties to the Amended and Restated Debtor-in-Possession Credit Agreement dated
June 3, 2009 (as amended, the “Postpetition Credit Agreement”). This
postpetition credit facility is intended to fund the Bankrupt Debtors’ working
capital and general corporate needs in the ordinary course of business and allow
them to pay such other amounts as required or permitted to be paid pursuant to
the terms of the Postpetition Credit Agreement.
On March
26, 2010, the Bankrupt Debtors filed a joint plan of reorganization with the
Bankruptcy Court, which was structured in cooperation with certain of the
Bankrupt Debtors’ secured lenders. The proposed plan contemplates
that ownership of the Bankrupt Debtors would be transferred to a new entity,
which would be wholly owned by the Bankrupt Debtors’ secured
lenders. Under the proposed plan, the Bankrupt Debtors’ existing
prepetition and postpetition secured indebtedness of approximately $293.5
million would be restructured to consist of approximately $48.0 million in
three-year term loans, $67.0 million in eight-year “PIK” term loans, and a new
three-year revolving credit facility of up to $35.0 million to fund working
capital requirements (the revolver is initially capped at $15.0 million but may
be increased to up to $35.0 million if more than two of the Bankrupt Debtors’
ethanol production facilities cease operations).
We are in
continuing discussions with the secured lenders regarding our possible
participation in the reorganization contemplated by the proposed plan, including
the potential acquisition by us of an ownership interest in the new entity that
would own the Bankrupt Debtors.
Under the
proposed plan, we would continue to manage and operate the ethanol plants under
the terms of an amended and restated asset management agreement and would
continue to market all of the ethanol and wet distillers grains produced by the
plants under the terms of amended and restated agreements with Kinergy and
PAP.
Delta-T
Corporation
On August
18, 2008, Delta-T Corporation filed suit in the United States District Court for
the Eastern District of Virginia (the “First Virginia Federal Court case”),
naming Pacific Ethanol, Inc. as a defendant, along with its subsidiaries Pacific
Ethanol Stockton, LLC, Pacific Ethanol Imperial, LLC, Pacific Ethanol Columbia,
LLC, Pacific Ethanol Magic Valley, LLC and Pacific Ethanol Madera, LLC. The suit
alleged breaches of the parties’ Engineering, Procurement and Technology License
Agreements, breaches of a subsequent term sheet and letter agreement and
breaches of indemnity obligations. The complaint seeks specified contract
damages of approximately $6.5 million, along with other unspecified damages. All
of the defendants moved to dismiss the Virginia Federal Court case for lack of
personal jurisdiction and on the ground that all disputes between the parties
must be resolved through binding arbitration, and, in the alternative, moved to
stay the Virginia Federal Court Case pending arbitration. In January 2009, these
motions were granted by the Court, compelling the case to arbitration with the
American Arbitration Association (“AAA”). By letter dated June 10, 2009, the AAA
notified the parties to the arbitration that the matter was automatically stayed
as a result of the Chapter 11 Filings.
On March
18, 2009, Delta-T Corporation filed a cross-complaint against Pacific Ethanol,
Inc. and Pacific Ethanol Imperial, LLC in the Superior Court of the State of
California in and for the County of Imperial. The cross-complaint arises out of
a suit by OneSource Distributors, LLC against Delta-T Corporation. On March 31,
2009, Delta-T Corporation and Bateman Litwin N.V, a foreign corporation, filed a
third-party complaint in the United States District Court for the District of
Minnesota naming Pacific Ethanol, Inc. and Pacific Ethanol Imperial, LLC as
defendants. The third-party complaint arises out of a suit by Campbell-Sevey,
Inc. against Delta-T Corporation. On April 6, 2009, Delta-T Corporation filed a
cross-complaint against Pacific Ethanol, Inc. and Pacific Ethanol Imperial, LLC
in the Superior Court of the State of California in and for the County of
Imperial. The cross-complaint arises out of a suit by GEA Westfalia Separator,
Inc. against Delta-T Corporation. Each of these actions allegedly relate to the
aforementioned Engineering, Procurement and Technology License Agreements and
Delta-T Corporation’s performance of services thereunder. The third-party suit
and the cross-complaints assert many of the factual allegations in the Virginia
Federal Court case and seek unspecified damages.
On June
19, 2009, Delta-T Corporation filed suit in the United States District Court for
the Eastern District of Virginia (the “Second Virginia Federal Court case”),
naming Pacific Ethanol, Inc. as the sole defendant. The suit alleges breaches of
the parties’ Engineering, Procurement and Technology License Agreements,
breaches of a subsequent term sheet and letter agreement, and breaches of
indemnity obligations. The complaint seeks specified contract damages of
approximately $6.5 million, along with other unspecified damages.
In
connection with the Chapter 11 Filings, the Bankrupt Debtors moved the United
States Bankruptcy Court for the District of Delaware to enter a preliminary
injunction in favor of the Bankrupt Debtors and Pacific Ethanol, Inc. staying
and enjoining all of the aforementioned litigation and arbitration proceedings
commenced by Delta-T Corporation. On August 6, 2009, the Delaware court
ordered that the litigation and arbitration proceedings commenced by Delta-T
Corporation be stayed and enjoined until September 21, 2009 or further order of
the court, and that the Bankrupt Debtors, Pacific Ethanol, Inc. and Delta-T
Corporation complete mediation by September 20, 2009 for purposes of settling
all disputes between the parties. Following mediation, the parties reached an
agreement pursuant to which a stipulated order was entered in the bankruptcy
court on September 21, 2009, providing for a complete mutual release and
settlement of any and all claims between Delta-T Corporation and the
Bankrupt Debtors, a complete reservation of rights as between Pacific Ethanol,
Inc. and Delta-T Corporation, and a stay of all proceedings by Delta-T
Corporation against Pacific Ethanol, Inc. until December 31, 2009.
On March
1, 2010, Delta-T Corporation resumed active litigation of the Second Virginia
Federal Court case by filing a motion for entry of a default judgment. Also on
March 1, 2010, Pacific Ethanol, Inc. filed a motion for extension of time for
its first appearance in the Second Virginia Federal Court case and also filed a
motion to dismiss Delta-T Corporation's complaint based on the mandatory
arbitration clause in the parties' contracts, and alternatively to stay
proceedings during the pendency of arbitration. These motions are scheduled for
hearing on March 31, 2010. We intend to continue to vigorously defend against
Delta-T Corporation’s claims.
Barry
Spiegel – State Court Action
On
December 22, 2005, Barry J. Spiegel, a former shareholder and director of
Accessity, filed a complaint in the Circuit Court of the 17th Judicial District
in and for Broward County, Florida (Case No. 05018512) (the “State Court
Action”) against Barry Siegel, Philip Kart, Kenneth Friedman and Bruce Udell
(collectively, the “Individual Defendants”). Messrs. Udell and Friedman are
former directors of Accessity and Pacific Ethanol. Mr. Kart is a former
executive officer of Accessity and Pacific Ethanol. Mr. Siegel is a former
director and former executive officer of Accessity and Pacific
Ethanol.
The State
Court Action relates to the Share Exchange Transaction and purports to state the
following five counts against the Individual Defendants: (i) breach of fiduciary
duty, (ii) violation of the Florida Deceptive and Unfair Trade Practices Act,
(iii) conspiracy to defraud, (iv) fraud, and (v) violation of Florida’s
Securities and Investor Protection Act. Mr. Spiegel based his claims on
allegations that the actions of the Individual Defendants in approving the Share
Exchange Transaction caused the value of his Accessity common stock to diminish
and is seeking approximately $22.0 million in damages. On March 8, 2006, the
Individual Defendants filed a motion to dismiss the State Court Action. Mr.
Spiegel filed his response in opposition on May 30, 2006. The Court granted the
motion to dismiss by Order dated December 1, 2006, on the grounds that, among
other things, Mr. Spiegel failed to bring his claims as a derivative
action.
On
February 9, 2007, Mr. Spiegel filed an amended complaint which purports to state
the following five counts: (i) breach of fiduciary duty, (ii) fraudulent
inducement, (iii) violation of Florida’s Securities and Investor Protection Act,
(iv) fraudulent concealment, and (v) breach of fiduciary duty of disclosure. The
amended complaint included Pacific Ethanol as a defendant. On March 30, 2007,
Pacific Ethanol filed a motion to dismiss the amended complaint. Before the
Court could decide that motion, on June 4, 2007, Mr. Spiegel amended his
complaint, which purports to state two counts: (a) breach of fiduciary duty, and
(b) fraudulent inducement. The first count is alleged against the Individual
Defendants and the second count is alleged against the Individual Defendants and
Pacific Ethanol. The amended complaint was, however, voluntarily dismissed on
August 27, 2007, by Mr. Spiegel as to Pacific Ethanol.
Mr.
Spiegel sought and obtained leave to file another amended complaint on June 25,
2009, which renewed his case against Pacific Ethanol, and named three additional
individual defendants, and asserted the following three counts: (x) breach of
fiduciary duty, (y) fraudulent inducement, and (z) aiding and abetting breach of
fiduciary duty. The first two counts are alleged solely against the Individual
Defendants. With respect to the third count, Mr. Spiegel has named Pacific
Ethanol California, Inc. (formerly known as Pacific Ethanol, Inc.), as well as
William L. Jones, Neil M. Koehler and Ryan W. Turner. Messrs. Jones and Turner
are directors of Pacific Ethanol. Mr. Turner is a former officer of Pacific
Ethanol. Mr. Koehler is a director and officer of Pacific Ethanol. Pacific
Ethanol and the Individual Defendants filed a motion to dismiss the count
against them, and the court granted the motion. Plaintiff then filed
another amended complaint, and Defendants once again moved to dismiss. The
motion was heard on February 17, 2010, and the Court, on March 22, 2010, denied
the motion requiring Pacific Ethanol and Messrs. Jones, Koehler and Turner to
answer the Complaint and respond to certain discovery requests.
Barry
Spiegel – Federal Court Action
On
December 28, 2006, Barry J. Spiegel, filed a complaint in the United States
District Court, Southern District of Florida (Case No. 06-61848) (the “Federal
Court Action”) against the Individual Defendants and Pacific Ethanol. The
Federal Court Action relates to the Share Exchange Transaction and purports to
state the following three counts: (i) violations of Section 14(a) of the
Exchange Act and SEC Rule 14a-9 promulgated thereunder, (ii) violations of
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and
(iii) violation of Section 20(A) of the Exchange Act. The first two counts are
alleged against the Individual Defendants and Pacific Ethanol and the third
count is alleged solely against the Individual Defendants. Mr. Spiegel bases his
claims on, among other things, allegations that the actions of the Individual
Defendants and Pacific Ethanol in connection with the Share Exchange Transaction
resulted in a share exchange ratio that was unfair and resulted in the
preparation of a proxy statement seeking shareholder approval of the Share
Exchange Transaction that contained material misrepresentations and omissions.
Mr. Spiegel is seeking in excess of $15.0 million in damages.
Mr.
Spiegel amended the Federal Court Action on March 5, 2007, and Pacific Ethanol
and the Individual Defendants filed a Motion to Dismiss the amended pleading on
April 23, 2007. Plaintiff Spiegel sought to stay his own federal case, but the
Motion was denied on July 17, 2007. The Court required Mr. Spiegel to
respond to our Motion to Dismiss. On January 15, 2008, the Court rendered an
Order dismissing the claims under Section 14(a) of the Exchange Act on the basis
that they were time barred and that more facts were needed for the claims under
Section 10(b) of the Exchange Act. The Court, however, stayed the entire case
pending resolution of the State Court Action.
Not
applicable.
The accompanying notes are an integral part of
these consolidated financial statements.
The
accompanying notes are an integral part of these consolidated financial
statements.
The
accompanying notes are an integral part of these consolidated financial
statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(308,705
|
)
|
|
$
|
(199,216
|
)
|
|
Adjustments
to reconcile net loss to
cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
Non-cash
reorganization costs:
|
|
|
|
|
|
|
|
|
|
Write-off
of unamortized deferred financing fees
|
|
|
7,545
|
|
|
|
—
|
|
|
Settlement
of accrued liability
|
|
|
(2,008
|
)
|
|
|
—
|
|
|
Gain
from write-off of liabilities
|
|
|
(14,232
|
)
|
|
|
—
|
|
|
Asset
impairments
|
|
|
252,388
|
|
|
|
40,900
|
|
|
Goodwill
impairments
|
|
|
—
|
|
|
|
87,047
|
|
|
Depreciation
and amortization of intangibles
|
|
|
34,876
|
|
|
|
26,608
|
|
|
Inventory
valuation
|
|
|
873
|
|
|
|
6,415
|
|
|
(Gain)
loss on derivative instruments
|
|
|
(3,671
|
)
|
|
|
1,138
|
|
|
Amortization
of deferred financing costs
|
|
|
1,193
|
|
|
|
2,018
|
|
|
Non-cash
compensation and consulting expense
|
|
|
1,924
|
|
|
|
3,015
|
|
|
Bad
debt expense (recovery)
|
|
|
(955
|
)
|
|
|
2,191
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
12,015
|
|
|
|
2,020
|
|
|
Restricted
cash
|
|
|
2,315
|
|
|
|
(1,740
|
)
|
|
Inventories
|
|
|
5,404
|
|
|
|
(1,596
|
)
|
|
Prepaid
expenses and other assets
|
|
|
2,434
|
|
|
|
(4,126
|
)
|
|
Prepaid
inventory
|
|
|
(1,176
|
)
|
|
|
1,022
|
|
|
Accounts
payable and accrued expenses
|
|
|
(3,138
|
)
|
|
|
(20,579
|
)
|
|
Accounts
payable and accrued expenses, related party
|
|
|
6,616
|
|
|
|
(292
|
)
|
|
Net
cash used in operating activities
|
|
$
|
(6,302
|
)
|
|
$
|
(55,175
|
)
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
$
|
(4,304
|
)
|
|
$
|
(152,635
|
)
|
|
Proceeds
from sales of available-for-sale investments
|
|
|
7,679
|
|
|
|
11,573
|
|
|
Proceeds
from sale of equipment
|
|
|
—
|
|
|
|
206
|
|
|
Net
cash provided by (used in) investing activities
|
|
$
|
3,375
|
|
|
$
|
(140,856
|
)
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings under DIP Financing
|
|
$
|
19,827
|
|
|
$
|
—
|
|
|
Proceeds
from related party borrowings
|
|
|
2,000
|
|
|
|
—
|
|
|
Proceeds
from other borrowings
|
|
|
—
|
|
|
|
157,322
|
|
|
Net
proceeds from issuance of preferred stock and warrants
|
|
|
—
|
|
|
|
45,643
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
—
|
|
|
|
26,649
|
|
|
Principal
payments paid on borrowings
|
|
|
(12,821
|
)
|
|
|
(20,787
|
)
|
|
Cash
paid for debt issuance costs
|
|
|
—
|
|
|
|
(1,818
|
)
|
|
Preferred
share dividend paid
|
|
|
—
|
|
|
|
(4,104
|
)
|
|
Dividend
payments to noncontrolling interests
|
|
|
—
|
|
|
|
(1,115
|
)
|
|
Net
cash provided by financing activities
|
|
$
|
9,006
|
|
|
$
|
201,790
|
|
|
Net
increase in cash and cash equivalents
|
|
|
6,079
|
|
|
|
5,759
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
11,466
|
|
|
|
5,707
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
17,545
|
|
|
$
|
11,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
|
Interest
paid ($0 and $9,186 capitalized)
|
|
$
|
3,349
|
|
|
$
|
20,602
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands
)
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend declared
|
|
$
|
3,202
|
|
|
$
|
—
|
|
|
Deemed
dividend on preferred stock
|
|
$
|
—
|
|
|
$
|
761
|
|
|
Accounts
payable converted to short-term note payable
|
|
$
|
—
|
|
|
$
|
1,500
|
|
|
Capital
lease obligations
|
|
$
|
75
|
|
|
$
|
810
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION,
SIGNIFICANT ACCOUNTING POLICIES
AND RECENT ACCOUNTING
PRONOUNCEMENTS.
|
Organization
and Business
– The consolidated financial statements include the accounts
of Pacific Ethanol, Inc., a Delaware corporation (“Pacific Ethanol”), and all of
its wholly-owned subsidiaries, including Pacific Ethanol California, Inc., a
California corporation (“PEI California”), 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’s four ethanol facilities, which produce ethanol and its co-products,
are as follows:
|
|
Facility
Name
|
Facility
Location
|
Estimated Annual
Production Capacity
(gallons)
|
Current
Operating
Status
|
|
|
|
|
|
|
|
|
|
|
Magic
Valley
|
Burley, ID
|
60,000,000
|
Operating
|
|
|
|
Columbia
|
Boardman,
OR
|
40,000,000
|
Operating
|
|
|
|
Stockton
|
Stockton, CA
|
60,000,000
|
Idled
|
|
|
|
Mader
|
Madera, CA
|
40,000,000
|
Idled
|
|
In
addition, the Company owns a 42% interest in Front Range, which owns a facility
located in Windsor, Colorado, with annual production capacity of up to 50
million gallons.
On March
23, 2005, the Company completed a share exchange transaction with the
shareholders of PEI California and the holders of the membership interests of
Kinergy and ReEnergy, LLC, pursuant to which the Company acquired all of the
issued and outstanding capital stock of PEI California and all of the
outstanding membership interests of Kinergy and ReEnergy, LLC (the “Share
Exchange Transaction”). Immediately prior to the consummation of the Share
Exchange Transaction, the Company’s predecessor, Accessity Corp., a New York
corporation (“Accessity”), reincorporated in the State of Delaware under the
name “Pacific Ethanol, Inc.” through a merger of Accessity with and into its
then-wholly-owned Delaware subsidiary named Pacific Ethanol, Inc., which was
formed for the purpose of effecting the reincorporation (the “Reincorporation
Merger”). In connection with the Reincorporation Merger, the shareholders of
Accessity became stockholders of the Company and the Company succeeded to the
rights, properties and assets and assumed the liabilities of
Accessity.
FASB
Codification
– The Financial Accounting Standards Board (“FASB”) sets
generally accepted accounting principles in the United States (“GAAP”) that the
Company follows to ensure it has consistently reported its financial condition,
results of operations and cash flows. Over the years, the FASB and other
designated GAAP-setting bodies have issued standards in the form of FASB
Statements, Interpretations, Staff Positions, Emerging Issues Task Force
Consensuses and American Institute of Certified Public Accountants Statements of
Position (“SOPs”), etc. Over the years, many of these standards have been
interpreted and amended several times and in many forms.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB
recognized the complexity of its standard-setting process and embarked on a
revised process which resulted in the FASB Accounting Standards Codification
(“Codification” or “ASC”). To the Company, this means instead of following the
guidance in SOP 90-7,
Financial Reporting by Entities in
Reorganization under the Bankruptcy Code
(“SOP 90-7”) for its accounting
and reporting of its restructuring under the protection of Chapter 11 of the
U.S. Bankruptcy Code, it now follows the guidance in FASB ASC 852,
Reorganizations
. The
Codification does not change how the Company accounts for its transactions or
the nature of the related disclosures made. However, when referring to guidance
issued by the FASB, the Company will now refer to sections in the ASC rather
than original guidance.
Chapter
11 Filings
– On May 17, 2009, five indirect wholly-owned subsidiaries of
Pacific Ethanol, Inc., namely, Pacific Ethanol Holding Co. LLC, Pacific Ethanol
Madera LLC, Pacific Ethanol Columbia, LLC, Pacific Ethanol Stockton, LLC and
Pacific Ethanol Magic Valley, LLC (collectively, the “Bankrupt Debtors”) each
commenced a case by filing voluntary petitions for relief under chapter 11 of
Title 11 of the United States Code (the “Bankruptcy Code”) in the United States
Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in an
effort to restructure their indebtedness (“Chapter 11 Filings”).
Neither
Pacific Ethanol, as the parent company, nor any of its other direct or indirect
subsidiaries, including Kinergy and Pacific Ag. Products, LLC (“PAP”), have
filed petitions for relief under the Bankruptcy Code. The Bankrupt Debtors may
not be able to confirm a plan of reorganization, and the Company may not be able
to restructure its debt and raise sufficient capital in a timely manner, and
therefore may need to seek further protection under the Bankruptcy Code,
including at the parent company level. See “Liquidity” immediately
below.
The
Company continues to manage the Bankrupt Debtors pursuant to asset management
agreements and Kinergy and PAP continue to market and sell their ethanol and
feed production pursuant to existing marketing agreements. The Bankrupt Debtors
continue to operate their businesses as “debtors-in-possession” under
jurisdiction of the Bankruptcy Court and in accordance with applicable
provisions of the Bankruptcy Code and order of the Bankruptcy
Court.
Basis of
Presentation and Liquidity
– The consolidated financial statements and
related notes have been prepared in accordance with GAAP and include the
accounts of Pacific Ethanol, each of its wholly-owned subsidiaries and Front
Range. All significant intercompany accounts and transactions have been
eliminated in consolidation.
As a
result of ethanol industry conditions that have negatively affected the
Company’s business and ongoing financial difficulties, the Company believes it
has sufficient liquidity to meet its anticipated working capital, debt service
and other liquidity needs until either June 30, 2010, if the Company is unable
to timely close a prospective $5.0 million credit facility, or through December
31, 2010, if the Company is able to timely close the credit facility and either
pay or further defer a $1.5 million payable owed to a judgment creditor on June
30, 2010. These expectations concerning the Company’s available liquidity until
June 30, 2010 or through December 31, 2010 presume that Lyles does not pursue
any action against the Company due to the Company’s default on an aggregate of
$21.5 million of remaining principal, plus accrued interest and fees, and that
the Company maintains its current levels of borrowing availability under
Kinergy’s line of credit. Accordingly, there continues to be substantial doubt
as to the Company’s ability to continue as a going concern. The Company is
seeking a confirmed plan of reorganization in connection with the Chapter 11
Filings and is seeking to raise additional debt or equity financing, or both,
but there can be no assurance that the Company will be successful. If the
Company cannot confirm a plan of reorganization in connection with the Chapter
11 Filings and raise sufficient capital in a timely manner, the Company may need
to seek further protection under the Bankruptcy Code, including at the Parent
company level.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
consolidated financial statements do not include any other adjustments that
might result from the outcome of these uncertainties.
Cash and
Cash Equivalents
– The Company considers all highly-liquid investments
with an original maturity of three months or less to be cash
equivalents.
Investments
in Marketable Securities
– The Company’s
short-term investments consists of amounts held in money market portfolio funds
and United States Treasury Securities, which represents funds available for
current operations. These short-term investments are classified as
available-for-sale and are carried at their fair market value. These securities
have stated maturities beyond three months but were priced and traded as
short-term instruments. Available-for-sale securities are marked-to-market based
on quoted market values of the securities, with the unrealized gains and losses,
net of tax, reported as a component of accumulated other comprehensive income
(loss). Realized gains and losses on sales of available-for-sale securities are
computed based upon the initial cost adjusted for any other-than-temporary
declines in fair value. The cost of investments sold is determined on the
specific identification method.
Accounts
Receivable and Allowance for Doubtful Accounts
– Trade accounts
receivable are presented at face value, net of the allowance for doubtful
accounts. The Company sells ethanol to gasoline refining and distribution
companies and WDG to dairy operators and animal feed distributors generally
without requiring collateral. Due to a limited number of ethanol customers, the
Company had significant concentrations of credit risk from sales of ethanol as
of December 31, 2009 and 2008, as described below.
The
Company maintains an allowance for doubtful accounts for balances that appear to
have specific collection issues. The collection process is based on the age of
the invoice and requires attempted contacts with the customer at specified
intervals. If, after a specified number of days, the Company has been
unsuccessful in its collection efforts, a bad debt allowance is recorded for the
balance in question. Delinquent accounts receivable are charged against the
allowance for doubtful accounts once uncollectibility has been determined. The
factors considered in reaching this determination are the apparent financial
condition of the customer and the Company’s success in contacting and
negotiating with the customer. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of ability to make
payments, additional allowances may be required.
The
allowance for doubtful accounts was $1,016,000 and $2,210,000 as of December 31,
2009 and 2008, respectively. The Company recorded a bad debt recovery of
$955,000 for the year ended December 31, 2009 and a bad debt expense of
$2,191,000 for the year ended December 31, 2008. The Company does not have any
off-balance sheet credit exposure related to its customers.
Concentrations
of Credit Risk
– Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. Concentrations of credit risk, whether on- or off-balance sheet,
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions described below. Financial instruments
that subject the Company to credit risk consist of cash balances maintained in
excess of federal depository insurance limits and accounts receivable, which
have no collateral or security. The Company has not experienced any losses in
such accounts and believes that it is not exposed to any significant risk of
loss of cash.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company sells fuel-grade ethanol to gasoline refining and distribution
companies. The Company had sales to customers representing 10% or more of total
net sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
19
|
%
|
|
|
19
|
%
|
|
|
|
|
Customer
B
|
|
13
|
%
|
|
|
13
|
%
|
|
|
As of
December 31, 2009, the Company had accounts receivable due from these customers
totaling $2,536,000, representing 20% of total accounts receivable. As of
December 31, 2008, the Company had accounts receivable due from these customers
totaling $5,496,000, representing 23% of total accounts receivable.
The
Company purchases fuel-grade ethanol and corn, its largest cost component in
producing ethanol, from its suppliers. The Company had purchases from ethanol
and corn suppliers representing 10% or more of total purchases by the Company in
the purchase and production of ethanol as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
15
|
%
|
|
|
27
|
%
|
|
|
|
|
Supplier
C
|
|
13
|
%
|
|
|
0
|
%
|
|
|
|
|
Supplier
D
|
|
10
|
%
|
|
|
22
|
%
|
|
|
Restricted
Cash
–
Current Asset
– The restricted cash balances of $205,000 and $2,520,000
as of December 31, 2009 and 2008, respectively, were the balance of deposits
held at the Company’s trade broker in connection with trading instruments
entered into as part of the Company’s hedging strategy.
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
|
|
$
|
5,957
|
|
|
$
|
9,000
|
|
|
|
|
Work
in progress
|
|
|
2,230
|
|
|
|
1,895
|
|
|
|
|
Finished
goods
|
|
|
2,483
|
|
|
|
5,994
|
|
|
|
|
Other
|
|
|
1,461
|
|
|
|
1,519
|
|
|
|
|
Total
|
|
$
|
12,131
|
|
|
$
|
18,408
|
|
|
Property
and Equipment
– Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the following estimated useful
lives:
|
|
Buildings
|
40
years
|
|
|
|
Facilities
and plant equipment
|
10
– 25 years
|
|
|
|
Other
equipment, vehicles and furniture
|
5
– 10 years
|
|
|
|
Water
rights
|
99
years
|
|
The cost
of normal maintenance and repairs is charged to operations as incurred.
Significant capital expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and any
resulting gains or losses are reflected in current operations.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible
Assets
– The Company amortizes intangible assets with definite lives
using the straight-line method over their established lives, generally 2-10
years. Additionally, the Company will test these assets with established lives
for impairment if conditions exist that indicate that carrying values may not be
recoverable. Possible conditions leading to the unrecoverability of these assets
include changes in market conditions, changes in future economic conditions or
changes in technological feasibility that impact the Company’s assessments of
future operations. If the Company determines that an impairment charge is
needed, the charge will be recorded in selling, general and administrative
expenses in the consolidated statements of operations.
Deferred
Financing Costs
– Deferred financing costs, which are included in other
assets, are costs incurred to obtain debt financing, including all related fees,
and are amortized as interest expense over the term of the related financing
using the straight-line method which approximates the interest rate method. To
the extent these fees relate to facility construction, a portion is capitalized
with the related interest expense into construction in progress until such time
as the facility is placed into operation. However, in accordance with FASB ASC
852, upon the Chapter 11 Filings, the Bankrupt Debtors wrote off approximately
$7,545,000 of their unamortized deferred financing fees related to their term
loans and working capital lines of credit, which are reclassified as liabilities
subject to compromise in the Company’s consolidated balance sheet as of December
31, 2009. Amortization of deferred financing costs was $1,193,000 and $2,018,000
for the years ended December 31, 2009 and 2008, respectively. Unamortized
deferred financing costs was $1,035,000 at December 31, 2009.
Derivative
Instruments and Hedging Activities
– Derivative transactions, which can
include forward contracts and futures positions on the New York Mercantile
Exchange and the Chicago Board of Trade and interest rate caps and swaps are
recorded on the balance sheet as assets and liabilities based on the
derivative’s fair value. Changes in the fair value of the derivative contracts
are recognized currently in income unless specific hedge accounting criteria are
met. If derivatives meet those criteria, effective gains and losses are deferred
in accumulated other comprehensive income (loss) and later recorded together
with the hedged item in income. For derivatives designated as a cash flow hedge,
the Company formally documents the hedge and assesses the effectiveness with
associated transactions. The Company has designated and documented contracts for
the physical delivery of commodity products to and from counterparties as normal
purchases and normal sales.
Consolidation
of Variable-Interest Entities
– The Company has determined that Front
Range meets the definition of a variable interest entity. The Company has also
determined that it is the primary beneficiary and is therefore required to treat
Front Range as a consolidated subsidiary for financial reporting purposes rather
than use equity investment accounting treatment. As a result, the Company
consolidates the financial results of Front Range, including its entire balance
sheet with the balance of the noncontrolling interest displayed as a component
of equity, and the income statement after intercompany eliminations with an
adjustment for the noncontrolling interest as net income (loss) attributed to
noncontrolling interest in variable interest entity. As long as the Company is
deemed the primary beneficiary of Front Range, it must treat Front Range as a
consolidated subsidiary for financial reporting purposes.
Revenue
Recognition
– The Company recognizes revenue when it is realized or
realizable and earned. The Company considers revenue realized or realizable and
earned when there is persuasive evidence of an arrangement, delivery has
occurred, the sales price is fixed or determinable, and collection is reasonably
assured. The Company derives revenue primarily from sales of ethanol and related
co-products. The Company recognizes revenue when title transfers to its
customers, which is generally upon the delivery of these products to a
customer’s designated location. These deliveries are made in accordance with
sales commitments and related sales orders entered into with customers either
verbally or in written form. The sales commitments and related sales orders
provide quantities, pricing and conditions of sales. In this regard, the Company
engages in three basic types of revenue generating transactions:
|
|
●
|
As a producer
. Sales as
a producer consist of sales of the Company’s inventory produced at its
ethanol production
facilities.
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
●
|
As a merchant
. Sales as
a merchant consist of sales to customers through purchases from
third-party suppliers in which the Company may or may not obtain physical
control of the ethanol or co-products, though ultimately titled to the
Company, in which shipments are directed from the Company’s suppliers to
its terminals or direct to its customers but for which the Company accepts
the risk of loss in the
transactions.
|
|
|
●
|
As an agent
. Sales as
an agent consist of sales to customers through purchases from third-party
suppliers in which, depending upon the terms of the transactions, title to
the product may technically pass to the Company, but the risks and rewards
of inventory ownership remain with third-party suppliers as the Company
receives a predetermined service fee under these transactions and
therefore acts predominantly in an agency
capacity.
|
The
Company records revenues based upon the gross amounts billed to its customers in
transactions where the Company acts as a producer or a merchant and obtains
title to ethanol and its co-products and therefore owns the product and any
related, unmitigated inventory risk for the ethanol, regardless of whether the
Company actually obtains physical control of the product.
When the
Company acts in an agency capacity, it recognizes revenue on a net basis or
recognizes its predetermined agency fees and any associated freight only, based
upon the amount of net revenues retained in excess of amounts paid to suppliers.
Revenue from sales of third-party ethanol and co-products is recorded net of
costs when the Company is acting as an agent between the customer and supplier
and gross when the Company is a principal to the transaction. Several factors
are considered to determine whether the Company is acting as an agent or
principal, most notably whether the Company is the primary obligor to the
customer and whether the Company has inventory risk and related risk of loss.
Consideration is also given to whether the Company has latitude in establishing
the sales price or has credit risk, or both.
Shipping
and Handling Costs
– Shipping and handling costs are classified as a
component of cost of goods sold in the accompanying consolidated statements of
operations.
Stock-Based
Compensation
– The Company accounts for the cost of employee services
received in exchange for the award of equity instruments based on the fair value
of the award on the date of grant. Fair value is determined as the closing
market price of the Company’s common stock on the date of grant of the
restricted stock. The expense is to be recognized over the period during which
an employee is required to provide services in exchange for the award. The
Company estimates forfeitures at the time of grant and revised, if necessary, in
the second quarter of each year, if actual forfeitures differ from those
estimates. Based on historical experience, the Company estimated future unvested
option forfeitures at 3% as of December 31, 2009 and 2008. The Company
recognizes stock-based compensation expense as a component of general and
administrative expenses in the consolidated statements of
operations.
Impairment
of Long-Lived Assets
– The Company assesses the impairment of long-lived
assets, including property and equipment and purchased intangibles subject to
amortization, when events or changes in circumstances indicate that the fair
value of assets could be less than their net book value. In such event, the
Company assesses long-lived assets for impairment by first determining the
forecasted, undiscounted cash flows the asset (or asset group) is expected to
generate plus the net proceeds expected from the sale of the asset (or asset
group). If this amount is less than the carrying value of the asset (or asset
group), the Company will then determine the fair value of the asset (or asset
group). An impairment loss would be recognized when the fair value is less than
the related asset’s net book value, and an impairment expense would be recorded
in the amount of the difference. Forecasts of future cash flows are judgments
based on the Company’s experience and knowledge of its operations and the
industries in which it operates. These forecasts could be significantly affected
by future changes in market conditions, the economic environment, including
inflation, and purchasing decisions of the Company’s customers.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
– Income taxes are accounted for under the asset and liability
approach, where deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities,
and are measured using enacted tax rates and laws that are expected to be in
effect when the differences reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Should the Company incur interest and penalties relating to tax uncertainties,
such amounts would be classified as a component of other expense and operating
expense, respectively.
Loss Per
Share
– Basic loss per share is computed on the basis of the
weighted-average number of shares of common stock outstanding during the period.
Preferred dividends are deducted from net loss and are considered in the
calculation of loss available to common stockholders in computing basic loss per
share.
The
following table computes basic and diluted net loss per share (in thousands,
except per share data):
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
(basic and diluted):
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(308,153
|
)
|
|
$
|
(146,547
|
)
|
|
|
|
Preferred
stock dividends
|
|
|
(3,202
|
)
|
|
|
(4,104
|
)
|
|
|
|
Deemed
dividend on preferred stock
|
|
|
—
|
|
|
|
(761
|
)
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(311,355
|
)
|
|
$
|
(151,412
|
)
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
outstanding
– basic and diluted
|
|
|
57,084
|
|
|
|
50,147
|
|
|
|
|
Loss
per share – basic and diluted
|
|
$
|
(5.45
|
)
|
|
$
|
(3.02
|
)
|
|
The
Company is in arrears on all of the accrued dividends on its preferred stock of
$3,202,000, or $0.06 per common share. There were an aggregate of 7,038,000 and
10,930,000 of potentially dilutive shares from stock options, common stock
warrants and convertible securities outstanding as of December 31, 2009 and
2008, respectively. These options, warrants and convertible securities were not
considered in calculating diluted loss per common share for the years ended
December 31, 2009 and 2008, as their effect would be anti-dilutive. As a result,
for each of the years ended December 31, 2009 and 2008, the Company’s basic and
diluted loss per share are the same. As discussed in Note 17, the Company
intends to issue additional shares of its common stock in satisfaction a portion
of its indebtedness.
Financial
Instruments
– The carrying value of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued expenses are
reasonable estimates of their fair value because of the short maturity of these
items. Except as noted below, the Company believes the carrying values of its
notes payable and long-term debt approximate fair value because the interest
rates on these instruments are variable.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company believes the carrying values and estimated fair values of its current
portion of long-term notes payable are as follows at December 31, 2008 (in
thousands):
|
|
Carrying
Value
|
|
$
|
291,925
|
|
|
|
|
Estimated
Fair Value
|
|
$
|
125,136
|
|
|
The
Company estimated the fair value of its current portion of long-term notes
payable associated with its Debt Financing, which at the time was in forbearance
consistent with its related interest rate caps and swaps. As discussed in Note
14, the Company applied a 40% standard market recovery rate to its caps and
swaps, and accordingly, applied the rate to its related debt carrying
value.
Estimates
and Assumptions
– The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates are required as part of determining
allowance for doubtful accounts, estimated lives of property and equipment and
intangibles, goodwill and long-lived asset impairments, valuation allowances on
deferred income taxes, and the potential outcome of future tax consequences of
events recognized in the Company’s financial statements or tax returns. Actual
results and outcomes may materially differ from management’s estimates and
assumptions.
Reclassifications
– Certain prior year amounts have been reclassified to conform to the current
presentation. Such reclassification had no effect on the net loss reported in
the consolidated statements of operations.
Recently
Issued Accounting Pronouncements
– On June 12, 2009, the FASB amended its
guidance to FASB ASC 810,
Consolidations
, surrounding a
company’s analysis to determine whether any of its variable interest entities
constitute controlling financial interests in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics: (a) the power to
direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance, and (b) the obligation to absorb
losses of the entity that could potentially be significant to the variable
interest entity. Additionally, an enterprise is required to assess whether it
has an implicit financial responsibility to ensure that a variable interest
entity operates as designed when determining whether it has the power to direct
the activities of the variable interest entity that most significantly impact
the entity’s economic performance. The new guidance also requires ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. The guidance is effective for the first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
The Company will adopt these provisions beginning on January 1, 2010. The
Company is currently evaluating whether this guidance will have a material
effect on its financial condition or results of operations.
On May
28, 2009, the FASB issued FASB ASC 855,
Subsequent Event
s, which
provides guidance on management’s assessment of subsequent events. Historically,
management had relied on United States auditing literature for guidance on
assessing and disclosing subsequent events. FASB ASC 855 represents the
inclusion of guidance on subsequent events in the accounting literature and is
directed specifically to management, since management is responsible for
preparing an entity’s financial statements. The guidance clarifies that
management must evaluate, as of each reporting period, events or transactions
that occur after the balance sheet date through the date that the financial
statements are issued. The guidance is effective prospectively for interim and
annual financial periods ending after June 15, 2009. The Company adopted the
provisions of FASB ASC 855 for its reporting period ending June 30, 2009 and its
adoption did not have a material impact on the Company’s financial condition or
results of operations. The Company has evaluated subsequent events up through
the date of the filing of this report with the Securities and Exchange
Commission.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
January 1, 2009, the Company adopted the provisions of FASB ASC 810,
Consolidations
, which amended
existing guidance that changed the Company’s classification and reporting for
its noncontrolling interests in its variable interest entity to a component of
stockholders’ equity (deficit) and other changes to the format of its financial
statements. Except for these changes in classification, the adoption of FASB ASC
810 did not have a material impact on the Company’s financial condition or
results of operations.
On
January 1, 2009, the Company adopted certain provisions of FASB ASC 815,
Derivatives and Hedging
,
which changed the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under FASB ASC 815 and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. The adoption of these amended
provisions resulted in enhanced disclosures and did not have any impact on the
Company’s financial condition or results of operations. (See Note
7.)
On
January 1, 2009, the Company adopted the provisions of FASB ASC 815,
Derivatives and Hedging
,
which mandates a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity’s own stock.
The adoption of these provisions did not have a material impact on the Company’s
financial condition or results of operations.
On
January 1, 2009, the Company adopted certain provisions of FASB ASC 805,
Business Combinations
, which
amended certain of its previous provisions. These amendments provide additional
guidance that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
The guidance requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. In addition, the guidance requires acquisition costs and
restructuring costs that the acquirer expected but was not obligated to incur to
be recognized separately from the business combination, therefore, expensed
instead of part of the purchase price allocation. These amended provisions will
be applied prospectively to business combinations for which the acquisition date
is on or after January 1, 2009. The adoption of these provisions did not have a
material impact on the Company’s financial condition or results of
operations.
|
2.
|
VARIABLE
INTEREST ENTITY.
|
On
October 17, 2006, the Company entered into a Membership Interest Purchase
Agreement with Eagle Energy to acquire Eagle Energy’s 42% 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.
The
Company has determined that Front Range meets the definition of a variable
interest. The Company has also determined that it is the primary beneficiary and
is therefore required to treat Front Range as a consolidated subsidiary for
financial reporting purposes rather than use equity investment accounting
treatment. As a result, the Company consolidates the financial results of Front
Range, including its entire balance sheet with the balance of the noncontrolling
interest displayed as a component of equity, and its income statement after
intercompany eliminations with an adjustment for the noncontrolling interest in
net income. As long as the Company is deemed the primary beneficiary of Front
Range, it must treat Front Range as a consolidated subsidiary for financial
reporting purposes.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to
the Company’s acquisition of its ownership interest in Front Range, the Company,
directly or through one of its subsidiaries, had entered into certain marketing
and management agreements with Front Range.
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
a half years with provisions for annual automatic renewal
thereafter.
The
Company entered into a grain supply agreement with Front Range on August 20,
2005 (amended October 17, 2006) under which the Company was to negotiate on
behalf of Front Range all grain purchase, procurement and transport contracts.
The Company was to receive a $1.00 per ton fee related to this service. The
grain supply agreement expired in May 2009.
The
Company entered into a WDG marketing and services agreement with Front Range on
August 19, 2005 (amended October 17, 2006) that provided the Company with the
exclusive right to market and sell all of Front Range’s WDG production. The
Company was to receive the greater of a 5% fee of the amount sold or $2.00 per
ton. The WDG marketing and services agreement had a term of two and a half years
with provisions for annual automatic renewal thereafter. In February 2009, the
Company and Front Range terminated this agreement and entered into a new
agreement with similar terms. The revised WDG marketing and services agreement
expired in May 2009.
|
3.
|
PROPERTY
AND EQUIPMENT.
|
Property and equipment consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
and plant equipment
|
|
$
|
307,142
|
|
|
$
|
549,829
|
|
|
|
|
Land
|
|
|
5,566
|
|
|
|
5,778
|
|
|
|
|
Other
equipment, vehicles and furniture
|
|
|
4,749
|
|
|
|
4,787
|
|
|
|
|
Water
rights – capital lease
|
|
|
1,613
|
|
|
|
1,613
|
|
|
|
|
Construction
in progress
|
|
|
2,445
|
|
|
|
11,655
|
|
|
|
|
|
|
|
321,515
|
|
|
|
573,662
|
|
|
|
|
Accumulated
depreciation
|
|
|
(77,782
|
)
|
|
|
(43,625
|
)
|
|
|
|
|
|
$
|
243,733
|
|
|
$
|
530,037
|
|
|
In 2008,
the Company performed its impairment analysis for the asset group associated
with its suspended plant construction project in the Imperial Valley near
Calipatria, California (the “Imperial Project”). The asset group consisted of
construction in progress of $43,751,000. In November 2008, the Company began
proceedings to liquidate these assets and liabilities. After assessing the
estimated undiscounted cash flows, the Company recorded an impairment charge of
$40,900,000, thereby reducing its property and equipment by that amount for the
year ended December 31, 2008. As developments occurred, the Company further
impaired these assets by an additional $2,200,000 for the nine months ended
September 30, 2009. In the fourth quarter of 2009, the assets were sold and the
resulting cash proceeds and settlement of the remaining liabilities were deemed
out of the Company’s control as they had been assigned to a trustee. As such,
the Company wrote-off its remaining liabilities, resulting in a gain of
$14,232,000, which was recorded in the Company’s statements of operations for
the year ended December 31, 2009.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company, through its Bankrupt Debtors, maintains ethanol production facilities,
with installed capacity of 200 million gallons per year. The carrying value of
these facilities at December 31, 2009 was approximately $407,657,000. In
accordance with the Company’s policy for evaluating impairment of long-lived
assets in accordance with FASB ASC 360,
Property, Plant and
Equipment
, management evaluated these facilities for possible impairment
based on projected future cash flows from these facilities. As the Bankrupt
Debtors are currently involved in the Chapter 11 Filings, and as it continues to
negotiate its reorganization, there are different probable scenarios that may
arise as the results of such negotiations. As such, the Company evaluated the
various cash flow scenarios using a probability-weighted analysis. The analysis
resulted in cash flows that were less than the carrying values of the facilities
at December 31, 2009. As such, the Company determined the fair value of these
facilities at approximately $160,000,000, which was $247,657,000 below their
carrying values, resulting in a noncash impairment charge. The Company’s
estimate of fair value was based on both market transactions over the past year,
for similar assets, giving more weight to those transactions that have more
recently closed, as well as valuations contemplated as the Company continues its
negotiations with its lenders and other interested parties. Some of the sales in
early 2009 were of facilities in bankruptcy and may not be representative of
transactions outside of bankruptcy. The Company’s estimated fair values of its
facilities are highly subjective and may change in the future as additional
information is obtained.
In
connection with the Company’s construction of its four ethanol production
facilities, it recorded capitalized interest during their construction, which is
included in property and equipment. At December 31, 2009 and 2008, capitalized
interest of $16,270,000 was included in facilities and plant equipment, before
impairments and $60,000 and $1,410,000, respectively, is included in
construction in progress. Depreciation expense, including idle property
discussed below, was $34,160,000 and $25,940,000 for the years ended December
31, 2009 and 2008, respectively. At December 31, 2009, two of the Company’s
ethanol production facilities were idled due to adverse market conditions. The
carrying values of these facilities totaled $80,000,000 at December 31, 2009.
The Company continues to depreciate these assets which resulted in depreciation
expense in the aggregate of $13,415,000 for the year ended December 31,
2009.
Intangible
assets, including goodwill, consisted of the following (in
thousands):
|
|
|
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization/ Impairment
|
|
|
|
|
|
Non-Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
recognized in business combinations
|
|
|
|
|
$
|
88,168
|
|
|
$
|
(88,168
|
)
|
|
$
|
—
|
|
|
$
|
88,168
|
|
|
$
|
(88,168
|
)
|
|
$
|
—
|
|
|
Tradename
|
|
|
|
|
|
2,678
|
|
|
|
—
|
|
|
|
2,678
|
|
|
|
2,678
|
|
|
|
—
|
|
|
|
2,678
|
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
10
|
|
|
|
4,741
|
|
|
|
(2,263
|
)
|
|
|
2,478
|
|
|
|
4,741
|
|
|
|
(1,789
|
)
|
|
|
2,952
|
|
|
Total
goodwill and intangible assets
|
|
|
|
|
$
|
95,587
|
|
|
$
|
(90,431
|
)
|
|
$
|
5,156
|
|
|
$
|
95,587
|
|
|
$
|
(89,957
|
)
|
|
$
|
5,630
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
–
The Company’s recorded
goodwill of $88,168,000 originated from the Share Exchange Transaction and the
Company’s purchase of its interest in Front Range. In 2008, the Company adjusted
its goodwill associated with its acquisition of its interest in Front Range
resulting in a decrease of goodwill of $1,121,000. Additionally, the Company
performed its annual review of impairment of goodwill and 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. The Company did not record
any goodwill impairments for the year ended December 31, 2009.
Tradename
– The Company recorded tradename of $2,678,000 as part of the Share Exchange
Transaction. The Company determined that the tradename has an indefinite life
and therefore, rather than being amortized, will be tested annually for
impairment. The Company did not record any impairment on its tradename for the
years ended December 31, 2009 and 2008.
Customer
Relationships
–
The Company recorded customer relationships of $4,741,000 as part of the Share
Exchange Transaction. The Company has established a useful life of ten years for
these customer relationships.
Amortization
expense associated with intangible assets totaled $474,000 and $693,000 for the
years ended December 31, 2009 and 2008, respectively. The weighted-average
unamortized life of the customer relationships is 5.2 years.
The
expected amortization expense relating to amortizable intangible assets in each
of the five years after December 31, 2009 are (in thousands):
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
474
|
|
|
|
|
2011
|
|
|
474
|
|
|
|
|
2012
|
|
|
474
|
|
|
|
|
2013
|
|
|
474
|
|
|
|
|
2014
|
|
|
474
|
|
|
|
|
Thereafter
|
|
|
108
|
|
|
|
|
Total
|
|
$
|
2,478
|
|
|
The
business and activities of the Company expose it to a variety of market risks,
including risks related to changes in commodity prices and interest rates. The
Company monitors and manages these financial exposures as an integral part of
its risk management program. This program recognizes the unpredictability of
financial markets and seeks to reduce the potentially adverse effects that
market volatility could have on operating results. The Company recognizes all of
its derivative instruments in its statement of financial position as either
assets or liabilities, depending on the rights or obligations under the
contracts, unless the contracts qualify as a normal purchase or normal sale as
further discussed below. The Company has designated and documented contracts for
the physical delivery of commodity products to and from counterparties as normal
purchases and normal sales. Derivative instruments are measured at fair value.
Changes in the derivative’s fair value are recognized currently in income unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative’s effective gains and losses to be deferred in
accumulated other comprehensive income (loss) and later recorded together with
the gains and losses to offset related results on the hedged item in income.
Companies must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 cash flow hedges and effectiveness is evaluated by assessing the
probability of the anticipated transactions and regressing commodity futures
prices against the Company’s purchase and sales prices. Ineffectiveness, which
is defined as the degree to which the derivative does not offset the underlying
exposure, is recognized immediately in cost of goods sold.
For the
year ended December 31, 2009, the Company recorded an effective loss of $17,000
and a loss from ineffectiveness in the amount of $85,000, both of which were
recorded in cost of goods sold. For the year ended December 31, 2008, the
Company recorded an effective gain of $566,000 and a loss from ineffectiveness
in the amount of $991,000. There were no balances remaining on these derivatives
as of December 31, 2009 and 2008.
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 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. The Company recognized a loss of $249,000 and $2,395,000 as
the change in the fair value of these contracts for the years ended December 31,
2009 and 2008, respectively. The notional balances remaining on these contracts
as of December 31, 2009 and 2008 were $319,000 and $4,215,000,
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 $16,063,000
is 5.50%-6.00% per annum. The rate for notional balances of interest rate swaps
ranging from $543,000 to $38,000,000 is 5.01%-8.16% per annum.
These
derivatives are designated and documented as 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 year ended December 31, 2009,
gains from effectiveness in the amount of $190,000 and gains from undesignated
hedges in the amount of $2,529,000 were recorded in other income (expense). For
the year ended December 31, 2008, gains from ineffectiveness in the amount of
$4,999,000, gains from effectiveness in the amount of $75,000 and losses from
undesignated hedges in the amount of $6,456,000 were recorded in other income
(expense). These gains and losses resulted primarily from the Company’s efforts
to restructure its debt financing, therefore making it not probable that the
related borrowings would be paid as designated. As such, the Company
de-designated certain of its interest rate caps and swaps.
The
Company marked its derivative instruments to fair value at each period end,
except for those derivative contracts that qualified for the normal purchase and
sale exemption.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
classification and amounts of the Company’s derivatives not designated as
hedging instruments are as follows (in thousands):
|
|
|
|
As
of December 31, 2009
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
Type
of Instrument
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
$
|
971
|
|
|
|
|
Interest
rate contracts
|
|
Other
current assets
|
|
$
|
21
|
|
Liabilities
subject to compromise
|
|
|
2,875
|
|
|
|
|
|
|
|
|
$
|
21
|
|
|
|
$
|
3,846
|
|
|
The
classification and amounts of the Company’s recognized gains (losses) for its
derivatives not designated as hedging instruments are as follow (in
thousands):
|
|
|
|
|
|
Gain
(Loss) Recognized
|
|
|
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
Type
of Instrument
|
|
Statements
of Operations Location
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Other
expense, net
|
|
$
|
2,529
|
|
|
$
|
(6,456
|
)
|
|
|
|
|
|
|
|
$
|
2,529
|
|
|
$
|
(6,456
|
)
|
|
The gains
for the year ended December 31, 2009 resulted primarily from the Company’s
efforts to restructure its debt financing and, therefore, making it not probable
that the related borrowings would be paid as designated. As such, the Company
de-designated certain of its interest rate caps and swaps. The losses for the
year ended December 31, 2008 resulted primarily from the Company’s deferral of
constructing its Imperial Valley facility.
Long-term
borrowings are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to related party
|
|
$
|
31,500
|
|
|
$
|
31,500
|
|
|
|
|
DIP
Financing and rollup
|
|
|
39,654
|
|
|
|
—
|
|
|
|
|
Notes
payable to related parties
|
|
|
2,000
|
|
|
|
—
|
|
|
|
|
Kinergy
operating line of credit
|
|
|
2,452
|
|
|
|
10,482
|
|
|
|
|
Swap
note
|
|
|
13,495
|
|
|
|
14,987
|
|
|
|
|
Variable
rate note
|
|
|
—
|
|
|
|
582
|
|
|
|
|
Front
Range operating line of credit
|
|
|
—
|
|
|
|
1,200
|
|
|
|
|
Water
rights capital lease obligations
|
|
|
1,003
|
|
|
|
1,123
|
|
|
|
|
Term
loans and working capital lines of credit
|
|
|
—
|
|
|
|
246,483
|
|
|
|
|
|
|
|
90,104
|
|
|
|
306,357
|
|
|
|
|
Less
short-term portion
|
|
|
(77,365
|
)
|
|
|
(291,925
|
)
|
|
|
|
Long-term
debt
|
|
$
|
12,739
|
|
|
$
|
14,432
|
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 (“Lyles United”) under a Secured Promissory
Note containing customary terms and conditions. The loan accrued 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 to 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 sale of the Company’s Series B Preferred Stock on March 27, 2008. The
warrant expired unexercised in September 2009.
In
December 2007, PEI Imperial borrowed an additional $15,000,000 from Lyles United
under a second Secured Promissory Note containing customary terms and
conditions. The loan accrued 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.
In
November 2008, PEI Imperial restructured its aggregate $30,000,000 loan
from Lyles United by paying all accrued and unpaid interest thereon and
assigning the aforementioned two Secured Promissory Notes to the Company. The
Company issued an Amended and Restated Promissory Note in the principal amount
of $30,000,000 and Lyles United cancelled the two Secured Promissory Notes. The
Amended and Restated Promissory Note was due March 15, 2009 and accrues interest
at the Prime Rate of interest as reported from time to time in The Wall Street
Journal, plus 3.00%, computed on the basis of a 360-day year of twelve 30-day
months. The Company and Lyles United jointly instructed Pacific Ethanol
California, Inc. (“PEI California”) pursuant to an Irrevocable Joint Instruction
Letter to remit directly to Lyles United any cash distributions received by PEI
California on account of its ownership interests in PEI Imperial and Front Range
until such time as the Amended and Restated Promissory Note is repaid in full.
In addition, PEI California entered into a Limited Recourse Guaranty to the
extent of such cash distributions in favor of Lyles United. Finally, PAP entered
into an Unconditional Guaranty as to all of the Company’s obligations under the
Amended and Restated Promissory Note and pledged all of its assets as security
therefor pursuant to a Security Agreement.
In
October 2008, upon completion of the Stockton facility, the Company converted
final unpaid construction costs to an unsecured note payable. The note payable
is between the Company and Lyles Mechanical Co. in the principal amount of
$1,500,000 and was due with accrued interest on March 31, 2009. Interest accrues
at 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.
In
February 2009, the Company notified Lyles United and Lyles Mechanical Co.
(collectively “Lyles”) that it would not be able to pay off its notes due March
15 and March 31, 2009 and as a result, entered into a forbearance agreement.
Under the terms of the forbearance agreement, Lyles agreed to forbear from
exercising their rights and remedies against the Company through April 30, 2009.
These forbearances have not been extended.
The
Company has announced agreements designed to satisfy this indebtedness. These
agreements are between a third party and Lyles under which Lyles may transfer
its claims in respect of the Company’s indebtedness in $5.0 million tranches,
which claims the third party may then settle in exchange for shares of the
Company’s common stock. Through the filing of this report, Lyles claims in
respect of an aggregate of $10.0 million of Company indebtedness have been
settled through this process. However, the Company may be unable to settle any
further claims in respect of this indebtedness unless and until the Company
receives stockholder approval of this arrangement as The NASDAQ Stock Market
imposes on its listed companies certain limitations on the number of shares
issuable in certain transactions.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DIP
Financing
– Certain of the Bankrupt Debtors’ existing lenders (the “DIP
Lenders”) entered into a credit agreement for up to a total of $20,000,000 (“DIP
Financing”), not including the DIP Rollup amount (as defined below). In October
2009, the DIP Financing amount was increased to a total of $25,000,000. The DIP
Financing was initially approved by the Bankruptcy Court on June 3, 2009, and
the Bankruptcy Court approved the October 2009 increase on October 23, 2009. The
DIP Financing provides for a first priority lien in the Chapter 11 Filings.
Proceeds of the DIP Financing will be used, among other things, to fund the
working capital and general corporate needs of the Company and the costs of the
Chapter 11 Filings in accordance with an approved budget. The DIP Financing
currently matures on March 31, 2010, or sooner if certain covenants are not
maintained. These covenants include various reporting requirements to the DIP
Lenders, as well as confirmation of a plan of reorganization prior to the
maturity date. The Company believes it is in compliance with the DIP Financing
covenants. The DIP Financing allows the DIP Lenders a first priority lien on a
dollar-for-dollar basis of their term loans and working capital lines of credit
funded prior to the Chapter 11 Filings for each dollar of DIP Financing. As the
Bankrupt Debtors draw down on their DIP Financing, an equivalent amount is
reclassified from liabilities subject to compromise to DIP financing and rollup
(“DIP Rollup”). As of December 31, 2009, the Bankrupt Debtors had received
proceeds in the amount of $19,827,000 from the DIP Financing. After accounting
for the DIP Rollup, the DIP Financing has a total balance of $39,654,000. The
interest rate at December 31, 2009, was approximately 14% per
annum.
Notes
Payable to Related Parties
– On March 31, 2009, the Company’s Chairman of
the Board and its Chief Executive Officer provided funds totaling $2,000,000 for
general cash and operating purposes, in exchange for two unsecured promissory
notes payable by the Company. Interest on the unpaid principal amounts accrues
at a rate per annum of 8.00%. All principal and accrued and unpaid interest on
the promissory notes was due and payable in March 2010. The maturity date of
these notes has been extended to January 5, 2011.
Kinergy
Operating Line of Credit
– Kinergy was originally a party to a
$17,500,000 credit facility dated as of August 17, 2007 with Comerica Bank.
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. On May 12, 2008, Kinergy and Comerica entered into a
forbearance agreement. The forbearance agreement identified certain existing
defaults under the credit facility 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 occurred under the Loan Documents, from exercising its rights
and remedies under the Loan Documents and under applicable law.
On July
28, 2008, Kinergy entered into a new Loan and Security Agreement (the “Loan
Agreement”) dated July 28, 2008 with Wachovia Capital Finance Corporation
(Western) (“Agent”) and Wachovia Bank, National Association (“Wachovia”).
Kinergy initially used the proceeds from the closing of this credit facility to
repay all amounts outstanding under its credit facility with Comerica Bank and
to pay certain closing fees.
The
original terms of the Loan Agreement provided 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 could also obtain letters of credit under the credit facility, subject
to a letter of credit sublimit of $10,000,000. The credit facility was subject
to certain other sublimits, including as to inventory loan limits. The Loan
Agreement also contained restrictions on distributions of funds from Kinergy to
the Company. In addition, the Loan Agreement contained a single financial
covenant requiring that Kinergy generate EBITDA in certain specified amounts
during 2008 and 2009.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Kinergy
paid customary closing fees, including a closing fee of 0.50% of the maximum
credit, or $200,000, to Wachovia, and $150,000 in legal fees to legal counsel to
Agent and Wachovia. On July 28, 2008, the Company entered into a Guarantee dated
July 28, 2008 in favor of Agent for and on behalf of Wachovia. 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.
In
February 2009, Kinergy determined it had violated certain of its covenants,
including its EBITDA covenant for 2008, and as a result, entered into an
amendment and forbearance agreement (“Wachovia Forbearance”) with Agent and
Wachovia. The Wachovia Forbearance identified certain defaults under the Loan
Agreement, as to which Agent and Wachovia agreed to forebear from exercising
their rights and remedies under the Loan Agreement commencing February 13, 2009
through April 30, 2009.
The
Wachovia Forbearance reduced the aggregate amount of the credit facility from up
to $40,000,000 to $10,000,000. The Wachovia Forbearance also increased the
interest rates. 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) 4.50% 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) 2.25% 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 Wachovia.
On May
17, 2009, Kinergy and the Company entered into an Amendment and Waiver Agreement
(“Wachovia Amendment”) with Kinergy’s lender. Under the Wachovia Amendment,
Kinergy’s monthly unused line fee increased from 0.375% to 0.500% of the amount
by which the maximum credit under the Line of Credit exceeds the average daily
principal balance. In addition, the Wachovia Amendment imposed a new $5,000
monthly servicing fee. The Wachovia Amendment also limited most payments that
may be made by Kinergy to the Company as reimbursement for management and other
services provided by the Company to Kinergy to $600,000 in any three month
period and $2,400,000 in any twelve month period. The Amendment amends the
definition of “Material Adverse Effect” to exclude the Chapter 11 Filings and
certain other matters and clarifies that certain events of default do not extend
to the Bankrupt Debtors. However, the Wachovia Amendment further made many
events of default that previously were applicable only to Kinergy now applicable
to the Company and its subsidiaries except for certain specified subsidiaries
including the Bankrupt Debtors. Under the Wachovia Amendment, the term of the
Line of Credit was reduced from three years to a term expiring on October 31,
2010. In addition, the Wachovia Amendment amended and restated Kinergy’s EBITDA
covenants. The Wachovia Amendment also prohibited Kinergy from incurring any
additional indebtedness (other than certain intercompany indebtedness) or making
any capital expenditures in excess of $100,000 absent the lender’s prior
consent. Further, under the Wachovia Amendment, the lender waived all existing
defaults under the Line of Credit. Kinergy was required to pay an amendment fee
of $200,000 to the lender.
The
Wachovia Amendment also required that, on or before May 31, 2009, the lender
shall have received copies of financing agreements, in form and substance
reasonably satisfactory to the lender, among the Company and certain of its
subsidiaries and Lyles United, which agreements shall provide, among other
things, for (i) a credit facility available to the Company of up to $2,500,000
over a term of eighteen months (or such shorter term but in no event prior to
the maturity date of the Loan Agreement), (ii) the grant by the Company to Lyles
United of a security interest in substantially all of the Company’s assets,
including a pledge by the Company to Lyles United of the equity interest of the
Company in Kinergy, and (iii) the use by the Company of borrowings thereunder
for general corporate and other purposes in accordance with the terms thereof.
The Company did not obtain the aforementioned financing with Lyles United and
Kinergy did not meet the required EBITDA amount for the month ended August 31,
2009, but did meet the required EBITDA amount for the month ended September 30,
2009. In November 2009, Kinergy obtained an amendment from its lender, which
removed the aforementioned financing requirement, waived the August 31, 2009
covenant violation and revised the EBITDA calculations for the remainder of
2009. Consequently, the Company believes that Kinergy is in compliance with the
credit facility.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Front
Range Operating Line of Credit
– Front Range has a line of credit of
$3,500,000 with a commercial bank to support working capital, specifically
inventories and accounts receivable. The line of credit expires June 14, 2010
and bears a floating interest rate equal to the greater of 5.00% or the 30-day
LIBOR plus 3.25-4.00%, depending on Front Range’s debt-to-net worth ratio. The
line of credit is secured by substantially all of the assets of Front
Range.
Swap
Note
– The swap note is a term loan, with a floating interest rate,
established on a quarterly basis, equal to the 90-day LIBOR plus 3.00%. Front
Range has entered into a swap contract with the lender to provide a fixed rate
of 8.16%. The loan matures in five years, but has required principal payments
due based on a ten-year amortization schedule. Quarterly payments are
approximately $678,000, including interest with final payment due November 10,
2011.
Variable
Rate Note
– The variable rate note was a term loan that carried a
floating interest rate equal to the 90-day LIBOR plus 2.75-3.50%, depending on a
debt-to-net worth ratio. The variable loan matured in five years and was
amortized over ten years with a final payment due November 10, 2011. Quarterly
payments of approximately $654,000 were applied in a cascading order, as
follows: long-term revolving note interest, variable rate note interest,
variable rate note principal and long-term revolving note principal. As of
December 31, 2009, the variable rate note was paid in full.
Long-Term
Revolving Note
– The long-term revolving note is a revolving loan in the
amount of $2,500,000 and carries a floating interest rate equal to the greater
of 5.00% or the 30-day LIBOR, plus 3.25-4.00%, depending on a debt-to-net worth
ratio. As of December 31, 2009, the interest rate was 5.00%. The revolving loan
matures in five years, but is amortized over ten years with a final payment due
August 10, 2011. Repayment terms are included above in the description of the
variable rate note.
As of December 31, 2009,
there were no borrowings on the revolving note.
The three
notes listed above represent permanent financing and are collateralized by a
perfected, priority security interest in all of the assets of Front Range,
including inventories and all rights, title and interest in all tangible and
intangible assets of Front Range; a pledge of 100% of the ownership interest in
Front Range; an assignment of all revenues produced by Front Range; a pledge and
assignment of Front Range’s material contracts and documents, to the extent
assignable; all contractual cash flows associated with such agreements; and any
other collateral security as the lender may reasonably request.
These
collateralizations restrict the assets and revenues as well as future financing
strategies of Front Range, the Company’s variable interest entity, but do not
apply to, nor have bearing upon any financing strategies that the Company may
choose to undertake in the future.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
carrying values and classification of assets that are collateral for the
obligations of Front Range at December 31, 2009 are as follows (in
thousands):
|
|
Current
assets
|
|
$
|
17,046
|
|
|
|
|
Property
and equipment
|
|
|
44,648
|
|
|
|
|
Other
assets
|
|
|
261
|
|
|
|
|
Total
collateralized assets
|
|
$
|
61,955
|
|
|
Front
Range is subject to certain loan covenants. Under these covenants, Front Range
is required to maintain a certain fixed-charge coverage ratio, a minimum level
of working capital and a minimum level of net worth. The covenants also set a
maximum amount of additional debt that may be incurred by Front Range. The
covenants also limit annual distributions that may be made to owners of Front
Range, including the Company, based on Front Range’s leverage ratio. The Company
believes that Front Range was in compliance with its covenants with its lender
as of December 31, 2009.
Water
Rights Capital Lease
– The water rights capital lease obligation relates
to a lease agreement with the Town of Windsor for augmentation water for use in
Front Range’s production processes. The lease required an initial payment of
$400,000, paid in 2006, and annual payments of $160,000 per year for the
following ten years. The future payments were discounted using a 5.25% interest
rate which was comparable to available borrowing rates at the time of execution
of the agreement. The obligation has been recorded as a capital lease and
included in long-term obligations and the related asset has been included in
property and equipment.
Term
Loans & Working Capital Lines of Credit
– In connection with
financing the Company’s construction of its four ethanol production facilities,
in 2007, the Company entered into a debt financing transaction through its
wholly-owned indirect subsidiaries. These subsidiaries are now the Bankrupt
Debtors and these loans are discussed in more detail in Note 7.
Interest
Expense on Borrowings
– Interest expense on all borrowings discussed
above, which excludes certain liabilities of the Bankrupt Debtors, was
$15,253,000 and $12,271,000
for the years ended
December 31, 2009 and 2008, respectively. These amounts were net of capitalized
interest and deferred financing fees of $0 and $9,186,000 for the years ended
December 31, 2009 and 2008, respectively, and included the Company’s
construction costs of plant and equipment.
Contractual
interest expense represents amounts due under the contractual terms of
outstanding debt, including liabilities subject to compromise for which interest
expense is not recognized in accordance with the provisions of FASB ASC 852. The
Bankrupt Debtors did not record contractual interest expense on certain
unsecured prepetition debt subject to compromise from the date of the Chapter 11
Filings. The Bankrupt Debtors are however, accruing interest on their DIP
Financing and related Rollup Debt as these amounts are likely to be paid in full
upon confirmation of a plan of reorganization. For the year ended December 31,
2009, the Bankrupt Debtors recorded interest expense of approximately
$11,508,000. Had the Bankrupt Debtors accrued interest on all of their
liabilities subject to compromise from May 17, 2009 through December 31, 2009,
the Bankrupt Debtors’ interest expense for the year ended December 31, 2009
would have been approximately $28,993,000.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
amounts of long-term debt maturing, including current debt in forbearance, due
in each of the next five years are included below (in thousands):
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
77,365
|
|
|
|
|
2011
|
|
|
12,038
|
|
|
|
|
2012
|
|
|
139
|
|
|
|
|
2013
|
|
|
130
|
|
|
|
|
2014
|
|
|
137
|
|
|
|
|
Thereafter
|
|
|
295
|
|
|
|
|
Total
|
|
$
|
90,104
|
|
|
|
7.
|
LIABILITIES
SUBJECT TO COMPROMISE
|
Liabilities
subject to compromise refers to prepetition obligations which may be impacted by
the Chapter 11 Filings. These amounts represent the Company’s current estimate
of known or potential prepetition obligations to be resolved in connection with
the Chapter 11 Filings.
Differences
between liabilities estimated and the claims filed, or to be filed, will be
investigated and resolved in connection with the claims resolution process. The
Company will continue to evaluate these liabilities during the Chapter 11
Filings and adjust amounts as necessary.
Liabilities
subject to compromise are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Term
loans
|
|
$
|
209,750
|
|
|
|
|
Working
capital lines of credit
|
|
|
16,906
|
|
|
|
|
Accounts
payable trade and accrued expenses
|
|
|
12,886
|
|
|
|
|
Derivative
instruments – interest rate swaps
|
|
|
2,875
|
|
|
|
|
Total
liabilities subject to compromise
|
|
$
|
242,417
|
|
|
Term
Loans & Working Capital Lines of Credit
– In connection with
financing the Company’s construction of its four ethanol production facilities,
in 2007, the Company entered into a debt financing transaction (the “Debt
Financing”) in the aggregate amount of up to $250,769,000 through its
wholly-owned indirect subsidiaries. These subsidiaries are now the Bankrupt
Debtors. The Debt Financing included four term loans and four working capital
lines of credit. In addition, the subsidiaries utilized approximately $825,000
of the working capital and letter of credit facility to obtain a letter of
credit, which was also outstanding at September 30, 2009 and December 31, 2008.
The obligations under the Debt Financing are secured by a first-priority
security interest in all of the equity interests in the subsidiaries and
substantially all their assets. The Chapter 11 Filings constituted an event of
default under the Debt Financing. Under the terms of the Debt Financing, upon
the Chapter 11 Filings, the outstanding principal amount of, and accrued
interest on, the amounts owed in respect of the Debt Financing became
immediately due and payable.
As
discussed above in Note 6, the DIP Lenders provided DIP Financing for up to a
total of $25,000,000. The DIP Financing has been approved by the Bankruptcy
Court and provides for a first-priority lien in the Chapter 11 Filings. The DIP
Financing also allows the DIP Lenders a first-priority lien on a
dollar-for-dollar basis of their term loans and working capital lines of credit
funded prior to the Chapter 11 Filings for each dollar of DIP Financing. As the
Bankrupt Debtors draw down on their DIP financing, an equivalent amount is
reclassified from liabilities subject to compromise to DIP
Financing.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with FASB ASC 852, revenues, expenses, realized gains and losses, and
provisions for losses that can be directly associated with the reorganization
and restructuring of the business must be reported separately as reorganization
items in the statements of operations. During the year ended December 31, 2009,
the Bankrupt Debtors settled a prepetition accrued liability with a vendor,
resulting in a realized gain. Professional fees directly related to the
reorganization include fees associated with advisors to the Bankrupt Debtors,
unsecured creditors, secured creditors and administrative costs in complying
with reporting rules under the Bankruptcy Code. As discussed in Note 1, the
Company wrote off a portion of its unamortized deferred financing fees on the
debt which is considered to be unlikely to be repaid by the Bankrupt
Debtors.
The
Bankrupt Debtors’ reorganization costs for the year ended December 31, 2009
consists of the following (in thousands):
|
|
Write-off
of unamortized deferred financing fees
|
|
$
|
7,545
|
|
|
|
|
Settlement
of accrued liability
|
|
|
(2,008
|
)
|
|
|
|
Professional
fees
|
|
|
5,198
|
|
|
|
|
DIP
financing fees
|
|
|
750
|
|
|
|
|
Trustee
fees
|
|
|
122
|
|
|
|
|
Total
|
|
$
|
11,607
|
|
|
The asset
and liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are recognized for tax credits and for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized.
The
Company files a consolidated federal income tax return. This return includes all
corporate companies 80% or more owned by the Company as well as the Company’s
pro-rata share of taxable income from pass-through entities in which the Company
holds an ownership interest. State tax returns are filed on a consolidated,
combined or separate basis depending on the applicable laws relating to the
Company and its subsidiaries.
The
Company recorded no provision for income taxes for the years ended December 31,
2009 and 2008.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the differences between the United States statutory federal
income tax rate and the effective tax rate as provided in the consolidated
statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
|
|
State
income taxes, net of federal benefit
|
|
(5.4
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
Change
in valuation allowance
|
|
40.2
|
|
|
|
37.6
|
|
|
|
|
|
Impairment
of goodwill
|
|
0.0
|
|
|
|
1.1
|
|
|
|
|
|
Valuation
allowance relating to equity items
|
|
0.0
|
|
|
|
0.7
|
|
|
|
|
|
Other
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
Effective
rate
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
Deferred
income taxes are provided using the asset and liability method to reflect
temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities using presently enacted tax rates and laws. The
components of deferred income taxes included in the consolidated balance sheets
were as follows (in thousands):
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
97,043
|
|
|
$
|
61,474
|
|
|
|
|
|
Impairment
of asset group
|
|
|
100,661
|
|
|
|
16,188
|
|
|
|
|
|
Investment
in partnerships
|
|
|
4,365
|
|
|
|
8,852
|
|
|
|
|
|
Deferred
financing costs
|
|
|
5,476
|
|
|
|
—
|
|
|
|
|
|
Derivative
instruments mark-to-market
|
|
|
1,157
|
|
|
|
2,452
|
|
|
|
|
|
Stock-based
compensation
|
|
|
3,309
|
|
|
|
2,494
|
|
|
|
|
|
Other
accrued liabilities
|
|
|
161
|
|
|
|
124
|
|
|
|
|
|
Other
|
|
|
918
|
|
|
|
1,920
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
213,090
|
|
|
|
93,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(22,681
|
)
|
|
|
(26,952
|
)
|
|
|
|
|
Intangibles
|
|
|
(2,088
|
)
|
|
|
(2,265
|
)
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
(24,769
|
)
|
|
|
(29,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(189,412
|
)
|
|
|
(65,378
|
)
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(1,091
|
)
|
|
$
|
(1,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
in balance sheet as:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax benefit (current assets)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Deferred
income taxes (long-term liability)
|
|
|
(1,091
|
)
|
|
|
(1,091
|
)
|
|
|
|
|
|
|
$
|
(1,091
|
)
|
|
$
|
(1,091
|
)
|
|
|
At
December 31, 2009 and 2008, the Company had federal net operating loss
carryforwards of approximately $255,968,000 and $151,426,000, and state net
operating loss carryforwards of approximately $248,908,000 and $142,664,000,
respectively. These net operating loss carryforwards expire at various dates
beginning in 2013. The deferred tax asset for the Company’s net operating loss
carryforwards at December 31, 2009 does not include $5,443,000 which
relates to the tax benefits associated with warrants and non-statutory options
exercised by employees, members of the board and others under the various
incentive plans. These tax benefits will be recognized in stockholders’ equity
(deficit) rather than in the statements of operations but not until the period
that these amounts decrease taxes payable.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A portion
of the Company’s net operating loss carryforwards will be subject to provisions
of the tax law that limit the use of losses incurred by a company prior to
becoming a member of a consolidated group as well as losses that existed at the
time there is a change in control of an enterprise. The amount of the Company’s
net operating loss carryforwards that would be subject to these limitations was
approximately $76,928,000 at December 31, 2009.
In
assessing whether the deferred tax assets are realizable, a more likely than not
standard is applied. If it is determined that it is more likely than not that
deferred tax assets will not be realized, a valuation allowance must be
established against the deferred tax assets. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the associated temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment.
A
valuation allowance has been established in the amount of $189,412,000 and
$65,378,000 at December 31, 2009 and 2008, respectively, based on Company’s
assessment of the future realizability of certain deferred tax assets. For the
years ended December 31, 2009 and 2008, the Company recorded an increase in the
valuation allowance of $124,034,000 and $54,924,000, respectively. The valuation
allowance on deferred tax assets is related to future deductible temporary
differences and net operating loss carryforwards (exclusive of net operating
losses associated with items recorded directly to equity) for which the Company
has concluded it is more likely than not that these items will not be realized
in the ordinary course of operations.
At
December 31, 2009, the Company had no increase or decrease in unrecognized
income tax benefits for the year as a result of tax positions taken in a prior
or current period. There was no accrued interest or penalties relating to tax
uncertainties at December 31, 2009. Unrecognized tax benefits are not expected
to increase or decrease within the next twelve months.
The
Company is subject to income tax in the United States federal jurisdiction and
various state jurisdictions and has identified its federal tax return and tax
returns in state jurisdictions below as “major” tax filings. These
jurisdictions, along with the years still open to audit under the applicable
statutes of limitation, are as follows:
|
|
Jurisdiction
|
|
Tax Years
|
|
|
|
|
|
|
|
|
|
Federal
|
|
2006 –
2008
|
|
|
|
California
|
|
2005 –
2008
|
|
|
|
Colorado
|
|
2006 –
2008
|
|
|
|
Idaho
|
|
2006 –
2008
|
|
|
|
Nebraska
|
|
2006 –
2008
|
|
|
|
Oregon
|
|
2006 –
2008
|
|
|
|
Wisconsin
|
|
2006 –
2008
|
|
However,
because the Company had net operating losses and credits carried forward in
several of the jurisdictions, including the United States federal and California
jurisdictions, certain items attributable to closed tax years are still subject
to adjustment by applicable taxing authorities through an adjustment to tax
attributes carried forward to open years.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has authorized, but unissued 5,315,625 shares of an undesignated series
preferred stock, which may be issued in the future on the authority of the
Company’s Board of Directors.
As of
December 31, 2009, the Company had issued the following series of preferred
stock:
Series A
Preferred Stock
– On April 13, 2006, the Company issued to Cascade
Investment, L.L.C. (“Cascade”), 5,250,000 shares of Series A Cumulative
Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) at a price
of $16.00 per share, for an aggregate purchase price of $84,000,000. The Company
used $4,000,000 of the proceeds for general working capital and the remaining
$80,000,000 for the construction of its ethanol production
facilities.
The
Series A Preferred Stock ranks senior in liquidation and dividend preferences to
the Company’s common stock. Holders of Series A Preferred Stock are entitled to
quarterly cumulative dividends payable in arrears in cash in an amount equal to
5% per annum of the purchase price per share of the Series A Preferred Stock.
Prior to March 27, 2008, and at the Company’s option, it could have made
dividend payments in additional shares of Series A Preferred Stock based on the
value of the purchase price per share of the Series A Preferred
Stock.
The
holders of the Series A Preferred Stock have conversion rights initially
equivalent to two shares of common stock for each share of Series A Preferred
Stock, subject to customary antidilution adjustments. Certain specified
issuances will not result in antidilution adjustments. The shares of Series A
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 A Preferred Stock of 25% or more. Accrued but unpaid dividends on the
Series A Preferred Stock are to be paid in cash upon any conversion of the
Series A Preferred Stock.
The
holders of Series A Preferred Stock have a liquidation preference over the
holders of the Company’s common stock equivalent to the purchase price per share
of the Series A Preferred Stock plus any accrued and unpaid dividends on the
Series A Preferred Stock. A liquidation will be deemed to occur upon the
happening of customary events, including transfer of all or substantially all of
the Company’s capital stock or assets or a merger, consolidation, share
exchange, reorganization or other transaction or series of related transaction,
unless holders of 66 2/3% of the Series A Preferred Stock vote affirmatively in
favor of or otherwise consent to such transaction.
The
Series A Preferred Stock’s redemption feature was likely a derivative instrument
that required bifurcation from the host contract. However, because the
underlying events that would cause the redemption feature to be exercisable
(i.e., redemption events) are in the Company’s control and were not probable of
occurrence in the foreseeable future, the Company believed that the fair value
of the embedded derivative was
de minimis
at the date of
issuance of the Series A Preferred Stock. As of December 31, 2007, the
redemption events were no longer applicable, as the funds had been fully used
for construction.
During
2008, Cascade 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 December 31, 2009 and 2008, no shares of Series A Preferred
Stock were outstanding.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Series B
Preferred Stock
– On March 18, 2008, the Company entered into a
Securities Purchase Agreement (the “Purchase Agreement”) with Lyles United. The
Purchase Agreement provided for the sale by the Company and the purchase by
Lyles United 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 $39,898,000, net of issuance costs, in
stockholders’ equity (deficit). 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.
On May
20, 2008, the Company entered into a Securities Purchase Agreement (the “May
Purchase Agreement”) with Neil M. Koehler, William L. 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 (deficit). 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.
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 has classified the Series B
Preferred Stock in stockholders’ equity (deficit)
.
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.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
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 and the May Purchasers.
Registration
Rights Agreement
– In connection with
the closing of the sale of its Series A and B Preferred Stock, the Company
entered into Registration Rights Agreements with holders of the Preferred Stock.
The Registration Rights Agreements are to be effective until the holders of the
Preferred Stock, and their affiliates, as a group, own less than 10% for each of
the series issued, including common stock into which such Preferred Stock has
been converted (the “Termination Date”). The Registration Rights Agreements
provide that holders of a majority of the Preferred Stock, including common
stock into which such 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 Preferred Stock and as payment of dividends
thereon, and, in the case of the Series B Preferred Stock, upon exercise of the
related warrants (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
Agreements include customary representations and warranties on the part of both
the Company and the holders and other customary terms and
conditions.
Under its
obligations described above, in connection with the Series A Preferred Stock,
the Company filed a registration statement with the Commission, registering for
resale shares of the common stock up to 10,500,000, which was declared effective
in November 2007.
Deemed
Dividend on Preferred Stock
– 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. As a result, the Company recorded a deemed dividend on preferred
stock of $761,000 for the year ended December 31, 2008. These non-cash dividends
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 any warrants) which was in excess of the fair value of the
Preferred Stock at the time of issuance. The fair value allocated to the
Preferred Stock together with the original conversion terms (as adjusted for the
value allocated to any warrants) were used to calculate the value of the deemed
dividend on the Preferred Stock on the date of issuance.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For the
year ended December 31, 2008, the deemed dividend on the Series B Preferred
Stock 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.
The
Company recorded preferred stock dividends of $3,202,000 and $4,104,000 for the
years ended December 31, 2009 and 2008, respectively.
|
11.
|
COMMON
STOCK AND WARRANTS.
|
In March
2008, in connection with the Company’s issuance of the Series B Preferred Stock,
as discussed in Note 10, the Company issued warrants to purchase an aggregate of
3,076,923 shares of common stock at an exercise price of $7.00 per
share.
In March
2008, in connection with the Company’s extension of its related party note, as
discussed in Note 6, it issued warrants to purchase 100,000 of common stock at
an exercise price of $8.00 per share. These warrants expired unexercised in
2009.
In May
2008, in connection with the Company’s issuance of additional Series B Preferred
Stock, as discussed in Note 10, the Company issued warrants to purchase an
aggregate of 442,305 shares of common stock at an exercise price of $7.00 per
share.
In May
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 $26,648,000, net of issuance
costs, in stockholders’ equity (deficit).
The
following table summarizes warrant activity for the years ended December 31,
2009 and 2008 (number of shares in thousands):
|
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
Balance
at December 31, 2007
|
|
—
|
|
|
|
|
—
|
|
|
|
|
Warrants
granted
|
|
6,619
|
|
$7.00
– $8.00
|
|
$
|
7.06
|
|
|
|
|
Balance
at December 31, 2008
|
|
6,619
|
|
$7.00
– $8.00
|
|
$
|
7.06
|
|
|
|
|
Warrants
expired
|
|
(100
|
)
|
$8.00
|
|
$
|
8.00
|
|
|
|
|
Balance
at December 31, 2009
|
|
6,519
|
|
$7.00
– $7.10
|
|
$
|
7.05
|
|
|
|
12.
|
STOCK-BASED
COMPENSATION.
|
The Company has three equity incentive
compensation plans: an Amended 1995 Incentive Stock Plan, a 2004 Stock Option
Plan and a 2006 Stock Incentive Plan.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Amended
1995 Incentive Stock Plan
– The Amended 1995 Incentive Stock Plan was
carried over from Accessity as a result of the Share Exchange Transaction. The
plan authorized the issuance of incentive stock options (“ISOs”) and
non-qualified stock options (“NQOs”), to the Company’s employees, directors or
consultants for the purchase of up to an aggregate of 1,200,000 shares of the
Company’s common stock. On July 19, 2006, the Company terminated the Amended
1995 Incentive Stock Plan, except to the extent of issued and outstanding
options then existing under the plan. The Company had 0 and 20,000 stock options
outstanding under its Amended 1995 Incentive Stock Plan at December 31, 2009 and
2008, respectively.
2004
Stock Option Plan
– The 2004 Stock Option Plan authorized the issuance of
ISOs and NQOs to the Company’s officers, directors or key employees or to
consultants that do business with the Company for up to an aggregate of
2,500,000 shares of common stock. On September 7, 2006, the Company terminated
the 2004 Stock Option Plan, except to the extent of issued and outstanding
options then existing under the plan. The Company had 80,000 and 110,000 stock
options outstanding under its 2004 Stock Option Plan at December 31, 2009
and 2008, respectively.
A summary
of the status of Company’s stock option plans as of December 31, 2009 and 2008
and of changes in options outstanding under the Company’s plans during those
years are as follows (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
Outstanding
at beginning of year
|
|
130
|
|
|
$7.37
|
|
|
225
|
|
|
$7.03
|
|
|
|
|
Terminated
|
|
(50
|
)
|
|
5.95
|
|
|
(95
|
)
|
|
6.55
|
|
|
|
|
Outstanding
at end of year
|
|
80
|
|
|
8.26
|
|
|
130
|
|
|
7.37
|
|
|
|
|
Options
exercisable at end of year
|
|
80
|
|
|
$8.26
|
|
|
130
|
|
|
$7.37
|
|
|
Stock
options outstanding as of December 31, 2009, were as follows (number of
shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.25-$8.30
|
|
|
|
5.57
|
|
$8.26
|
|
|
|
$8.26
|
|
|
The
options outstanding and exercisable at December 31, 2009 and 2008 had no
intrinsic value.
2006
Stock Incentive Plan
– The 2006 Stock Incentive Plan authorizes the
issuance of options, restricted stock, restricted stock units, stock
appreciation rights, direct stock issuances and other stock-based awards to the
Company’s officers, directors or key employees or to consultants that do
business with the Company for up to an aggregate of 2,000,000 shares of common
stock.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company grants to certain employees and directors shares of restricted stock
under its 2006 Stock Incentive Plan pursuant to restricted stock agreements. A
summary of unvested restricted stock activity is as follows (shares in
thousands):
|
|
|
|
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
Unvested
at December 31, 2007
|
|
508
|
|
|
$
|
13.07
|
|
|
|
|
|
Issued
|
|
630
|
|
|
$
|
3.65
|
|
|
|
|
|
Vested
|
|
(275
|
)
|
|
$
|
7.78
|
|
|
|
|
|
Canceled
|
|
(111
|
)
|
|
$
|
13.06
|
|
|
|
|
|
Unvested
at December 31, 2008
|
|
752
|
|
|
$
|
7.11
|
|
|
|
|
|
Vested
|
|
(214
|
)
|
|
$
|
8.03
|
|
|
|
|
|
Canceled
|
|
(256
|
)
|
|
$
|
5.23
|
|
|
|
|
|
Unvested
at December 31, 2009
|
|
282
|
|
|
$
|
8.09
|
|
|
|
Stock-based
compensation expense related to employee and non-employee stock grants, options
and warrants recognized in income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
1,660
|
|
|
$
|
2,232
|
|
|
|
|
Non-employees
|
|
|
264
|
|
|
|
783
|
|
|
|
|
Total
stock-based compensation expense
|
|
$
|
1,924
|
|
|
$
|
3,015
|
|
|
At
December 31, 2009, the total compensation cost related to unvested awards which
had not been recognized was $3,302,000 and the associated weighted-average
period over which the compensation cost attributable to those unvested awards
would be recognized was 1.5 years.
|
13.
|
COMMITMENTS AND
CONTINGENCIES.
|
Commitments
– The following is a description of significant commitments at December 31,
2009:
Operating Leases –
Future
minimum lease payments required by non-cancelable operating leases in effect at
December 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,068
|
|
|
|
|
2011
|
|
|
1,816
|
|
|
|
|
2012
|
|
|
1,244
|
|
|
|
|
2013
|
|
|
1,176
|
|
|
|
|
2014
|
|
|
735
|
|
|
|
|
Total
|
|
$
|
7,039
|
|
|
Total
rent expense during the years ended December 31, 2009 and 2008 was $2,320,000
and $2,967,000, respectively. Included in the amounts above is approximately
$1,013,000 as to which the Company has been notified that it is in violation of
certain of its lease covenants, which the Company disputes. The Company
continues to be current on its payments to the lessor.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Commitments
– At
December 31, 2009, the Company had purchase contracts with its suppliers to
purchase certain quantities of ethanol and corn. These fixed- and indexed-price
commitments will be delivered throughout 2010. 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
|
|
$
|
5,106
|
|
|
|
|
Corn
|
|
|
1,802
|
|
|
|
|
Total
|
|
$
|
6,908
|
|
|
|
|
|
|
Indexed-Price
Contracts
(Volume)
|
|
|
|
|
Corn
(bushels)
|
|
|
10,080
|
|
|
Sales Commitments
– At
December 31, 2009, the Company had entered into sales contracts with its major
customers to sell certain quantities of ethanol, WDG and syrup. The volumes
indicated in the indexed price contracts table will be sold at publicly-indexed
sales prices determined by market prices in effect on their respective
transaction dates (in thousands):
|
|
|
|
|
|
|
|
|
WDG
|
|
$
|
5,688
|
|
|
|
|
Syrup
|
|
|
919
|
|
|
|
|
Ethanol
|
|
|
771
|
|
|
|
|
Total
|
|
$
|
7,378
|
|
|
|
|
|
|
Indexed-Price
Contracts
(Volume)
|
|
|
|
|
Ethanol
(gallons)
|
|
|
67,542
|
|
|
The
Company recorded in cost of goods sold estimated losses on its fixed-price
purchase and sale commitments of approximately $4,687,000 for the year ended
December 31, 2008. There were no estimated losses recorded for the year ended
December 31, 2009.
Contingencies
– The following is a description of significant contingencies at December 31,
2009:
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 such
matters will not adversely affect the Company’s financial position, results of
operations or cash flows.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation – Western Ethanol
Company
– On January 9, 2009, Western Ethanol Company, LLC (“Western
Ethanol”) filed a complaint in the Superior Court of the State of California
(the “Superior Court”) naming Kinergy as defendant. In the complaint, Western
Ethanol alleges that Kinergy breached an alleged agreement to buy and accept
delivery of a fixed amount of ethanol. On January 12, 2009, Western Ethanol
filed an application for issuance of right to attach order and order for
issuance of writ of attachment. On February 10, 2009, the Superior Court granted
the right to attach order and order for issuance of writ of attachment against
Kinergy in the amount of approximately $3,700,000. On February 11, 2009, Kinergy
filed an answer to the complaint. On May 14, 2009, Kinergy entered into an
Agreement with Western Ethanol under which Western Ethanol agreed to terminate
all notices, writs of attachment issued to the Sheriff of any county other than
Contra Costa County, and all notices of levy, liens, and similar claims or
actions except as to a levy against a specified Kinergy receivable in the amount
of $1,350,000. Kinergy agreed to have the $1,350,000 receivable paid over to the
Contra Costa County Sheriff in compliance with and in satisfaction of the levy
on the receivable to be held pending final outcome of the litigation. In
September 2009, the Company entered into a confidential settlement agreement
with Western Ethanol, under which the Company paid an amount less than
$1,350,000 and received payment on the balance of the $1,350,000
receivable.
Litigation – Delta-T
Corporation
– On August 18, 2008, Delta-T Corporation filed suit in the
United States District Court for the Eastern District of Virginia (the “First
Virginia Federal Court case”), naming Pacific Ethanol, Inc. as a defendant,
along with its subsidiaries Pacific Ethanol Stockton, LLC, Pacific Ethanol
Imperial, LLC, Pacific Ethanol Columbia, LLC, Pacific Ethanol Magic Valley, LLC
and Pacific Ethanol Madera, LLC. The suit alleged breaches of the parties’
Engineering, Procurement and Technology License Agreements, breaches of a
subsequent term sheet and letter agreement and breaches of indemnity
obligations. The complaint seeks specified contract damages of approximately
$6.5 million, along with other unspecified damages. All of the defendants moved
to dismiss the Virginia Federal Court case for lack of personal jurisdiction and
on the ground that all disputes between the parties must be resolved through
binding arbitration, and, in the alternative, moved to stay the Virginia Federal
Court Case pending arbitration. In January 2009, these motions were granted by
the Court, compelling the case to arbitration with the American Arbitration
Association (“AAA”). By letter dated June 10, 2009, the AAA notified the parties
to the arbitration that the matter was automatically stayed as a result of the
Chapter 11 Filings.
On March
18, 2009, Delta-T Corporation filed a cross-complaint against Pacific Ethanol,
Inc. and Pacific Ethanol Imperial, LLC in the Superior Court of the State of
California in and for the County of Imperial. The cross-complaint arises out of
a suit by OneSource Distributors, LLC against Delta-T Corporation. On March 31,
2009, Delta-T Corporation and Bateman Litwin N.V, a foreign corporation, filed a
third-party complaint in the United States District Court for the District of
Minnesota naming Pacific Ethanol, Inc. and Pacific Ethanol Imperial, LLC as
defendants. The third-party complaint arises out of a suit by Campbell-Sevey,
Inc. against Delta-T Corporation. On April 6, 2009, Delta-T Corporation filed a
cross-complaint against Pacific Ethanol, Inc. and Pacific Ethanol Imperial, LLC
in the Superior Court of the State of California in and for the County of
Imperial. The cross-complaint arises out of a suit by GEA Westfalia Separator,
Inc. against Delta-T Corporation. Each of these actions allegedly relate to the
aforementioned Engineering, Procurement and Technology License Agreements and
Delta-T Corporation’s performance of services thereunder. The third-party suit
and the cross-complaints assert many of the factual allegations in the Virginia
Federal Court case and seek unspecified damages.
On June
19, 2009, Delta-T Corporation filed suit in the United States District Court for
the Eastern District of Virginia (the “Second Virginia Federal Court case”),
naming Pacific Ethanol, Inc. as the sole defendant. The suit alleges breaches of
the parties’ Engineering, Procurement and Technology License Agreements,
breaches of a subsequent term sheet and letter agreement, and breaches of
indemnity obligations. The complaint seeks specified contract damages of
approximately $6.5 million, along with other unspecified damages.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the Chapter 11 Filings, the Bankrupt Debtors moved the United
States Bankruptcy Court for the District of Delaware to enter a preliminary
injunction in favor of the Bankrupt Debtors and Pacific Ethanol, Inc. staying
and enjoining all of the aforementioned litigation and arbitration proceedings
commenced by Delta-T Corporation. On August 6, 2009, the Delaware court ordered
that the litigation and arbitration proceedings commenced by Delta-T Corporation
be stayed and enjoined until September 21, 2009 or further order of the court,
and that the Bankrupt Debtors, Pacific Ethanol, Inc. and Delta-T Corporation
complete mediation by September 20, 2009 for purposes of settling all disputes
between the parties. Following a mediation, the parties reached an agreement
pursuant to which a stipulated order was entered in the bankruptcy court on
September 21, 2009, providing for a complete mutual release and settlement
of any and all claims between Delta-T Corporation and the Bankrupt Debtors,
a complete reservation of rights as between Pacific Ethanol, Inc. and Delta-T
Corporation, and a stay of all proceedings by Delta-T Corporation against
Pacific Ethanol, Inc. until December 31, 2009. As a result of the complete
mutual release and settlement, the Company recorded a gain of approximately
$2,008,000 in reorganization costs for the year ended December 31,
2009.
On March
1, 2010, Delta-T Corporation resumed active litigation of the Second Virginia
Federal Court case by filing a motion for entry of a default judgment. Also on
March 1, 2010, Pacific Ethanol, Inc. filed a motion for extension of time for
its first appearance in the Second Virginia Federal Court case and also filed a
motion to dismiss Delta-T Corporation's complaint based on the mandatory
arbitration clause in the parties' contracts, and alternatively to stay
proceedings during the pendency of arbitration. These motions are scheduled for
hearing on March 31, 2010. The Company intends to continue to vigorously defend
against Delta-T Corporation’s claims.
Litigation – Barry Spiegel – State
Court Action
– On December 22, 2005, Barry J. Spiegel, a former
shareholder and director of Accessity, filed a complaint in the Circuit Court of
the 17th Judicial District in and for Broward County, Florida (Case No.
05018512) (the “State Court Action”) against Barry Siegel, Philip Kart, Kenneth
Friedman and Bruce Udell (collectively, the “Individual Defendants”). Messrs.
Udell and Friedman are former directors of Accessity and Pacific Ethanol. Mr.
Kart is a former executive officer of Accessity and Pacific Ethanol. Mr. Siegel
is a former director and former executive officer of Accessity and Pacific
Ethanol.
The State
Court Action relates to the Share Exchange Transaction and purports to state the
following five counts against the Individual Defendants: (i) breach of fiduciary
duty, (ii) violation of the Florida Deceptive and Unfair Trade Practices Act,
(iii) conspiracy to defraud, (iv) fraud, and (v) violation of Florida’s
Securities and Investor Protection Act. Mr. Spiegel based his claims on
allegations that the actions of the Individual Defendants in approving the Share
Exchange Transaction caused the value of his Accessity common stock to diminish
and is seeking approximately $22.0 million in damages. On March 8, 2006, the
Individual Defendants filed a motion to dismiss the State Court Action. Mr.
Spiegel filed his response in opposition on May 30, 2006. The Court granted the
motion to dismiss by Order dated December 1, 2006, on the grounds that, among
other things, Mr. Spiegel failed to bring his claims as a derivative
action.
On
February 9, 2007, Mr. Spiegel filed an amended complaint which purports to state
the following five counts: (i) breach of fiduciary duty, (ii) fraudulent
inducement, (iii) violation of Florida’s Securities and Investor Protection Act,
(iv) fraudulent concealment, and (v) breach of fiduciary duty of disclosure. The
amended complaint included Pacific Ethanol as a defendant. On March 30, 2007,
Pacific Ethanol filed a motion to dismiss the amended complaint. Before the
Court could decide that motion, on June 4, 2007, Mr. Spiegel amended his
complaint, which purports to state two counts: (a) breach of fiduciary duty and
(b) fraudulent inducement. The first count is alleged against the Individual
Defendants and the second count is alleged against the Individual Defendants and
Pacific Ethanol. The amended complaint was, however, voluntarily dismissed on
August 27, 2007, by Mr. Spiegel as to Pacific Ethanol.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Mr.
Spiegel sought and obtained leave to file another amended complaint on June 25,
2009, which renewed his case against Pacific Ethanol, and named three additional
individual defendants, and asserted the following three counts: (x) breach of
fiduciary duty, (y) fraudulent inducement, and (z) aiding and abetting breach of
fiduciary duty. The first two counts are alleged solely against the Individual
Defendants. With respect to the third count, Mr. Spiegel has named PEI
California, as well as William L. Jones, Neil M. Koehler and Ryan W. Turner.
Messrs. Jones and Turner are directors of Pacific Ethanol. Mr. Turner is a
former officer of Pacific Ethanol. Mr. Koehler is a director and officer of
Pacific Ethanol. Pacific Ethanol and the Individual Defendants filed a motion to
dismiss the count against them, and the court granted the motion. Plaintiff
then filed another amended complaint, and Defendants once again moved to
dismiss. The motion was heard on February 17, 2010, and the Court, on March
22, 2010, denied the motion requiring Pacific Ethanol and Messrs. Jones, Koehler
and Turner to answer the Complaint and respond to certain discovery
requests.
Litigation – Barry Spiegel – Federal
Court Action
– On December 28, 2006, Barry J. Spiegel, filed a complaint
in the United States District Court, Southern District of Florida (Case No.
06-61848) (the “Federal Court Action”) against the Individual Defendants and the
Company. The Federal Court Action relates to the Share Exchange Transaction and
purports to state the following three counts: (i) violations of Section 14(a) of
the Exchange Act and SEC Rule 14a-9 promulgated thereunder, (ii) violations of
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and
(iii) violation of Section 20(A) of the Exchange Act. The first two counts are
alleged against the Individual Defendants and the Company and the third count is
alleged solely against the Individual Defendants. Mr. Spiegel bases his claims
on, among other things, allegations that the actions of the Individual
Defendants and the Company in connection with the Share Exchange Transaction
resulted in a share exchange ratio that was unfair and resulted in the
preparation of a proxy statement seeking shareholder approval of the Share
Exchange Transaction that contained material misrepresentations and omissions.
Mr. Spiegel is seeking in excess of $15.0 million in damages.
Mr.
Spiegel amended the Federal Court Action on March 5, 2007, and the Company and
the Individual Defendants filed a Motion to Dismiss the amended pleading on
April 23, 2007. Plaintiff Spiegel sought to stay his own federal case, but the
Motion was denied on July 17, 2007. The Court required Mr. Spiegel to
respond to the Company’s Motion to Dismiss. On January 15, 2008, the Court
rendered an Order dismissing the claims under Section 14(a) of the Exchange Act
on the basis that they were time barred and that more facts were needed for the
claims under Section 10(b) of the Exchange Act. The Court, however, stayed the
entire case pending resolution of the State Court Action.
The fair
value hierarchy prioritizes the inputs used in valuation techniques into three
levels as follows:
|
|
●
|
Level
1 – Observable inputs – unadjusted quoted prices in active markets for
identical assets and
liabilities;
|
|
|
●
|
Level
2 – Observable inputs other than quoted prices included in Level 1 that
are observable for the asset or liability through corroboration with
market data; and
|
|
|
●
|
Level
3 – Unobservable inputs – includes amounts derived from valuation models
where one or more significant inputs are
unobservable.
|
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; the fair
value of the interest rate caps and certain 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; and certain
interest rate swaps are based on a combination of observable inputs and material
unobservable inputs.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes fair value measurements by level at December 31, 2009
(in thousands):
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in marketable securities
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
|
|
|
Interest
rate caps and swaps
|
|
|
—
|
|
|
|
21
|
|
|
|
—
|
|
|
|
21
|
|
|
|
|
Total
Assets
|
|
$
|
101
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate caps and swaps
|
|
$
|
—
|
|
|
$
|
971
|
|
|
$
|
2,875
|
|
|
$
|
3,846
|
|
|
|
|
Total
Liabilities
|
|
$
|
—
|
|
|
$
|
971
|
|
|
$
|
2,875
|
|
|
$
|
3,846
|
|
|
For fair
value measurements using significant unobservable inputs (Level 3), a
description of the inputs and the information used to develop the inputs is
required along with a reconciliation of Level 3 values from the prior reporting
period. The Company has five
pay-fixed and receive
variable interest rate swaps in liability positions at December 31, 2009. The
value of these swaps at December 31, 2009 was materially affected by the
Company’s credit as the swaps are held by the Bankrupt Debtors. A pre-credit
fair value of each swap was determined using conventional present value
discounting based on the 3-year Euro dollar futures curves and the LIBOR swap
curve beyond 3 years, resulting in a liability of approximately $7,189,000. To
reflect the Company’s current financial condition and Chapter 11 Filings, a
recovery rate of 40% was applied to that value. Management elected the 40%
recovery rate in the absence of any other company-specific information. As the
recovery rate is a material unobservable input, these swaps are considered Level
3. It is the Company’s understanding that 40% reflects the standard market
recovery rate provided by Bloomberg in probability of default calculations. The
Company applied their interpretation of the 40% recovery rate to the swap
liability reducing the liability by 60% to approximately $2,875,000 to reflect
the credit risk to counterparties. The changes in the Company’s fair value of
its Level 3 inputs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Beginning
balance, September 30, 2009
|
|
$
|
(3,561
|
)
|
|
|
|
Adjustments
to fair value for the period
|
|
|
686
|
|
|
|
|
Ending
balance, December 31, 2009
|
|
$
|
(2,875
|
)
|
|
|
15.
|
RELATED
PARTY TRANSACTIONS.
|
Related
Customers
– The Company sold corn and WDG to Tri J Land and Cattle (“Tri
J”), an entity owned by a director of the Company. The Company is not under
contract with Tri J, but currently sells corn on a spot basis as needed. Sales
to Tri J totaled $1,300 for the year ended December 31, 2008. There were no
sales to Tri J during the year ended December 31, 2009. Accounts receivable from
Tri J totaled $0 and $1,300 at December 31, 2009 and 2008,
respectively.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Related
Vendors
– The Company contracted for transportation services for its
products sold from its Madera, Magic Valley and Stockton facilities with a
transportation company. At the time these contracts were entered into, a senior
officer of the transportation company was a member of the Company’s Board of
Directors. The senior officer subsequently retired from the transportation
company but remains a member of the Company’s Board of Directors. The Company
purchased transportation services in the amount of $860,000 and $2,840,000 for
the years ended December 31, 2009 and 2008, respectively. The Company had
$1,171,000 and $608,000 of outstanding accounts payable to this vendor as of
December 31, 2009 and 2008, respectively.
The
Company entered into a consulting agreement with a relative of the Company’s
Chairman of the Board for consulting services related to the Company’s
restructuring efforts. Compensation payable under the agreement was $10,000 per
month plus expenses. For the year ended December 31, 2009, the Company paid a
total of $86,500. There were no payments for the year ended December 31, 2008.
As of December 31, 2009, the Company had no outstanding accounts payable to this
consultant. This agreement was terminated in February 2010 in connection with
the consultant’s appointment to the Company’s Board of Directors.
Financing
Activities
– As discussed in Note 10, on March 27 and May 20, 2008, the
Company issued shares of its Series B Preferred Stock to certain related
parties. The Company had outstanding and unpaid preferred dividends of
$3,202,000 and $0 as of December 31, 2009 and 2008, respectively, in respect of
its Series B Preferred Stock.
As
discussed in Note 6, the Company had certain notes payable to Lyles United and
Lyles Mechanical Co. in the aggregate principal amount of $31,500,000 as of
December 31, 2009 and 2008 and accrued and unpaid interest of $2,731,000 and
$243,000 as of December 31, 2009 and 2008, respectively.
Also as
discussed in Note 6, the Company had certain notes payable to its Chairman of
the Board and its Chief Executive Officer totaling $2,000,000 and accrued and
unpaid interest of $120,000 as of December 31, 2009.
The
Company sold $33,500 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 year ended December 31, 2008.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
16.
|
BANKRUPT
DEBTORS’ CONDENSED COMBINED FINANCIAL
STATEMENTS
|
Since the
consolidated financial statements of the Company include entities other than the
Bankrupt Debtors, the following presents the condensed combined financial
statements of the Bankrupt Debtors. Pacific Ethanol Holding Co. LLC is the
direct parent company of the other Bankrupt Debtors. These condensed combined
financial statements have been prepared, in all material respects, on the same
basis as the consolidated financial statements of the Company. The condensed
combined financial statements of the Bankrupt Debtors are as follows (unaudited,
in thousands):
PACIFIC
ETHANOL HOLDING CO. LLC AND SUBSIDIARIES
CONDENSED
COMBINED BALANCE SHEET
As
of December 31, 2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,246
|
|
|
|
|
Accounts
receivable trade
|
|
|
716
|
|
|
|
|
Accounts
receivable related parties
|
|
|
2,371
|
|
|
|
|
Inventories
|
|
|
7,789
|
|
|
|
|
Prepaid
expenses
|
|
|
1,131
|
|
|
|
|
Other
current assets
|
|
|
1,029
|
|
|
|
|
Total
current assets
|
|
|
16,282
|
|
|
|
|
Property
and equipment, net
|
|
|
160,000
|
|
|
|
|
Other
assets
|
|
|
858
|
|
|
|
|
Total
Assets
|
|
$
|
177,140
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
MEMBER’S DEFICIT
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$
|
2,219
|
|
|
|
|
Accrued
liabilities
|
|
|
174
|
|
|
|
|
Other
liabilities – related parties
|
|
|
36
|
|
|
|
|
DIP
Financing and Rollup (Note 6)
|
|
|
39,654
|
|
|
|
|
Other
current liabilities
|
|
|
1,504
|
|
|
|
|
Total
current liabilities
|
|
|
43,587
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
61
|
|
|
|
|
Liabilities
subject to compromise
|
|
|
242,417
|
|
|
|
|
Total
Liabilities
|
|
|
286,065
|
|
|
|
|
Member’s
Deficit:
|
|
|
|
|
|
|
|
Member’s
equity
|
|
|
257,487
|
|
|
|
|
Accumulated
deficit
|
|
|
(366,412
|
)
|
|
|
|
Total
Member’s Deficit
|
|
|
(108,925
|
)
|
|
|
|
Total
Liabilities and Member’s Deficit
|
|
$
|
177,140
|
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
PACIFIC
ETHANOL HOLDING CO. LLC AND SUBSIDIARIES
CONDENSED
COMBINED STATEMENTS OF OPERATIONS
May
17, 2009 to December 31, 2009
|
|
Net
sales
|
|
$
|
50,448
|
|
|
|
|
Cost
of goods sold
|
|
|
66,470
|
|
|
|
|
Gross
loss
|
|
|
(16,022
|
)
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,420
|
|
|
|
|
Asset
impairments
|
|
|
247,657
|
|
|
|
|
Loss
from operations
|
|
|
(266,099
|
)
|
|
|
|
Reorganization
costs
|
|
|
11,607
|
|
|
|
|
Other
expense, net
|
|
|
267
|
|
|
|
|
Net
loss
|
|
$
|
(277,973
|
)
|
|
PACIFIC
ETHANOL HOLDING CO. LLC AND SUBSIDIARIES
CONDENSED
COMBINED STATEMENT OF CASH FLOWS
May
17, 2009 to December 31, 2009
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(277,973
|
)
|
|
|
|
Adjustments
to reconcile net loss to
cash
used in operating activities:
|
|
|
|
|
|
|
|
Non-cash
reorganization costs:
|
|
|
|
|
|
|
|
Write-off
of unamortized deferred financing fees
|
|
|
7,545
|
|
|
|
|
Settlement
of accrued liability
|
|
|
(2,008
|
)
|
|
|
|
Asset
impairments
|
|
|
247,657
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,042
|
|
|
|
|
Gain
on derivative instruments
|
|
|
(1,572
|
)
|
|
|
|
Amortization
of deferred financing fees
|
|
|
61
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(103
|
)
|
|
|
|
Inventories
|
|
|
(5,016
|
)
|
|
|
|
Prepaid
expenses and other assets
|
|
|
(378
|
)
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,893
|
|
|
|
|
Related
party receivables and payables
|
|
|
(2,335
|
)
|
|
|
|
Net
cash used in operating activities
|
|
$
|
(16,187
|
)
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
$
|
(446
|
)
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(446
|
)
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings under DIP Financing
|
|
$
|
19,827
|
|
|
|
|
Net
cash provided by financing activities
|
|
$
|
19,827
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
3,194
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
52
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,246
|
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Lyles
Debt Agreements
– In March 2010, the Company announced agreements
designed to satisfy the Lyles United indebtedness. These agreements are between
a third party and Lyles under which Lyles may transfer its claims in respect of
the Company’s indebtedness in $5.0 million tranches, which claims the third
party may then settle in exchange for shares of the Company’s common
stock. See Note 6 for additional details of these
agreements.
Plan of
Reorganization
– On March 26, 2010, the Bankrupt Debtors filed a joint
plan of reorganization with the Bankruptcy Court, which was structured in
cooperation with certain of the Bankrupt Debtors’ secured lenders. The proposed
plan contemplates that ownership of the Bankrupt Debtors would be transferred to
a new entity, which would be wholly owned by the Bankrupt Debtors’ secured
lenders. Under the proposed plan, the Bankrupt Debtors’ existing prepetition and
postpetition secured indebtedness of approximately $293.5 million would be
restructured to consist of approximately $48.0 million in three-year term loans,
$67.0 million in eight-year “PIK” term loans, and a new three-year revolving
credit facility of up to $35.0 million to fund working capital requirements (the
revolver is initially capped at $15.0 million but may be increased to up to
$35.0 million if more than two of the Bankrupt Debtors’ ethanol production
facilities cease operations). The Company is in continuing
discussions with the secured lenders regarding the Company’s possible
participation in the reorganization contemplated by the proposed plan, including
the potential acquisition by the Company of an ownership interest in the new
entity that would own the Bankrupt Debtors. Under the proposed plan, the Company
would continue to manage and operate the ethanol plants under the terms of an
amended and restated asset management agreement and would continue to market all
of the ethanol and WDG produced by the plants under the terms of amended and
restated agreements with Kinergy and PAP.
INDEX
TO EXHIBITS
|
Exhibit
Number
|
|
Description
|
|
3.1
|
|
Certificate
of Incorporation of the Registrant (1)
|
|
3.2
|
|
Certificate
of Designations, Powers, Preferences and Rights of the Series A Cumulative
Redeemable Convertible Preferred Stock (5)
|
|
3.3
|
|
Certificate
of Designations, Powers, Preferences and Rights of the Series B Cumulative
Convertible Preferred Stock (13)
|
|
3.4
|
|
Bylaws
of the Registrant (1)
|
|
10.01
|
|
Form
of Confidentiality, Non-Competition and Non-Solicitation Agreement dated
March 23, 2005 between the Registrant and each of Neil M. Koehler, Tom
Koehler, William L. Jones, Andrea Jones and Ryan W. Turner
(1)
|
|
10.02
|
|
Pacific
Ethanol Inc. 2004 Stock Option Plan (#)(2)
|
|
10.03
|
|
Amended
1995 Stock Option Plan (#)(3)
|
|
10.04
|
|
First
Amendment to Pacific Ethanol, Inc. 2004 Stock Option Plan
(#)(4)
|
|
10.05
|
|
Pacific
Ethanol, Inc. 2006 Stock Incentive Plan (#)(6)
|
|
10.06
|
|
Engineering,
Procurement and Technology License Agreement dated September 6, 2006 by
and between Delta-T Corporation and PEI Columbia, LLC
(**)(7)
|
|
10.07
|
|
Engineering,
Procurement and Technology License Agreement (Plant No. 3) dated September
6, 2006 by and between Delta-T Corporation and Pacific Ethanol, Inc.
(**)(7)
|
|
10.08
|
|
Engineering,
Procurement and Technology License Agreement (Plant No. 4) dated September
6, 2006 by and between Delta-T Corporation and Pacific Ethanol, Inc.
(**)(7)
|
|
10.09
|
|
Engineering,
Procurement and Technology License Agreement (Plant No. 5) dated September
6, 2006 by and between Delta-T Corporation and Pacific Ethanol, Inc.
(**)(7)
|
|
10.10
|
|
Form
of Employee Restricted Stock Agreement (#)(8)
|
|
10.11
|
|
Form
of Non-Employee Director Restricted Stock Agreement
(#)(8)
|
|
10.12
|
|
Second
Amended and Restated Operating Agreement of Front Range Energy, LLC among
the members identified therein (as amended by Amendment No. 1 described
below) (9)
|
|
10.13
|
|
Amendment
No. 1, dated as of October 17, 2006, of the Second Amended and Restated
Operating Agreement of Front Range Energy, LLC to Add a Substitute Member
and for Certain Other Purposes (9)
|
|
10.14
|
|
Amendment
to Amended and Restated Ethanol Purchase and Sale Agreement dated October
17, 2006 between Kinergy Marketing, LLC and Front Range Energy, LLC
(9)
|
|
10.15
|
|
Sponsor
Support Agreement, dated as of February 27, 2007, by and among Pacific
Ethanol, Inc., Pacific Ethanol Holding Co. LLC and WestLB AG, New York
Branch, as administrative agent (10)
|
|
10.16
|
|
Amended
and Restated Executive Employment Agreement dated December 11, 2007 by and
between Pacific Ethanol, Inc. and Neil M. Koehler (#)
(11)
|
|
Exhibit
Number
|
|
Description
|
|
10.17
|
|
Amended
and Restated Executive Employment Agreement dated December 11, 2007 by and
between Pacific Ethanol, Inc. and Christopher W. Wright (#)
(11)
|
|
10.18
|
|
Warrant
dated March 27, 2008 issued by Pacific Ethanol, Inc. to Lyles United, LLC
(12)
|
|
10.19
|
|
Registration
Rights Agreement dated as of March 27, 2008 by and between Pacific
Ethanol, Inc. and Lyles United, LLC (12)
|
|
10.20
|
|
Letter
Agreement dated March 27, 2008 by and between Pacific Ethanol, Inc. and
Lyles United, LLC (12)
|
|
10.21
|
|
Form
of Waiver and Third Amendment to Credit Agreement dated as of March 25,
2008 by and among Pacific Ethanol, Inc. and the parties thereto
(12)
|
|
10.22
|
|
Form
of Warrant dated May 22, 2008 issued by Pacific Ethanol, Inc.
(13)
|
|
10.23
|
|
Letter
Agreement dated May 22, 2008 by and among Pacific Ethanol, Inc. and Neil
M. Koehler, Bill Jones, Paul P. Koehler and Thomas D. Koehler
(13)
|
|
10.24
|
|
Form
of Subscription Agreement dated May 22, 2008 between Pacific Ethanol, Inc.
and each of the purchasers (13)
|
|
10.25
|
|
Form
of Warrant to purchase shares of Pacific Ethanol, Inc. Common Stock
(13)
|
|
10.26
|
|
Loan
and Security Agreement dated July 28, 2008 by and among Kinergy Marketing
LLC, the parties thereto from time to time as Lenders, Wachovia Capital
Finance Corporation (Western) and Wachovia Bank, National Association
(14)
|
|
10.27
|
|
Guarantee
dated July 28, 2008 by and between Pacific Ethanol, Inc. in favor of
Wachovia Capital Finance Corporation (Western) for and on behalf of
Lenders (14)
|
|
10.28
|
|
Loan
Restructuring Agreement dated as of November 7, 2008 by and among Pacific
Ethanol, Inc., Pacific Ethanol Imperial, LLC, Pacific Ethanol California,
Inc. and Lyles United, LLC (15)
|
|
10.29
|
|
Amended
and Restated Promissory Note dated November 7, 2008 by Pacific Ethanol,
Inc. in favor of Lyles United, LLC (15)
|
|
10.30
|
|
Security
Agreement dated as of November 7, 2008 by and between Pacific Ag.
Products, LLC and Lyles United, LLC (15)
|
|
10.31
|
|
Limited
Recourse Guaranty dated November 7, 2008 by Pacific Ethanol California,
Inc. in favor of Lyles United, LLC (15)
|
|
10.32
|
|
Unconditional
Guaranty dated November 7, 2008 by Pacific Ag. Products, LLC in favor of
Lyles United, LLC (15)
|
|
10.33
|
|
Irrevocable
Joint Instruction Letter dated November 7, 2008 executed by Pacific
Ethanol, Inc., Lyles United, LLC and Pacific Ethanol California, Inc.
(15)
|
|
10.34
|
|
Amendment
and Forbearance Agreement dated February 13, 2009 by and among Pacific
Ethanol, Inc., Kinergy Marketing LLC and Wachovia Capital Finance
Corporation (Western) (16)
|
|
10.35
|
|
Amendment
No. 1 to Letter re: Amendment and Forbearance Agreement dated February 26,
2009 by and among Pacific Ethanol, Inc., Kinergy Marketing LLC and
Wachovia Capital Finance Corporation (Western)
(17)
|
|
Exhibit
Number
|
|
Description
|
|
10.36
|
|
Amendment
No. 2 to Letter re: Amendment and Forbearance Agreement dated March 27,
2009 by and among Wachovia Capital Finance Corporation (Western), Kinergy
Marketing LLC and Pacific Ethanol, Inc. (18)
|
|
10.37
|
|
Promissory
Note dated October 20, 2008 by and among Pacific Ethanol, Inc. and Lyles
Mechanical Co. (18)
|
|
10.38
|
|
Promissory
Note dated March 30, 2009 by and among Pacific Ethanol, Inc. and William
L. Jones (18)
|
|
10.39
|
|
Promissory
Note dated March 30, 2009 by and among Pacific Ethanol, Inc. and Neil M.
Koehler (18)
|
|
10.40
|
|
Amendment
and Waiver Agreement dated May 17, 2009 by and between Wachovia Capital
Finance Corporation (Western) and Kinergy Marketing LLC
(19)
|
|
10.41
|
|
Pledge
and Security Agreement dated as of May 19, 2009 by and among Pacific
Ethanol California, Inc., Pacific Ethanol Holding Co. LLC and WestLB AG
(20)
|
|
10.42
|
|
Amended
and Restated Executive Employment Agreement dated November 25, 2009 by and
between Pacific Ethanol, Inc. and Bryon T. McGregor (#)
(21)
|
|
10.43
|
|
Credit
Agreement, dated as of February 27, 2007, by and among Pacific Ethanol
Holding Co. LLC, Pacific Ethanol Madera LLC, Pacific Ethanol Columbia,
LLC, Pacific Ethanol Stockton, LLC, Pacific Ethanol Imperial, LLC, and
Pacific Ethanol Magic Valley, LLC, as borrowers, the lenders party
thereto, WestLB AG, New York Branch, as administrative agent, lead
arranger and sole book runner, WestLB AG, New York Branch, as collateral
agent, Union Bank of California, N.A., as accounts bank, Mizuho Corporate
Bank, Ltd., as lead arranger and co-syndication agent, CIT Capital
Securities LLC, as lead arranger and co-syndication agent, Cooperative
Centrale Raiffeisen-Boerenleenbank BA., “Rabobank Nederland”, New York
Branch, and Banco Santander Central Hispano S.A., New York Branch
(23)
|
|
10.44
|
|
Debtor-In
Possession Credit Agreement dated as of May 19, 2009 by and among Pacific
Ethanol Holding Co. LLC, Pacific Ethanol Madera LLC, Pacific Ethanol
Columbia, LLC, Pacific Ethanol Stockton, LLC, Pacific Ethanol Magic
Valley, LLC, WestLB AG, Amarillo National Bank and the Lenders referred to
therein (23)
|
|
10.45
|
|
Amendment
No. 2 to Loan and Security Agreement, Consent and Waiver dated November 5,
2009 by and between Wachovia Capital Finance Corporation (Western),
Kinergy Marketing LLC and Pacific Ethanol, Inc. (23)
|
|
10.46
|
|
Form
of Indemnity Agreement between the Registrant and each of its Executive
Officers and Directors (#) (*)
|
|
21.1
|
|
Subsidiaries
of the Registrant (22)
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1
|
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002
|
_______________
|
(#)
|
Management
contract or compensatory plan, contract or arrangement required to be
filed as an exhibit.
|
|
(**)
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment filed with the Securities and Exchange
Commission.
|
|
(1)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for
March 23, 2005 filed with the Securities and Exchange Commission on March
29, 2005 and incorporated herein by
reference.
|
|
(2)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8 (Reg.
No. 333-123538) filed with the Securities and Exchange Commission on March
24, 2005 and incorporated herein by
reference.
|
|
(3)
|
Filed
as an exhibit to the Registrant’s annual report Form 10-KSB for
December 31, 2002 (File No. 0-21467) filed with the Securities and
Exchange Commission on March 31, 2003 and incorporated herein by
reference.
|
|
(4)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for
January 26, 2006 filed with the Securities and Exchange Commission on
February 1, 2006 and incorporated herein by
reference.
|
|
(5)
|
Filed
as an exhibit to the Registrant’s annual report on Form 10-KSB for
December 31, 2005 filed with the Securities and Exchange Commission on
April 14, 2006 and incorporated herein by
reference.
|
|
(6)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8 (Reg.
No. 333-137663) filed with the Securities and Exchange Commission on
September 29, 2006.
|
|
(7)
|
Filed
as an exhibit to the Registrant’s quarterly report on Form 10-Q for
September 30, 2006 filed with the Securities and Exchange Commission on
November 20, 2006 and incorporated herein by
reference.
|
|
(8)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for October
4, 2006 filed with the Securities and Exchange Commission on October 10,
2006.
|
|
(9)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for October
17, 2006 filed with the Securities and Exchange Commission on October 23,
2006.
|
|
(10)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for February
27, 2007 filed with the Securities and Exchange Commission on March 5,
2007.
|
|
(11)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for December
11, 2007 filed with the Securities and Exchange Commission on December 17,
2007.
|
|
(12)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for March 26,
2008 filed with the Securities and Exchange Commission on March 27,
2008.
|
|
(13)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for May 22,
2008 filed with the Securities and Exchange Commission on May 23,
2008.
|
|
(14)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for July 28,
2008 filed with the Securities and Exchange Commission on August 1,
2008.
|
|
(15)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for November
7, 2008 filed with the Securities and Exchange Commission on November 10,
2008.
|
|
(16)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for February
13, 2009 filed with the Securities and Exchange Commission on February 20,
2009.
|
|
(17)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for February
26, 2009 filed with the Securities and Exchange Commission on March 4,
2009.
|
|
(18)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for March 27,
2009 filed with the Securities and Exchange Commission on April 2,
2009.
|
|
(19)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for May 17,
2009 filed with the Securities and Exchange Commission on May 18,
2009.
|
|
(20)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for May 20,
2009 filed with the Securities and Exchange Commission on May 27,
2009.
|
|
(21)
|
Filed
as an exhibit to the Registrant’s current report on Form 8-K for November
19, 2009 filed with the Securities and Exchange Commission on November 27,
2009.
|
|
(22)
|
Filed
as an exhibit to the Registrant’s annual report on Form 10-K for the year
ended December 31, 2008 filed with the Securities and Exchange Commission
on March 31, 2009.
|
|
(23)
|
Filed
as an exhibit to the Registrant’s annual report on Form 10-Q for the
quarter ended September 30, 2009 filed with the Securities and Exchange
Commission on November 9, 2009.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on this 31st day of March,
2010.
|
|
PACIFIC
ETHANOL, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ NEIL
M. KOEHLER
|
|
|
|
|
Neil
M. Koehler
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
William
L. Jones
|
|
Chairman
of the Board and Director
|
|
March
31, 2010
|
|
|
|
|
|
|
/s/
NEIL M. KOEHLER
Neil
M. Koehler
|
|
President,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
Bryon
T. McGregor
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
March
31, 2010
|
|
|
|
|
|
|
/s/
TERRY L. STONE
Terry
L. Stone
|
|
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
John
L. Prince
|
|
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
Douglas
L. Kieta
|
|
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
Larry
D. Layne
|
|
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
Michael
D. Kandris
|
|
Director
|
|
March
31, 2010
|
|
|
|
|
|
|
|
/s/
RYAN W. TURNER
Ryan
W. Turner
|
|
Director
|
|
March
31, 2010
|
EXHIBITS
FILED WITH THIS REPORT
|
Exhibit
Number
|
|
Description
|
|
10.46
|
|
Form
of Indemnity Agreement between the Registrant and each of its Executive
Officers and Directors
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1
|
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|