Pacific Ethanol Inc., a California biofuels darling that boasts political connections and an investment from Bill Gates, is short on cash and suffering from higher corn and plant construction costs, which threaten to derail the once-promising biofuels maker.
The Sacramento company on Monday posted record-high sales but a larger-than-expected $14.7-million loss in the fourth quarter, reflecting a financial squeeze that has clouded prospects for ethanol producers nationwide.
Pacific Ethanol reported the loss just days after it shored up its depleted coffers with a $40-million cash infusion from Lyles United, a company whose affiliates have provided construction services to Pacific Ethanol and had previously lent it funds.
The Lyles investment provided a bit of good news for the company and helped remedy several violations of Pacific Ethanol's credit agreement with a group of lenders. The company recently postponed construction of its Imperial Valley ethanol plant, said it suffered from large construction cost overruns and admitted to having a "material weakness" in its financial controls -- problems it says it has since fixed.
"Pacific Ethanol is probably having a harder time than other, larger peers," said Eitan Bernstein, energy analyst at Friedman, Billings, Ramsey & Co., who doesn't own shares in the company and rates the stock "underperform."
The company operates ethanol plants in Madera, Calif., and Boardman, Ore., and has a major interest in an ethanol production plant in Windsor, Colo. Two others have yet to come on line; a plant in Burley, Idaho, is in the start-up process and a plant in Stockton is set to open this year.
Pacific Ethanol's chairman and co-founder is Bill Jones, a second-generation farmer and cattle rancher who served more than a decade in the California Legislature and spent eight years as secretary of state.
Chief Executive Neil Koehler on Monday attributed the fourth-quarter loss primarily to sharply higher corn costs combined with lower prices for ethanol caused by industry overexpansion. Pacific Ethanol, like most other U.S. ethanol producers, makes its biofuel from corn.
For the three months ended Dec. 31, Pacific Ethanol's gross margins -- the difference between the cost of production and the selling price of the ethanol -- plummeted to 1.3% from 14.6% in the final quarter of 2006. For the full year, the margin slipped to 7.1%, down from 2006's margin of 11%.
The lower margins couldn't cover the company's debt and overhead expenses, Koehler said. The quarterly loss equaled 39 cents a share, well off average analyst expectations of a 17-cent loss, according to a survey by Thomson Financial. In the fourth quarter of 2006, the company lost $3.1 million, or 11 cents a share.
The margin crunch has taken a toll industrywide. Grain giant Cargill Inc. suspended plans for an ethanol plant near Topeka, Kan.; an ethanol producer in Illinois fell into bankruptcy protection; and VeraSun Energy Corp. scrapped plans for an ethanol plant in Reynolds, Ind. -- a community that had hoped to call itself BioTown USA.
During the quarter, Pacific Ethanol also recorded special charges of $5.5 million, or 14 cents a share, reflecting financing fees from the suspended plant and a decrease in fair value of interest-rate hedges.
For the full year, Pacific Ethanol recorded a loss of $14.4 million, or 47 cents a share, compared with a loss of $142,000, or $2.50 a share, in 2006, when there were fewer shares outstanding.
Net sales for 2007 more than doubled to $462,000, reflecting record volumes of ethanol deliveries that were partly offset by lower sales prices. The firm sold 190.6 million gallons of ethanol last year, up 87% from 2006.
Shares of Pacific Ethanol fell 45 cents to $4.40 on Monday, a losing day for ethanol producers after the U.S. Agriculture Department released estimates showing that farmers intended to plant 8% less corn this year. The stock, which traded above $40 in 2006, sold as high as $17 last April.
"It's a pretty levered business model," Bernstein, who had expected a 20-cent loss for the quarter, said of the company's situation. "The question is, how do we get confident and comfortable about earnings going forward?"