Ian Gilson, CFA
Initiating coverage of Pacific Ethanol as Outperform
Pacific Ethanol (PEIX) was formed in 2003 and marketed ethanol produced by third parties through a subsidiary, Kinergy Marketing LLC. The company went public in 2005. The company started construction of its first ethanol production plant in 2006 and subsequently built three more between 2006 and 2008. Adverse market conditions and inadequate working capital caused the company to idle three of the four plants and the plant subsidiaries to file for Chapter 11 of the Bankruptcy Code on May 17, 2009. The plan of reorganization was approved by the Court on June 8, 2010 and became effective on June 29, 2010. Much of the bank debt was converted to equity in the production plants and was restructured into a new company New PE Holdco LLC.
Under the plan Pacific Ethanol continued as an operator and manager of the four plants on behalf of the plant owners. Subsequently the 42% part ownership of the fifth plant, located in Windsor, Colorado was sold and a 20% minority ownership of New PE Holdco was acquired, making Pacific Ethanol the largest ownership interest in New PE Holdco. Kinergy Marketing LLC and Pacific Ag Products LLC remain wholly owned subsidiaries of Pacific Ethanol.
Under the terms of an asset management agreement with the plant owners, Pacific Ethanol manages buying the grain, plant operations and marketing of ethanol and wet distillers grains (WDG) and other co-products produced at the four plants.
In November, 2010 Kinergy and AE Keyes (AE Biofuels, AEBF) signed an exclusive marketing agreement to market the ethanol from a plant in Keyes, CA. The plant became operational in the second quarter of 2011 at a rated capacity of 55 million gallons a year.
Pacific Ethanol currently operates three plants and the fourth is on stand-by. These are:
| Plant: |
Quarterly Capacity million gallons |
Status |
| Magic Valley, Burley, ID | 15 | Operating |
| Columbia, Boardman, OR | 10 | Operating |
| Stockton, Stockton, CA | 15 | Operating |
| Madera, Madera, CA | 10 | Idle |
Captive capacity is 40 million gallons per quarter from three plants. In the first and second quarters of 2011 sales from the three operating plants aggregated 37 and 38 million gallons, essentially these plants are at capacity.
| AE Keys, Keys, CA | 13.75 | Operating. |
Currently third party sales in the first and second quarters were 47 and 63 million gallons.
The two largest customers currently are Chevron (19% of ethanol purchases) and Valero (5%)
Corn is the basic raw material and is purchased under contracts, mainly from Midwest US growers and shipped to the ethanol plants.
Excluding the net loss of the New PE Holdco that is consolidated for the income statement Pacific Ethanol is profitable to break-even for the first two quarters of 2011.
The stock has been under pressure due to the probable reduction in the ethanol subsidy, which goes to the gasoline blenders and not to the ethanol producer. In our opinion the subsidy will be reduced but not eliminated. We are rating the stock "outperform" with a price target of $3.00.
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