Pacific Ethanol discusses impact of trade barriers, EPA actions

By Erin Voegele | August 13, 2018

Pacific Ethanol Inc. released second quarter financial results on Aug. 9, reporting a slight increase in net sales. The company also discussed how current trade barriers and the U.S. EPA’s administration of the Renewable Fuel Standard are reducing short-term demand for ethanol.  

“Even with a challenging first half, we believe market fundamentals remain strong, supporting better production margins in the second half of the year,” said Neil Koehler, president and CEO of Pacific Ethanol. “However, questionable regulatory actions have reduced short-term ethanol demand in both domestic and export markets impacting both Pacific Ethanol and the ethanol industry as a whole. During this period of continued compressed and volatile production margins, our focus remains on initiatives and investments to reduce costs, improve yields, lower carbon scores, and maintain a healthy balance sheet. We are benefiting from increased product diversification that supports stronger margins and lessens our exposure to commodity price fluctuations in the fuel ethanol markets.” 

During an investor call, Koehler said the trade tariffs and RFS small refinery hardship waivers have resulted in significant demand destruction for U.S. ethanol, resulting in higher than optimal industry inventory levels. Despite this regulatory-induced demand destruction, Koehler said Pacific Ethanol believes that market fundamentals remains strong and should support better margins. He also noted the company is encouraged by the recent change in leadership at the EPA.

“We as a company, and through the industry trade associations, are actively engaged with the EPA and the White House to implement RVP parity for E15 blends, maintaining the EPA RVO targets to be consistent with the law, and to be more judicious in granting small refinery economic hardship exemptions, and when granted relocate those gallons into all other obligated parties,” Koehler said.  “While these changes won’t impact 2018, we do believe and anticipate positive movement in 2019 for expansion in the year-end blending of E15.”

Regarding plant operations, Koehler noted that Pacific Ethanol has successfully completed a solar power project at its Madera, California-based ethanol plant. The 5 MW project is currently running at approximately 70 percent capacity, and is scheduled to reach full capacity by the end of the year, once PG&E completes upgrades to the adjacent substation.

Koehler also noted that the 3.5 MW cogeneration project at the company’s Stockton, California, ethanol plant has not yet reached commercial operations. He said the two power generation units have required modifications to meet performance standards.

The AirGas CO2 plant at the Stockton plant is under construction and expected to be online by the end of the fourth quarter, he added.

According to Koehler, the Stockton plant is currently producing cellulosic ethanol and is generating D3 renewable identification numbers (RINs). The company is still awaiting EPA approval of cellulosic pathways for its Madera, California, and Magic Valley, Idaho, plants. “We believe the delays have been primarily a function of the negative political environment at EPA towards advanced biofuels, and we’re hopeful that under the new regulatory leadership these approvals will move forward,” Koehler added.

For the second quarter, Pacific Ethanol reported net sales of $410.5 million, up from $405.2 million during the same period of last year. Total gallons sold reached 227.4 million, down from 235.8 million during the second quarter of 2017. Total production gallons sold was 144.4 million, up from 120 million.

Gross loss was $1.3 million, compared to a gross profit of $1.7 million. Operating loss was $10.2 million, compared to $7.1 million during the same quarter of last year. Loss available to common stockholders was $13.2 million, or 31 cents per share, compared to $9.2 million, or 22 cents per share. Adjusted EBITDA was $1 million, down from $2.6 million during the second quarter of 2017.