Pacific Ethanol loses $14.4m

Sacramento-based Pacific Ethanol Inc. reported Thursday that it lost $14.4 million in 2007, as falling ethanol prices and rising corn prices cut into its margins despite a big increase in sales volume.

The company also announced it has closed a $40 million investment from a Fresno-based company, a move that comes one week after the ethanol maker warned it expected to lose money in 2007 and needed new cash to keep operating.

The company's 2007 loss dwarfed its 2006 loss of $100,000, and came despite growth of net sales to $461.5 million in 2007, up 104% from 2006 net sales of $226.4 million, the company reported in a filing with the U.S. Securities and Exchange Commission.

But Pacific Ethanol, like ethanol makers across the country, has been hurt by rising corn prices and falling ethanol prices, as the industry's rapid expansion has led to a glut of the biofuel and a spike in the price of the corn from which it is made.

As profit margins for ethanol have dipped, investors have fled once-hot ethanol companies, driving down share prices for Pacific Ethanol and other publicly traded producers of the fuel, primarily used as an additive to gasoline.

Pacific Ethanol saw average corn prices rise to $3.61 per bushel in 2007, up 48% from $2.44 per bushel in 2006, the company reported.

"In addition, we had significant fixed-price contracts and held inventory balances during a period of declining ethanol prices, both of which reduced our margins," the company reported.

Gross profit margin for 2007 fell to 7.1%, down from 11% in 2006, as corn prices continued to rise and ethanol prices continued to fall through last year.

"That is a key risk in the ethanol business," Neil Koehler, Pacific Ethanol's president and chief executive, said in an interview Thursday. "The fourth quarter of 2007 was a difficult environment for ethanol margins."

Last year also brought Pacific Ethanol new costs, as the company founded in Fresno in 2003 started producing ethanol from its own plants, rather than simply marketing ethanol made by others, as it had done in previous years.

The company's earnings report also noted a $1.8 million increase in interest expenses due to additional borrowings and interest on outstanding debt, and a $3.2 million increase in amortization of interest and financing costs, tied primarily to the company's decision to halt construction of a plant in California's Imperial Valley late last year. The company borrowed about $30 million in the fourth quarter of 2007 to pay for work done on the unfinished plant.

In addition, the company recognized a $5.5 million loss related to interest rate hedges, and a $9.7 million noncash loss related to the company's 42% ownership of Colorado-based ethanol maker Front Range Energy LLC.

The company operates plants in Madera County and in Boardman, Ore., both capable of producing about 40 million gallons a year, and is building plants in Burley, Idaho, and Stockton, both of which saw higher-than-anticipated construction costs, the company reported.

In a filing last week in which the company projected the 2007 loss, it also reported that a cash shortfall, as well as defaults on agreements governing a $250 million secured line of credit meant to finance plant construction, could force the company "to delay or abandon its plant expansion program" if additional financing was not secured.

"Given the uncertainty, if we had not been able to close this transaction and to get the waivers, there are risk factors that we had to address," Koehler said.

But the $40 million investment announced Thursday -- along with waivers it has received from its lenders for the defaults disclosed last week -- resolved those immediate concerns, Koehler said.

The investment comes from Lyles United LLC, a company affiliated with Fresno-based Lyles Diversified Inc., which in 2005 converted a $1.5 million loan to 1 million shares of Pacific Ethanol stock, and W.M. Lyles Co., the designer and builder of Pacific Ethanol's plant in Madera County.

The $40 million investment from Lyles United LLC comes with the condition that Pacific Ethanol not undertake any projects costing more than $1 million and not already budgeted unless it repays $30 million owed to Lyles United, the company reported to the SEC.