UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) | July 3, 2017 | |||
PACIFIC ETHANOL, INC. | ||||
(Exact name of registrant as specified in its charter) | ||||
Delaware (State or other jurisdiction of incorporation) |
000-21467 (Commission File Number) |
41-2170618 (IRS Employer Identification No.) | ||
400 Capitol Mall, Suite 2060, Sacramento, CA | 95814 | |||
(Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: | (916) 403-2123 | |||
(Former name or former address, if changed since last report) | ||||
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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EXPLANATORY NOTE
As reported in the Current Report on Form 8-K filed by Pacific Ethanol, Inc. (the “Company”) on July 5, 2017 (the “Initial Form 8-K”), effective July 3, 2017, the Company completed its previously announced acquisition of Illinois Corn Processing, LLC. The Company is filing this Amendment No. 1 to the Initial Form 8-K (“Amendment No. 1”) to amend and restate in its entirety Item 9.01 in the Initial Form 8-K to provide the financial statements and pro forma information required by Item 9.01 of Form 8-K that were omitted from the Initial Form 8-K as permitted.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The audited balance sheets of Illinois Corn Processing, LLC as of December 31, 2016 and 2015, and the related audited statements of comprehensive income, changes in members’ equity and cash flows for the years then ended, the related notes to such audited financial statements and the related independent auditor’s report are attached as Exhibit 99.1 to this Amendment No. 1.
The audited balance sheets of Illinois Corn Processing, LLC as of December 31, 2015 and 2014, and the related audited statements of comprehensive income, changes in members’ equity and cash flows for the years then ended, the related notes to such audited financial statements and the related independent auditor’s report are attached as Exhibit 99.2 to this Amendment No. 1.
The unaudited condensed balance sheet of Illinois Corn Processing, LLC as of March 31, 2017, and the related unaudited condensed statements of comprehensive income and cash flows for the three months ended March 31, 2017 and 2016, and the related notes thereto are attached as Exhibit 99.3 to this Amendment No. 1.
(b) Pro Forma Financial Information.
The following pro forma financial information is attached as Exhibit 99.4 to this Amendment No. 1:
· | Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 2017; |
· | Unaudited Pro Forma Combined Condensed Statement of Operations for the three months ended March 31, 2017; and |
· | Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 2016. |
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(d) Exhibits.
Number | Description (#) |
10.1 | Note Purchase Agreement, dated June 26, 2017, by and among Pacific Ethanol, Inc. and the Investors (1) |
10.2 | Consent of Holders and Amendment of Senior Secured Notes, dated June 26, 2017, by and among the Investors and the other holders identified therein (1) |
10.4 | Security Agreement, dated December 15, 2016, by and among Pacific Ethanol, Inc., Cortland Capital Market Services LLC and the holders of Pacific Ethanol, Inc.’s Prior Senior Notes (3) |
10.6 | Promissory Note issued to Illinois Corn Processing Holdings Inc. on July 3, 2017 (2) |
10.7 | Promissory Note issued to MGPI Processing, Inc. on July 3, 2017 (2) |
23.1 | Consent of Ernst & Young LLP, independent auditors for Illinois Corn Processing, LLC (*) |
99.4 | Pro Forma Financial Information listed in Item 9.01(b) (*) |
(*) | Filed herewith. |
(#) | All of the agreements filed as exhibits to this report contain representations and warranties made by the parties thereto. The assertions embodied in such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other purpose at the time they were made or otherwise. |
(1) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 27, 2017 and incorporated herein by reference. The Agreement and Plan of Merger filed as Exhibit 2.1 omits certain exhibits and the disclosure schedules to the Agreement and Plan of Merger pursuant to Item 601(b)(2) of Regulation S-K promulgated by the Securities and Exchange Commission. The Company agrees to furnish on a supplemental basis a copy of the omitted exhibits and schedules to the Securities and Exchange Commission upon request. |
(2) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 5, 2017. |
(3) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2016. |
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SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: July 31, 2017 | PACIFIC ETHANOL, INC. | |
By: | /S/ CHRISTOPHER W. WRIGHT | |
Christopher W. Wright | ||
Vice President, General Counsel & Secretary |
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EXHIBITS FILED WITH THIS REPORT
Number | Description |
23.1 | Consent of Ernst & Young LLP, independent auditors for Illinois Corn Processing LLC |
99.4 | Pro Forma Financial Information listed in Item 9.01(b) |
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Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements:
(1) | Registration Statement (Form S-3 Nos. 333-178685, 333-180731, 333-195364 and 333-217323) of Pacific Ethanol, Inc., |
(2) | Registration Statement (Form S-4 No. 333-201879) of Pacific Ethanol, Inc., and |
(3) | Registration Statement (Form S-8 Nos. 333-137663, 333-169002, 333-176540, 333-185884, 333-189478, 333-196876 and 333-212070) of Pacific Ethanol, Inc., |
of our report dated April 26, 2017 with respect to the financial statements of Illinois Corn Processing, LLC as of and for the years ended December 31, 2016 and 2015, and of our report dated and March 24, 2016 with respect to the financial statements of Illinois Corn Processing, LLC as of and for the years ended December 31, 2015 and 2014, included in this Amendment No. 1 to Current Report (Form 8-K/A) of Pacific Ethanol, Inc.
/s/ Ernst & Young, LLP
St. Louis, Missouri
July 31, 2017
Exhibit 99.1
FINANCIAL STATEMENTS
Illinois Corn Processing, LLC (a Limited Liability Company)
Years Ended December 31, 2016 and 2015
With Report of Independent Auditors
Illinois Corn Processing, LLC
(a Limited Liability Company)
INDEX TO FINANCIAL STATEMENTS
Page | |
Report of Independent Auditors | 1 |
Financial Statements: | |
Balance Sheets as of December 31, 2016 and 2015 | 3 |
Statements of Comprehensive Income for the Years Ended December 31, 2016 and 2015 | 4 |
Statements of Changes in Members' Equity for the Years Ended December 31, 2016 and 2015 | 5 |
Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 | 6 |
Notes to Financial Statements | 7 |
i |
Report of Independent Auditors
The Board of Advisors
Illinois Corn Processing, LLC
We have audited the accompanying financial statements of Illinois Corn Processing, LLC, which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of comprehensive income, changes in members’ equity and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
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Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Corn Processing, LLC at December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
April 26, 2017
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Illinois Corn Processing, LLC
(a Limited Liability Company)
Balance Sheets
(in thousands)
December 31 | ||||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 25,158 | $ | 20,616 | ||||
Restricted cash | 264 | 410 | ||||||
Margin deposits | 274 | 1,596 | ||||||
Trade receivables: | ||||||||
Due from affiliates | 3,423 | 2,385 | ||||||
Due from nonaffiliates, net of allowance for doubtful accounts of $0 in 2016 and 2015 | 7,212 | 4,679 | ||||||
Deposits | 104 | 54 | ||||||
Inventories | 11,133 | 18,574 | ||||||
Derivative assets | 1,445 | 803 | ||||||
Prepaid expenses | 70 | 151 | ||||||
Total current assets | 49,083 | 49,268 | ||||||
Property and Equipment: | ||||||||
Historical Cost | 50,156 | 45,434 | ||||||
Accumulated depreciation | (28,811 | ) | (25,782 | ) | ||||
Net property and equipment | 21,345 | 19,652 | ||||||
Debt issuance costs | 119 | 213 | ||||||
$ | 70,547 | $ | 69,133 | |||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable: | ||||||||
Due to affiliates | $ | 393 | $ | 571 | ||||
Due to nonaffiliates | 5,069 | 5,711 | ||||||
Accrued wages and benefits | 729 | 687 | ||||||
Accrued property taxes | 107 | 106 | ||||||
Derivative liabilities | 1,000 | 1,315 | ||||||
Total current liabilities | 7,298 | 8,390 | ||||||
Postretirement liabilities | 135 | 139 | ||||||
Total liabilities | 7,433 | 8,529 | ||||||
Members’ equity: | ||||||||
Contributed capital | 33,000 | 33,000 | ||||||
Accumulated earnings | 30,106 | 27,550 | ||||||
Accumulated other comprehensive income | 8 | 54 | ||||||
Total members’ equity | 63,114 | 60,604 | ||||||
$ | 70,547 | $ | 69,133 |
See accompanying notes to financial statements.
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Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Comprehensive Income
(in thousands)
For the years ended December 31 | |||||||||
2016 | 2015 | ||||||||
Net Sales | $ | 177,401 | $ | 166,905 | |||||
Cost of Sales (exclusive of depreciation shown separately below): | |||||||||
Finished goods | 158,495 | 143,967 | |||||||
Derivative gains (losses), net | (911 | ) | 1,251 | ||||||
157,584 | 145,218 | ||||||||
Gross profit (exclusive of depreciation shown separately below) | 19,817 | 21,687 | |||||||
Selling, General and Administrative Expenses | 3,002 | 2,191 | |||||||
Depreciation | 3,030 | 2,634 | |||||||
Operating Income | 13,785 | 16,862 | |||||||
Other Income | – | 4,112 | |||||||
Interest Expense | (229 | ) | (160 | ) | |||||
Net Income | 13,556 | 20,814 | |||||||
Gain (Loss) on Postretirement Benefits | (46 | ) | 44 | ||||||
Comprehensive Income | $ | 13,510 | $ | 20,858 |
See accompanying notes to financial statements.
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Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Changes in Members’ Equity
(in thousands)
Contributed Capital | Accumulated Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||
December 31, 2014 | $ | 33,000 | $ | 11,127 | $ | 10 | $ | 44,137 | ||||||||
Net income | – | 20,814 | – | 20,814 | ||||||||||||
Dividends paid to members | – | (4,391 | ) | – | (4,391 | ) | ||||||||||
Postretirement benefit obligation | – | – | 44 | 44 | ||||||||||||
December 31, 2015 | 33,000 | 27,550 | 54 | 60,604 | ||||||||||||
Net income | – | 13,556 | – | 13,556 | ||||||||||||
Dividends paid to members | – | (11,000 | ) | – | (11,000 | ) | ||||||||||
Postretirement benefit obligation | – | – | (46 | ) | (46 | ) | ||||||||||
December 31, 2016 | $ | 33,000 | $ | 30,106 | $ | 8 | $ | 63,114 |
See accompanying notes to financial statements.
5 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Cash Flows
(in thousands)
For the years ended December 31 | ||||||||
2016 | 2015 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 13,556 | $ | 20,814 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 3,030 | 2,634 | ||||||
Amortization of debt issuance costs | 94 | 71 | ||||||
Postretirement benefit expense | (17 | ) | 8 | |||||
Contributions to postretirement benefit plan | (33 | ) | (7 | ) | ||||
Derivative (gains) losses, net | (911 | ) | 1,251 | |||||
Cash settlements on derivative transactions, net | (47 | ) | (1,344 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Margin deposits | 1,322 | (288 | ) | |||||
Accounts receivable | (3,571 | ) | 3,255 | |||||
Inventories | 7,441 | (7,404 | ) | |||||
Prepaid expenses and deposits | 31 | 129 | ||||||
Accounts payable and accrued expenses | (777 | ) | (325 | ) | ||||
Net cash provided by operating activities | 20,118 | 18,794 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property and equipment | (4,722 | ) | (4,712 | ) | ||||
Decrease (Increase) in restricted cash | 146 | (110 | ) | |||||
Net cash used in investing activities | (4,576 | ) | (4,822 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Debt issuance costs | – | (284 | ) | |||||
Dividend payments to members | (11,000 | ) | (4,391 | ) | ||||
Net cash used in financing activities | (11,000 | ) | (4,675 | ) | ||||
Net Increase in Cash | 4,542 | 9,297 | ||||||
Cash, Beginning of Year | 20,616 | 11,319 | ||||||
Cash, End of Year | $ | 25,158 | $ | 20,616 | ||||
Supplemental Information: | ||||||||
Interest paid | $ | 134 | $ | 79 |
See accompanying notes to financial statements.
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Illinois Corn Processing, LLC
(a Limited Liability Company)
Notes to Financial Statements
1. | NATURE OF OPERATIONS AND ACCOUNTING POLICIES |
Nature of Operations. Illinois Corn Processing LLC (the "Company"), a Delaware limited liability company, consists of two members, Illinois Corn Processing Holdings, Inc. ("ICPH") and MGPI Processing, Inc. ("MGPI"). ICPH is a wholly owned subsidiary of SEACOR Holdings Inc. (along with its controlled and consolidated subsidiaries collectively referred to as "SEACOR"). MGPI is a wholly owned subsidiary of MGP Ingredients, Inc. (along with its controlled and consolidated subsidiaries collectively referred to as "MGP"). The Company was formed on November 20, 2009, through MGPI’s contribution of a previously idled manufacturing plant in Pekin, IL, and the sale of a 50% interest to SEACOR for $15.0 million in cash. On February 1, 2012, ICPH acquired an additional 20% equity interest in the Company from MGPI for $9.1 million. Pursuant to the Limited Liability Company agreement entered into on November 20, 2009, between ICPH and MGPI (the "LLC Agreement"), the purchase price was based on a predetermined enterprise value of the Company plus capital improvements made since inception. Following this transaction, ICPH owns 70% of the Company.
These financial statements do not reflect push-down purchase accounting activity for ICPH’s acquisition to obtain a controlling interest in the Company. Capital contributions, distributions, and allocations of net income or loss are made based on each member’s proportionate share of ownership, with certain exceptions, and the liability of the members is limited to their investment in the Company.
The Company is in the business of manufacturing alcohol for beverage, industrial, and fuel applications. During the years ended December 31, 2016 and 2015, the Company sold certain alcohol finished goods to MGP and also sold alcohol finished goods to other unrelated third parties. Certain co-products and byproducts of the manufacturing process are also sold to other unrelated third parties.
The LLC Agreement contains certain covenants including, among others, a provision that does not allow the Company to incur three consecutive fiscal quarters of losses, as defined, equaling or exceeding $1.5 million in the aggregate; or at any time allow the Company’s net working capital to be less than $2.5 million. In the event of noncompliance with these covenants, MGPI or ICPH would have the unilateral right to shut down the plant, which could result in a default on the Company's Revolving Credit Facility (see Note 2).
Also in accordance with the LLC Agreement, either member (the "Electing Party") has the right to elect a shutdown of the Pekin plant if the Company incurs a quarterly loss, as defined, in excess of $0.5 million; however, the other member has the right to object to the shutdown election and continue operations of the plant. The Electing Party has the right but not the obligation to withdraw its shutdown election at the beginning of each subsequent quarter. Effective April 1, 2013, MGPI elected to shut down the Pekin plant in accordance with the provisions of the LLC Agreement. ICPH objected to the shutdown, thereby keeping the plant operational. On April 1, 2014, MGPI withdrew its shutdown election. As a consequence of the shutdown election, in accordance with the Company’s LLC agreement, the Company’s EBITDA was allocated to MGPI and ICPH at 20% and 80%, respectively, during the shutdown election period. The earnings allocation between MGPI and ICPH reverted to 30% and 70%, respectively, after the withdrawal of the shutdown election. As a result of the disproportional allocation of EBITDA during the shutdown election period as of December 31, 2014, ICPH and MGPI members’ equity balances represented 72% and 28%, respectively, of total equity. On April 1, 2015, the Company made a disproportionate distribution of $4.4 million to ICPH, which resulted in the members' capital account to equal their respective ownership.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Such estimates include those related to the allowance for doubtful accounts, impairments, certain accrued liabilities, and postretirement benefit obligations. Actual results could differ from those estimates and those differences may be material.
Subsequent Events. The Company has performed an evaluation of subsequent events through April 26, 2017, the date the financial statements were available to be issued.
Revenue Recognition. The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Revenue that does not meet these criteria is deferred until the criteria are met. The Company earns revenues from the sale of alcohol, co-products, and byproducts. Revenues and related costs from these sales are recorded when title transfers to the buyer.
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Shipping Costs. The sales price for certain of the Company's products includes a component for the shipment of the product on behalf of its customers. The costs related to these shipments are included in cost of goods sold in the accompanying statements of comprehensive income.
Trade
Receivables. The Company’s customers primarily are petrochemical, agricultural and industrial companies. Customers
are granted credit on a basis and credit risks are considered
minimal. The Company routinely reviews its trade receivables and makes provisions for doubtful accounts based on existing customer
and economic conditions; however, those provisions are estimates and actual results could differ from those estimates, and those
differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance
for doubtful accounts when collection efforts have been exhausted.
Restricted Cash. The Company is a self-directing customer of the Natural Gas Energy Efficiency Program, a state of Illinois excise tax program that funds natural gas energy efficiency projects. Under this state regulation, the Company reserves two-percent of its natural gas costs incurred, not to exceed $150,000 per fiscal year. These restricted funds are held by the Company to fund internal capital expenditure projects designed to reduce consumption of natural gas by the Company. As of December 31, 2016 and 2015, the Company had $0.3 million and $0.4 million, respectively, of restricted cash to fund future energy efficiency projects. The Company must either use these funds toward natural gas energy efficiency projects within three years of designation or remit them as a tax payment to the state of Illinois.
Margin Deposits. The Company’s margin deposits consist of cash on deposit with its futures commission merchant in support of its open derivative contracts (see Note 3). The amount of margin deposit required to be maintained is based on the number of open derivative contracts and their underlying fair value.
Inventories. Inventories are stated at the lower of cost (using the average cost method) or market. Inventories consist of finished goods (alcohol and dried distillers grains with solubles (DDGS) and raw materials in the form of agricultural commodities used in the production process.
The Company’s inventories at December 31 consisted of the following (in thousands):
2016 | 2015 | |||||||
Raw materials | $ | 1,826 | $ | 2,198 | ||||
Finished goods | 7,850 | 14,907 | ||||||
Work in process | 1,457 | 1,469 | ||||||
$ | 11,133 | $ | 18,574 |
Derivative Instruments. The Company accounts for derivatives through the use of a fair value concept whereby all of the Company’s derivative positions are stated at fair value in the accompanying balance sheets. Realized and unrealized gains and losses on derivatives are reported in the accompanying statements of comprehensive income as derivative losses, net. As of December 31, 2016 and 2015, the Company had not designated any of its derivative instruments as hedges. Forward commodity purchase and sales contracts entered into by the company are not marked to fair value, as such contracts meet the normal purchases and sales exception under accounting principles generally accepted in the United States.
Concentrations of Credit Risk. The Company is exposed to concentrations of credit risk associated with its cash, restricted cash, margin deposits, raw material purchase commitments, and derivative instruments. The Company minimizes its credit risk relating to these positions by monitoring the financial condition of the financial institutions and counterparties involved and by primarily conducting business with large, well-established financial institutions and diversifying its counterparties. Derivatives instruments counterparty risk is supported by margin deposits maintained by the futures commission merchant. The Company does not currently anticipate nonperformance by any of its significant counterparties. The Company is also exposed to concentrations of credit risk relating to its receivables due from customers as described above. The Company does not generally require collateral or other security to support its outstanding receivables. The Company minimizes its credit risk relating to receivables by performing ongoing credit evaluations and, to date, credit losses have not been material.
For the year ended December 31, 2016, four companies, Archer Daniels Midland Company, Alcotra North America, Inc., Marathon Petroleum Corporation and MGP, each represented more than 10% of the Company’s revenues. For the year ended December 31, 2015, three companies, Archer Daniels Midland Company, Alcotra North America, Inc., and MGP each represented more than 10% of the Company’s revenues. The loss of one or more of these companies could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
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Property and Equipment. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value.
The estimated useful life (in years) of each of the Company’s major asset classes was as follows:
Warehouse, buildings, and improvements | 20 |
Machinery and equipment | 3–10 |
The Company’s major classes of property and equipment as of December 31 were as follows (in thousands):
2016 | 2015 | |||||||
Land | $ | 1,100 | $ | 1,100 | ||||
Warehouses, buildings, and improvements | 3,534 | 3,534 | ||||||
Machinery and equipment | 44,822 | 35,370 | ||||||
Construction in progress | 700 | 5,430 | ||||||
$ | 50,156 | $ | 45,434 |
Depreciation expense totaled $3.0 million and $2.6 million for the years ended December 31, 2016 and 2015, respectively. Equipment maintenance and repair costs are expensed as incurred.
Impairment of Long-Lived Assets. The Company performs an impairment analysis of long-lived assets used in operations, when indicators of impairment are present. These indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows, the estimated fair value of the assets or asset groups are compared to their current carrying values and impairment charges are recorded if the carrying value exceeds fair value. The Company performs its testing on an asset or asset group basis. Generally, fair value is determined using valuation techniques, such as expected discounted cash flows or appraisals, as appropriate. During the years ended December 31, 2016 and 2015, the Company recognized no impairment charges related to long-lived assets held for use.
Debt Issuance Costs. Debt issuance costs are amortized over the life of the related debt using the straight line method and are included in interest expense in the accompanying statements of comprehensive income.
Income Taxes. The income or loss of the Company is included in the taxable income or loss of its individual members, and therefore, no provision for income taxes is included in the accompanying financial statements.
Postretirement Benefit Plan. The Company sponsors a postretirement benefit plan that provides medical benefits to certain retired employees (see Note 5). The Company annually measures the obligation for this plan at year end using actuarial techniques that reflect management’s assumptions for certain factors that impact the determination of the obligation and recognizes an asset or liability in the accompanying balance sheets based on the funded status of the plan. The Company’s obligation under this plan was unfunded as of December 31, 2016 and 2015.
New Accounting Pronouncements. On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. The core principal of the new standard is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company has not yet selected the method of adoption or determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On February 25, 2016, the FASB issued a comprehensive new leasing standard, which improves transparency and comparability among companies by requiring lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The new standard is effective for interim and annual periods beginning after December 15, 2019 and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
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On August 26, 2016, the FASB issued an amendment to the accounting standard which amends or clarifies guidance on classification of certain transactions in the statement of cash flows, including classification of proceeds from the settlement of insurance claims, debt prepayments, debt extinguishment costs and contingent consideration payments after a business combination. This new standard is effective for the Company as of January 1, 2018 and early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On November 17, 2016, the FASB issued an amendment to the accounting standard which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of- period total cash amounts shown on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
2. | LONG-TERM DEBT |
Revolving Credit Facility. On April 9, 2015, the Company obtained a new $30.0 million revolving credit facility with JPMorgan Chase Bank, N.A. serving as Administrative Agent and Lender (the "Revolving Credit Facility"), which includes an accordion feature whereby loan commitments available under the facility could be increased in the future by an additional $20.0 million, subject to lender approval. The Revolving Credit Facility is available to finance working capital requirements and for general corporate purposes. The Revolving Credit Facility matures on April 9, 2018, and is secured by all of the assets of the Company, except for real estate. The Company has agreed not to pledge its real estate as collateral to any other party. The amount available for borrowing at any given time under the Revolving Credit Facility is determined by a formula based on the current outstanding loan balance, the amount of the Company’s eligible outstanding accounts receivable and the carrying value of its eligible inventories, subject to additional reserves. Interest on outstanding loans equates to the one-month London Interbank Offered Rate ("LIBOR") interest rate plus an applicable margin of 2.00%. All loan interest rates increase by an additional 2.00% margin if the credit agreement is in default status. The Company pays a commitment fee on the unused portion of the Revolving Credit Facility ranging from 0.2% to 0.6%, as defined, which is included in interest expense in the accompanying statements of comprehensive income. The Revolving Credit Facility places restrictions on the Company including limitations on its ability to incur indebtedness, liens, restricted payments and asset sales. Other restricted payments, including dividends, are subject to certain conditions, including undrawn availability under the revolver and the Company’s pro forma fixed charge coverage ratio, as defined. In addition, the Company is subject to various covenants under the Revolving Credit Facility, as defined. As of December 31, 2016 and 2015, the Company had no outstanding borrowings on the Revolving Credit Facility and as of December 31, 2016 had $16.2 million of borrowing capacity.
3. | DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES |
Derivative instruments are classified as either assets or liabilities based on their individual fair values. Derivative assets and liabilities are included in derivative assets and derivative liabilities, respectively, in the accompanying balance sheets. For the years ended December 31, 2016 and 2015, the Company had not designated any of its derivative activities as hedging instruments. The fair values of the Company’s derivative instruments as of December 31 were as follows (in thousands):
2016 | 2015 | |||||||||||||||
| Derivative Asset |
Derivative Liability | Derivative Asset | Derivative Liability | ||||||||||||
Exchange-traded commodity swap, options and future contracts: | ||||||||||||||||
Corn | $ | 639 | $ | 997 | $ | 802 | $ | 1,030 | ||||||||
Natural gas | 320 | – | – | 90 | ||||||||||||
Ethanol | 486 | 3 | 1 | 195 | ||||||||||||
$ | 1,445 | $ | 1,000 | $ | 803 | $ | 1,315 |
10 |
The Company recognized gains (losses) on derivative instruments for the periods ended December 31 as follows (in thousands):
Derivative Gains (Losses), net | ||||||||
2016 | 2015 | |||||||
Exchange-traded commodity swap, future contracts and options: | ||||||||
Corn | $ | (64 | ) | $ | 418 | |||
Natural gas | 294 | (628 | ) | |||||
Ethanol | 681 | (1,041 | ) | |||||
$ | 911 | $ | (1,251 | ) |
The Company enters and settles positions in various exchange traded commodity swap, future contracts, and options (primarily corn, ethanol, and natural gas) to offset its net commodity market exposure on raw material and finished goods inventory balances and forward purchase and sales commitments.
4. | FAIR VALUE MEASUREMENTS |
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity.
The Company’s financial assets and liabilities as of December 31, that are measured at fair value on a recurring basis were as follows (in thousands):
2016 | Level 1 | Level 2 | Level 3 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||||||
Derivative instruments | $ | 1,445 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 1,000 | – | – | |||||||||
2015 | ||||||||||||
ASSETS | ||||||||||||
Derivative instruments | $ | 803 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 1,315 | – | – |
The carrying value of cash, restricted cash and margin deposits approximates fair value due to the short maturity of these instruments.
5. | BENEFIT PLANS |
Savings Plan. The Company provides a defined contribution plan to its employees (the "Savings Plan"). The Company’s contribution to the Savings Plan is limited to 6% of an eligible employee’s salary, regardless of their contribution to the plan. For the years ended December 31, 2016 and 2015, the Company’s Savings Plan costs were $0.2 million and $0.2 million, respectively.
Postretirement Benefit Plan. During 2010, the Company established a contributory qualified postretirement benefit plan (the "Benefit Plan") that provides certain medical benefits, including prescription drug coverage, to certain eligible retired employees. Contributions are adjusted annually and the plan contains fixed deductibles, coinsurance, and out-of-pocket limitations. Effective April 11, 2011, the Company and its labor union agreed to a new contract that resulted in a reduction in the number of employees eligible for the Benefit Plan.
11 |
The Benefit Plan’s liabilities are unfunded as it is the Company’s policy to fund benefits payable as they are due. As of December 31, 2016, three retirees are active in the Benefit Plan. The Company’s measurement date for the Benefit Plan is December 31.
The change in the accumulated benefit obligation for the Benefit Plan for the years ended December 31 was as follows (in thousands):
Accumulated Benefit Obligation | ||||||||
2016 | 2015 | |||||||
Beginning of Year | $ | 139 | $ | 182 | ||||
Service cost | 1 | 2 | ||||||
Interest cost | 2 | 3 | ||||||
Actuarial loss | 26 | (40 | ) | |||||
Net benefits paid | (33 | ) | (8 | ) | ||||
End of Year | $ | 135 | $ | 139 |
In order to estimate the Company’s accumulated benefit obligation, it makes certain assumptions. The accumulated benefit obligation as of December 31, 2016 and 2015, assumed a discount rate of 1.71% and 1.81%, respectively.
The components of net periodic benefit cost for the Benefit Plan for the years ended December 31, included in selling, general and administrative expenses in the accompanying statements of comprehensive income, were as follows (in thousands):
Net Periodic Benefit Cost | ||||||||
2016 | 2015 | |||||||
Service cost | $ | 1 | $ | 1 | ||||
Interest cost | 2 | 3 | ||||||
Amortization of unrecognized prior service cost | – | 4 | ||||||
Recognition of actuarial gain | (20 | ) | – | |||||
$ | (17 | ) | $ | 8 |
In order to estimate the Company’s net periodic benefit cost, it makes certain assumptions. The net periodic benefit cost for the years ended December 31, 2016 and 2015, assumed discount rates of 1.81% and 1.65%, respectively, a healthcare cost trend rate of 7.0% and 8.0%, respectively, and an ultimate healthcare cost trend rate of 5.0% and 5.5%, respectively. The Company further assumed the healthcare cost trend rate would be achieved in 2023. A one-percentage-point increase or decrease in the assumed healthcare cost trend rate as of December 31, 2016 and 2015, would not have had a material impact on the accumulated benefit obligation or the service and interest cost.
The Company further assumed the average service time to full eligibility was approximately five years and is amortizing its unrecognized prior service cost over that period.
The amount of expected benefits to be paid, net of retiree contributions, as of December 31, 2016, was as follows (in thousands):
2017 | $ | 57 | ||||
2018 | 40 | |||||
2019 | 34 | |||||
2020 | 9 | |||||
$ | 140 |
12 |
6. | RELATED PARTY TRANSACTIONS |
During the years ended December 31, 2016 and 2015, $27.7 million, or 15.6%, and $38.9 million, or 23.3%, respectively, of the Company’s net sales were to the MGP. During the years ending December 31, 2016 and 2015, the Company also purchased $3.9 million and $5.3 million, respectively, of transportation services from certain SEACOR subsidiaries. In addition, in each of the years ended December 31, 2016 and 2015, the Company paid $0.2 million to SEACOR for certain information technology services.
7. | COMMITMENTS AND CONTINGENCIES |
As of December 31, 2016 and 2015, the Company had purchase commitments of $26.6 million and $9.1 million, respectively, for raw materials, primarily corn, and services for use in its manufacturing process.
On July 22, 2014, the Company experienced an electricity disruption that caused significant damage to two boilers disrupting the Company's ability to operate its manufacturing facility. During the year ended December 31, 2015, the Company filed a business interruption insurance claim and received $4.1 million of proceeds, which is included in other income in the accompanying statement of comprehensive income.
As of December 31, 2016, the Company had 72 employees, 39 of whom are covered by a collective bargaining agreement with one labor union that will expire October 31, 2021. The labor contract that covers substantially all of the non-management employees at the Company’s manufacturing plant addresses predetermined wage escalation over the life of the agreement, the Company’s contribution to its 401(k) plan and addresses other general work rule provisions.
In the normal course of its business, the Company may become involved in various litigation matters or be the subject of administrative or regulatory reviews and inspections by governmental or quasi-governmental authorities. Management uses estimates in determining the Company’s possible exposure and may record reserves in its financial statements related to these claims when appropriate. It is possible that a change in the Company’s estimates of such exposure could occur, but the Company does not expect such changes in estimated costs will have a material effect on the Company’s financial position, its results of operations or its cash flows.
13 |
Exhibit 99.2
FINANCIAL STATEMENTS
Illinois Corn Processing, LLC (a Limited Liability Company)
Years Ended December 31, 2015 and 2014
With Report of Independent Auditors
Illinois Corn Processing, LLC
(a Limited Liability Company)
INDEX TO FINANCIAL STATEMENTS
Page | |
Report of Independent Auditors | 1 |
Financial Statements: | |
Balance Sheets as of December 31, 2015 and 2014 | 3 |
Statements of Comprehensive Income for the Years Ended December 31, 2015 and 2014 | 4 |
Statements of Changes in Members' Equity for the Years Ended December 31, 2015 and 2014 | 5 |
Statements of Cash Flows for the Years Ended December 31, 2015 and 2014 | 6 |
Notes to Financial Statements | 7 |
i |
Report of Independent Auditors
The Board of Advisors
Illinois Corn Processing, LLC
We have audited the accompanying financial statements of Illinois Corn Processing, LLC, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of comprehensive income, changes in members’ equity and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
1 |
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Corn Processing, LLC at December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
March 24, 2016
2 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Balance Sheets
(in thousands)
December 31 | ||||||||
2015 | 2014 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 20,616 | $ | 11,319 | ||||
Restricted cash | 410 | 300 | ||||||
Margin deposits | 1,596 | 1,308 | ||||||
Trade receivables: | ||||||||
Due from affiliates | 2,385 | 3,333 | ||||||
Due from nonaffiliates, net of allowance for doubtful accounts of $0 in 2015 and $3 in 2014 | 4,679 | 6,986 | ||||||
Deposits | 54 | 233 | ||||||
Inventories | 18,574 | 11,170 | ||||||
Derivative assets | 803 | 1,501 | ||||||
Prepaid expenses | 151 | 101 | ||||||
Total current assets | 49,268 | 36,251 | ||||||
Property and Equipment: | ||||||||
Historical Cost | 45,434 | 40,722 | ||||||
Accumulated depreciation | (25,782 | ) | (23,148 | ) | ||||
Net property and equipment | 19,652 | 17,574 | ||||||
Debt issuance costs | 213 | – | ||||||
$ | 69,133 | $ | 53,825 | |||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable: | ||||||||
Due to affiliates | $ | 571 | $ | 1,001 | ||||
Due to nonaffiliates | 5,711 | 5,204 | ||||||
Accrued wages and benefits | 687 | 1,066 | ||||||
Accrued property taxes | 106 | 130 | ||||||
Brokerage account balance | – | 139 | ||||||
Derivative liabilities | 1,315 | 1,966 | ||||||
Total current liabilities | 8,390 | 9,506 | ||||||
Postretirement liabilities | 139 | 182 | ||||||
Total liabilities | 8,529 | 9,688 | ||||||
Members’ equity: | ||||||||
Contributed capital | 33,000 | 33,000 | ||||||
Accumulated earnings | 27,550 | 11,127 | ||||||
Accumulated other comprehensive income | 54 | 10 | ||||||
Total members’ equity | 60,604 | 44,137 | ||||||
$ | 69,133 | $ | 53,825 |
See accompanying notes to financial statements.
3 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Comprehensive Income
(in thousands)
For the years ended December 31 | |||||||||
2015 | 2014 | ||||||||
Net Sales | $ | 166,905 | $ | 236,294 | |||||
Cost of Sales (exclusive of depreciation shown separately below): | |||||||||
Finished goods | 143,967 | 187,784 | |||||||
Derivative gains (losses), net | 1,251 | 3,777 | |||||||
145,218 | 191,561 | ||||||||
Gross profit (exclusive of depreciation shown separately below) | 21,687 | 44,733 | |||||||
Selling, General and Administrative Expenses | 2,191 | 2,137 | |||||||
Depreciation | 2,634 | 2,847 | |||||||
Operating Income | 16,862 | 39,749 | |||||||
Other Income | 4,112 | 193 | |||||||
Interest Expense: | |||||||||
SEACOR | – | (221 | ) | ||||||
Nonaffiliates | (160 | ) | (14 | ) | |||||
Net Income | 20,814 | 39,707 | |||||||
Gain on Postretirement Benefits | 44 | 27 | |||||||
Comprehensive Income | $ | 20,858 | $ | 39,734 |
See accompanying notes to financial statements.
4 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Changes in Members’ Equity
(in thousands)
Contributed Capital | Accumulated Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||
December 31, 2013 | $ | 33,000 | $ | (10,580 | ) | $ | (17 | ) | $ | 22,403 | ||||||
Net income | – | 39,707 | – | 39,707 | ||||||||||||
Dividends paid to members | – | (18,000 | ) | – | (18,000 | ) | ||||||||||
Postretirement benefit obligation | – | – | 27 | 27 | ||||||||||||
December 31, 2014 | 33,000 | 11,127 | 10 | 44,137 | ||||||||||||
Net income | – | 20,814 | – | 20,814 | ||||||||||||
Dividends paid to members | – | (4,391 | ) | – | (4,391 | ) | ||||||||||
Postretirement benefit obligation | – | – | 44 | 44 | ||||||||||||
December 31, 2015 | $ | 33,000 | $ | 27,550 | $ | 54 | $ | 60,604 |
See accompanying notes to financial statements.
5 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Statements of Cash Flows
(in thousands)
For the years ended December 31 | ||||||||
2015 | 2014 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 20,814 | $ | 39,707 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 2,634 | 2,847 | ||||||
Amortization of debt issuance costs | 71 | – | ||||||
Postretirement benefit expense | 8 | 11 | ||||||
Contributions to postretirement benefit plan | (7 | ) | – | |||||
Derivative losses, net | 1,251 | 3,777 | ||||||
Cash settlements on derivative transactions, net | (1,344 | ) | (3,863 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Margin deposits | (288 | ) | (582 | ) | ||||
Accounts receivable | 3,255 | (5,424 | ) | |||||
Inventories | (7,404 | ) | 4,914 | |||||
Prepaid expenses and deposits | 129 | (46 | ) | |||||
Accounts payable and accrued expenses | (325 | ) | 878 | |||||
Net cash provided by operating activities | 18,794 | 42,219 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property and equipment | (4,712 | ) | (3,062 | ) | ||||
Increase in restricted cash | (110 | ) | (300 | ) | ||||
Net cash used in investing activities | (4,822 | ) | (3,362 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Debt issuance costs | (284 | ) | – | |||||
Dividend payments to members | (4,391 | ) | (18,000 | ) | ||||
Principal payments on SEACOR term loan | – | (2,521 | ) | |||||
Proceeds from SEACOR revolving credit facility | – | 25,700 | ||||||
Principal payments on SEACOR revolving credit facility | – | (33,600 | ) | |||||
Net cash used in financing activities | (4,675 | ) | (28,421 | ) | ||||
Net Increase in Cash | 9,297 | 10,436 | ||||||
Cash, Beginning of Year | 11,319 | 883 | ||||||
Cash, End of Year | $ | 20,616 | $ | 11,319 | ||||
Supplemental Information: | ||||||||
Interest paid | $ | 79 | $ | 356 |
See accompanying notes to financial statements.
6 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Notes to Financial Statements
1. | NATURE OF OPERATIONS AND ACCOUNTING POLICIES |
Nature of Operations. Illinois Corn Processing LLC (the "Company"), a Delaware limited liability company, consists of two members, Illinois Corn Processing Holdings, Inc. ("ICPH") and MGPI Processing, Inc. ("MGPI"). ICPH is a wholly owned subsidiary of SEACOR Energy Group Inc. (along with its controlled and consolidated subsidiaries being a wholly owned subsidiary of SEACOR Holdings, Inc., collectively referred to as "SEACOR"). MGPI is a wholly owned subsidiary of MGP Ingredients, Inc. (along with its controlled and consolidated subsidiaries collectively referred to as MGP). The Company was formed on November 20, 2009, through MGPI’s contribution of a previously idled manufacturing plant in Pekin, IL, and the sale of a 50% interest to SEACOR for $15.0 million in cash.
At inception, SEACOR provided funding to the Company through a term loan and a revolving credit facility subject to certain borrowing restrictions, both of which were secured by all of the assets of the Company (see Note 2).
On February 1, 2012, ICPH acquired an additional 20% equity interest in the Company from MGPI for $9.1 million. Pursuant to the Limited Liability Company agreement entered into on November 20, 2009, between ICPH and MGPI ("LLC Agreement"), the purchase price was based on a predetermined enterprise value of the Company plus capital improvements made since inception. Following this transaction, ICPH owns 70% of the Company. These financial statements do not reflect push- down purchase accounting activity for ICPH’s acquisition to obtain a controlling interest in the Company. Capital contributions, distributions, and allocations of net income or loss are made based on each member’s proportionate share of ownership, with certain exceptions, and the liability of the members is limited to their investment in the Company.
The Company is in the business of manufacturing alcohol for beverage, industrial, and fuel applications. During the years ended December 31, 2015 and 2014, the Company sold certain alcohol finished goods to MGP and also sold alcohol finished goods to other unrelated third parties. Certain co-products and byproducts of the manufacturing process are also sold to other unrelated third parties.
The LLC Agreement contains certain covenants including, among others, a provision that does not allow the Company to incur three consecutive fiscal quarters of losses, as defined, equaling or exceeding $1.5 million in the aggregate; or at any time allow the Company’s net working capital to be less than $2.5 million. In the event of noncompliance with these covenants, MGPI or ICPH would have the unilateral right to shut down the plant, which could result in a default on the Company's Revolving Credit Facility (see Note 2).
Also in accordance with the LLC Agreement, either member (the "Electing Party") has the right to elect a shutdown of the Pekin plant if the Company incurs a quarterly loss, as defined, in excess of $0.5 million; however, the other member has the right to object to the shutdown election and continue operations of the plant. The Electing Party has the right but not the obligation to withdraw its shutdown election at the beginning of each subsequent quarter. Effective April 1, 2013, MGPI elected to shut down the Pekin plant in accordance with the provisions of the LLC Agreement. ICPH objected to the shutdown, thereby keeping the plant operational. On April 1, 2014, MGPI withdrew its shutdown election. As a consequence of the shutdown election, in accordance with the Company’s LLC agreement, the Company’s EBITDA was allocated to MGPI and ICPH at 20% and 80%, respectively, during the shutdown election period. The earnings allocation between MGPI and ICPH reverted to 30% and 70%, respectively, after the withdrawal of the shutdown election. As a result of the disproportional allocation of EBITDA during the shutdown election period as of December 31, 2014, ICPH and MGPI members’ equity balances represented 72% and 28%, respectively, of total equity. On April 1, 2015, the Company made a disproportionate distribution of $4.4 million to ICPH, which resulted in the members' capital account to equal their respective ownership.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Such estimates include those related to the allowance for doubtful accounts, impairments, certain accrued liabilities, and postretirement benefit obligations. Actual results could differ from those estimates and those differences may be material.
Subsequent Events. On February 26, 2016, the Company paid an $11.0 million cash dividend to its members. The Company has performed an evaluation of subsequent events through March 24, 2016, the date the financial statements were available to be issued.
7 |
Revenue Recognition. The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Revenue that does not meet these criteria is deferred until the criteria are met. The Company earns revenues from the sale of alcohol, co-products, and byproducts. Revenues and related costs from these sales are recorded when title transfers to the buyer.
Shipping Costs. The sales price for certain of the Company's products includes a component for the shipment of the product on behalf of its customers. The costs related to these shipments are included in cost of goods sold in the accompanying statements of comprehensive income.
Trade
Receivables. The Company’s customers primarily are petrochemical, agricultural and industrial companies. Customers
are granted credit on a basis and credit risks are considered
minimal. The Company routinely reviews its trade receivables and makes provisions for doubtful accounts based on existing customer
and economic conditions; however, those provisions are estimates and actual results could differ from those estimates, and those
differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance
for doubtful accounts when collection efforts have been exhausted.
Restricted Cash. The Company is a self-directing customer of the Natural Gas Energy Efficiency Program, a state of Illinois excise tax program that funds natural gas energy efficiency projects. Under this state regulation, the Company reserves two-percent of its natural gas costs incurred, not to exceed $150,000 per fiscal year. These restricted funds are held by the Company to fund internal capital expenditure projects designed to reduce consumption of natural gas by the Company. As of December 31, 2015 and 2014, the Company had $0.4 million and $0.3 million, respectively, of restricted cash to fund future energy efficiency projects. The Company must either use these funds toward natural gas energy efficiency projects within three years of designation or remit them as a tax payment to the state of Illinois.
Margin Deposits. The Company’s margin deposits consist of cash on deposit with its futures commission merchant in support of its open derivative contracts (see Note 3). The amount of margin deposit required to be maintained is based on the number of open derivative contracts and their underlying fair value.
Inventories. Inventories are stated at the lower of cost (using the average cost method) or market. Inventories consist of finished goods (alcohol and dried distillers grains with solubles (DDGS) and raw materials in the form of agricultural commodities used in the production process.
The Company’s inventories at December 31 consisted of the following (in thousands):
2015 | 2014 | |||||||
Raw materials | $ | 2,198 | $ | 2,106 | ||||
Finished goods | 14,907 | 7,332 | ||||||
Work in process | 1,469 | 1,732 | ||||||
$ | 18,574 | $ | 11,170 |
Derivative Instruments. The Company accounts for derivatives through the use of a fair value concept whereby all of the Company’s derivative positions are stated at fair value in the accompanying balance sheets. Realized and unrealized gains and losses on derivatives are reported in the accompanying statements of comprehensive income as derivative losses, net. As of December 31, 2015 and 2014, the Company had not designated any of its derivative instruments as hedges. Forward commodity purchase and sales contracts entered into by the company are not marked to fair value, as such contracts meet the normal purchases and sales exception under accounting principles generally accepted in the United States.
Brokerage Account Balance. The Company’s brokerage account balance as of December 31, 2014, represents the net margin call balance due.
Concentrations of Credit Risk. The Company is exposed to concentrations of credit risk associated with its cash, restricted cash, margin deposits, raw material purchase commitments, and derivative instruments. The Company minimizes its credit risk relating to these positions by monitoring the financial condition of the financial institutions and counterparties involved and by primarily conducting business with large, well-established financial institutions and diversifying its counterparties. Derivatives instruments counterparty risk is supported by margin deposits maintained by the futures commission merchant. The Company does not currently anticipate nonperformance by any of its significant counterparties. The Company is also exposed to concentrations of credit risk relating to its receivables due from customers as described above. The Company does not generally require collateral or other security to support its outstanding receivables. The Company minimizes its credit risk relating to receivables by performing ongoing credit evaluations and, to date, credit losses have not been material.
8 |
For the year ended December 31, 2015, three companies, Archer Daniels Midland Company, Alcotra North America, Inc., and MGP, each represented more than 10% of the Company’s revenues. For the year ended December 31, 2014, four companies, Archer Daniels Midland Company, Alcotra North America, Inc., Marathon Petroleum Corporation and MGP, each represented more than 10% of the Company’s revenues. The loss of one or more of these companies could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Property and Equipment. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value.
The estimated useful life (in years) of each of the Company’s major asset classes was as follows:
Warehouse, buildings, and improvements | 20 |
Machinery and equipment | 3–10 |
The Company’s major classes of property and equipment as of December 31 were as follows (in thousands):
2015 | 2014 | |||||||
Land | $ | 1,100 | $ | 1,100 | ||||
Warehouses, buildings, and improvements | 3,534 | 3,534 | ||||||
Machinery and equipment | 35,370 | 35,370 | ||||||
Construction in progress | 5,430 | 718 | ||||||
$ | 45,434 | $ | 40,722 |
Depreciation expense totaled $2.6 million and $2.8 million for the years ended December 31, 2015 and 2014, respectively.
Equipment maintenance and repair costs are expensed as incurred.
Impairment
of Assets. The Company performs an impairment
analysis of
assets used in operations when indicators of impairment
are present. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows,
the carrying values of the assets are reduced to fair value. Generally, fair value is determined using valuation techniques, such
as expected discounted cash flows or appraisals, as appropriate. During the years ended December 31, 2015 and 2014, the Company
recognized no impairment charges related to
assets held for use.
Debt Issuance Costs. Debt issuance costs are amortized over the life of the related debt using the straight line method and are included in interest expense in the accompanying statements of comprehensive income.
Income Taxes. The income or loss of the Company is included in the taxable income or loss of its individual members, and therefore, no provision for income taxes is included in the accompanying financial statements.
Postretirement Benefit Plan. The Company sponsors a postretirement benefit plan that provides medical benefits to certain retired employees (see Note 5). The Company annually measures the obligation for this plan at year end using actuarial techniques that reflect management’s assumptions for certain factors that impact the determination of the obligation and recognizes an asset or liability in the accompanying balance sheets based on the funded status of the plan. The Company’s obligation under this plan was unfunded as of December 31, 2015 and 2014.
New Accounting Pronouncements. On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. The core principal of the new standard is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company has not yet selected the method of adoption or determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On April 7, 2015, the FASB issued final guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. The recognition and measurement guidance for debt issuance costs have not changed. The new standard requires retrospective application and represents a change in accounting principle. The final guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted.
Reclassifications. Certain reclassifications of prior period information have been made to conform with the presentation of the current period information.
9 |
2. | LONG-TERM DEBT |
Revolving Credit Facility. On April 9, 2015, the Company obtained a new $30.0 million revolving credit facility with JPMorgan Chase Bank, N.A. serving as Administrative Agent and Lender (the "Revolving Credit Facility"), which includes an accordion feature whereby loan commitments available under the facility could be increased in the future by an additional $20.0 million, subject to lender approval. The Revolving Credit Facility is available to finance working capital requirements and for general corporate purposes. The Revolving Credit Facility matures on April 9, 2018, and is secured by all of the assets of the Company, except for real estate. The Company has agreed not to pledge its real estate as collateral to any other party. The amount available for borrowing at any given time under the Revolving Credit Facility is determined by a formula based on the current outstanding loan balance, the amount of the Company’s eligible outstanding accounts receivable and the carrying value of its eligible inventories, subject to additional reserves. Interest on outstanding loans equates to the one-month London Interbank Offered Rate ("LIBOR") interest rate plus an applicable margin of 2.00%. All loan interest rates increase by an additional 2.00% margin if the credit agreement is in default status. The Company pays a commitment fee on the unused portion of the Revolving Credit Facility ranging from 0.2% to 0.6%, as defined, which is included in interest expense in the accompanying statements of comprehensive income. The Revolving Credit Facility places restrictions on the Company including limitations on its ability to incur indebtedness, liens, restricted payments and asset sales. Other restricted payments, including dividends, are subject to certain conditions, including undrawn availability under the revolver and the Company’s pro forma fixed charge coverage ratio, as defined. In addition, the Company is subject to various covenants under the Revolving Credit Facility, as defined. Simultaneous with the execution of the Chase Revolver, the Company terminated its $15.0 million amended and restated revolving credit facility with SEACOR, which would have matured January 31, 2016. As of December 31, 2015, the Company had no outstanding borrowings on the Revolving Credit Facility and had $19.7 million of borrowing capacity.
Revolving
Credit Facility due to SEACOR. Upon formation of the Company, SEACOR provided funding to the Company through a $20.0 million
revolving credit facility (the "Revolver") with a maturity in November 2012, subject to certain borrowing restrictions
and secured by all of the Company’s assets. On February 27, 2012, the Company and SEACOR amended the Revolver to extend the
maturity to January 1, 2013. Interest on the Revolver was equal to the LIBOR
plus an applicable margin of 550 basis points and reset monthly. Interest increased by an additional six percent per annum while
the credit facility was in default status. Upon declaring an event of default in January 2013, SEACOR continued to provide funding
to the Company under the terms of the Revolver, while maintaining its legal rights related to the event of default. As a result,
the Company paid a default interest rate on the Term Loan debt during the default period. On April 24, 2014, SEACOR provided the
Company with a waiver of all Revolver defaults, and simultaneously executed an amended and restated Revolver with the Company,
which reduced the size of the facility to $15.0 million, and extended the maturity to January 31, 2016. The Revolver was terminated
on April 9, 2015, in conjunction with the Company obtaining its Revolving Credit Facility. During the year ended December 31, 2014,
the Company made net payments of $7.9 million.
Term
Loan Due to SEACOR. Upon formation of the Company, SEACOR also provided funding to the Company through a $10.0 million
term loan (the "Term Loan") with a maturity in November 2014, secured by all of the Company’s assets. Interest
on the Term Loan was equal to the LIBOR plus an applicable margin
of 550 basis points and reset monthly. Interest increased by an additional six percent per annum if the term loan was in default
status. In conjunction with an event of default regarding the Company’s revolving credit facility in January 2013, the Term
Loan was also declared in default due to a cross- default provision. As a result, the Company paid a default interest rate on the
Term Loan debt during the default period. During the year ended December 31, 2014, the Company repaid the Term Loan in full.
3. | DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES |
Derivative instruments are classified as either assets or liabilities based on their individual fair values. Derivative assets and liabilities are included in derivative assets and derivative liabilities, respectively, in the accompanying balance sheets. For the years ended December 31, 2015 and 2014, the Company had not designated any of its derivative activities as hedging instruments. The fair values of the Company’s derivative instruments as of December 31 were as follows (in thousands):
2015 | 2014 | |||||||||||||||
| Derivative Asset | Derivative Liability | Derivative Asset | Derivative Liability | ||||||||||||
Exchange-traded commodity swap, options and future contracts: | ||||||||||||||||
Corn | $ | 802 | $ | 1,030 | $ | 1,426 | $ | 541 | ||||||||
Natural gas | – | 90 | – | 864 | ||||||||||||
Ethanol | 1 | 195 | 75 | 561 | ||||||||||||
$ | 803 | $ | 1,315 | $ | 1,501 | $ | 1,966 |
10 |
The Company recognized gains (losses) on derivative instruments for the periods ended December 31 as follows (in thousands):
Derivative Gains (Losses), net | ||||||||
2015 | 2014 | |||||||
Exchange-traded commodity swap, future contracts and options: | ||||||||
Corn | $ | 418 | $ | 138 | ||||
Natural gas | (628 | ) | (1,078 | ) | ||||
Ethanol | (1,041 | ) | (2,837 | ) | ||||
$ | (1,251 | ) | $ | (3,777 | ) |
The Company enters and settles positions in various exchange traded commodity swap, future contracts, and options (primarily corn, ethanol, and natural gas) to offset its net commodity market exposure on raw material and finished goods inventory balances and forward purchase and sales commitments.
4. | FAIR VALUE MEASUREMENTS |
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity.
The Company’s financial assets and liabilities as of December 31, that are measured at fair value on a recurring basis were as follows (in thousands):
2015 | Level 1 | Level 2 | Level 3 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||||||
Derivative instruments | $ | 803 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 1,315 | – | – | |||||||||
2014 | ||||||||||||
ASSETS | ||||||||||||
Derivative instruments | $ | 1,501 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 1,966 | – | – |
The carrying value of cash, restricted cash and margin deposits approximates fair value due to the short maturity of these instruments.
5. | BENEFIT PLANS |
Savings Plan. The Company provides a defined contribution plan to its employees (the "Savings Plan"). The Company’s contribution to the Savings Plan is limited to 5% of an eligible employee’s salary, regardless of their contribution to the plan. For the years ended December 31, 2015 and 2014, the Company’s Savings Plan costs were $0.2 million and $0.2 million, respectively.
Postretirement Benefit Plan. During 2010, the Company established a contributory qualified postretirement benefit plan (the "Benefit Plan") that provides certain medical benefits, including prescription drug coverage, to certain eligible retired employees. Contributions are adjusted annually and the plan contains fixed deductibles, coinsurance, and out-of-pocket limitations. Effective April 11, 2011, the Company and its labor union agreed to a new contract that resulted in a reduction in the number of employees eligible for the Benefit Plan.
11 |
The Benefit Plan’s liabilities are unfunded as it is the Company’s policy to fund benefits payable as they are due. As of December 31, 2015, one retiree is active in the Benefit Plan. The Company’s measurement date for the Benefit Plan is December 31.
The change in the accumulated benefit obligation for the Benefit Plan for the years ended December 31 was as follows (in thousands):
Accumulated Benefit Obligation | ||||||||
2015 | 2014 | |||||||
Beginning of Year | $ | 182 | $ | 198 | ||||
Service cost | 2 | 4 | ||||||
Interest cost | 3 | 3 | ||||||
Actuarial loss | (40 | ) | (23 | ) | ||||
Net benefits paid | (8 | ) | – | |||||
End of Year | $ | 139 | $ | 182 |
In order to estimate the Company’s accumulated benefit obligation, it makes certain assumptions. The accumulated benefit obligation as of December 31, 2015 and 2014, assumed a discount rate of 1.81% and 1.65%, respectively.
The components of net periodic benefit cost for the Benefit Plan for the years ended December 31, included in selling, general and administrative expenses in the accompanying statements of comprehensive income, were as follows (in thousands):
Net Periodic Benefit Cost | ||||||||
2015 | 2014 | |||||||
Service cost | $ | 1 | $ | 4 | ||||
Interest cost | 3 | 3 | ||||||
Amortization of unrecognized prior service cost | 4 | 4 | ||||||
$ | 8 | $ | 11 |
In order
to estimate the Company’s net periodic benefit cost, it makes certain assumptions. The net periodic benefit cost for the
years ended December 31, 2015 and 2014, assumed discount rates of 1.65% and 1.72%, respectively, a healthcare cost trend rate of
8.0% and 8.5%, respectively, and an ultimate healthcare cost trend rate of 5.5% and 5.0%, respectively. The Company further assumed
the healthcare cost trend rate would be achieved in 2024. A increase
or decrease in the assumed healthcare cost trend rate as of December 31, 2015 and 2014, would not have had a material impact on
the accumulated benefit obligation or the service and interest cost.
The Company further assumed the average service time to full eligibility was approximately five years and is amortizing its unrecognized prior service cost over that period.
The amount of expected benefits to be paid, net of retiree contributions, as of December 31, 2015, was as follows (in thousands):
2016 | $ | 30 | ||||
2017 | 48 | |||||
2018 | 32 | |||||
2019 | 23 | |||||
2020 | 8 | |||||
2021-2025 | 3 | |||||
$ | 144 |
6. | RELATED PARTY TRANSACTIONS |
The Company had various debt agreements with SEACOR (see Note 2). During the years ended December 31, 2015 and 2014, $38.9 million, or 23.3%, and $36.3 million, or 15.3%, respectively, of the Company’s net sales were to the MGP. During the years ending December 31, 2015 and 2014, the Company also purchased $5.3 million and $6.4 million, respectively, of transportation services from certain SEACOR subsidiaries. In addition, during the year ended December 31, 2015, the Company paid $0.2 million to SEACOR for certain information technology services.
12 |
7. | COMMITMENTS AND CONTINGENCIES |
As of December 31, 2015 and 2014, the Company had purchase commitments of $9.1 million and $21.0 million, respectively, for raw materials, primarily corn, and services for use in its manufacturing process.
On July 22, 2014, the Company experienced an electricity disruption that caused significant damage to two boilers disrupting the Company's ability to operate its manufacturing facility. During the year ended December 31, 2015, the Company filed a business interruption insurance claim and received $4.1 million of proceeds, which is included in other income in the accompanying statement of comprehensive income.
On May 28, 2013, one of the Company’s tanks was struck by lightning causing an explosion and fire damaging the tank and surrounding structures and equipment disrupting the Company's ability to operate its manufacturing facility. During the year ended December 31, 2014, the Company filed a business interruption insurance claim and received $0.2 million of proceeds, which is included in other income in the accompanying statement of comprehensive income.
As of December 31, 2015, the Company had 74 employees, 45 of whom are covered by a collective bargaining agreement with one labor union that will expire October 31, 2016. The labor contract that covers substantially all of the non-management employees at the Company’s manufacturing plant addresses predetermined wage escalation over the life of the agreement, the Company’s contribution to its 401(k) plan and addresses other general work rule provisions.
In the normal course of its business, the Company may become involved in various litigation matters or be the subject of administrative or regulatory reviews and inspections by governmental or quasi-governmental authorities. Management uses estimates in determining the Company’s possible exposure and may record reserves in its financial statements related to these claims when appropriate. It is possible that a change in the Company’s estimates of such exposure could occur, but the Company does not expect such changes in estimated costs will have a material effect on the Company’s financial position, its results of operations or its cash flows.
13 |
Exhibit 99.3
FINANCIAL STATEMENTS
Illinois Corn Processing, LLC (a Limited Liability Company)
Three Months Ended March 31, 2017 and 2016
Unaudited
Illinois Corn Processing, LLC
(a Limited Liability Company)
INDEX TO FINANCIAL STATEMENTS
Page | |
Report of Independent Auditors | 1 |
Financial Statements: | |
Condensed Balance Sheets as of March 31, 2017 and December 31, 2016 | 3 |
Condensed Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 | 4 |
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 | 6 |
Notes to Financial Statements | 7 |
i |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Condensed Balance Sheets
(in thousands)
March 31, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 26,849 | $ | 25,158 | ||||
Restricted cash | 300 | 264 | ||||||
Margin deposits | – | 274 | ||||||
Trade receivables: | ||||||||
Due from affiliates | 2,864 | 3,423 | ||||||
Due from nonaffiliates, net of allowance for doubtful accounts of $0 in 2017 and 2016 | 3,646 | 7,212 | ||||||
Deposits | 12 | 104 | ||||||
Inventories | 12,913 | 11,133 | ||||||
Derivative assets | 1,220 | 1,445 | ||||||
Prepaid expenses | 1,304 | 70 | ||||||
Total current assets | 49,108 | 49,083 | ||||||
Property and Equipment: | ||||||||
Historical Cost | 50,821 | 50,156 | ||||||
Accumulated depreciation | (29,670 | ) | (28,811 | ) | ||||
Net property and equipment | 21,151 | 21,345 | ||||||
Debt issuance costs | 101 | 119 | ||||||
$ | 70,360 | $ | 70,547 | |||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable: | ||||||||
Due to affiliates | $ | 418 | $ | 393 | ||||
Due to nonaffiliates | 3,826 | 5,069 | ||||||
Accrued wages and benefits | 463 | 729 | ||||||
Accrued property taxes | 132 | 107 | ||||||
Brokerage account balance | 180 | – | ||||||
Derivative liabilities | 528 | 1,000 | ||||||
Total current liabilities | 5,547 | 7,298 | ||||||
Postretirement liabilities | 135 | 135 | ||||||
Total liabilities | 5,682 | 7,433 | ||||||
Members’ equity: | ||||||||
Contributed capital | 33,000 | 33,000 | ||||||
Accumulated earnings | 31,676 | 30,106 | ||||||
Accumulated other comprehensive income | 2 | 8 | ||||||
Total members’ equity | 64,678 | 63,114 | ||||||
$ | 70,360 | $ | 70,547 |
See accompanying notes to financial statements.
2 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Condensed Statements of
Comprehensive Income
(in thousands)
For the three months ended March 31 | |||||||||
2017 | 2016 | ||||||||
Net Sales | $ | 38,385 | $ | 49,609 | |||||
Cost of Sales (exclusive of depreciation shown separately below): | |||||||||
Finished goods | 36,101 | 46,289 | |||||||
Derivative (gains) losses, net | (334 | ) | 187 | ||||||
35,767 | 46,476 | ||||||||
Gross profit (exclusive of depreciation shown separately below) | 2,618 | 3,133 | |||||||
Selling, General and Administrative Expenses | 738 | 655 | |||||||
Depreciation | 858 | 735 | |||||||
Operating Income | 1,022 | 1,743 | |||||||
Other Income (Expense) | 615 | – | |||||||
Interest Expense | (64 | ) | (24 | ) | |||||
Net Income | 1,573 | 1,719 | |||||||
Gain (Loss) on Postretirement Benefits | (2 | ) | 4 | ||||||
Comprehensive Income | $ | 1,571 | $ | 1,723 |
See accompanying notes to financial statements.
3 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Condensed Statements of Cash Flows
(in thousands)
For the three months ended March 31 | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 1,571 | $ | 1,723 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 858 | 736 | ||||||
Amortization of debt issuance costs | 18 | 24 | ||||||
Postretirement benefit expense | 2 | (4 | ) | |||||
Contributions to postretirement benefit plan | (9 | ) | (12 | ) | ||||
Derivative (gains) losses, net | (248 | ) | 702 | |||||
Changes in operating assets and liabilities: | ||||||||
Margin deposits | 274 | 132 | ||||||
Accounts receivable | 4,124 | 68 | ||||||
Inventories | (1,779 | ) | 5,249 | |||||
Prepaid expenses and deposits | (1,142 | ) | (570 | ) | ||||
Accounts payable and accrued expenses | (1,278 | ) | 63 | |||||
Net cash provided by operating activities | 2,391 | 8,111 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property and equipment | (664 | ) | (686 | ) | ||||
Decrease (Increase) in restricted cash | (36 | ) | (37 | ) | ||||
Net cash used in investing activities | (700 | ) | (723 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Dividend payments to members | – | (11,000 | ) | |||||
Net cash used in financing activities | – | (11,000 | ) | |||||
Net Increase in Cash | 1,691 | (3,612 | ) | |||||
Cash, Beginning of Quarter | 25,158 | 20,616 | ||||||
Cash, End of Quarter | $ | 26,849 | $ | 17,004 | ||||
Supplemental Information: | ||||||||
Interest paid | $ | – | $ | – |
See accompanying notes to financial statements.
4 |
Illinois Corn Processing, LLC
(a Limited Liability Company)
Notes to Financial Statements
1. | NATURE OF OPERATIONS AND ACCOUNTING POLICIES |
Nature of Operations. Illinois Corn Processing LLC (the "Company"), a Delaware limited liability company, consists of two members, Illinois Corn Processing Holdings, Inc. ("ICPH") and MGPI Processing, Inc. ("MGPI"). ICPH is a wholly owned subsidiary of SEACOR Holdings Inc. (along with its controlled and consolidated subsidiaries collectively referred to as "SEACOR"). MGPI is a wholly owned subsidiary of MGP Ingredients, Inc. (along with its controlled and consolidated subsidiaries collectively referred to as "MGP"). The Company was formed on November 20, 2009, through MGPI’s contribution of a previously idled manufacturing plant in Pekin, IL, and the sale of a 50% interest to SEACOR for $15.0 million in cash. On February 1, 2012, ICPH acquired an additional 20% equity interest in the Company from MGPI for $9.1 million. Pursuant to the Limited Liability Company agreement entered into on November 20, 2009, between ICPH and MGPI (the "LLC Agreement"), the purchase price was based on a predetermined enterprise value of the Company plus capital improvements made since inception. Following this transaction, ICPH owns 70% of the Company.
These financial statements do not reflect push-down purchase accounting activity for ICPH’s acquisition to obtain a controlling interest in the Company. Capital contributions, distributions, and allocations of net income or loss are made based on each member’s proportionate share of ownership, with certain exceptions, and the liability of the members is limited to their investment in the Company.
The Company is in the business of manufacturing alcohol for beverage, industrial, and fuel applications. During the three months ended March 31, 2017 and 2016, the Company sold certain alcohol finished goods to MGP and also sold alcohol finished goods to other unrelated third parties. Certain co-products and byproducts of the manufacturing process are also sold to other unrelated third parties.
The LLC Agreement contains certain covenants including, among others, a provision that does not allow the Company to incur three consecutive fiscal quarters of losses, as defined, equaling or exceeding $1.5 million in the aggregate; or at any time allow the Company’s net working capital to be less than $2.5 million. In the event of noncompliance with these covenants, MGPI or ICPH would have the unilateral right to shut down the plant, which could result in a default on the Company's Revolving Credit Facility (see Note 2).
Also in accordance with the LLC Agreement, either member (the "Electing Party") has the right to elect a shutdown of the Pekin plant if the Company incurs a quarterly loss, as defined, in excess of $0.5 million; however, the other member has the right to object to the shutdown election and continue operations of the plant. The Electing Party has the right but not the obligation to withdraw its shutdown election at the beginning of each subsequent quarter.
The preparation of the condensed financial statements in conformity with GAAP requires ICP to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. These estimates are based on ICP’s management team's knowledge of current events and actions that ICP may take in the future. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates.
The accompanying condensed financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments unless otherwise disclosed) which, in the opinion of ICP’s management team, are necessary for a fair presentation of the results of operations for the three months ended March 31, 2017 and 2016. The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Such estimates include those related to the allowance for doubtful accounts, impairments, certain accrued liabilities, and postretirement benefit obligations. Actual results could differ from those estimates and those differences may be material.
Subsequent Events. The Company has performed an evaluation of subsequent events through July 31, 2017, the date the financial statements were available to be issued.
Revenue Recognition. The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Revenue that does not meet these criteria is deferred until the criteria are met. The Company earns revenues from the sale of alcohol, co-products, and byproducts. Revenues and related costs from these sales are recorded when title transfers to the buyer.
5 |
Shipping Costs. The sales price for certain of the Company's products includes a component for the shipment of the product on behalf of its customers. The costs related to these shipments are included in cost of goods sold in the accompanying statements of comprehensive income.
Trade Receivables. The Company’s customers primarily are petrochemical, agricultural and industrial companies. Customers are granted credit on a short-term basis and credit risks are considered minimal. The Company routinely reviews its trade receivables and makes provisions for doubtful accounts based on existing customer and economic conditions; however, those provisions are estimates and actual results could differ from those estimates, and those differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted.
Restricted Cash. The Company is a self-directing customer of the Natural Gas Energy Efficiency Program, a state of Illinois excise tax program that funds natural gas energy efficiency projects. Under this state regulation, the Company reserves two-percent of its natural gas costs incurred, not to exceed $150,000 per fiscal year. These restricted funds are held by the Company to fund internal capital expenditure projects designed to reduce consumption of natural gas by the Company. As of March 31, 2017 and December 31, 2016, the Company had $0.3 million, of restricted cash to fund future energy efficiency projects. The Company must either use these funds toward natural gas energy efficiency projects within three years of designation or remit them as a tax payment to the state of Illinois.
Margin Deposits. The Company’s margin deposits consist of cash on deposit with its futures commission merchant in support of its open derivative contracts (see Note 3). The amount of margin deposit required to be maintained is based on the number of open derivative contracts and their underlying fair value.
Inventories. Inventories are stated at the lower of cost (using the average cost method) or market. Inventories consist of finished goods (alcohol and dried distillers grains with solubles (DDGS) and raw materials in the form of agricultural commodities used in the production process.
The Company’s inventories consisted of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Raw materials | $ | 1,849 | $ | 1,826 | ||||
Finished goods | 9,531 | 7,850 | ||||||
Work in process | 1,533 | 1,457 | ||||||
$ | 12,913 | $ | 11,133 |
Derivative Instruments. The Company accounts for derivatives through the use of a fair value concept whereby all of the Company’s derivative positions are stated at fair value in the accompanying balance sheets. Realized and unrealized gains and losses on derivatives are reported in the accompanying statements of comprehensive income as derivative losses, net. As of March 31, 2017 and December 31, 2016, the Company had not designated any of its derivative instruments as hedges. Forward commodity purchase and sales contracts entered into by the company are not marked to fair value, as such contracts meet the normal purchases and sales exception under accounting principles generally accepted in the United States.
Concentrations of Credit Risk. The Company is exposed to concentrations of credit risk associated with its cash, restricted cash, margin deposits, raw material purchase commitments, and derivative instruments. The Company minimizes its credit risk relating to these positions by monitoring the financial condition of the financial institutions and counterparties involved and by primarily conducting business with large, well-established financial institutions and diversifying its counterparties. Derivatives instruments counterparty risk is supported by margin deposits maintained by the futures commission merchant. The Company does not currently anticipate nonperformance by any of its significant counterparties. The Company is also exposed to concentrations of credit risk relating to its receivables due from customers as described above. The Company does not generally require collateral or other security to support its outstanding receivables. The Company minimizes its credit risk relating to receivables by performing ongoing credit evaluations and, to date, credit losses have not been material.
6 |
Property and Equipment. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value.
Impairment of Long-Lived Assets. The Company performs an impairment analysis of long-lived assets used in operations, when indicators of impairment are present. These indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows, the estimated fair value of the assets or asset groups are compared to their current carrying values and impairment charges are recorded if the carrying value exceeds fair value. The Company performs its testing on an asset or asset group basis. Generally, fair value is determined using valuation techniques, such as expected discounted cash flows or appraisals, as appropriate. During the three months ended March 31, 2017 and 2016, the Company recognized no impairment charges related to long-lived assets held for use.
Debt Issuance Costs. Debt issuance costs are amortized over the life of the related debt using the straight line method and are included in interest expense in the accompanying statements of comprehensive income.
Income Taxes. The income or loss of the Company is included in the taxable income or loss of its individual members, and therefore, no provision for income taxes is included in the accompanying financial statements.
Postretirement Benefit Plan. The Company sponsors a postretirement benefit plan that provides medical benefits to certain retired employees (see Note 5). The Company annually measures the obligation for this plan at year end using actuarial techniques that reflect management’s assumptions for certain factors that impact the determination of the obligation and recognizes an asset or liability in the accompanying balance sheets based on the funded status of the plan. The Company’s obligation under this plan was unfunded as of March 31, 2017 and December 31, 2016.
New Accounting Pronouncements. On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. The core principal of the new standard is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company has not yet selected the method of adoption or determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On February 25, 2016, the FASB issued a comprehensive new leasing standard, which improves transparency and comparability among companies by requiring lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The new standard is effective for interim and annual periods beginning after December 15, 2019 and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On August 26, 2016, the FASB issued an amendment to the accounting standard which amends or clarifies guidance on classification of certain transactions in the statement of cash flows, including classification of proceeds from the settlement of insurance claims, debt prepayments, debt extinguishment costs and contingent consideration payments after a business combination. This new standard is effective for the Company as of January 1, 2018 and early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On November 17, 2016, the FASB issued an amendment to the accounting standard which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of- period total cash amounts shown on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
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2. | LONG-TERM DEBT |
Revolving Credit Facility. On April 9, 2015, the Company obtained a new $30.0 million revolving credit facility with JPMorgan Chase Bank, N.A. serving as Administrative Agent and Lender (the "Revolving Credit Facility"), which includes an accordion feature whereby loan commitments available under the facility could be increased in the future by an additional $20.0 million, subject to lender approval. The Revolving Credit Facility is available to finance working capital requirements and for general corporate purposes. The Revolving Credit Facility matures on April 9, 2018, and is secured by all of the assets of the Company, except for real estate. The Company has agreed not to pledge its real estate as collateral to any other party. The amount available for borrowing at any given time under the Revolving Credit Facility is determined by a formula based on the current outstanding loan balance, the amount of the Company’s eligible outstanding accounts receivable and the carrying value of its eligible inventories, subject to additional reserves. Interest on outstanding loans equates to the one-month London Interbank Offered Rate ("LIBOR") interest rate plus an applicable margin of 2.00%. All loan interest rates increase by an additional 2.00% margin if the credit agreement is in default status. The Company pays a commitment fee on the unused portion of the Revolving Credit Facility ranging from 0.2% to 0.6%, as defined, which is included in interest expense in the accompanying statements of comprehensive income. The Revolving Credit Facility places restrictions on the Company including limitations on its ability to incur indebtedness, liens, restricted payments and asset sales. Other restricted payments, including dividends, are subject to certain conditions, including undrawn availability under the revolver and the Company’s pro forma fixed charge coverage ratio, as defined. In addition, the Company is subject to various covenants under the Revolving Credit Facility, as defined. As of March 31, 2017 and December 31, 2016, the Company had no outstanding borrowings on the Revolving Credit Facility and as of March 31, 2107 and December 31, 2016 had $14.6 million and $16.2 million of borrowing capacity, respectively. As discussed in Note 8, the Revolving Credit Facility was terminated on June 28, 2017.
3. | DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES |
Derivative instruments are classified as either assets or liabilities based on their individual fair values. Derivative assets and liabilities are included in derivative assets and derivative liabilities, respectively, in the accompanying balance sheets. As of March 31, 2017 and December 31, 2016, the Company had not designated any of its derivative activities as hedging instruments. The fair values of the Company’s derivative instruments were as follows (in thousands):
March 31, 2017 | December 31, 2016 | |||||||||||||||
|
Derivative Asset | Derivative Liability | Derivative Asset | Derivative Liability | ||||||||||||
Exchange-traded commodity swap, options and future contracts: | ||||||||||||||||
Corn | $ | 834 | $ |
528 | $ | 639 | $ | 997 | ||||||||
Natural gas | 79 | – | 320 | – | ||||||||||||
Ethanol | 307 | – | 486 | 3 | ||||||||||||
$ | 1,220 | $ | 528 | $ | 1,445 | $ | 1,000 |
The Company recognized gains (losses) on derivative instruments for the three months ended March 31 as follows (in thousands):
Derivative Gains (Losses), net | ||||||||
2017 | 2016 | |||||||
Exchange-traded commodity swap, future contracts and options: | ||||||||
Corn | $ | 394 | $ | 110 | ||||
Natural gas | (280 | ) | (212 | ) | ||||
Ethanol | 220 | (85 | ) | |||||
$ | 334 | $ | (187 | ) |
The Company enters and settles positions in various exchange traded commodity swap, future contracts, and options (primarily corn, ethanol, and natural gas) to offset its net commodity market exposure on raw material and finished goods inventory balances and forward purchase and sales commitments.
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4. | FAIR VALUE MEASUREMENTS |
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity.
The Company’s financial assets and liabilities as of March 31, 2017, that are measured at fair value on a recurring basis were as follows (in thousands):
Level 1 | Level 2 | Level 3 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||||||
Derivative instruments | $ | 1,220 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 528 | – | – |
The Company’s financial assets and liabilities as of December 31, 2016, that are measured at fair value on a recurring basis were as follows (in thousands):
Level 1 | Level 2 | Level 3 | ||||||||||
ASSETS | ||||||||||||
Derivative instruments | $ | 1,445 | $ | – | $ | – | ||||||
LIABILITIES | ||||||||||||
Derivative instruments | 1,000 | – | – |
The carrying value of cash, restricted cash and margin deposits approximates fair value due to the short maturity of these instruments.
5. | BENEFIT PLANS |
Savings Plan. The Company provides a defined contribution plan to its employees (the "Savings Plan"). The Company’s contribution to the Savings Plan is limited to 6% of an eligible employee’s salary, regardless of their contribution to the plan. For the three months ended March 31, 2017 and 2016, the Company’s Savings Plan costs were $0.1 million and $0.1 million, respectively.
Postretirement Benefit Plan. During 2010, the Company established a contributory qualified postretirement benefit plan (the "Benefit Plan") that provides certain medical benefits, including prescription drug coverage, to certain eligible retired employees. Contributions are adjusted annually and the plan contains fixed deductibles, coinsurance, and out-of-pocket limitations. Effective April 11, 2011, the Company and its labor union agreed to a new contract that resulted in a reduction in the number of employees eligible for the Benefit Plan.
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The Benefit Plan’s liabilities are unfunded as it is the Company’s policy to fund benefits payable as they are due. As of March 31, 2017 and December 31, 2016, three retirees are active in the Benefit Plan. The Company’s measurement date for the Benefit Plan is December 31.
The components of net periodic benefit cost for the Benefit Plan for the three months ended March 31, included in selling, general and administrative expenses in the accompanying statements of comprehensive income, were as follows (in thousands):
Net Periodic Benefit Cost | ||||||||
2017 | 2016 | |||||||
Service cost | $ | – | $ | – | ||||
Interest cost | – | 1 | ||||||
Amortization of unrecognized prior service cost | – | – | ||||||
Recognition of actuarial gain | (– | ) | (5 | ) | ||||
$ | (– | ) | $ | (4 | ) |
6. | RELATED PARTY TRANSACTIONS |
During the three months ended March 31, 2017 and 2016, $8.7 million, or 22.6%, and $6.1 million, or 12.3%, respectively, of the Company’s net sales were to the MGP. During the three months ending March 31, 2017 and 2016, the Company also purchased $0.9 million and $0.8 million, respectively, of transportation services from certain SEACOR subsidiaries. In addition, in each of the three months ended March 31, 2017 and 2016, the Company paid $0.1 million to SEACOR for certain information technology services.
7. | COMMITMENTS AND CONTINGENCIES |
As of March 31, 2017 and December 31, 2016, the Company had purchase commitments of $22.7 million and $26.6 million, respectively, for raw materials, primarily corn, and services for use in its manufacturing process. Furthermore, as of March 31, 2017 and December 31, 2016, the Company had commitments of $2.1 million and $2.1 million, respectively, for future capital additions.
In the normal course of its business, the Company may become involved in various litigation matters or be the subject of administrative or regulatory reviews and inspections by governmental or quasi-governmental authorities. Management uses estimates in determining the Company’s possible exposure and may record reserves in its financial statements related to these claims when appropriate. It is possible that a change in the Company’s estimates of such exposure could occur, but the Company does not expect such changes in estimated costs will have a material effect on the Company’s financial position, its results of operations or its cash flows.
8. | SUBSEQUENT EVENTS |
In June 2017, the Company paid cash dividends totaling $24.8 million to its members.
On June 28, 2017, the Company terminated its $30.0 million revolving credit facility with JPMorgan Chase Bank, N.A. (see Note 2). Effective with the revolver termination, the bank released all security interests in all assets of the Company.
On June 26, 2017, ICPH and MGPI, (the “Sellers”) and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pacific Ethanol Central, LLC, a subsidiary of Pacific Ethanol, Inc. (“Buyer”), and ICP Merger Sub, LLC, a wholly-owned subsidiary of Buyer (“Merger Sub”), pursuant to which, upon the terms and conditions set forth therein, (a) Merger Sub was subsequently merged with and into the Company (the “Merger”) with the Company being the surviving company and Buyer becoming the sole owner of the Company, and (b) the Sellers’ equity interests in the Company were converted into Sellers’ right to receive their proportionate percentage (i.e., 70% for ICPH and 30% for MGPI) of merger consideration consisting of (i) $30.0 million in cash (the “Cash Consideration Amount”) and (ii) secured promissory notes of Merger Sub (which, pursuant to the Merger became obligations of the Company) in the aggregate principal amount of $46.7 million, subject to a post-closing working capital adjustment. The obligations of the Company under the promissory notes are secured by the equity and substantially all of assets of the Company. The Closing Date of the transaction and the effective date of the Merger occurred on July 3, 2017, upon which date the Cash Consideration Amount was paid by the Buyer and the secured promissory notes were issued, subject to the aforementioned post-closing working capital adjustment.
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Exhibit 99.4
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed balance sheet as of March 31, 2017 is presented as if the merger had occurred as of March 31, 2017. The unaudited pro forma combined condensed statements of operations for the three months ended March 31, 2017 and year ended December 31, 2016 are presented as if the merger had occurred on January 1, 2016. The pro forma consolidated financial statements of Pacific Ethanol, Inc. and Illinois Corn Processing, LLC (“ICP”) have been adjusted to reflect certain reclassifications in order to conform ICP’s historical financial statement presentation to Pacific Ethanol’s financial statement presentation for the combined company.
The unaudited pro forma combined condensed financial statements give effect to the merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, which we refer to as ASC 805, with Pacific Ethanol treated as the acquirer. As of the date of this filing, Pacific Ethanol has not completed the detailed valuation work necessary to arrive at the required estimates of the fair value of the ICP assets acquired and the liabilities assumed and the related allocation of purchase price, nor has it identified all adjustments necessary to conform ICP’s accounting policies to Pacific Ethanol’s accounting policies. A final determination of the fair value of ICP’s assets and liabilities, including intangible assets with both indefinite or finite lives, will be based on the actual net tangible and intangible assets and liabilities of ICP that exist as of the closing date of the merger on July 3, 2017. The value of the consideration paid by Pacific Ethanol has been based on the cash paid and promissory notes issued to the sellers upon closing. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of presenting the unaudited pro forma combined condensed financial statements. Pacific Ethanol estimated the fair values of ICP’s assets and liabilities as of March 31, 2017 which are based on preliminary valuation studies and due diligence. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
Assumptions and estimates underlying the unaudited adjustments to the pro forma combined condensed financial statements are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma combined condensed financial statements. The historical consolidated financial statements have been adjusted in the unaudited pro forma combined condensed financial statements to give effect to pro forma events that are: (1) directly attributable to the merger; (2) factually supportable; and (3) with respect to the unaudited pro forma combined condensed statements of operations, expected to have a continuing impact on the combined results of Pacific Ethanol and ICP following the merger.
In connection with the plan to integrate the operations of Pacific Ethanol and ICP, Pacific Ethanol anticipates that non-recurring charges, such as costs associated with systems implementation, relocation expenses, severance and other costs related to closing the transaction, will be incurred. Pacific Ethanol is not able to determine the timing, nature and amount of these charges as of the date of this filing. However, these charges could affect the combined results of operations of Pacific Ethanol and ICP, as well as those of the combined company following the merger, in the period in which they are recorded. The unaudited pro forma combined condensed financial statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the transaction, as they are non-recurring in nature and not factually supportable at the time that the unaudited pro forma combined condensed financial statements were prepared. Additionally, these adjustments do not give effect to any synergies that may be realized as a result of the merger, nor do they give effect to any nonrecurring or unusual restructuring charges that may be incurred as a result of the integration of the two companies.
1 |
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
OF PACIFIC ETHANOL AND ICP
As of March 31, 2017
(in thousands)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
PEI | ICP | Adjustments | Notes | Amounts | |||||||||||||
Cash and Equivalents | $ | 73,734 | $ | 26,849 | $ | (30,000 | ) | (a) | $ | 70,583 | |||||||
Accounts Receivable, net | 64,018 | 6,810 | – | 70,828 | |||||||||||||
Inventories | 58,045 | 12,913 | – | 70,958 | |||||||||||||
Prepaid Inventory | 7,913 | – | – | 7,913 | |||||||||||||
Other current assets | 9,554 | 2,536 | – | 12,090 | |||||||||||||
Total Current Assets | 213,264 | 49,108 | (30,000 | ) | 232,372 | ||||||||||||
Property and Equipment, net | 460,192 | 21,151 | 12,017 | (b) | 493,360 | ||||||||||||
Intangible Assets | 2,678 | – | – | 2,678 | |||||||||||||
Other assets | 5,620 | 101 | – | 5,721 | |||||||||||||
Total Other Assets | 8,298 | 101 | – | 8,399 | |||||||||||||
– | |||||||||||||||||
Total Assets | $ | 681,754 | $ | 70,360 | $ | (17,983 | ) | $ | 734,131 | ||||||||
Accounts Payable, trade | $ | 32,490 | $ | 1,959 | $ | – | $ | 34,449 | |||||||||
Accrued Liabilities | 17,733 | 2,880 | – | 20,613 | |||||||||||||
Current portion of capital leases | 794 | – | – | 794 | |||||||||||||
Current portion of long-term debt | 14,000 | – | – | 14,000 | |||||||||||||
Other current liabilities | 6,933 | 708 | – | 7,641 | |||||||||||||
Total Current Liabilities | 71,950 | 5,547 | – | 77,497 | |||||||||||||
Long-term debt - Sellers Notes | – | – | 46,695 | (a) | 46,695 | ||||||||||||
Long-term debt - Term and revolving debt | 182,383 | – | – | 182,383 | |||||||||||||
Other Liabilities | 21,699 | 135 | – | 21,834 | |||||||||||||
Total Liabilities | 276,032 | 5,682 | 46,695 | 328,409 | |||||||||||||
Preferred Stock | 1 | – | – | 1 | |||||||||||||
Common Stock | 44 | – | – | 44 | |||||||||||||
Additional Paid-In Capital | 923,956 | 33,000 | (33,000 | ) | (c) | 923,956 | |||||||||||
Accumulated other comprehensive income (loss) | (2,620 | ) | 2 | (2 | ) | (c) | (2,620 | ) | |||||||||
Accumulated Earnings (Deficit) | (545,181 | ) | 31,676 | (31,676 | ) | (c) | (545,181 | ) | |||||||||
Total Pacific Ethanol Equity | 376,200 | 64,678 | (64,678 | ) | 376,200 | ||||||||||||
Noncontrolling interest Equity | 29,522 | – | – | 29,522 | |||||||||||||
Total Stockholders' Equity | 405,722 | 64,678 | (64,678 | ) | 405,722 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 681,754 | $ | 70,360 | $ | (17,983 | ) | $ | 734,131 |
The accompanying notes are an integral part of these pro forma combined condensed financial statements
2 |
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS
OF OPERATIONS OF PACIFIC ETHANOL AND ICP
For the three months ended March 31, 2017
(in thousands, except per share amounts)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
PEI | ICP | Adjustments | Notes | Amounts | |||||||||||||
Net Revenues | $ | 386,340 | $ | 38,385 | $ | – | $ | 424,725 | |||||||||
Cost of Goods Sold | 392,113 | 35,767 | 858 | (d) | |||||||||||||
150 | (e) | 428,888 | |||||||||||||||
Gross Profit (Loss) | (5,773 | ) | 2,618 | (1,008 | ) | (4,163 | ) | ||||||||||
Selling, General and Administrative Expenses | 5,450 | 738 | – | 6,188 | |||||||||||||
Depreciation expense | – | 858 | (858 | ) | (d) | – | |||||||||||
Income (loss) from Operations | (11,223 | ) | 1,022 | (150 | ) | (10,351 | ) | ||||||||||
Fair value adjustments | 455 | – | – | 455 | |||||||||||||
Interest expense, net | (2,637 | ) | (64 | ) | (1,167 | ) | (f) | (3,868 | ) | ||||||||
Other income (expense), net | (80 | ) | 615 | – | 535 | ||||||||||||
Income (loss) before provision for income taxes | (13,485 | ) | 1,573 | (1,317 | ) | (13,229 | ) | ||||||||||
Provision for income taxes | – | – | – | – | |||||||||||||
Consolidated net income (loss) | (13,485 | ) | 1,573 | (1,317 | ) | (13,229 | ) | ||||||||||
Net loss attributed to noncontrolling interests | 849 | – | – | 849 | |||||||||||||
Net income (loss) attributed to Pacific Ethanol | (12,636 | ) | 1,573 | (1,317 | ) | (12,380 | ) | ||||||||||
Preferred Dividends | (312 | ) | – | – | (312 | ) | |||||||||||
Net income (loss) available to common stockholders | $ | (12,948 | ) | $ | 1,573 | $ | (1,317 | ) | $ | (12,692 | ) | ||||||
Net Loss Per Share, Basic and Diluted | $ | (0.31 | ) | $ | (0.30 | ) | |||||||||||
Weighted-Average Shares Outstanding, Basic and Diluted | 42,375 | 42,375 |
The accompanying notes are an integral part of these pro forma combined condensed financial statements
3 |
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS
OF OPERATIONS OF PACIFIC ETHANOL AND ICP
For the year ended December 31, 2016
(in thousands, except per share amounts)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
PEI | ICP | Adjustments | Notes | Amounts | |||||||||||||
Net Revenues | $ | 1,624,758 | $ | 177,401 | $ | – | $ | 1,802,159 | |||||||||
Cost of Goods Sold | 1,572,926 | 157,584 | 3,030 | (d) | |||||||||||||
601 | (e) | 1,734,141 | |||||||||||||||
Gross Profit | 51,832 | 19,817 | (3,631 | ) | 68,018 | ||||||||||||
Selling, General and Administrative Expenses | 28,323 | 3,002 | – | 31,325 | |||||||||||||
Depreciation expense | – | 3,030 | (3,030 | ) | (d) | – | |||||||||||
Income from Operations | 23,509 | 13,785 | (601 | ) | 36,693 | ||||||||||||
Fair value adjustments | (557 | ) | – | – | (557 | ) | |||||||||||
Interest expense, net | (22,406 | ) | (229 | ) | (4,670 | ) | (f) | (27,305 | ) | ||||||||
Other expense, net | (1 | ) | – | – | (1 | ) | |||||||||||
Income before provision for income taxes | 545 | 13,556 | (5,271 | ) | 8,830 | ||||||||||||
Benefit for Income Taxes | 981 | – | – | (g) | 981 | ||||||||||||
Consolidated net income | 1,526 | 13,556 | (5,271 | ) | 9,811 | ||||||||||||
Net (income) loss attributed to noncontrolling interests | (107 | ) | – | – | (107 | ) | |||||||||||
Net income attributed to Pacific Ethanol | 1,419 | 13,556 | (5,271 | ) | 9,704 | ||||||||||||
Preferred Dividends | (1,269 | ) | – | – | (1,269 | ) | |||||||||||
Net income available to common stockholders | $ | 150 | $ | 13,556 | $ | (5,271 | ) | $ | 8,435 | ||||||||
Net Income Per Share, Basic | $ | – | $ | 0.20 | |||||||||||||
Net Income Per Share, Diluted | $ | – | $ | 0.20 | |||||||||||||
Weighted-Average Shares Outstanding, Basic | 42,182 | 42,182 | |||||||||||||||
Weighted-Average Shares Outstanding, Diluted | 42,251 | 42,251 |
The accompanying notes are an integral part of these pro forma combined condensed financial statements
4 |
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined condensed financial statements are prepared under the acquisition accounting method in accordance with ASC 805, with Pacific Ethanol treated as the acquirer. Under the acquisition accounting method, the total estimated purchase price allocation is calculated as described in Note 3. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at fair value based on various preliminary estimates, and these estimates are subject to change pending further review of the fair value of assets acquired and liabilities assumed. The final amounts recorded for the merger may differ materially from the information presented herein.
The unaudited pro forma combined condensed financial statements were prepared in accordance with GAAP and pursuant to Securities and Exchange Commission Regulation S-X, Article 11, and present the pro forma financial position and results of operations of the combined companies based upon the historical information after giving effect to the merger and adjustments described in these Notes to the unaudited pro forma combined condensed financial statements. The unaudited pro forma combined condensed balance sheet is presented as if the merger had occurred on March 31, 2017; and the unaudited pro forma combined condensed statements of operations for the three months ended March 31, 2017 and year ended December 31, 2016 are presented as if the merger had occurred on January 1, 2016.
Certain reclassifications have been made relative to ICP’s historical financial statements to conform to the financial statement presentation of Pacific Ethanol. Such reclassifications are described in further detail in Note 4 to the unaudited pro forma combined condensed financial statements.
2. Preliminary Estimated Purchase Price Consideration
On July 3, 2017, Pacific Ethanol paid $30.0 million in cash and issued $46.7 million in promissory notes to the sellers to effect the merger. The promissory notes mature January 3, 2019 and their initial interest rate is LIBOR plus 5.00% and will increase to LIBOR plus 8.00% on October 4, 2017 and further increase to LIBOR plus 10.0% from July 4, 2018 through maturity, if not repaid sooner, which there is no prepayment penalty. For purposes of the proforma combined condensed financial statements, the rate is assumed to be 10.0% per annum. The principal amount of the promissory notes will be increased or decreased to reflect the results of a customary working capital adjustment.
For purposes of these unaudited pro forma combined condensed financial statements, the estimated total purchase price has been allocated among ICP’s tangible and intangible assets and liabilities based on their estimated fair values as of March 31, 2017. Based on a preliminary analysis, and after considering potential intangibles related to ICP’s customer base, no material identifiable intangible assets or liabilities have been determined and as such, none have been included in the allocation of the preliminary estimated purchase price.
The final determination of the allocation of the estimated total purchase price will be based on the fair value of such assets and liabilities as of the date of closing of the merger. Such final determination of the purchase price allocation may be significantly different from the preliminary estimates used in these unaudited pro forma combined condensed financial statements.
5 |
3. Preliminary Estimated Purchase Price Allocation
The following allocation of the preliminary estimated purchase price assumes, with the exception of property and equipment, carrying values approximate fair value. Fair value of property and equipment is based on a preliminary valuation of similar historical transactions available. Based upon these assumptions, the total purchase price consideration was allocated to ICP’s assets and liabilities, as of March 31, 2017, as follows (in thousands):
Estimated Fair Value | ||||
Cash and Equivalents | $ | 26,849 | ||
Accounts Receivable, net | 6,810 | |||
Inventories | 12,913 | |||
Other current assets | 2,536 | |||
Total Current Assets | 49,108 | |||
Property and Equipment, net | 33,168 | |||
Other assets | 101 | |||
Total Assets Acquired | $ | 82,377 | ||
Accounts Payable, trade | $ | 1,959 | ||
Accrued Liabilities | 2,880 | |||
Other current liabilities | 708 | |||
Total Current Liabilities | 5,547 | |||
Other Liabilities | 135 | |||
Total Liabilities Assumed | $ | 5,682 | ||
Net Assets Acquired | $ | 76,695 | ||
Goodwill | $ | – | ||
Total Estimated Purchase Price | $ | 76,695 |
The actual determination of the purchase price allocation on the closing date will be based on the actual net tangible and intangible assets of ICP that existed on the date of the merger and completion of the valuation of the fair value of such net assets.
4. Preliminary Pro Forma Financial Statement Adjustments
Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:
Unaudited Pro Forma Combined Condensed Balance Sheet
(a) Reflects the purchase price of $30.0 million in cash and the issuance of $46.7 million in notes payable issued to the sellers. The principal amount of the promissory notes will be increased or decreased to reflect the results of a customary working capital adjustment.
(b) To record the difference in book value and fair value of property and equipment acquired. The step up in property and equipment relates primarily to the ethanol production facility, which have a current estimated weighted average useful life of 20 years that will be depreciated on a straight-line basis. The amount of purchase price allocated to tangible assets, as well as the associated useful lives, may increase or decrease and could materially affect the amount of pro forma depreciation expense to be recorded in the pro forma combined condensed statements of operations.
(c) Represents the elimination of ICP’s historical stockholders’ equity.
6 |
Unaudited Pro Forma Combined Condensed Statements of Operations
Conforming Reclassifications Between Pacific Ethanol and ICP:
The following reclassifications have been made to the presentation of ICP’s historical financial statements to conform to Pacific Ethanol’s presentation:
(d) Depreciation expense is recorded in cost of goods sold for Pacific Ethanol and is being reclassed with respect to ICP’s reported amounts, which was presented as a separate line within operating income (loss) in ICP’s historical financial statements.
Pro Forma Adjustments
(e) Reflects pro forma adjustments to depreciation of property and equipment assuming the preliminary estimates of the fair value and estimated useful life of the asset as described in Note (a) and conforming classifications.
(f) Reflects additional interest expense associated with promissory notes issued to the sellers upon closing the merger.
(g) The Company did not record a pro forma tax provision for the year ended December 31, 2016, as the Company believes it would have utilized available net operating losses, which were fully reserved for at December 31, 2016.
5. Pro Forma Combined Net Income (Loss) Per Share
The pro forma basic and diluted net income (loss) per share presented in the unaudited pro forma combined condensed statements of operations is computed based on the weighted-average number of shares outstanding (in thousands except per share data):
Three Months Ended March 31, 2017 | ||||
Pro Forma net loss available to common stockholders, as combined | $ | (12,692 | ) | |
Pacific Ethanol’s historical weighted-average shares, Basic | 42,375 | |||
Pro Forma net loss per share, Basic and Diluted | $ | (0.30 | ) |
Year Ended December 31, 2016 | ||||
Pro Forma net income available to common stockholders, as combined | $ | 8,435 | ||
Pacific Ethanol’s historical weighted-average shares, Basic | 42,182 | |||
Pro Forma net income per share, Basic | $ | 0.20 | ||
Pro Forma net income available to common stockholders, as combined | $ | 8,435 | ||
Pacific Ethanol’s historical weighted-average shares, Diluted | 42,251 | |||
Pro Forma net income per share, Diluted | $ | 0.20 |
7 |
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