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Pacific Ethanol adds to New PE Holdco ownership and files for a public offering

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PEIX: Pacific Ethanol adds to New PE Holdco ownership and files for a public offering. Modest increases in ethanol prices may be due to seasonal improvement in demand.

Ian Gilson, CFA

The company has announced a proposed offering of stock and warrants registered under a prior shelf offering. The offering was priced at $0.43 for 28.0 million units prior to the market opening on June 28, 2012. Lazard Capital Markets is the sole manager. Each unit is one common share of stock, one Series II warrants for 1/2 a share of common stock at $0.53 with a term of 18-months and a Series I warrant for one share at $0.63 with a term of 5 years. The warrants will be certified and are separable and traded immediately on closing. The offering is expected to close on or about June 3, 2012. The stock closed at $0.35 on June 28, 2012. We have reduced our price target from $3 a share to $2 a share.

Pacific Ethanol (PEIX - Free Report) should receive about $10.8 million in net proceeds. We have adjusted our forecasts to reflect the increase in shares outstanding. Before any warrant conversion there will be close to 114 million shares before any warrant conversion.

Pacific Ethanol announced on June 27, 2012 that it has increased its ownership of New PE Holdco, LLC from 34% to 67% at a cost of $20 million. At the same time the company has amended the Pacific Ethanol credit agreement with certain lenders and announced a proposed offering of common stock and warrants.

The $20 million purchase will be at least $10 in cash and the balance in Senior Unsecured Notes issued to the current owners of New PE Holdco at a 5% annual rate which will be due nine months after the closing date of the transaction. The purchase price is at an attractive valuation that is less than the last purchase, below current market valuations and is well below current replacement cost. The increase in ownership is in line with the stated desire on the part of management to gain control of the strategic direction of the assets.

The changes in the plant credit agreement extends the maturity date of $46.7 million of debt and credit revolver from June 25, 2013 to June 30, 2016 and increases the amount of the $35 million revolver to $40 million, adding $5 million in liquidity to the plant's operations.

As expected the (seasonal) demand for gasoline is increasing. This is reducing the inventory that built up during the winter and prices are firming. The decline in gasoline prices would normally increase the miles driven which should increase the demand for ethanol. Profits will depend of the spread between the price of gasoline and the price of corn.

Pacific Ethanol has awarded a turn-key contract to ICM Inc. for the installation of a corn oil separation plant at the Magic Valley ethanol plant. This is one of the two largest ethanol plants with capacity of 15 million gallons a year. ICM Inc. will use its patented Advanced Oil Separation System and the unit should be installed by year-end 2012. The plant will produce 6,000 metric tons of corn oil, which sells for between $780 and $820 a metric ton. Revenue from corn oil could add $4 million to $5 million a year in 2013, most of which would be profit.

If this is successful the other two operating plants will be fitted with separation units in early 2013 with a total of $12.8 million a year in additional income.

As part of the production of ethanol the company produces and sells Wet Distillers Grains (WDG). At this time the corn oil is mixed with the WDG. The separation of the corn oil will have negligible impact on the production of WDG. There is also the potential of a slight increase in selling prices of WDG since a number of farmers do not want WDG mixed with corn oil.

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