Cash-strapped Pacific Ethanol of Sacramento sells $40 million of stock

Facing a cash crunch, Sacramento's Pacific Ethanol Inc. completed a badly needed $40 million stock sale Thursday.

Pacific Ethanol, one of the leaders of the ethanol movement on the West Coast, said the deal puts it back on firm financial ground. But an investment analyst who follows the company's stock said Pacific Ethanol is still facing considerable hurdles.

A week ago, Pacific Ethanol disclosed $27 million in construction cost overruns and a $14.7 million loss for the fourth quarter of 2007. Although half the quarterly loss was due to non-cash items, the company said it was struggling with "extremely limited liquidity."

It had a lifeline, though: a proposed $40 million preferred stock sale to its construction contractor, Fresno's Lyles United LLC. But there were no guarantees that the deal would be completed.

Multimillion-dollar accounting errors had left the company in default on its bank loans, which meant its 18 banks had to sign off before the deal with Lyles could go forward.

On Thursday, the company said the banks approved the deal, but at a price. Among other things, Pacific Ethanol had to pay them a "consent fee" totaling $600,000.

The deal with Lyles "puts us firmly on track," said Neil Koehler, Pacific Ethanol's president and chief executive. The company can now complete plants under construction in Stockton and Idaho.

Although Koehler said he "never doubted" that the Lyles deal would go through, he acknowledged "a few stomach cramps" while the negotiations with the banks were in progress.

"I'm feeling a lot better now," he said.

Still, investment analyst Eitan Bernstein said he believes Pacific Ethanol faces "some serious liquidity issues" and will have trouble raising the money it needs to build any plants beyond Stockton and Idaho.

Bernstein, an analyst with investment firm Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said ethanol producers continue to deal with a difficult economic climate.

The business has suffered from its own popularity. Increasing demand brought in a flood of new supply, which depressed prices. At the same time, the supply rush generated major price increases in the industry's raw material: corn.

The slump in profit margins has forced plant developers to postpone or cancel numerous projects. Pacific Ethanol last fall suspended construction of a plant in the Imperial Valley.

Pacific Ethanol's stock, which once traded over $40 a share, closed Thursday at $4.48, down 5 cents, in regular Nasdaq trading before the Lyles deal was announced. In after-hours trading, the stock picked up 16 cents a share.

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