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2. PACIFIC ETHANOL PLANTS | 12 Months Ended
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Dec. 31, 2013
Pacific Ethanol Plants |
2. PACIFIC ETHANOL PLANTS | Consolidation of New PE Holdco – The Company concluded that since New PE Holdco’s inception, through the point the Company became a 91% owner, New PE Holdco was a VIE because the other owners of New PE Holdco, due to the Company’s involvement through the contractual arrangements discussed below, at all times lacked the power to direct the activities that most significantly impacted its economic performance. However, since the Company’s recent acquisition bringing its ownership interest in New PE Holdco to 91%, the Company has obtained sufficient control both by way of agreements as well as based on structural control of New PE Holdco, such that New PE Holdco is no longer considered a VIE, and as such the Company will consolidate New PE Holdco under the voting rights model. In January, March, June and December 2013, the Company purchased an additional 13%, 3%, 2% and 6% of the ownership interests in New PE Holdco for $1,308,000, $331,000, $197,000 and $505,000 in cash, respectively, bringing its total ownership interest to 91% as of December 31, 2013. At the beginning of the year ended December 31, 2012, the Company had a 34% ownership interest in New PE Holdco. In July 2012, the Company purchased an additional 33% ownership interest in New PE Holdco for $20,000,000 by paying $10,000,000 in cash and issuing $10,000,000 in promissory notes. Because the Company has a controlling financial interest in New PE Holdco, it did not record any gain or loss on these purchases, but instead reduced the amount of noncontrolling interest on the consolidated balance sheets by an aggregate $14,281,000 and $27,647,000 and recorded the difference of $11,940,000 and $7,646,000 for the years ended December 31, 2013 and 2012, respectively, which represents the fair value of these purchases above the price paid by the Company, to additional paid-in capital on the consolidated balance sheets. The Company’s acquisition of its ownership interest in New PE Holdco does not impact the Company’s rights or obligations under any of the agreements described below. Further, creditors of New PE Holdco do not have recourse to the Company. Since its acquisition, the Company has not provided any additional support to New PE Holdco beyond the terms of the agreements described below. The Company, directly or through one of its subsidiaries, has entered into the management and marketing agreements described below. Asset Management Agreement – The Company entered into an Asset Management Agreement (“AMA”) with the Plant Owners under which the Company agreed to operate and maintain the Pacific Ethanol Plants on behalf of the Plant Owners. These services generally include, but are not limited to, administering the Plant Owners’ compliance with their credit agreements and performing billing, collection, record keeping and other administrative and ministerial tasks. The Company agreed to supply all labor and personnel required to perform its services under the AMA, including the labor and personnel required to operate and maintain the production facilities. The costs and expenses associated with the Company’s provision of services under the AMA are prefunded by the Plant Owners under a preapproved budget. The Company’s obligation to provide services is limited to the extent there are sufficient funds advanced by the Plant Owners to cover the associated costs and expenses. As compensation for providing the services under the AMA, the Company is paid $75,000 per month for each production facility that is operational and $40,000 per month for each production facility that is idled. In addition to the monthly fee, if during any six-month period (measured on September 30 and March 31 of each year commencing March 31, 2011) a production facility has annualized earnings before interest, taxes, depreciation and amortization (“EBITDA”) per gallon of operating capacity of $0.20 or more, the Company will be paid a performance bonus equal to 3% of the increment by which EBITDA exceeds such amount. The aggregate performance bonus for all plants is capped at $2,200,000 for each six-month period. The performance bonus is to be reduced by 25% if all production facilities then operating do not operate at a minimum average yield of 2.70 gallons of denatured ethanol per bushel of corn. In addition, no performance bonus is to be paid if there is a default or event of default under the Plant Owners’ credit agreement resulting from their failure to pay any amounts then due and owing. The AMA also provides the Company with an incentive fee upon any sale of a production facility to the extent the sales price is above $0.60 per gallon of annual capacity. To date, no such bonuses have been earned by the Company. The AMA had an initial term of six months and successive six-month renewal periods at the option of the Plant Owners. In addition to typical conditions for a party to terminate the agreement prior to its expiration, the Company may terminate the AMA, and the Plant Owners may terminate the AMA with respect to any facility, at any time by providing at least 60 days prior notice of such termination. The Company recorded revenues and New PE Holdco recorded costs of approximately $3,477,000 and $3,180,000 related to the AMA for the years ended December 31, 2013 and 2012, respectively. As such, these amounts have been eliminated upon consolidation. Ethanol Marketing Agreements – The Company entered into separate ethanol marketing agreements with each of the three Plant Owners whose facilities are operating, which granted it the exclusive right to purchase, market and sell the ethanol produced at those facilities. Under the terms of the ethanol marketing agreements, within ten days after delivering ethanol to the Company, an amount is paid to the Company equal to (i) the estimated purchase price payable by the third-party purchaser of the ethanol, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated incentive fee payable to the Company, which equals 1% of the aggregate third-party purchase price, provided that the marketing fee shall not be less than $0.015 per gallon and not more than $0.0225 per gallon. Each of the ethanol marketing agreements had an initial term of one year and successive one year renewal periods at the option of the individual Plant Owner. The Company recorded revenues and New PE Holdco recorded costs of approximately $3,351,000 and $3,157,000 related to the ethanol marketing agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated upon consolidation. Corn Procurement and Handling Agreements – The Company entered into separate corn procurement and handling agreements with each of the three Plant Owners whose facilities are operating. Under the terms of the corn procurement and handling agreements, each facility appointed the Company as its exclusive agent to solicit, negotiate, enter into and administer, on its behalf, corn supply arrangements to procure the corn necessary to operate its facility. The Company also provides grain handling services including, but not limited to, receiving, unloading and conveying corn into the facility’s storage and, in the case of whole corn delivered, processing and hammering the whole corn. The Company is to receive a fee of $0.045 per bushel of corn delivered to each facility as consideration for its procurement and handling services, payable monthly. The Company agreed to enter into an agreement guaranteeing the performance of its obligations under the corn procurement and handling agreement upon the request of a Plant Owner. Each corn procurement and handling agreement had an initial term of one year and successive one year renewal periods at the option of the individual Plant Owner. The Company recorded revenues and New PE Holdco recorded costs of approximately $2,423,000 and $2,271,000 related to the corn procurement and handling agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated upon consolidation. Distillers Grains Marketing Agreements – The Company entered into separate distillers grains marketing agreements with each of the three Plant Owners whose facilities are operating, which grant the Company the exclusive right to market, purchase and sell the WDG and corn oil produced at each facility. Under the terms of the distillers grains marketing agreements, within ten days after a Plant Owner delivers WDG or corn oil to the Company, the Plant Owner is paid an amount equal to (i) the estimated purchase price payable by the third-party purchaser of the WDG or corn oil, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated amount of fees and taxes payable to governmental authorities in connection with the tonnage of WDG or corn oil produced or marketed, minus (iv) the estimated incentive fee payable to the Company, which equals the greater of (a) 5% of the aggregate third-party purchase price, and (b) $2.00 for each ton of WDG or corn oil sold in the transaction, but not less than $2.00 per ton and not more than $3.50 per ton. Each distillers grains marketing agreement had an initial term of one year and successive one year renewal periods at the option of the individual Plant Owner. The Company recorded revenues and New PE Holdco recorded costs of approximately $4,584,000 and $4,353,000 related to the distillers grain marketing agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated upon consolidation. Assets and Liabilities of New PE Holdco – The carrying values and classification of assets that are collateral for the obligations of New PE Holdco at December 31, 2013 were as follows (in thousands):
Cash and cash equivalents |  | $ | 18 |
Other current assets |  |  | 15,820 |
Property and equipment |  |  | 150,341 |
Other assets |  |  | 2,839 |
Total assets |  | $ | 169,018 |
Current liabilities |  | $ | 18,295 |
Long-term debt |  |  | 94,144 |
Other liabilities |  |  | 6,281 |
Total liabilities |  | $ | 118,720 |

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