Gateway Ethanol defaults on $53 million note

By Sarah Smith | April 08, 2008
Web exclusive posted April 25, 2008 at 9:53 a.m. CST

Six weeks after Kansas-based Gateway Ethanol shut down to restructure its finances it has defaulted on a 2006 note acquired to fund its 55 MMgy dry mill plant in Pratt, Kan.

The company's latest setback was announced in a quarterly U.S. Securities and Exchange Commission filing April 17. Minneapolis-based Dougherty Funding notified Gateway Ethanol of the $53.4 million default on April 11. A receptionist for Gateway Ethanol said the company would not comment on the notice. The SEC filing indicated that Gateway Ethanol was working with Dougherty Financing to resolve the matter, and disputed that the loan was in default. Dougherty Financing filed the action with the SEC demanding full payment when Gateway Ethanol allegedly failed to meet certain performance standards and payment schedules. Dougherty Financing declined to comment on the situation.

Gateway Ethanol started up in November 2007. A month later an ice storm caused heavy damage to plant components requiring re-engineering and repair, which has been under way. The plant also lost electricity for several days. In late February, when the plant shut down, it cited rising grain prices and a need to recapitalize. Construction of the $100 million plant was initially delayed by heavy rains.

When it entered into the deal with Dougherty Financing in 2006, Gateway Ethanol also signed an $11.34 million note secured by future revenues to finance the Pratt, Kan., plant. The note specified that Gateway Ethanol was to pay monthly interest from April 1, 2006, until Feb. 1, 2007, and then annually. Gateway Ethanol defaulted on the first principal payment, due Feb. 1, 2008, Dougherty Financing maintains. The lender indicated a number of specific incidents of default as reasons for calling in the note. Gateway Ethanol is more than $2 million behind in payments, Dougherty claims.

Gateway Ethanol, formerly known as Wildcat Bio-Energy LLC, began site work in 2004. In 2006, Orion Ethanol was formed to build the plant. Orion Ethanol, also based in Pratt, Kan., owns 62 percent of Gateway Ethanol and other investors own the remainder of the company. Orion Ethanol investors saw the plant to completion, according to SEC filings.

"We're working aggressively to get the plant up and running in the near term," said Orion Ethanol spokesman David Waldman. He said even without production, "they do have a number of options at their disposal" to repay the debt, adding, "I can't go into specifics."

Waldman said he's optimistic that Gateway Ethanol will overcome these latest challenges. "It's not uncommon to get these letters" of default, he said. "Because it's a public company they're required to file [default notices] with the SEC."

In May 2007 Orion Ethanol announced a $150 million deal to move to Texas and acquire GreenHunter Energy Inc. The deal fell through. In March 2008 Orion Ethanol delayed filing its annual SEC report, citing "significant management turnover" and said additional time was needed to prepare its statement. That same month, Orion Ethanol acquired a corn fructose wet milling facility in Texas, from Dimmitt Ethanol LP.