Panda Ethanol terminates Lurgi

By Susanne Retka Schill | September 08, 2008
Web exclusive posted Sept. 25, 2008 at 1:30 p.m. CST

Panda Ethanol Inc. announced Sept. 22 it has terminated Lurgi Inc. as the general contractor for its 115 MMgy biomass-fueled ethanol plant in Hereford, Texas. The action was approved by Panda Ethanol's board of directors and the project's senior and subordinated lenders. "We just lost confidence in Lurgi's ability to finish this plant, it kept getting delayed and delayed," said Bill Pentak, Panda Ethanol's director of communications. Panda Ethanol will take over responsibility for final completion of the project.

Under terms of the comprehensive engineering, procurement and construction (EPC) contract, Panda Ethanol had the right to terminate the contract for cause, including if final acceptance was not achieved within 180 days of the guaranteed substantial completion date. The refinery was to have been constructed in 17 months and was initially due for substantial completion by December of 2007. Due in large part to faulty foundation work, which is currently in the late stages of remediation, the facility has been under construction for approximately 26 months and is not yet finished.

Pentak explained that prior to building at the 380-acre site in Hereford, Panda Ethanol had done extensive geotechnical soil analysis and written specifications into the EPC contract with Lurgi, which were not followed. Remediation work included using a jackhammer to break up the concrete foundations on several tanks, doing the proper soil stabilization and replacing the foundations. Pentak said among the work to be completed at the ethanol plant is reconnecting the piping on the tanks, along with other finishing details that are being surveyed now. Panda Ethanol will be working with project subcontractors to complete the project. "We've got construction experience on our own," he added. Panda Ethanol's founder, Panda Energy International, has built over 9,000 megawatts of power generation around the world, and a number of people involved in those projects moved over to Panda Ethanol when it was formed, he explained.

Prior to terminating Lurgi, Panda Ethanol drew upon the full amount of a $16.2 million irrevocable letter of credit provided as a guarantee by Lurgi as part of the EPC contract. Funds from the letter of credit will be used to pay contractor penalties owed to the Panda Ethanol Hereford project plus amounts owed to subcontractors and expenses incurred as a part of the remediation effort.

In a recent securities commission filing, the company disclosed that the Hereford project's senior lenders approved a Sept. 4 construction draw in the amount of $3.8 million. The company will continue to seek senior lender approval for additional draws to complete construction of the project.

"The singular most important priority we have as a company is to complete construction and bring this facility on line," said Darol Lindloff, chief executive officer of Panda Ethanol. "Panda has extensive construction management experience, and we are confident in our ability to finish and start up this plant. We intend to bring this plant on line, and we continue to believe that, once completed, it will be one of the most cost-efficient ethanol production facilities in the United States."

Panda Ethanol expects to commission its 115 MMgy corn ethanol plant in the first quarter 2009. Located in the heart of the Texas Panhandle's cattle feedlot industry, the facility has been designed to use gasified manure for its process heat.