Panda Ethanol subsidiary files for bankruptcy protection

By Bryan Sims | January 12, 2009
Web exclusive posted Jan. 28, 2009, at 3:41 p.m. CST

Dallas-based Panda Ethanol Inc.'s Hereford Biofuels subsidiary filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Northern District of Texas.

According to the company, it intends to sell its major asseta 105 MMgy ethanol facility currently in the late stages of construction in Hereford, Texaspursuant to a Section 363 sale process, pending approval by the bankruptcy court. The bankruptcy filing doesn't include the parent company of the Hereford subsidiary, Panda Ethanol.

Panda Ethanol was recently notified by Societe Generale, the administrative agent for the Hereford subsidiary's lending syndicate, that one of the major syndicate banks would not fund its share of further borrowing requests for the project.

According to the company, "we retired a $1.6 million loan, successfully negotiated the granting of waivers that would extend construction deadlines to Feb. 28 and obtained $2.5 million in new working capital. We also restructured the funding arrangements for the Hereford subsidiary during a very difficult time in the capital markets that would allow us to make borrowings of up to $31.5 million to complete construction and bring this facility on line."

Panda Ethanol said it is in negotiations with a buyer for the Hereford plant, but added that under Section 363, other companies will be able to participate in a court-supervised bidding process. The company expects to complete a sale within 90 days.

In September 2008, Panda Ethanol terminated Lurgi Inc. as its general contractor for the Hereford ethanol plant. According to Panda Ethanol, "the company had lost confidence in Lurgi's ability to finish the facility due to continued construction delays." Since then, Panda Ethanol assumed responsibility for managing the remaining construction at the facility.

Prior to terminating Lurgi, Panda Ethanol also drew upon the full amount of a $16.2 million irrevocable letter of credit, issued as part of the engineering, procurement and construction (EPC) contract, as a guarantee of certain Lurgi payment obligations. Funds from the letter of credit were used to pay liquidated damages owed to the Hereford ethanol project and sub-contractors, as well as expenses incurred as a part of the remediation effort.

In January 2008, Panda Ethanol announced it would be selling carbon credits for its use of cow manure to power the Hereford ethanol plant, which would make it the largest biomass-fueled ethanol plant in the U.S. once operational.

In December 2007, Panda Ethanol canceled plans to build a 100 MMgy ethanol plant in Wallace, Neb.; the facility would not have used the manure-to-syngas system. The company was also waiting for market conditions to improve before starting work on proposed projects in Yuma, Colo.; Haskell, Kan.; and Stratford, Texas. In that same month, the company received air quality permits for a proposed 115 MMgy ethanol plant in Muleshoe, Texas. Once operational, the plant would utilize up to 500,000 tons of cattle manure per year to generate biogas that could be used for steam generation.