Aventine blames excess RINs for bankruptcy

By Erin Voegele | May 04, 2009
In an April 8 statement announcing its Chapter 11 bankruptcy filing, Aventine Renewable Energy Holdings Inc. stated that operating margins, high gasoline prices and excess RINs all have negatively affected the ethanol industry. According to Aventine, "Ethanol demand has also been negatively affected by refiners and blenders using excess renewable identification numbers (RINs) to help meet their renewable fuels standard obligations instead of purchasing actual gallons of ethanol." Aventine was unavailable for further comment on the role of RINs in its bankruptcy.

Hunt Stookey, managing director of management consulting firm HighQuest Partners LLC, said he doesn't believe excess RINs have played a significant role in the bankruptcy of ethanol plants. Instead, he said those plants aren't able to produce more ethanol because there is not enough corn in the market and many producers are going bankrupt because they bought long corn.

Stookey's firm is using a unique model to project how the ethanol industry will be affected by the corn and RIN markets over the next several years that assumes that the ethanol fleet does the demand rationing in the corn market. This means that the purchasing behavior of those buying corn for use in the food, feed and export markets are not responsive to price increases. The ethanol fleet, however, is. Ethanol producers tend to use the balance of the corn supply that is not utilized in these other markets.

While there currently are excess RINs in the market, Stookey said those excess RINs that are carried over year to year will be needed to help obligated parties meet the requirements of the RFS in 2009 and 2010. In 2011 Stookey projects those obligated parties will start bidding up the price of ethanol to meet their requirements, which will also bring up the price of corn.

Clayton McMartin, president of Clean Fuels Clearinghouse, which owns and operates the Renewable Fuels Registry RINSTAR, said Aventine's claim regarding RINs may be true, but not for the reason Aventine claims. McMartin said excess RINs are not due to overproduction, but instead due to the presence of invalid or duplicated RINs. There are undoubtedly fraudulent RINs on the market, he said.

According to McMartin the issue of greater importance is how ethanol producers deal with the RINs they produce. Although one RIN is generated with each gallon of renewable fuel that is produced, each gallon of renewable fuel can be assigned up to 2.5 RINs, he said. This means that a producer making 1 million gallons of ethanol must generate 1 million RINs, however that producer does not have to assign one RIN to each gallon. Instead, the producer could assign two RINs to each gallon of a 500,000 gallon batch, charge for those RINs, and sell the remaining 500,000 gallons of ethanol with no RINs attached.

Instead of simply giving away a RIN with each gallon of ethanol that is produced, a business model focused on supplying RINs to the entities that need them could allow ethanol producers to realize an additional revenue stream. In fact, McMartin estimates that many producers may see more margin in their RINs than in the ethanol they produce.

As part of Aventine's bankruptcy filing, the company and certain holders of its 10.0 percent senior unsecured notes agreed to a first priority secured debtor-in-possession (DIP) term loan totaling $30 million. The DIP loan, which will enable the company to continue to satisfy customary obligations associated with ongoing operations, was given interim approval by the Bankruptcy Court in the District of Delaware on April 16. The interim approval allowed Aventine immediate access to the first $15 million of its DIP financing. The second $15 million of the DIP financing package was scheduled to be considered at a Bankruptcy Court hearing on May 5.