Beating Bankruptcy

For ethanol plants in financial distress, the way out can seem almost impossible, but several plants this year have negotiated a path through reorganization.
By Luke Geiver | June 10, 2010
The era of emergence has officially started. Over the past year, several bankrupt and idled ethanol plants have come back online or started the journey to recovery, successfully rebounding from thin crush spreads, bad profit margins and volatile corn prices. Although the threat of bankruptcy still looms for some, the number of plants exiting from the Chapter 11 bankruptcy reorganization process demonstrates the industry is seeing greater financial stability.

Pointing to the unfavorable market conditions of high corn prices and low petroleum costs that eventually pushed many other facilities into bankruptcy, Aventine Renewable Energy Holdings Inc. announced this spring that it had not only emerged from Chapter 11 reorganization, but would also resume construction at two, nearly complete, 80 MMgy facilities in Nebraska and Illinois. Like Aventine, Pacific Ethanol Inc., has nearly completed a reorganization process that will reduce the debt of the company. After halting production at all but one of five ethanol plants in 2009, Pacific restarted operations at its 60 MMgy Burley, Idaho, facility this spring. In Texas, 110 MMgy Plainview Bioenergy has resumed operations and is producing at full capacity after parent company, White Energy emerged from bankruptcy in March. The former Renew Energy plant in Jefferson, Wis., also resumed full operations after Valero Energy Corp. purchased the 110 MMgy corn-based ethanol plant in January 2010. The Renew plant filed for bankruptcy and, unable to successfully reorganize, eventually was sold to Valero for $72 million. Another oil company, Sunoco Inc., purchased a 100 MMgy bankrupt plant in New York for $8.5 million. The former Northeast Biofuels plant is currently being retrofitted by ICM Inc., and will start operations in the fall of 2010.

While some struggling facilities ultimately sold out, as did the owners of the Renew and Northeast Biofuels plants, many others attempt to survive and maintain a majority stake. Jeff White, former CEO of Renew Energy, says maintaining majority ownership is difficult: "No one trusts the debtor." White explains many other factors contribute to the difficulties associated with successful reorganization under Chapter 11, yet the stories of others show there is a way out.

Keys to Survival
While every plant faced the same unfavorable market conditions, Bradley Kruse, a member of the bankruptcy and renewable fuels practice group at BrownWinick law firm, says plants normally have different levels of financial distress when they enter into Chapter 11 proceedings. "Predicting what will happen in the process is very difficult," Kruse says. "It's on a case-by-case basis, and almost everyone that enters will try reorganization first." Even before officially filing, White says a plant should prepare for the hard times to come. "Accept the bankruptcy as early as you can in order to get debtor-in-possession financing," White recommends. "If you spend all your money before you get to bankruptcy, you have no leverage."

For White, this is the first step of the process—preparing and saving before officially filing. By reserving a portion of capital, a plant will have the ability to slow down the reorganization process with the bank or lenders because the plant will still be able to pay the bills. Avoiding a loan request just to remain in operation allows the debtor to obtain another loan or additional financing. By maintaining cash instead of exhausting all capital before filing, a plant has a better chance to effectively negotiate with a bank and find a way to successfully reorganize without losing everything through liquidation.

Kruse says there are other avenues a plant can take to avoid liquidation as well. Automatic stay provisions prohibit a creditor from collecting a debt which gives the debtor room to breathe, and executory contract provisions allow the debtor to cancel unfavorable future contracts for commodities. Ultimately, White and Kruse both say that slowing down the process is crucial for the plant's survival.

The most important thing a plant can do to avoid a total loss is to do what the plant most likely does best—run. Trevor Hinz, director of business and development for ICM Inc., says the underlying reason for many recent bankruptcies was not operating deficiencies at the plants. White explains that the Jefferson plant, which was initially valued at roughly $9 million, was purchased by Valero Corp. for nearly $90 million due to the facility's ability to maintain operations while in Chapter 11. Whether the plant is seeking new investors or simply hoping to sell for a premium price, maintaining an operational status will positively affect the outcome, even though it costs money every day to keep running. "You will sell for more if you stay open," White says.

"The plant's technologies are assets that, if shutdown, can't be showcased," Kruse says. The visual of a running plant indicates to investors what's not working at a plant, and more importantly, what is working, White says. "If a plant is operating at full capacity and does have a few bugs, shutting down the plant will only halt the process of locating and fixing those problems." A halt in operations also means a plant may lose another key asset, existing employees.

Although the easiest path to emergence is to maintain operational status there are other options. In the event a plant totally shuts down as did many of the former VeraSun plants after it filed bankruptcy in 2008, others can assume management in the interim. During the VeraSun bankruptcies, Hinz says that some of the banks found themselves owning ethanol assets that they had to do something with. While they figured out what to do, ICM was brought in to maintain the plants. "We protected the human assets and the physical assets so that when the plants were ready to go again, they would be ready to come back online," Hinz says.

During a shutdown period, Hinz says ICM will create an individual plan for each facility. Then, members from ICM will go the facility and perform needed tasks ranging from general maintenance to employee updates on the status of the plant. In some cases, Hinz says ICM can inherit an existing staff and in others, may bring in extra staff for special needs. With ICM currently retrofitting a New York plant for the new owner Sunoco Oil, Hinz says that as more and more refiners get into the industry, the industry will grow and learn from them (refiners). "We will become a more sophisticated industry," Hinz says.

Avoiding the Past
Growing into an industry that is more highly evolved, or "sophisticated" is exactly what White believes will prohibit a repeat of past bankruptcies among ethanol producers. Although crush spreads are currently favorable for most facilities, a down cycle is always on the horizon. "We will go through cycles where margins get better," White says. "And then you have more supply again and subsequently, margins get shrunk again. Anytime the supply and demand are close together the industry will cycle downward, but with growth, the bad times won't be as bad." Growth in White's view means two things. One, developing and employing the most qualified and skilled people with a background in the industry. And two, creating a plan that prices margins by including both the price of corn and ethanol into the equation.

"Personnel overall is a small cost in the big picture," White says. He attributes a large portion of the success in the sale of the Jefferson plant to the fact that he brought in a team of individuals that had an extensive background and skill set for each required position. "Many plants under invest in people when they should be finding the best out there." White explains that a $300 million ethanol company is no different from a $300 million company in a different industry. While the non-ethanol company most likely has a top level, highly skilled employee or set of employees, most ethanol plants simply promote from within without ever attempting to locate more qualified individuals.

Even with the most highly qualified people running the plant, White says that a plant can't be successful no matter who is running it, if speculation exists. "A plant needs to make a plan that includes the price of corn and the price of ethanol while pricing margins."

With a string of record ethanol output production numbers dating back to October of 2009, the positive trend for producers is clear. But as White points out, this may not always be the case. "You better be ready for another rainy day, because we (the industry) will have another rainy day." EP

Luke Geiver is an associate editor of Ethanol Producer Magazine. Reach him at (701) 738-4944 or lgeiver@bbiinternational.com.