Plants in Transition

Restructuring in the ethanol industry continues with several ethanol plants heading to the auction block and a handful of other plants restarting or preparing to restart.
By Holly Jessen | November 15, 2010
After the difficulties of 2008, the ethanol industry went from booming construction to a new reality, where greenfield construction is a rarity. No new construction projects broke ground in 2009 or 2010. Instead, the past two years have seen changes to existing plants including a handful of ethanol plant auctions.

As of late October, the only ethanol plant to actually sell at auction was the 10.5 MMgy Alchem ethanol plant in Grafton, N.D. Minnesota resident Jim Borchart, owner of Borchart Steel Inc., and other investors purchased the idled legacy plant for $577,500 on Sept. 29. After auction, three groups approached him about buying part of the plant to possibly relocate within North Dakota for production of pharmaceutical-grade products, move it out of country or piece it out. "We're basically going to make a decision when we get a clear title," he says, adding that could happen in November. Regardless whether Borchart sells, odds are very large that the plant will be moved from Grafton, he says. The basic configuration of the plant is out of date and it would require complete restructuring to operate again. It hasn't been decided yet if the equipment from the plant, some never used after the last upgrade, will be used to produce ethanol. "I would say 50/50," he says.

The action the latter part of this year wasn't all about auctions, however. Four idled plants either restarted or were working toward restart, with a fifth plant purchased with no specific plans announced. Finally, three plants, at which construction was halted before startup, saw work resume.

Some of these plants represent the work of companies clawing their way out of bankruptcy and resuming normal operations, as with Aventine Renewable Energy Holdings LLC and Pacific Ethanol Inc. Other plants were purchased for pennies on the dollar of what it cost to build them. Despite that, is it still positive news to see a once-shuttered ethanol plant on its way to producing ethanol again? The answer depends on who is asked.

Todd Sneller, administrator for the Nebraska Ethanol Board, sees the bright side. Some good things have been happening in the ethanol industry in that state in the past year. "There's been a little more sunshine on the horizon than there's been a in a little while," he says. It's all part of a trend Sneller sees in Nebraska and believes is representative of what's happening nationally. Idled ethanol plants are being purchased and restarted. Other companies are strategically investing small amounts of capital for greater efficiency or to diversify coproducts. "We're seeing a little more confidence," he says.

Last summer, three former VeraSun Energy Corp. ethanol plants in Nebraska were acquired and restarted. Green Plains Renewable Energy Inc. purchased plants in Central City and Ord and is now in the process of installing corn oil extraction technology. Valero Renewable Fuels LLC acquired the plant in Albion and has initiated improvements, Sneller said. Another good news story happened this spring, when Aventine emerged from bankruptcy and restarted construction at its Aventine Renewable Energy Aurora West LLC plant in Nebraska, as well as at a plant in Mount Vernon, Ind.

In fact, Sneller is optimistic that by the end of 2011, all 26 plants in the state will be back up and operating. That includes the idled E3 BioFuels LLC, a 25 MMgy plant in Mead, Neb, which filed for bankruptcy in 2007. Ten months after an auction in 2009, a sale agreement finally worked its way through bankruptcy court. The buyer, AltEn LLC of Kansas, was working on closing the sale in late October and expects to restart the plant.

Douglas Durante, executive director of the Clean Fuels Development Coalition, doesn't want to be the "old grump" of the group, he says, but he sees things a little differently. Has the past year been a time of more opportunity for the ethanol industry? Talk to two people and get two different answers, Durante says. Does he believe the ethanol industry rebounded? Maybe. Some of the idled ethanol plants may come back online, yes, but overall, Durante advocates a slow deliberate recovery versus the "gold rush mentality" of the past. "Nobody wants to do that again," he says.

Some describe the renewable fuel standard (RFS) as a floor for ethanol production, not the ceiling. Durante disagrees, saying that he wouldn't want to be the ethanol producer that's producing the gallons over and above what the RFS calls for. "As soon as you get more ethanol than you need, the oil guys, who are the people that buy ethanol, hold the price down," he says.

There's no doubt there are some big issues facing the industry today. It's a time of political uncertainty, tight finances, low oil prices and high commodity prices. In October, after the USDA lowered corn yield estimates, corn futures shot up to nearly $6 at the highest point. "Not to be negative but all of those things are out there," he says. Corn futures climbing up over $5 is one thing that drove the bankruptcies in 2008, Durante points out. Besides that, the industry simply overbuilt, like many other industries such as housing, during the time when it was easy to get a loan. "A lot of stuff was financed that never should have been financed," he says, adding many projects need refinancing.

Unfortunately, banks are very hesitant. For new projects, banks are requiring much bigger down payments and a much faster payoff rateterms that are simply not doable. "Lots and lots of banks I talk to just simply aren't interested in running the risk," he says.

When an idled plant is purchased and restarted, it's good news for a variety of reasons, not the least of which is the fact that it gets people back to work. However, Durante says he can't celebrate too much when a plant built for $100 million is purchased for $10 million. "It's just shameful how these plants were devalued," he says. "There was definitely a bad case of people saying, let's see if it gets to be a little lower."

On the good news side, demand for ethanol still exists. "We've always overcome these challenges as an industry," he says.

On the subject of profitability, Rob Carringer of CRG Partners says there are three tiers among ethanol industry competitors. The first tier includes ethanol plants built two or three years ago with a debt of $2 to $2.50 a gallonwho struggle to service that debt. The second tier has restructured and carries around 80 cents to 90 cents in debt per gallon. The third tier includes the large companies that have multiple plants and the advantage of scale. It's clear that ethanol plants in the first categories will have a much tougher time remaining profitable than the other two, Carringer points out.

Restarts
In Lima, Ohio, the former Greater Ohio Ethanol LLC plant is expected to get new life in 2011. PEA Lima, a wholly owned subsidiary of Paladin Ethanol Acquisition LLC, purchased the plant for $5.75 million in the spring, and this fall the company was approved for a 40 percent, five-year tax credit. In exchange, PEA has committed to operating the 54 MMgy plant continuously for eight years and creating 22 full-time jobs. The goal is to restart the facility in the first half of 2011, says Mourad Yesayan of Paladin Capital Group. In late October, there were 10 employees on site, with a total of 30 to 35 employees expected when the plant is producing again.

In early October, Pacific Ethanol Inc. spent $23.3 million to purchase a 20 percent ownership in New PE Holdco LLC, which owns Pacific Ethanol's four facilities. The move means Pacific Ethanol once again has a controlling ownership and will allow the company to restart its two California plants. The company plans to restart its 60 MMgy Stockton, Calif., plant at the end of the year and have it running at full capacity less than 60 days later, says Paul Koehler, the company's vice president of corporate development. The company also hopes to restart its 40 MMgy plant in Madera, Calif., possibly in the first quarter of 2011. The two other Pacific Ethanol plants, in Burley, Idaho, and Boardman, Ore., were not idled.

In Morris, Minn., the Denco II LLC plant restarted in October. The 24 MMgy plant was in cold idle for 20 months before being purchased by a group of local investors, many of them farmers.
Aventine has been busy too, starting this spring when construction resumed at two 113 MMgy plants in Aurora, Neb., and Mount Vernon, Ind. The projects are expected to wrap up the end of 2010, although reports are the Nebraska plant won't actually restart until spring. In addition, this summer the company purchased the 38 MMgy Riverland Biofuels ethanol plant in Canton, Ill., for $16.5 million. Although company officials have indicated it would be operational again, no timeline for restarting the idle plant has been announced.

Another construction project that was halted before completion is expected to move forward in early 2011 after Murphy Oil Corp. purchased the former Panda Ethanol plant near Hereford, Texas, in mid-September. Construction and a retrofit of the plant, which has been renamed Hereford Renewable Energy LLC, is expected to begin before the end of 2010, says Barry Jeffery, director of investor relations for Murphy Oil. The goal is to start up the plant at its nameplate capacity of 105 MMgy in the first quarter of 2011. "Once we have achieved a stable, reliable operation at nameplate capacity, then we will explore the full capability of the facility and expect to achieve higher rates towards 115 MMgy with improved operational efficiencies," he says.

On the Auction Block
The sale of the Gateway ethanol plant in Pratt, Kan., was still pending in late October. An auction planned for the end of September was cancelled when a potential buyer stepped forward. The buyer, who has expressed interest in restarting the idled 55 MMgy plant, remained anonymous as it worked through its due diligence.

A buyer wasn't found before the Nov. 10 auction date, and Renova Energy Idaho, a partially-constructed 20 MMgy plant in Heyburn, Idaho, was sold in bits and pieces. Another auction set for Feb. 1 is unique because the facility is still operating. North County Ethanol, a 25 MMgy facility in Rosholt, S.D., filed for bankruptcy in October 2008 and has been operating for the past year.

A fifth auction was scheduled this fall for a small ethanol plant in Parker, S.D. Built in 2008 adjacent to a feed lot in Parker, S.D., the 2 to 4 MMgy Genesis Ethanol I plant was operated less than a year, according to Maas Companies, which handled the auction. "Although the micro ethanol plant began operations, it was not able to sustain its momentum with overwhelming external factors affecting the industry as well as some operational issues," Maas explained in its auction brochure.

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946
hjessen@bbiinternational.com