As Industry Struggles, Pacific Ethanol is Running on Fumes
As industry struggles, Pacific Ethanol is running on fumes
By Dale Kasler and Jim Downing
The Sacramento Bee
Apr. 13, 2009
After laboring a quarter-century in the ethanol business, Neil Koehler insists the industry will become healthy again, maybe in as little as two years. Others agree with him.
But Koehler’s company, Pacific Ethanol Inc. of Sacramento, might not make it to the promised land.
The unprofitable ethanol maker has warned investors it could run out of cash at the end of April and might have to file for bankruptcy protection – a stunning downfall for a company that once set out to conquer the West and counted Bill Gates as an investor.
Adding insult to injury for Koehler and other ethanol pioneers: As their industry struggles, their old nemesis, the oil industry, is prepared to gobble up the remains. Oil refiner Valero Corp. just agreed to buy seven bankrupt ethanol plants in the Midwest for 30 cents on the dollar.
“The industry has a very bright future,” said Koehler, Pacific Ethanol’s president and chief executive, in an interview last week. “It’s a question of who the players are going to be.”
Koehler (pronounced “curler”) has been something of an ethanol prophet, a fervent believer in the idea of turning corn into a gasoline additive that would clean the air and reduce America’s oil dependency. He’s also championed ethanol as an agent of rural economic development, arguing that California should make its own ethanol and not import everything from the corn-rich Midwest.
But Pacific Ethanol has been caught up in an industrywide downturn. Ethanol makers expanded too quickly and took on too much debt. They got hurt by rising corn costs. When oil became cheap, petroleum refiners cut their ethanol use to the bare, government-mandated minimums. Prices plunged.
“We had a perfect storm,” Koehler said.
Market dynamics will change, in time. Demand for ethanol in California, the nation’s largest market, will grow a whopping 66 percent next year, said Dean Simeroth of the California Air Resources Board. That’s because of new state and federal regulations. Gasoline sold in California will contain 10 percent ethanol starting Jan. 1, up from the current 5.7 percent blend.
“This oversupply will dry up,” said Gordon Schremp, fuel specialist at the California Energy Commission. “The market will go back into balance.”
Five California plants idled
But in the meantime, the industry is bleeding. Two Midwest producers, VeraSun Energy and Aventine Renewable Energy, have filed for Chapter 11 bankruptcy protection.
Some 15 percent to 20 percent of the nation’s production capacity has been idled. All five major plants in California, none of which existed before 2005, have stopped producing. That includes Pacific Ethanol’s two California plants, in Stockton and Madera, which produced 7 percent of the state’s supply.
The Sacramento company has terminated 50 employees, or one-third of its work force. It laid off its chief financial officer. Having defaulted on $250 million in debt, it has just $8.7 million in cash and credit and probably can’t keep going beyond April 30, according to a March 31 filing with the Securities and Exchange Commission. Koehler and Chairman Bill Jones just loaned the company $2 million.
In the interview, Koehler refused to predict if Pacific Ethanol would make it, saying he was constrained by securities regulations. The SEC filing says there’s “substantial doubt” Pacific Ethanol can continue unless it finds new cash or renegotiates its debts.
Industry expanded too fast
The industry’s problems are striking in light of its built-in advantages, including a 45 cents-a-gallon federal tax subsidy and government mandates requiring ethanol usage. But the industry grew too quickly. It also did a poor job of using hedging and other strategies to control price and cost fluctuations, said economist Robert Wisner of Iowa State University.
“This is the first dance for the renewable fuel industry, and they didn’t realize what was coming,” said Clayton McMartin of the Clean Fuels Clearinghouse, which tracks the market. “They didn’t understand how to play the game.”
Now savvier players, some of whom have been ethanol’s biggest opponents, are exploiting the industry’s weaknesses. Just a year ago, Valero’s CEO was blasting laws that require ethanol use. Now Valero is paying $477 million to buy plants from VeraSun.
McMartin said the Valero deal is the first of many. Referring to the dozens of shuttered plants across the country, he said, “Those assets will be operated. But it won’t be by the ethanol companies. It will be by refiners.”
By federal law, nationwide use of ethanol is supposed to grow 14 percent next year and keep growing every year through 2015. But Dan Sperling, a fuels expert at the University of California, Davis, believes the government is likely to back off that requirement. Meeting those stringent mandates could drive up gasoline prices, he said.
Koehler, though, said the government can’t back away from its support for ethanol. He believes the industry deserves more support from the Air Resources Board, which regulates gas-blending formulas, and says ethanol deserves to get some of the economic stimulus dollars set aside for supporting green energy.
“Talk about green jobs – we had ’em,” Koehler said. “Now everyone is laying off people.”
Ethanol prices plummeted
A Green Party member from Davis, the 51-year-old Koehler started in 1984 at a tiny plant in Rancho Cucamonga that made ethanol from beer and soft-drink syrup. He later teamed up with Jones, the former California secretary of state, who founded Pacific Ethanol in 2003.
Their first plant, in Madera, opened in 2006. Three more plants followed in less than two years, and Pacific Ethanol became a $700 million-a-year company.
Gates invested $84 million from his Microsoft fortune, and Pacific Ethanol shares briefly topped $40 on the Nasdaq market.
But the industry’s building boom got out of hand, and “we were a part of that,” Koehler said.
Then the bust came. Ethanol prices fell from nearly $3 a gallon last summer to the $1.60 to $1.70 range. The company in late 2007 halted construction on a plant in the Imperial Valley and has been scrambling ever since to deal with debt and cash woes. It lost $146 million last year. The stock is below 50 cents and Gates has dumped most of his shares.
But Koehler remains “a firm believer” in ethanol, even as he struggles to keep Pacific Ethanol afloat.
“I’m a lifer,” he said.
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.