Ethanol Bankruptcy Filing a Blow to Biofuels Industry

Bumpy Road for Ethanol
By BRETT CLANTON
Houston Chronicle
May 11, 2009

The bankruptcy filing last week by Texas’ largest ethanol producer deals yet another blow to the state’s struggling biofuels sector and is part of a broader industry downturn that analysts say may claim other victims before it is done.

Dallas-based White Energy said a Chapter 11 filing became necessary after high raw material costs coupled with low ethanol prices led to “minimal or nonexistent profit margins.” It also blamed significant debt payments and an inability to raise capital from frozen equity markets.

The move comes just three years after the privately held firm entered the business and on the heels of bankruptcy filings by ethanol powerhouse VeraSun Energy Corp. and Dallas-based Panda Energy, which in January placed its plant near Amarillo in Chapter 11.

“It’s clearly a challenging environment,” said Bob Thompson, partner in the Kansas City law office of Bryan Cave, who advises companies investing in renewable fuel and energy projects. “But the reality is that most of these ethanol producers are dealing with are problems that were created last year.”

In recent months, the industry has been pummeled by volatile corn and oil prices, seen funding dry up for new projects and watched demand stall as slowing gasoline consumption and lower pump prices reduce the incentive for blending the fuel with gasoline. Some producers have stayed afloat by cutting output or idling plants.

About 16 percent of the nation’s 12.6 billion gallons of corn ethanol production capacity is currently shut down, according to the Renewable Fuels Association, an ethanol trade group.

Two Out of Four
Among Texas’ four plants, just two are operating, while one is temporarily shut and another still under construction.

In January, White Energy halted production at its 100- million-gallon-per-year plant in Plainview, citing poor market conditions, but has continued production at a plant of similar size in Hereford and a 45-million-gallon-per-year plant in Kansas.

White officials did not return calls seeking comment but said in court papers filed Thursday that they intend to continue normal business operations in Chapter 11.

In its bankruptcy filing, the company listed assets and liabilities in the range of $100 million to $500 million and said its operations produced over $500 million in revenue in 2008.

In the U.S., ethanol is blended with gasoline to help reduce dependence on oil and improve air quality in densely populated areas like Houston and Dallas.

Slow Growth Expected
The Energy Independence and Security Act of 2007 requires greater usage of ethanol and other biofuels in coming years, growing to 36 billion gallons in 2022 — or about 25 percent of the 140 billion gallons of gasoline U.S. drivers now consume annually. This year, the law requires 10.5 billion gallons of grain ethanol in the fuel supply.

But the U.S. Energy Information Administration expects the growth in U.S. ethanol plant capacity and production over the last few years to slow dramatically in 2009 as lower gasoline prices depress ethanol production profits, and financial market constraints impede construction plans and bring plant shutdowns.

Thompson said the tough conditions will likely mean more ethanol company bankruptcies, but he believes the industry is about to stabilize.

Currently, the ethanol industry is pushing hard to raise the federal limit on the amount of ethanol that can be blended in gasoline from 10 percent to 15 percent.

Such a move would create a bigger market for the fuel, but critics argue higher blends could harm engines, which the ethanol industry disputes.

The industry is also challenging a decision last week by the EPA to enact the first-ever greenhouse gas performance standards for biofuels. The standards would take into account all emissions created in the process of making ethanol, rather than just emissions from burning the fuel.

But the industry has taken issue with how the government measures emissions under the proposed program.