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Lenders take over four Pacific Ethanol plants

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Parent company will continue to market product and operate plant facilities





By MATEUSZ PERKOWSKI
Capital Press



A West Coast ethanol company will hand over its production plants in Oregon, Idaho and California to its lenders as part of a bankruptcy plan.



Last year, four Pacific Ethanol production facilities filed for Chapter 11 bankruptcy protection, which allows firms to restructure debt and avoid liquidation.



The plants' parent company, Pacific Ethanol, Inc., did not file for bankruptcy, however.



As part of a recent reorganization deal, the company's lenders will extinguish about $290 million of debt in return for ownership of the four plants, located in Boardman, Ore.; Magic Valley, Idaho; Madera, Calif.; and Stockton, Calif.



Pacific Ethanol can buy back up to 25 percent of the plants' ownership for $30 million and will continue to operate the facilities, according to documents filed with the U.S. Securities and Exchange Commission.



Altogether, the four plants have a yearly ethanol production capacity of about 200 million gallons, said Paul Koehler, Pacific Ethanol's vice president of corporate development.



The two California facilities, which make up half the total capacity, have been shuttered since late 2008 and early 2009, he said. "We really could not keep all the plants open because we didn't have the working capital to do that."



The Oregon plant was able to stay operational throughout the bankruptcy, but the Idaho plant reopened in January after being closed early last year, Koehler said.



Price fluctuations in corn and ethanol drove the company's margins into negative territory in 2008 and 2009, prompting the four plants' bankruptcy, he said. Since then, the facilities have begun returning a modest operating margin.



The four plants will be allocated among lenders who extended credit to Pacific Ethanol before and after the bankruptcy filings, with pre-bankruptcy lenders taking over about three-fourths of the ownership, according to SEC filings.



Credit agreements filed with the SEC list 15 lenders who have extended credit to Pacific Ethanol before and after the bankruptcy.



WestLB, a German bank that has invested in several other U.S. ethanol companies, is named as a chief organizer of the financing deals. In its fiscal statement for 2009, the bank reported a net loss equivalent to more than $760 million.



Banks generally don't like to become operators of assets, said Michael Swanson, an economist who tracks the farm and ethanol industries for Wells Fargo.



However, lenders may prefer to take over an asset rather than liquidating it during a market crisis, he said. That way, they can wait to see if market conditions -- and the asset's value -- improve.



Ethanol producers have generally been in better shape recently, with each gallon of fuel selling for about 40 cents more than the cost of corn needed to produce it, he said.



To break even, ethanol producers must generate roughly 45 cents per gallon above the cost of corn, Swanson said.



The industry still isn't producing healthy profits, but the situation is much better than in March 2009, when producers were selling ethanol for only 15 cents above the cost of corn, he said.



To put that in perspective, a gallon of ethanol sold for about $1.14 above the corn cost in December 2006, during the industry's heyday, Swanson said.



"These guys never seem to get a moment's peace," he said. "This is a heartbreak business."



Margins can be expected to continue swinging wildly, since the federal government requires ethanol to be blended with gasoline at a fixed ratio -- but doesn't take into account the fluctuating price of fuel versus corn, he said.



"The government mandate has no adjustment factor for the profitability of the ethanol industry," Swanson said. That's particularly problematic because most new ethanol plants can't be used for other purposes, like corn syrup or lysine production, he said.



"This is an industry with zero flexibility. These guys have very limited options, and that's going to contribute to the volatility," Swanson said.



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