Pacific Ethanol plants seek bankruptcy protection

May 19, 2009 (The Sacramento Bee - McClatchy-Tribune Information Services via COMTEX) -- PEIX | Quote | Chart | News | PowerRating -- Pacific Ethanol Inc.'s dream of a West Coast biofuels empire has landed in bankruptcy court.

The Sacramento ethanol maker said Monday it has put its four production plants under Chapter 11 bankruptcy protection, the result of low fuel prices and the high cost of corn, ethanol's main ingredient.

Pacific Ethanol lined up new financing and promised to keep operating. But its troubles symbolize the sad state of an industry that was a darling among Wall Street financiers and the venture capital crowd not long ago. Bill Gates once invested $84 million in Pacific Ethanol stock.

The long-term outlook for biofuels remains strong, with federal and state governments ramping up requirements for blending ethanol into gasoline. President Barack Obama is expected to announce tight new standards on greenhouse gases today, paving the way for increased biofuel use.

"The future has to be rosy for the industry," said Dan Sperling, a member of the California Air Resources Board and a transportation fuel expert at UC Davis.

But in the short run, prices are too low to make a profit.

"Even though the government is mandating it, you can't (sell) it if people aren't driving," said Joel Karlin, a market analyst at Western Milling in Goshen. "Gasoline demand is lower."

Founded in 2003 by former California Secretary of State Bill Jones, the company built two of California's earliest ethanol plants -- in Stockton and Madera -- and was an aggressive lobbyist at the state Capitol for increased ethanol usage. President and Chief Executive Officer Neil Koehler became the face of the industry, popping up frequently on the cable business channel CNBC.

But as prices sank, the company closed three of its four plants -- the two in California and one in Idaho. Only its plant in Oregon is open.

Pacific Ethanol defaulted on about $250 million in debt and warned in March that it was nearly out of cash and might file for bankruptcy. A week ago it reported a $23.9 million first-quarter loss and a 50 percent drop in revenue.

The bankruptcy "really isn't a surprise," said Rick Kment, analyst with DTN market news service in Omaha, Neb.

The Chapter 11 filing, made Sunday in U.S. Bankruptcy Court in Delaware, applied to the four debt-ridden plants. The company itself and its marketing subsidiaries didn't file. Pacific Ethanol obtained $20 million in new financing; loans made after a company is in bankruptcy generally have a good chance of being repaid.

"We have worked well with our creditors to develop a plan that we believe allows us to continue operations," Koehler said in a press release. "We are unwavering in our vision of being a leading producer and marketer of low carbon fuels."

But its future is unclear. Clayton McMartin of the Clean Fuels Clearinghouse said oil companies might try to buy its plants, the way Texas refiner Valero Corp. recently bought seven Midwest ethanol plants in bankruptcy court for 30 cents on the dollar.

Koehler declined an interview request. So did Jones, the founder and chairman. The two loaned the company a combined $2 million in late March.

Pacific Ethanol was part of an ethanol boom that went overboard. Five major plants have been built in California since 2005, including Pacific Ethanol's. All are closed.

The industry's business model was based in part on high prices for oil, which encouraged refiners to blend in more ethanol. When oil fell, refiners cut their ethanol use to the minimum required by law, reducing prices for the biofuel.

At the same time, ethanol makers got hit by high corn prices.

"There's very little margin left in the market," Kment said. "It's still going to be a very challenging situation for the rest of the year."

With ethanol selling for about $1.70 a gallon, producers are losing about 30 cents on the gallon, he said.

Profits will remain under pressure even as government mandates increase. In California, the nation's largest ethanol market, demand for ethanol is expected to jump 66 percent in January because of new regulations.

The bankruptcy filing sent Pacific Ethanol's stock plummeting to 32 cents a share, down 25 cents, on the Nasdaq market.

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Call The Bee's Dale Kasler at (916) 321-1066. Read his blog on the economy, Home Front, at www.sacbee.com/blogs.

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