The Worst Isn't Over for Pacific Ethanol

Pacific Ethanol, the corn ethanol producer whose future once seemed so bright it attracted a big investment from Bill Gates, continued its downward spiral today, a long and unprofitable journey that has now taken the company into bankruptcy courts. And things could get worse before they get better.

Pacific Ethanol isn’t alone in the great biofuel bust of 2008-9, but it’s decline has been painful. In early April, Pacific Ethanol said it would run out of cash by the end of the month if it didn’t renegotiate its debts or raise new capital. The company subsequently raised $2 million from its chairman and president. But earlier this month, it warned again of a risk of bankruptcy after reporting first-quarter sales that fell 46 percent from a year earlier.

Those warnings proved true Monday, when several subsidiaries of Pacific Ethanol — including four that own ethanol production plants — filed for bankruptcy court protection while they restructure their finances. The parent company (Pacific Ethanol Inc.) isn’t seeking Chapter 11 protection, nor are its marketing units, Kinergy Marketing and Pacific Ag.

The four ethanol plants are in Stockton, Calif., Burley, Idaho, Boardman, Ore., and Madera Calif. In a statement, Pacific Ethanol said that lenders to the bankrupt units have extended another $20 million in loans “to satisfy customary obligations.” Since three of those four facilities have suspended production, most of the $20 million will go toward general corporate needs and the costs of the bankruptcy process.

Pacific Ethanol produced 220 million gallons of ethanol last year, but the price of its ethanol sank to $1.65 a gallon in the first quarter of 2008 from $2.30 a gallon in the first quarter of 2009. A plunge in gasoline prices in the second half of the year contributed to lower ethanol prices while pushing up production costs.

The Kinergy marketing unit, meanwhile, has renegotiated a loan with Wachovia Bank that will provide up to $10 million. But in an 10-Q filing Monday, the company noted that the new loan “requires the Company to obtain certain financing by May 31, 2009.” That filing added other details about Pacific Ethanol’s financial problems that weren’t included in the press release:

As a result of ethanol industry conditions that have negatively affected the Company’s business, the Company believes that it currently has sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs only through the end of June 2009, provided that the Company is able to timely restructure its $31.5 million indebtedness to Lyles United LLC and Lyles Mechanical Co.

That suggests Pacific Ethanol will continue its awkward dance with creditors for some time. Eventually, factors may swing back in favor of ethanol producers: A recovery in demand should gas prices continue higher, lower production costs, easier credit. But the next few months, at least, will remain lean.

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