Saturday, March 29, 2008

Corn versus pomegranates -- no change in the outlook for Omega 5 oil products

Ethanex Energy of Basehor, Kan., files for bankruptcy

Depressed ethanol prices, high corn prices and skittish credit markets have claimed another victim in the once high-flying ethanol industry.

Ethanex Energy Inc. of Basehor, Kan., and subsidiary Ethanex Southern Illinois LLC filed for Chapter 7 bankruptcy late Thursday after Ethanex Energy’s quest for financing fell through.

The moves were expected. In a regulatory filing Monday, Ethanex Energy said it would seek bankruptcy protection.

Ethanex Energy listed $1.85 million in assets and nearly $849,000 in liabilities. Ethanex Southern Illinois, which was involved in a joint venture to build an ethanol plant in southern Illinois, listed $450,502 in assets and $1.37 million in liabilities.

Ethanex Energy at one point planned to build three ethanol plants. Instead, the company has ceased operations and canceled an agreement to buy a small ethanol facility in Nebraska.

“I think the capital markets were the biggest problem, and coupled with high corn prices — I see absolutely no reason for corn to be trading above $5 today — it has led to this sad state of affairs,” said Al Knapp III, who was Ethanex’s president and chief executive officer until his resignation Wednesday.

The ethanol industry has been battered recently by surging prices for feedstock corn, the source of most ethanol, and lower ethanol prices resulting from oversupply.

Ethanex entered the ethanol business in 2006 amid a veritable ethanol gold rush, when corn was selling for less than $2 a bushel and ethanol was selling for between $3 and $4 a gallon. Most ethanol plants convert about one bushel of corn into roughly 2.8 gallons of ethanol, so the prices ethanol and corn are now fetching have left ethanol producers with extremely thin profit margins.

“The operating margin was fantastic a couple of years ago. People rushed into the industry when they were making in excess of $1 per gallon operating profit. … As the price of corn went up without a corresponding increase in the price of ethanol, we’ve seen that spread decline,” said Todd Alexander, an attorney who represents ethanol companies, including Ethanex.

“What that has done is put pressure on the marginal producers in the industry. Overall, the industry is fairly healthy. Profit margins are nowhere near what they were, but projects that were thinly capitalized, or sited in the wrong place, or bet the wrong way on the price of a commodity, or had construction difficulties — those types of projects are the ones that are really in trouble.”

There were roughly 50 ethanol plants nationwide in 1999. Today there are 139, with others on the drawing boards, according to the Renewable Fuels Association, a trade association for the ethanol industry.

Ethanex became a public company in mid-2006 when it merged with an existing business that was registered with the Securities and Exchange Commission. The fledgling operation announced plans to develop three ethanol plants in the Midwest with a combined annual production capacity of 300 million gallons.

Ethanex initially raised $20 million in a private stock offering, which Knapp said it spent for real estate in Illinois, technology licenses, engineering and construction contracts, development and permitting costs, investments in Ethanex’s proposed projects, salaries and other costs.

In November 2006, Ethanex said it had secured environmental permits needed to begin construction of a 132 million-gallon plant in southeast Missouri, adjacent to a corn mill under construction by SEMO Milling LLC. Ethanex and SEMO formed a joint venture to develop the plant, which was to be built by Chevron Energy Solutions Co.

A year later, though, the outlook for the industry had changed markedly. The Missouri proposal fell through, and Ethanex put off plans to raise capital for a proposed plant in Waltonville, Ill. Instead, it decided to buy a 28 million-gallon plant in Nebraska and retrofit it with new technology.

“By mid-2007, we’d crossed the line where you could buy a facility for the same amount as it would cost to build a greenfields facility,” Knapp said.

In mid-2006, it had been cheaper to build a plant than to buy one, owing to soaring ethanol prices. That changed when ethanol prices plummeted.

The Sutherland, Neb., plant was built in 1991 but never performed to expectations. After lenders foreclosed on a second group of owners, the plant was sold to Midwest Renewable Energy LLC, which agreed to sell it to Ethanex in a deal valued at $220 million in cash and Ethanex stock.

But that deal fell through when Ethanex proved unable to raise $1.5 million in interim financing.
“There was a perception in the marketplace that the industry was overbuilt,” Knapp said.

Troy Gavin, the plant’s general manager, said Ethanex’s bankruptcy would not interfere with the plant’s operations nor with plans to expand production from 28 million gallons to 120 million gallons a year.

“We knew Ethanex had to raise some operating capital, and the ethanol industry is pretty tough right now,” he said. “We’re seeing $5.50 a bushel corn, and a lot of lenders that were pretty excited about it a year ago, or even four or five months ago, have backed away.”

Ethanex’s prospects weren’t helped when it discovered last year that its corporate attorney had bought unregistered shares of its stock in private transactions and then sold them illegally at huge profits.

The attorney, Louis W. Zehil, was fired by his law firm and now faces criminal and civil charges of securities fraud. Zehil allegedly carried out the same scheme with the stock of Kansas City-based Alternative Energy Sources Inc., another ethanol producer, and five other ethanol companies.

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Knapp said the discovery of Zehil’s alleged malfeasance delayed the filing of its registration statement for the stock, which in turn led to its having to pay a $600,000 “registration rights” penalty to shareholders.

“When this came to light, I couldn’t believe it,” he said. “I’ve never been so fooled by an individual in my life.”

The SEC complaint against Zehil charged that he bought 3 million shares of Ethanex’s unregistered common stock for $3.75 million and sold them for $12.3 million.

The ethanol boom dates to 2005, when Congress mandated the use of renewable fuel in gasoline. The industry remains heavily dependent on government subsidies.

At least two other local ethanol producers have been adversely affected by the soaring price of corn and the declining price of ethanol. Earlier this year, Alternative Energy Sources, which was formed around the same time as Ethanex, said it had dropped an option to buy land near Kankakee, Ill., where it hoped to build one of three 110 million-gallon ethanol plants.

And E3 BioFuels LLC of Shawnee, an ethanol producer with a plant in Nebraska, filed for Chapter 11 protection late last year.

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