How Golden Is Aventine Renewable Energy's Future?

(MoneyWatch) 

• The Company: Aventine Renewable Energy Holdings, a leading distributor and producer of fuel-grade ethanol in the U.S.
• The Filing: A Form 8-K on June 13, 2008.
• The Finding: Aventine raised $97.1 million from the sale of student loan-based auction rate securities to various parties. The cash proceeds will be used to fund plant construction, which is integral to the ethanol producer's growth strategy. The sale mitigates the company's immediate liquidity issues in the face of ongoing construction expenses, but Aventine still lost $31.6 million by playing in the auction-rate market and may have to tap a $200 million credit line.

The Gist: Aventine produces total ethanol volume of 191.9 millions of gallons per year -- 92.7 percent of total capacity - with corn processing capacity of approximately 77 million bushels per year in 2007. The annual run-rate of operating marketing alliance plants yielded an additional 506.4 million gallons.

Aventine is adding to capacity, constructing 113 million-gallon production facilities in Mt. Vernon, Ind., and Aurora, Neb., with ramp up of ethanol production expected in the first quarter of 2009. The company needs approximately $300 million to complete its two new production facilities.

With the cash raised from the sale of the auction-rate securities, and including cash on hand of $73.9 million and $132.1 million in borrowing availability under a revolving asset-based loan facility with JPMorgan Chase Bank, the company has likely liquidity available to it in excess of $300 million.

In addition, existing debt agreements permit the Company to increase its senior credit facilities by another $75 million, potentially further strengthening the Company's liquidity position.

The arithmetic expression behind Avantine's business model is that increased demand, coupled with delays in new supply of ethanol, would allow additions of new product supply into marketplace without depressing price. However, the polynomial variable ignored by management was the unexpected meteoric rise in corn costs.

Given the worst flooding in fifteen years in the Midwest -- the world's largest corn-producing region -- commodity costs are soaring, with corn futures for May 2009 delivery at the CBOT settling at a record high of $8 a bushel on Wednesday. In the first quarter of 2008, Aventine paid an average of $4.50 a bushel.

At March 31, 2008, Aventine had fixed the price of 21.9 million bushels of corn through December 2008 at an average of $5.11 per bushel, representing approximately 39% percent of its corn requirements for the remainder of 2008.

Ethanol competitor VeraSun said on Monday it was delaying the opening of two 110 million-gallon plants in the Midwest until market conditions improve.

Aventine does not have that luxury, for the company is subject to material penalties for construction delays. For example, if the first phase of the Aurora campus is not processing biofuel by July 1, 2009, the company is responsible for liquidated damages of $138,889 per month (up to a maximum of $5 million) until the plant is fully operational.

The Question: With higher fuel and corn costs negatively impacting all ethanol producers, is now a prudent time to be expanding capacity? Also, given likely increases in net interest obligations (borrowings needed for timely completion of facility expansions) combined with narrower commodity spreads (falling ethanol prices combined with rising corn costs), does anyone expect the liquidity outlook at Aventine to improve come 2009?