Ethanol producers Green Plains, KAAPA prosper as they snap up plants sold in bankruptcy

Source: By Russell Hubbard, Omaha World-Herald • Posted: Monday, August 29, 2016

Nebraska ethanol producers Green Plains and KAAPA Ethanol are again taking advantage of the bankruptcies that scythe through the notoriously cyclical, commodity-based business every few years.

Last week, Omaha-based Green Plains and Minden’s KAAPA bought plants sold in bankruptcy by troubled Spanish bioenergy company Abengoa. It is a marketplace where they have shopped before on the way to becoming big Midwest ethanol producers.

Green Plains, a publicly traded member of the Fortune 1000, added 20 percent to its annual production capacity of the motor fuel made mostly from distilling corn, submitting winning bids for Abengoa plants in York, Nebraska, and in Indiana and Illinois. KAAPA Ethanol, owned by Kearney-area shareholders who also are members of an affiliated ag cooperative, submitted the winning bankruptcy bid for the Abengoa plant in Ravenna, Nebraska.

Neither ethanol producer is new to the process. Both added plants during an earlier round of ethanol industry bankruptcies about seven years ago, buying capacity from insolvent operators that failed to successfully navigate a business with many moving parts. The price of corn, the price of crude oil, global grain production and motorist activity are just a few of the factors that can mean prosperity to an ethanol producer if judged correctly, disaster if misjudged.

The case of Spain’s Abengoa is instructive. A global energy, industrial and construction titan, the company expanded heavily into renewable fuels, coming to operate six U.S. plants. But the effort was costly: The main Abengoa parent company eventually came to owe $10 billion to creditors who lent money for the global energy expansion.

Ethanol prices, meanwhile plummeted by more than half from April 2014 to January of this year, falling as low as $1.30 a gallon, as high inventories, low motorist demand and dropping crude oil prices, which correlate with ethanol prices, crushed ethanol profit margins.

End result: bankruptcy for Abengoa’s U.S. ethanol plants early this year. Corollary consequence: bargain acquisitions for Green Plains and KAAPA, also known as the Kearney Area Ag Producers Alliance.

“We acquired some good plants at good prices for our shareholders,” Green Plains Chief Executive Todd Becker told The World-Herald. “And we aren’t done — we are always in the market when others aren’t.”

Green Plains, employer of about 160 people in Omaha and now operator of 17 ethanol plants nationwide, paid $236 million to acquire 237 million gallons of production at the three Abengoa plants. That works out to about $1 per gallon of production, or about half of what it would cost to build such capacity from scratch. Green Plains ethanol production will now vault to about 1.5 billion gallons a year, making it the nation’s second-largest producer, trailing only Chicago-based commodities giant Archer Daniels Midland.

KAAPA spent $115 million for the 90 million-gallon-per-year plant in Ravenna, a little more than $1 a gallon, but still far below new construction costs. The acquisition raised KAAPA’s annual production by almost half, to about 300 million gallons. (The total includes KAAPA’s wholly owned plants and those in which it shares an operating stake with others.)

Paul Kenney, president of KAAPA Ethanol’s board of directors, said ethanol plants in Nebraska such as the Abengoa locations have a built-in advantage that makes them desirable. Because they are in the leading state with cattle on feedlots, Nebraska ethanol plants don’t have to spend money on drying and shipping the grain left over from ethanol distillation, which is a high-protein livestock feed. It can be sold wet and shipped to hungry customers usually right around the corner, Kenney said.

“Where the corn is and where the cattle are,” Kenney said. “Those are the critical ingredients in putting together a business plan for a profitable plant.”

The KAAPA and Green Plains scenarios are reminiscent of 2009, when both companies profited from the misfortune of a bankrupt South Dakota ethanol producer called VeraSun. One of the nation’s largest ethanol companies, it bet the wrong way on corn prices, locking in contracts to buy the grain at $7 a bushel as prices plummeted to below $4 a bushel. It was a rough period. In late 2008 and early 2009, there were about 10 U.S. ethanol producers in bankruptcy.

In 2009, KAAPA, in collaboration with four partners, bought in bankruptcy auction a Minnesota plant that failed under VeraSun. The group now owns or has a stake in five plants in Nebraska, Minnesota, Ohio and North Dakota. Green Plains wound up with VeraSun’s former plants in Ord and Central City, Nebraska.

“It’s pretty much how we started out,” Kenney said, of KAAPA’s out-of-state expansion via buying where others had failed. “No one knows what the future holds, but we are always on the lookout.”

Todd Sneller, administrator of the state-run Nebraska Ethanol Board, said Cornhusker ethanol producers have among the lowest costs in the U.S. industry, which works in their favor even as others in the business struggle. The advantages include sales to nearby feedlots, operating amid the third-largest U.S. corn crop, and proximity to California’s incentive-laden green energy economy and its overseas export terminals.

As for mopping up the failed plants of others in bankruptcy, KAAPA and Green Plains have experienced management and “they spot opportunities and know how those available assets can strengthen their core businesses if purchased for the right price.”

When it comes to the bigger picture, ethanol will probably always be the subject of political debate. The American Petroleum Institute trade group made up of oil refiners runs advertisements decrying ethanol as bad for the environment and for small engines, and critics say the lower price for ethanolized gas is canceled out by its lower energy content.

Ethanol is nonetheless a big business in the Midwest. Nebraska is the second-largest ethanol producer behind Iowa. The 25 plants in Nebraska have an annual economic impact of about $5 billion, according to a University of Nebraska analysis; while even large plants only employ a few dozen people, the analysis concluded that large multiplier effects spread out through farms, equipment suppliers, ethanol plant suppliers and research and development efforts designed to get more starch from each kernel of corn.

Becker, the Green Plains CEO, said the corn-based motor fuel is likely here to stay regardless of some opposition. Almost all U.S. gas now contains at least 10 percent ethanol, so even if renewable fuels requirements enforced by the EPA were to disappear, it wouldn’t matter much, Becker said. Ethanol, he said, has become the preferred octane-boosting additive by gasoline companies, because it is the cheapest.

“Look at it this way: There are now E15 pumps all over Omaha,” Becker said, referring to blends of 15 percent ethanol and 85 percent clear gas. “They said just a few years ago it would never make it to the retail pump, but chains nationwide are adding it every day.”

Another telling signal: The third-largest U.S. ethanol producer is now Texas-based Valero Energy. One of the nation’s largest oil refiners — the historical enemies of all things ethanol — Valero owns 11 ethanol plants, including one in Albion, Nebraska, and four in Iowa.

“The combined production of denatured ethanol from our plants in 2014 averaged 3.4 million gallons per day,” the oil refiner proudly states in its 2015 annual report to shareholders.

While higher blends mean greater ethanol demand, investing in the sector can grate on the nerves. Volatile like the commodity, Green Plains shares have ranged between a high of about $50 in 2006 to as low as $2 during the recession of 2008.

Shares hit a low this year of about $13 in January, but have rebounded and have now almost doubled since then. The company had a profit last year of about $7 million on $3 billion in sales, down from 2014’s $160 million profit on $3.2 billion in sales.