A debt load approaching $1 billion proved to be too much to handle for Hawkeye Energy Holdings, Iowa's largest ethanol producer. The company has turned over two of its four ethanol plants to bankers in a December 21, 2009 bankruptcy filing. The two plants, at Iowa Falls and Fairbank, will stay open.

Farmers have been paid for their corn that has been delivered and the company has enough cash and will continue to buy corn from farmers and will pay for the corn it has already agreed to buy on forward contracts from farmers, says company CEO Bruce Rastetter.

Hawkeye Energy Holdings announced on Monday December 21 that one of its subsidiaries, Hawkeye Renewables, with plants in Iowa Falls and Fairbank, would reorganize under Chapter 11 of the U.S. Bankruptcy Code. The company also owns plants in Shell Rock and Menlo.

Profits have improved, but debt load was too high

Profits in the ethanol industry have improved in the last six months, but some ethanol plants have continued to suffer from over expansion. Demand for ethanol is declining, in part because drivers are using less gasoline. Unless the federal government increases the percentage of ethanol allowed to be sold in gasoline in the U.S., ethanol producers will face stagnant demand and poor profits.

"It's a different world today than in 2006," says Bruce Rastetter, president of Hawkeye, headquartered in Ames. For awhile that year demand was so strong for ethanol, producers had profit margins of $2 per gallon or better. Margins are 30 cents today.

Rastetter says all four of his company's plants are operating profitably today and the company has cash on hand. However, the company had to declare bankruptcy because the debt load it was carrying was simply too high, given the projected operating profile of the industry.

The plants at Iowa Falls and Fairbank, each with 45 employees, will continue to operate under the current management without layoffs, he says. The plants also will keep buying corn and will honor forward contracts for purchases of corn from farmers. The two plants annually use about 77 million bushels of corn and produce 215 million gallons of ethanol. The Iowa Falls plant is a 100 million gallon plant, and the Fairbank plant is a 115 million gallon plant.

Plants at Menlo, Shell Rock stay under Hawkeye ownership

Hawkeye's plants at Menlo and Shell Rock aren't affected by the bankruptcy filing, says Rastetter, and will remain under Hawkeye ownership. The Menlo plant produces 115 million gallons per year, as does the Shell Rock plant.

Hawkeye's bank debt is between $500 million and $1 billion, and the money is owed to a consortium of lenders, led by Credit Suisse. About 20 banks were involved in the transaction, none in Iowa. Hawkeye borrowed the money in 2006 after withdrawing a planned public stock offering. Against the debt, Hawkeye has about $250 million in assets. Hawkeye's creditors had already approved the bankruptcy plan under what is known as a prepackaged bankruptcy.

The debt taken out in 2006 was based on a value of about $4.50 per gallon of ethanol. Today the valuation is about $1 to $1.10 per gallon. The ethanol industry in Iowa over-expanded in 2006, says Monte Shaw, executive director of the Iowa Renewable Fuels Association. The industry benefited when oil companies could no longer get liability protection for the additive MTBE, which for years was blended into gasoline to reduce emissions. MTBE has some toxic characteristics.

The ethanol industry suffered from a sharp reversal in the second half of 2007 as price of ethanol fell by more than 50% after the overcapacity production started to come on line. The financial squeeze tightened further in the first half of 2008 when corn prices hit record highs. The downturn in the general economy in late 2008 reduced demand for gasoline.

Ethanol industry says EPA needs to allow E15 blend

Thanks to its 46-cents per gallon federal tax break, the lower cost ethanol is always attractive to gasoline dealers during times of high oil prices. But higher oil prices in turn cause the price of corn to rise, eating into the profit margins of ethanol producers.

After losing money, ethanol plants saw more favorable margins in the last half of 2009 as demand for ethanol blending recovered and the price of corn has stayed below $4 per bushel. Iowa State University economists estimate the average ethanol plant now has a favorable operating margin of 30 cents per gallon.

Shaw hopes for a big boost in ethanol demand in 2010 if the U.S. Environmental Protection Agency increases the allowable blend of ethanol with gasoline from 10% (E10, which is currently allowed) to 15% (E15). EPA has delayed a decision on the request for E15 until mid-2010 but officials of the agency indicate EPA will likely approve it. If so, nationwide demand for ethanol will jump another 7 billion gallons from the current 11 billion to 12 billion gallons.