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BioFuel Energy on the brink

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It’s scramble-mode for the ethanol producer Biofuel Energy.
The Denver startup reported that it lost $84.1 million last year on revenue of nearly $180 million, due primarily to “hedging losses” on corn contracts and significant costs associated with the startup and operation of its two dry mill ethanol facilities. It lost $12.3 million in the fourth quarter on revenue of $89 million.
It began commercial operations in June 2008 and started ethanol production at two plants, one in Wood River, NE and the other in Fairmont, MN. It “achieved project completion” of both plants last December.
The facilities can produce 230 million gallons per year of fuel grade ethanol and 720 tons of distillers grains.
From its inception the publicly traded company (Nasdaq: Biof) has worked closely with Cargill Inc., the huge agribusiness company. BioFuel has extensive contractual ties with Cargill.
The plant locations were selected primarily based on access to corn supplies, the availability of rail transportation and natural gas and Cargill’s competitive position in the area, BioFuel says. At each location, Cargill has a strong local presence and owns adjacent grain storage facilities. Cargill also provides corn procurement services, markets the ethanol and distillers grain that’s produced and provides transportation logistics for the two plants under long-term contracts. In addition, BioFeul leases grain storage and handling facilities adjacent to the plants from affiliates of Cargill. “We believe that our relationship with Cargill will provide us with a number of competitive advantages.”
It sounded like a great setup. But the economy, the collapse of the commodity market and the difficulties facing every alternative energy startup – even those with strong backing and relationships with giants such as Cargill – are pushing BioFuel to the edge. The company says its operations and cash flows are subject to fluctuations due to changes in commodity prices. In December it said it would no longer pursue construction of three more plant sites it had under evaluation, and BioFuel had to write-off development costs associated with that exercise.
It has continued to post operating losses this year “resulting from poor operating margins due to the relative prices of corn and ethanol.”
Further it’s facing the very strong possibility of defaulting on a senior credit facility.
BioFuel’s liquidity position continues to erode. Under the terms of the company’s senior debt facility with a group of lenders who financed the construction of the two plants, minimum quarterly principal payments of $3.15 million are scheduled to begin on June 30. “Based on current operating margins and the company’s liquidity position, the company may not be able to generate sufficient cash flow to make principal and interest payments when they become due during 2009,” it said.
“Failure to make these payment obligations when they become due would result in events of default under the senior debt facility, which we would have up to 3 days to cure.”
June is not far off. BioFuel is scrambling to restructure and reduce costs and it is exploring various alternatives to address its liquidity issues. Options include job cuts, “operating efficiency initiatives,” renegotiation of its supply and service agreements with Cargill, seeking forbearance or some kind of accommodation from its lenders, and seeking new capital.
However there’s no assurance that any or all of those actions will work.
The next step would be bankruptcy, or as the company told the U.S. Securities and Exchange Commission: “If we are unable to reach an agreement with our lenders to restructure our debt or are unable to raise additional capital, or are otherwise unable to generate sufficient liquidity from our operations to satisfy our debt obligations, it may have a material adverse effect on our liquidity and may result in our inability to continue as a going concern. This in turn could potentially force us to seek relief from creditors through a filing under the U.S. Bankruptcy Code.”
When a company raises the b-word in public, the reality usually soon follows.

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Written by William DiBenedetto

30 March, 2009 at 10:29 am

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