Aventine Renewable Energy (“Aventine”), one of the country’s largest ethanol producers, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on April 7, 2009.  In the ethanol production process, corn is broken down either through a dry mill or wet mill process.  Both processes produce ethanol and create by-products that are used in the animal feed industry.  Ninety percent of Aventine’s revenue comes from the sale of ethanol, while 10% of its revenue come from the sale of ethanol by-products formed in the milling process.

Aventine’s Business

According to Aventine’s Declaration in Support of Bankruptcy Petitions, Aventine operates two ethanol production facilities – one in Pekin, Illinois and one in Aurora, Nebraska.  Combined, the two facilities produce over 200 million gallons of ethanol each year.  In 2007, Aventine sought to expand its business by adding two more ethanol plants.  By the time Aventine filed for bankruptcy, construction of one of the new facilities was delayed and the builder for the second facility terminated the contract due to Aventine’s failure to make payment.

Besides producing ethanol,  Aventine operates a “marketing alliance” whereby it buys ethanol from other producers and sells it on the open market, receiving a commission.  In addition to purchasing from its alliance members, Aventine purchases ethanol on the spot market which it then sells through its distribution network.  Aventine’s distribution network covers fuel markets on the east, west and gulf coasts of the United States.

Events Leading to Bankruptcy

Aventine is not the first ethanol producer to recently file for bankruptcy.  In November, VeraSun Energy, a South Dakota-based ethanol producer, also filed bankruptcy in Delaware (read my post regarding the VeraSun bankruptcy here).  Like VeraSun, volatility in corn and ethanol prices played a significant role in Aventine’s need to file for bankruptcy.

Aventine’s success is dependent to a large degree on what it calls the “corn spread” – the difference in price between ethanol and corn.  Although corn is the prime ingredient in ethanol, corn and ethanol prices do not move in tandem.  As stated in Aventine’s Declaration, weather, crop conditions and international trade affect the price of corn, whereas crude oil and gasoline demand affect the price of ethanol.  In 2006, the commodity spread for ethanol reached historically high levels, only to fall to what Aventine considers “near break even cash margins” in 2008.

Aventine’s Bankruptcy Financing

One of Aventine’s “first day” motions in bankruptcy is its Motion to Obtain Post-Petition Financing (the “DIP Financing Motion” or the “Motion”).  Under the Motion, Aventine seeks $30 million in post-petition financing which it contends is “essential to the Debtors’ efforts to preserve and maximize the value of their assets.” Prior to bankruptcy, Aventine business operations were funded through cash receipts from operations.  Aventine’s lenders assert a lien and security interest against these “cash collateral” assets.  According to Aventine’s Motion, the lenders’ claims against its cash leave it with no unencumbered cash in which to operate going forward.  Aventine therefore filed the DIP Financing Motion in order to use cash collateral to pay for services and expenses.

Aventine’s Financials

According to Aventine’s bankruptcy petition, Aventine has assets totaling $779 million and debts totaling $491 million.  Aventine lists the following entities as holding the largest trade creditor claims:

  1. Union Tank Car Co. … $1.9 million
  2. Shell Energy … $1.5 million
  3. Agri Energy … $1.4 million
  4. Delta T Corp. … $1.3 million
  5. Aurora Coop Elevator … $1.1 million

This bankruptcy proceeding is before the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware.