After laboring a quarter-century in the ethanol business, Neil Koehler insists the industry will become healthy again, maybe in as little as two years. Others agree with him.
But Koehler's company, Pacific Ethanol Inc. of Sacramento, might not make it to the promised land.
The unprofitable ethanol maker founded in Fresno six years ago has warned investors it could run out of cash at the end of April and might have to file for bankruptcy protection -- a stunning downfall for a company that once set out to conquer the West and counted Bill Gates as an investor.
But Pacific Ethanol has been caught up in an industrywide downturn. Ethanol makers expanded too quickly and took on too much debt. They got hurt by rising corn costs. When oil became cheap, petroleum refiners cut their ethanol use to the bare, government-mandated minimums. Prices plunged.
"We had a perfect storm," Koehler said.
Market dynamics will change, in time. Demand for ethanol in California, the nation's largest market, will grow a whopping 66% next year, said Dean Simeroth of the California Air Resources Board. That's because of new state and federal regulations. Gasoline sold in California will contain 10% ethanol starting Jan. 1, up from the current 5.7% blend.
But in the meantime, the industry is bleeding. Two Midwest producers, VeraSun Energy Corp. and Aventine Renewable Energy Inc., have filed for Chapter 11 bankruptcy protection.
Some 15% to 20% of the nation's production capacity has been idled. All five major plants in California, none of which existed before 2005, have stopped producing. That includes Pacific Ethanol's two California plants, in Stockton and Madera, which produced 7% of the state's supply.
Pacific Ethanol has terminated 50 employees, or one-third of its work force. It laid off its chief financial officer. Having defaulted on $250 million in debt, it has just $8.7 million in cash and credit and probably can't keep going beyond April 30, according to a March 31 filing with the Securities and Exchange Commission. Koehler, the company's president and chief executive, and chairman Bill Jones of Fresno just loaned Pacific Ethanol $2 million.
Koehler started in 1984 at a tiny plant in Rancho Cucamonga that made ethanol from beer and soft-drink syrup. He later teamed with Jones, the former California secretary of state, who founded Pacific Ethanol in 2003.
Their first plant, in Madera, opened in 2006. Three more plants followed in less than two years, and Pacific Ethanol became a $700 million-a-year company. Gates invested $84 million from his Microsoft fortune, and Pacific Ethanol shares briefly topped $40 on the Nasdaq market.
But the industry's building boom got out of hand, and "we were a part of that," Koehler said.
Then the bust came. Ethanol prices fell from nearly $3 a gallon last summer to the $1.60 to $1.70 range. The company in late 2007 halted construction on a plant in the Imperial Valley and has been scrambling ever since to deal with debt and cash woes. It lost $146 million last year. The stock is below 50 cents and Gates has dumped most of his shares.
But Koehler remains "a firm believer" in ethanol, even as he struggles to keep Pacific Ethanol afloat.
"I'm a lifer," he said.