Green Plains Renewable Opens New Ethanol Plant -- Too Late?

• The Company: Green Plains Renewable Energy, a fuel-grade ethanol producer.
• The Filing: Form 10-K filed with the SEC on February 13, 2008.
• The Finding: Green Plains is celebrating commenced production of ethanol at its new 55 million gallon per year facility in Superior, Iowa. If a bill introduced by Senator Kay Bailey Hutchison (R-TEX), and co-sponsored by eleven other Republican Senators-including John McCain – that calls for freezing the corn ethanol mandate at 2007 levels of 4.7 billion gallons – becomes law this fall, the ethanol producer’s celebration could be short-lived.

The Upshot: Green Plains, like many of its ethanol peers, is struggling under a mountain of debt. The estimated cost to construct the 55 million gallons of ethanol per year Superior plant was approximately $107.4 million.

The company has a second ethanol facility operating in Shenandoah, Iowa, with nameplate capacity of 55 million gallons of ethanol per year, too, which cost an estimated $83 million to build.

Critics contend Midwest corn going to produce fuel-grade ethanol is responsible for food inflation, and wastes valuable resources, such as water. One bushel of corn, which weighs about 56 pounds, produces about 2.7 gallons of ethanol (using the dry mill process). And, it is estimated that one gallon of ethanol requires about 1,700 gallons of water.

In addition, ethanol production contributes to greenhouse gas emissions. For example, each nameplate 55 million gallon per year plant emits approximately 148,000 tons of carbon dioxide annually, according to Green Plain documents filed with the SEC.

Green Plains is a small player in an industry with an estimated U.S. ethanol production of approximately 13.4 gallons by the end of 2009, according to the Renewable Fuel Association. Management’s appetite for growth, however, exceeds its wallet. Limited financial flexibility — total debt exceeds stockholder equity — combined with contractual obligations of approximately $301 million due in one -to- three years, could prove to be burdensome should Congress mandate production cutbacks in current Renewable Fuel Standard mandates.

The Question: Could even talk of repealing Renewable Fuel Standards dry up financing required by ethanol producers, leading to either insolvencies of small producers like Green Plains — or facilitate merger acquisitions in the ethanol space?