Bloomington-based Advanced BioEnergy plans to sell its two ethanol plants in South Dakota and then liquidate, a casualty of an ethanol industry downturn fueled by overproduction and the U.S.-China trade war.
The 14-year-old company earlier this week disclosed the sale of its plants in Aberdeen and Huron to Glacial Lakes Energy for $47.5 million, plus inventory valued at $2.5 million to $3 million. Advanced BioEnergy expects to use the proceeds to pay off about $26.5 million in bank debt, with the rest distributed to its owners pending a vote on the deal.
Advanced BioEnergy's largest owner — holding about 33% of its outstanding "units" — is Boston-based private equity firm Thomas H. Lee Partners. Many of the rest of the company's owners are farmers and people and businesses in the communities where its plants have been located.
Advanced BioEnergy's two facilities are on the smaller side, with around 80 million gallons of combined production capacity. Glacial Lakes owns two plants in South Dakota with a combined production capacity of around 250 million gallons.
"Glacial has a bigger footprint and can spread fixed costs over more gallons [of production]," said Richard Peterson, Advanced BioEnergy's CEO.
With the ethanol industry hobbled by oversupply and depressed profits, asset sales like Advanced BioEnergy's will become more common, Peterson said. "Consolidation will drive more supply discipline. … The ethanol industry is going through what I think is a fundamental rebalancing."
Advanced BioEnergy, which employed 62 in December, lost money in 2018 and in two of its three previous fiscal years. The red ink continued flowing through the first half of this year. In February, the company announced it was "exploring strategic alternatives," including a sale.
The ethanol industry has seen profits diminish or outright evaporate over at least the past year — a condition made worse by the nation's trade war with China, a critical export destination. In 2017, China slapped a 30% tariff on U.S. ethanol exports, upping it last year to 45%.
"With those tariffs, you basically shut down exports to China," Peterson said.
ADM, owner of an ethanol plant in Marshall, saw its second-quarter earnings dragged down partly by its biofuel business. Ray Young, ADM's chief financial officer, said in an earnings call last week that "ethanol margins remain negative as the China trade situation continues to weigh on export demand and industry inventory levels remain elevated."
Green Plains, a large ethanol producer like ADM, this week reported a $45.4 million loss for the second quarter, considerably worse than its $1 million loss during the same time a year ago. Green Plains has plants in Fairmont and Fergus Falls, Minn.
The ethanol industry started expanding a few years ago, while at the same time improving the production efficiency and therefore output of its existing plants, said Peterson of Advanced BioEnergy. "I think ultimately for the industry, the issue is oversupply. It's holding the industry back from profitability."