Aventine Renewable Energy Holdings, Inc.

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Aventine Renewable Energy Holdings, Inc.

1300 South 2nd Street
Pekin, Illinois 61554-5402 U.S.A.
Telephone: (309) 347-9200
Fax: (309) 346-0742
Web site:http://www.aventinerei.com

Public Company
Incorporated: 2003
Employees: 321
Sales: $1.6 billion (2006)
Stock Exchanges: New York
Ticker Symbol: AVR
NAIC: 325998 All Other Miscellaneous Chemical Product and Preparation Manufacturing

LATE 19TH-CENTURY LINEAGE

SALE OF PEKIN ENERGY: 1995

FORMATION OF AVENTINE: 2003

PRINCIPAL DIVISIONS

PRINCIPAL COMPETITORS

LATE 19TH-CENTURY LINEAGE

Although corn-based ethanol used to make gasohol dates only to the 1970s, Aventine’s lineage and connection to Pekin, Illinois, reach back to the late 1890s when the Illinois Sugar Refining Company opened a sugar beet–processing plant in the town to convert locally grown beets into sugar. It became quickly apparent, however, that beets were not the best crop for the area’s climate, and the farmers began planting corn instead. The local plant followed suit and around 1904 the Corn Products Refining Company bought the operation and began to process corn using the wet milling process. The corn kernels were removed from the cob, and the starch, fiber, oil, and protein components were separated out. The starch and oil were especially valuable, used to make such products as Argo Corn Starch, Mazola Corn Oil, and Skippy peanut butter. In addition, the plant produced corn meal and feed pellets.

In time, Corn Products grew into a large company, CPC International Inc. By 1980 CPC had opened plants on both coasts to be closer to the primary markets for corn products and looked for a new use for the Pekin plant. At the time, in the wake of the Arab oil embargo of the 1970s, ethanol became a viable product. The Energy Tax Act of 1978 passed by the U.S. Congress provided an exemption to the 4-cents-per-gallon federal fuel excise tax on gasoline for fuel blended with at least 10 percent ethanol, and two years later more helpful legislation followed: the Crude Oil Windfall Profit Tax Act, and the Energy Security Act, both of which promoted energy conservation and domestic fuel development. To take advantage of this situation, CPC in 1980 formed a 50-50 joint venture with Texaco Inc. called Pekin Energy Company.

The old Corn Products plant remained in operation while an addition was constructed to house fermentation and distillation capabilities. When the work was completed, the old plant was shut down, and some of the old facilities destroyed. By the end of 1980 the conversion was complete and the plant began producing fuel-grade ethanol. The initial capacity of the operation was 60 million gallons of ethanol a year. Texaco had planned to procure most of the plant’s ethanol but soon decided against marketing ethanol-enhanced fuels in the region. As a result, Pekin Energy very quickly launched its own marketing effort. The government helped further by adding more incentives for ethanol use. In 1982 the Surface Transportation Assistance Act increased the exemption for 10 percent ethanol blended gas to 5 cents per gallon, and the exemption was increased to 6 cents per gallon by the Tax Reform Act of 1984. In response, Pekin Energy increased the plant’s capacity to 70 million gallons.

Then, the Alternative Motor Fuels Act of 1988 provided further support to ethanol use, and a year later Pekin Energy added another ten million gallons of production. Although the tax incentive was lowered from 6 cents per gallon to 5.4 cents in 1990, through the Omnibus Budget Reconciliation Act, Congress extended the ethanol tax incentive from 1992 to 2000. In addition, the Clean Air Act of 1990 provided a boost to the ethanol industry, which successfully lobbied for the inclusion of oxygenated fuels, such as those produced using ethanol. Rather than just serving as a gasoline extender, ethanol was able to challenge MTBE as a fuel additive, used to reduce carbon dioxide emissions. In 1991 the Pekin Energy plant was expanded to its current 100-million-gallon capacity.

SALE OF PEKIN ENERGY: 1995

By the mid-1990s Pekin Energy was the second largest producer of ethanol, trailing only Archer Daniels Midland Corporation. Texaco finally became an important customer of Pekin Energy ethanol, using it in fuel blends marketed to Oregon and Washington State. Texaco, however, was never comfortable being the only major oil company with a stake in an ethanol company, so it came as no surprise in 1995 when it decided, along with CPC, to sell Pekin Energy to Williams Energy Ventures for $167 million. For its part, CPC was willing to divest its stake in the joint venture, as well as its Enzyme Bio-Systems Ltd. unit, because it wanted to focus on its core food manufacturing and processing businesses. The United States’ largest natural gas company, Williams had recently entered the ethanol field and was interested in expanding on its Midwest asset base, which included 20 fuel handling and blending facilities in seven states. It also owned a two-thirds position in Nebraska Energy L.L.C., a joint venture with Nebraska Energy Cooperative that was building a 30-million-gallon corn dry mill ethanol plant in Aurora, Nebraska. This unit was combined with the Pekin Energy unit to form Williams BioEnergy, which maintained its headquarters in Pekin.

COMPANY PERSPECTIVES

We are proud to be one of the leading innovators in the renewable energy field. The products we sell help reduce our country’s dependence on foreign oil, benefit the environment by reducing pollutants and improve automobile performance by increasing octane.

The ethanol industry continued to grow in the second half of the 1990s primarily because of its lobbying efforts. While some politicians decried ethanol’s hefty tax credit, half of which benefited Archer Daniels Midland, as little more than corporate welfare, others were not willing to challenge officeholders from farm states who were committed to ethanol. Presidential candidates who had to campaign heavily in Iowa, because of its prominent position in the primary season, found themselves currying favor with the ethanol lobby or incurring its wrath. The Republican-controlled Congress talked about eliminating the tax exemption, but in the end included an extension through 2007 in the 1998 highway bill, and Democratic President Bill Clinton signed it. The only concession was a reduction from 5.4 cents per gallon to 5.1 cents, beginning in 2005.

The ethanol lobby also made great strides in undermining the manufacturers of MTBE, who carried far less clout, given that the leading players were international firms. By the start of the 21st century, ethanol appeared to be on the verge of a major growth spurt, buoyed by its prospects as a gasoline extender, at a time when energy prices were rising; as an oxygenate, as some states such as California banned MTBE; and as an important source of energy. Moreover, new markets were opening up overseas for ethanol, creating even more opportunities, and the price of corn was low, making ethanol even more profitable.

FORMATION OF AVENTINE: 2003

Despite ethanol’s emergence, Williams elected to divest the Williams BioEnergy subsidiary, along with some other assets in 2002 in order to pay down debt in the wake of some financial problems, which included Williams Communications Co. filing for bankruptcy in April of that year. In February 2003 the business was sold for $75 million to a company formed that month by Morgan Stanley Capital Partners, called Aventine Renewable Energy Holdings, Inc. Serving as Aventine’s president and chief executive officer was the former president of Williams BioEnergy, Ronald H. Miller. After graduating from Southern Illinois University at Carbondale, Miller had gone to work for Texaco and a decade later transferred to Pekin Energy as director of marketing. He stayed when Williams bought the company and continued to work his way up through the ranks until becoming president in 2000.

Market conditions continued to favor ethanol after Aventine carried on the Williams BioEnergy business, as a number of new producers cropped up and production capacity soared. Although Aventine did not build new plants it continued to add more sales by forging alliances with new producers. Sales that totaled $858.9 million in 2004 grew to $1.6 billion in 2006, and net income improved from $29.2 million to $54.9 million.

With a large amount of ethanol production capacity coming on line, the industry faced an impending shake-out, but that did not scare away investors when some of the ethanol companies decided to go public. In 2006 three were set to sell stock: VeraSun Energy, the industry’s second largest producer; Hawkeye Renewables, the third largest; and Aventine, the fourth largest (but because of its marketing alliances, Aventine was a much larger company than the other two). Both Aventine and VeraSun were able to complete their initial public offerings (IPOs) of stock in June 2006 before market conditions soured. Aventine grossed about $275.6 million, while existing shareholders and management raised another $114 million in the offering, underwritten by Bank of America Corp.; Friedman Billings Ramsey Group Inc.; and Goldman Sachs Group Inc. Morgan Stanley Capital Partners retained a 31 percent stake in the business. Of the $260.6 million Aventine netted, almost $170 million was used to reduce debt. The remaining money was earmarked for general corporate purposes, including a 56.5-million-gallon expansion to its Pekin plant. The company also considered constructing a 110-million-gallon dry mill expansion, as well as new 220-million-gallon plants in Aurora and Mount Vernon, Indiana.

KEY DATES

1980:: Pekin Energy Company is formed.
1995:: Pekin Energy is sold to Williams Energy Ventures.
2003:: Aventine Renewable Energy Holdings, Inc., is formed and acquires Williams BioEnergy subsidiary.
2006:: Aventine goes public.
2007:: Aventine enters biodiesel market.

When Aventine stock began trading on the New York Stock Exchange, it quickly lost value against its $43 IPO price. VeraSun, which had come to the market earlier in the month, had fared better, but it was clear that investors were beginning to have second thoughts about ethanol, wondering if ethanol’s promise had once again been overhyped because of high oil prices and the cheerleading of politicians pursuing their own agenda. To complicate matters, the price of corn spiked and with a sudden surge in ethanol production capacity, the price of ethanol inevitably collapsed. Moreover, there was even more production capacity waiting in the wings. Aventine, at least, had been able to tap into the equity market before all of these problems became apparent. Hawkeye Renewables had hoped to raise $325 million in its own offering, but was forced to postpone its IPO.

Despite questionable market conditions, Aventine was able to post record results for 2006, and in 2007 continued in its efforts to dramatically increase production capacity. At the same time, the company looked to leverage its marketing capabilities honed over 25 years and achieve a measure of diversity by launching a marketing program for biodiesel, a renewable fuel in its formative stages. In June 2007 the new business received a boost when it signed one of the leading biodiesel companies, Delta BioFuels, to a marketing agreement. Located in Mississippi, Delta BioFuels had launched production the previous month and expected its plant to produce as much as 100 million gallons of biodiesel a year.

Ed Dinger