Great Adaptions

After less than a year under new ownership, Aventine Renewable Energy is proving to be a valuable investment for Morgan Stanley Capital Partners.
By Tom Bryan | January 01, 2004
When Morgan Stanley Capital Partners acquired Williams Bio-Energy for a bargain-like $75 million last year, Ron Miller knew what stood to be gained and lost.

There would be no jobs eliminated, no customer relationships broken and no drastic changes to the company itself. Those assurances comforted Miller. The thought of being disconnected from Williams did not.

"Overnight, we went from being part of a giant corporation to a virtual stand-alone company," said the longtime president of the Pekin, Ill.-based ethanol producer and marketer. "Our information network was gone."

But they weren't alone.

The acquisition left certain temporary voids—changes of ownership always do—but Morgan Stanley Capital Partners, stepped in and helped the company recreate itself as Aventine Renewable Energy Inc. The company was able to rebuild its information network and, for the first time in years, focus on the products, employees and customers that directly affected its bottom line—its own bottom line. No longer would ethanol production be a "small potato" asset overshadowed by pipelines, petroleum and natural gas.

"Frankly, it is the first time in 20 years that we have been really important to our owners," Miller said. "We are a priority again, and it is a nice change."

When Morgan Stanley Capital Partners purchased Williams Bio-Energy, it bought a 100-mmgy wet mill ethanol plant in Pekin, 78 percent of a 35-mmgy dry mill ethanol plant in Aurora, Neb. (Nebraska Energy LLC), and the nation's second largest ethanol marketing alliance.

The acquisition was perhaps the biggest changing of hands, so to speak, that the industry had ever witnessed. While the deal was finalized last February (it was actually made official with the name change in May), the acquisition had been in the works for months, with talks beginning as far back as the summer of 2002. In fact, Williams had been considering a sale since 2001.

"Williams had actually been looking for a buyer since mid-2001, even before 9/11," Miller said. "In late 2001 the company began selling assets. They initially let go of much larger assets—pipelines, refineries, retail and natural gas subsidiaries. Because of our small size, we slid down the priority curve and it took almost a year before a buyer was identified."

That buyer was Morgan Stanley Capital Partners, the main "fund" of Morgan Stanley Private Equity.

Since its founding 17 years ago, various Morgan Stanley Private Equity funds have invested capital across a broad range of industries including telecommunications, technology, financial services and healthcare. The company consists of three groups: Capital Partners, Venture Partners and Emerging Markets.

"They look for investment opportunities, and that's how they view Aventine—as an investment." Miller said. "In fact, they'll want to exit the business at some point. That's why growth is so important to this company."

Why invest in ethanol?

"They bought the company because they saw a favorable political environment and a very attractive growth curve," Miller said.

Today, Miller reports to an eight-person board of directors, a well-rounded group that, in addition to Miller, includes four current employees of Morgan Stanley Capital Partners and three experienced advisors.

"They're asking questions that our owners before had never asked," Miller said. "They appreciate the idea of efficiency—doing more with less. Not less employees but, for example, less inventory. We're always doing what we can to reduce costs."

From the beginning, Morgan Stanley expressed confidence in management's ability to perform.

"We were light at the top before the acquisition," Miller said, explaining how the company had reorganized for efficiency and growth in 2000.

"We continuously look for opportunities to become more streamlined," he said. "This industry is too volatile to carry excess weight. We're pretty thin at the top now, and that's the way we want it. We have Jim (Redding) running marketing, Jerry Weiland running the wet mill here in Pekin and Tom Kell running the dry mill in Nebraska."

During the lengthy acquisition period, however, employees in the plant were perhaps less certain of what the outcome would bring. Miller, who had to maintain confidentiality about the acquisition, did his best to address the looming ownership change.

"A sale always brings uncertainty," he said. "You naturally do your best to address that uncertainty head on. Morgan Stanley made it clear early on that they were not in the business of producing ethanol; they were coming in to create value. So we were confident that they would choose to work with us.

"Nothing really changed. Everybody was offered positions. We had to communicate this to employees during the transition to quell rumors. We balanced the needs of the employees while maintaining confidentiality during the sensitive sales negotiation process."

In the end, Miller said, the outcome was good for everyone, and Aventine's 250 employees kept working.

Aventine has substantial ethanol marketing infrastructure, with a 50-terminal market system that includes the Magellan (formerly Williams) Pipeline. The company markets over 500 mmgy and wants to reach 700 mmgy by 2006.

"We market 135 million equity gallons a year," said Jim Redding, Aventine's vice president of marketing. "You can bet we're going to achieve the best selling price when we have that much skin in the game. What we offer our alliance partners is peace of mind. They know we have a vested interest in getting the best possible returns."

Like Miller, Redding has been with the company for more than 20 years.

"I've seen a lot of changes in the last two decades," Redding said. When I came into this business, the industry was producing about 400 million gallons of ethanol a year. From the oil embargo to the Clean Air Act to the energy bill we're looking at now, I can't tell you how far we've come."

Redding, who started working for the company when it was owned by Texaco/CPC, is responsible for making sure every product produced by Aventine, from ethanol to corn gluten feed, finds a market.

"I basically run the cash portion of the machine—everything outside the fence," he told EPM.

Now pursuing new marketing contracts as aggressively as ever, Aventine's ethanol marketing group, which includes a small team of marketers in South Dakota, has a 17 percent U.S. market share.

"Our goal is to reach 20 to 25 percent," Redding said.

Aventine's current alliance partners include Ace Ethanol LLC in Stanley, Wis., Adkins Energy LLC in Lena, Ill., Agri-Energy LLC in Luverne, Minn., Glacial Lakes Energy LLC in Watertown, S.D., Heartland Grain Fuels LP in Aberdeen, S.D., Heartland Grain Fuels LP in Huron, S.D., Nebraska Energy LLC in Aurora, Neb., Quad County Corn Processors LLC in Galva, Iowa, Reeve Agri-Energy LLC in Garden City, Kan., Tri-State Ethanol Company LLC in Rosholt, S.D., and Aventine Renewable Energy in Pekin, Ill.

Aventine's marketing division has a "profit and loss" focus, for itself and for its alliance partners.

"We're in this to make money, just like our alliance partners" Miller said. "We're out there to maximize net backs over the long haul. We're looking for the best returns possible. Period."

Redding added, "We have earned a reputation a supplier of choice. And our goal is to make ethanol marketing a non-event for our alliance partners. We want the producers we represent to think about ethanol marketing as something that just gets done—it should be hassle-free."

Aventine's Pekin wet mill, unlike similar plants run by Archer Daniels Midland Co. (ADM), Cargill and A.E. Staley, does not have "swing capacity," the ability to produce high fructose corn syrup (HFCS) instead of ethanol.

"Being locked into ethanol makes things simple, and we consider it an advantage, Redding told EPM. "One hundred percent of our grind is dedicated to ethanol production. It's our core product."

The other products produced at the Pekin facility include germ, corn gluten meal, corn gluten feed, corn condensed distillers solubles (CCDS), ethanol, industrial alcohol (or grain neutral spirits-GNS), dried brewers yeast and carbon dioxide (through off-take agreements).

The wet mill products are valuable but, according to both Miller and Redding, dry mill ethanol plants make more economic sense in today's capital-thin market.

"Are we glad we have a wet mill? Yes," Miller said. "Would we build a new green field wet mill ethanol plant today? No, probably not. Dry mills are clearly the way to go in terms of building with less capital."

With a wet mill, of course, the coproduct credit return is greater. As opposed to a 33 percent to 35 percent credit return achieved with a dry mill, Miller said, wet mill coproducts typically produce returns in the high 40-percent range, sometimes upwards of 50 percent.

Still, it's an expensive venture.

"To build a wet mill today on a green field site would, in my opinion, require too much capital—something over $2 per gallon of capacity—compared to $1.10 to $1.40 per gallon for a dry mill ethanol plant," Miller said. "However, it probably still makes sense to retrofit an existing wet mill with an ethanol plant."

Expanding is an option too.

In fact, Miller said Aventine plans to eventually expand its existing facility in Pekin.

"We're already examining the possibilities. In my view, its not if, but when," he said. "We will also look at acquiring additional plants. We will make new alliance partners and continue to purchase on the retail side as we strive to achieve a 20 to 25 percent market share." EP