Texas plant asks bankruptcy court to approve tolling agreement

By Holly Jessen | May 11, 2011

If approved in U.S. Bankruptcy court, a tolling agreement may help Levelland Hockley County Ethanol LLC start production again after sitting idle since December. The 40 MMgy ethanol plant filed paperwork on May 10, requesting approval of an arrangement with Tenaska BioFuels LLC that would put the supply of grain, natural gas and marketing of ethanol and DDGS in Tenaska’s corner.

The goal is to get the plant restarted quickly to take advantage of the “prime profitable months,” beginning in September, the start of the milo and corn harvest. “There’s a lot of variables, but we’re hoping to be back up in production in a few weeks,” plant manager Rodney Penton, told EPM.

LHCE filed for Chapter 11 bankruptcy protection on April 27, thanks to high feedstock prices and tight margins, Penton said. About 30 people, including some seasonal workers, were laid off in December, when the plant shut down. Currently there are about 23 people working at the plant full time. When the plant is in operation, it employs between 40 and 45 people, he said.

If the tolling agreement is approved, Tenaska would retain title to all inputs and outputs. In return, the ethanol plant would receive the net sales as processing fees, less a 2.5 percent fee to Tenaska and a 3.5 percent fee on ethanol sales. In all, it would help the company access about $10 million in post-bankruptcy working capital without adversely affecting the secured lenders’ collateral. This type of agreement is referred to as a tolling agreement because Tenaska is charging a percentage of revenues, or a toll, and the remainder goes to the producer for processing the goods. “Title to the inputs and outputs remain with Tenaska and would not be subject to liens of Debtor’s creditors,” the company said.

LHCE believes the agreement is essential to help the plant begin operating again and realize the value of its assets. “Based on all information available to its board of managers, the debtor’s ethanol plant in production is worth at least 25 percent more than it is not in production,” the company said in court documents. “While operating, the Debtor expects to propose a plan of reorganization that will repay all creditors and retain some value for its members that may be funded by new investment, a market purchaser or even through its operations alone.”

If the agreement is approved, the ethanol plant can operate at full capacity without having to borrow money or commit to long-term contracts to sell ethanol or DDGS. “The debtor is at a difficult crossroads,” the company said in court documents. “It has sufficient cash only to operate as a skeleton for a number of months and hope for a miracle, or to implement the Tenaska Agreement and perhaps blaze a new future. The Debtor’s board of managers, in the proper exercise of business judgment, has chosen the second course.”

An appraisal completed Jan. 27, not long after the plant shut down, valued the plant assets at more than $51.5 million, if the plant is fully operating. If idled, the value is $40 million. The company owes the senior secured bank group, represented by GE Energy Financial Services, about $33 million in principal and accrued interest. Another $9 million is due to a subordinated secure lender, Farmers Energy Levelland LLC, an affiliate of Rex American Resources Corp., which owns the most equity in the ethanol plant with member interests of 48.6 percent. Unsecured debt and other obligations are estimated at $4.6 million.

The ethanol plant requested an expedited hearing for not later than May 17 or May 23. However, on May 11 GE Energy filed an objection to the motion to set an expedited hearing. The Tenaska agreement would tie up all the assets of the ethanol plant through the end of 2014, preventing the ethanol plant or any potential buyer from using the plant for anything else for more than three years, the lender said in court documents. GE Energy said the agreement had “onerous terms and questionable benefits” in addition to the fact that LHCE has been trying to sell the plant for four months, yielding “no offers even remotely close to the amount of debt owed” and calling the plant’s equity cushion “at best illusory.”