While the energy bill continues to ping pong between the House of Representatives and the Senate, one Company announced its bet that at least one proposition of the bill (the increase in ethanol production and use) will be stripped from the legislation in order to gain bipartisan support.
Pacific Ethanol Incorporated (PEIX) announced on Monday that the Company was suspending construction of its Imperial Valley Project in Calipatria, California until the market conditions improved. The market conditions causing the suspension were not mentioned, and whether the conditions included the federal legislation or not was also unclear.
What is known is that Pacific Ethanol’s founder, Bill Jones, had been at odds with the California state government over waste treatment financing for the plants in Stockton and the Imperial Valley. The waste treatment designation, which is defined as the transformation of useless and unwanted material into something of use, was used by the Company in Oregon to secure tax breaks of $6 million from the state for construction of a 40 million gallon per year facility. The waste they transformed was the corn byproduct in ethanol production and the dehydration of it for sale to ranchers and dairy farmers as corn feed.
PEIX was attempting to garner this waste treatment designation in California which was noted as some $14 million in tax breaks from the state. Recently, the California Debt Limitation Committee recommended against funding the Company through reduced borrowing costs.
But Jones, who was the former Secretary of State for California, has strong political ties and has utilized them for the advocacy of ethanol use in the state. Jones was instrumental in the state upping the percentage of ethanol use from 6% to 10% to meet air quality guidelines even though the increased use of ethanol was noted as actually resulting in higher levels of smog-producing nitrogen oxide. Later, it was found that by reducing levels of sulfur during the refining process, the 10% blend burned as clean as gasoline did with the now banned MTBE additive.
PEIX won that bout, and also benefited from the state of Oregon implementing their own 10% mandate. Last week it was announced that PEIX also received the acceptance of a special committee which included Governor Schwarzenegger, state Treasurer Bill Lockyer, and state Controller John Chiang which effectively overrides the California Debt Limitation Committee’s recommendation.
But now the tax breaks and reduced financing costs could be in limbo now that the Company suspended the construction of the Imperial Valley Project which along with the Stockton plant were granted the waste treatment designation. Even though ethanol prices have dropped with the increased production of the substance throughout the nation, the tax break should have offset some of that decline in revenue along with California’s subsidy of 51c per gallon. In any event, with PEIX suspending its construction and expansion, the ethanol market may not be as conducive to profits as it once was which is in stark contrast to how stocks of other ethanol names have reacted over the past few weeks. With that in mind, investors would be wise to watch.
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