Gates Invests in
Ethanol Company
November 17, 2005 — By E.J. Schultz, Fresno Bee
Billionaire Microsoft Corp. Chairman
Bill Gates is investing in a Fresno ethanol company.
Pacific Ethanol announced Tuesday that Cascade Investment LLC, a
privately held company serving as Gates' investment vehicle, has agreed
to purchase $84 million of Pacific Ethanol stock.
The deal, which still requires stockholder and regulatory approval,
gives the Fresno company a much-needed boost as it tries to bring
large-scale ethanol production to California.
"It certainly gives our team the thumbs up, and we're definitely honored
to have that level of investor on our team," said Ryan Turner, chief
operating officer of Pacific Ethanol.
Pacific Ethanol stock rose 12.35 percent, or $1.12, to close at $10.10
in trading Tuesday on the Nasdaq Stock Market.
Under the deal, Cascade will buy 5.25 million shares of convertible
preferred stock. If converted immediately to common stock, Cascade would
own 10.5 million shares, or 27 percent of all outstanding common stock.
Also, Cascade will have the right to appoint two members to Pacific
Ethanol's board of directors.
Of Cascade's $84 million investment, $80 million must be used to build
or buy ethanol plants, according to the deal's terms.
Pacific Ethanol, founded by former California Secretary of State Bill
Jones, is building an ethanol plant in Madera scheduled to be
operational by the end of next year.
The company has plans to build four additional plants on the West Coast.
The average ethanol plant costs $60 million to $70 million to build,
Turner said.
Pacific Ethanol recently reneged on an acquisition of a plant in Goshen
owned by Phoenix Bio-Industries, saying the plant failed to meet
performance standards.
Turner said the company has options to buy or lease land at four sites.
Two sites are in the Central Valley, including one in Visalia near the
intersection of highways 99 and 198.
The other sites are in Southern California and the Pacific Northwest, he
said.
Ethanol is a gasoline additive, or oxygenate, typically made from corn.
Today, most ethanol is shipped to California from the Midwest.
Pacific Ethanol is betting that the alternative fuel gains popularity in
California as worldwide oil supplies fall.
One possible advantage of producing here is that distillers grain, a
byproduct of ethanol production, can be sold as cattle feed to the
booming California dairy industry.
Turner said that Gates' investment "clearly puts Pacific Ethanol on the
map."
Cascade, based in Kirkland, Wash., has made at least one other energy
play recently. In October, the company bought $100 million of
equity-linked securities from PNM Resources, an energy holding company
in Albuquerque, N.M., according to a PNM statement. Cascade's other
holdings include a stake in theme park company Six Flags Inc., according
to published reports.
In putting money into ethanol, Gates is investing in an industry that is
showing good profit potential, said David Hackett, an energy industry
consultant at Stillwater Associates in Irvine.
"One of the reasons Bill Gates is the richest guy in the world is
because he makes smart investments," he said.
Hackett once was not so bullish on ethanol but has changed his tune as a
result of revised forecasts that show gas prices staying near
record-high levels.
Ethanol prices tend to move in the same direction as gas prices. But
production costs for ethanol haven't risen as quickly as gas costs
because corn prices have remained flat, Hackett said.
"Poll ID Ethanol does not exist.
producers are making more money this year," Hackett said.
One wild card could be how oil companies react to the recently signed
federal energy bill.
The new law removes a nationwide mandate requiring fuel in polluted
areas to contain a percentage of oxygenates; in California most gas
contains 5.7 percent ethanol. The law replaces the oxygenate standard
with a more flexible requirement.
Under the new mandate, the amount of total ethanol used nationwide will
almost double, from 4 billion gallons in 2006 to 7.5 billion in 2012.
But oil companies can choose when and where to use ethanol.
One reason oil companies blend in ethanol is because it boosts octane
ratings, which provide the get-up-and-go in gas.
Free from the per-gallon mandate, California blenders might come up with
nonethanol solutions, Hackett said.
"But still, they'll use a lot of it," he said.
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http://www.fresnobee.com
Source: Knight Ridder/Tribune Business News
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