Who'll be left holding the bag in Pa. ethanol plant's demise?

CLEARFIELD, Pa. - Five years ago, officials of Getty Petroleum Marketing Inc. enlisted then-Gov. Ed Rendell to help build Pennsylvania's first ethanol plant in this borough of 6,100 people, a badly needed investment in a community battered by coal's long decline.

The state agreed to support the $270 million project with $27 million in grants and loans and by issuing $67 million in tax-free bonds. Getty agreed to buy the ethanol to blend into its gasoline.

But by the time the plant began converting corn into ethanol in December 2009, the market for the additive had soured. Last month, Bionol Clearfield L.L.C. shut down and declared bankruptcy, less than two years after starting up.

Though the plant is idled, its workforce of 55 remains employed while a Bankruptcy Court trustee seeks a buyer, a process expected to take six months.

"That plant's going to be taken by somebody," Rendell said in an interview last week. "It will be a fire sale, but somebody will take the plant."

Still to be determined is who will be left holding the bag for Bionol's demise: Bionol's equity investors; TD Bank N.A., which holds $131 million in loans; the buyers of the $67 million in tax-free bonds; or the Commonwealth of Pennsylvania, which is owed $6.3 million in loans.

Getty Marketing's obligations also remain unclear.

Getty's contract to buy the plant's production was the foundation upon which the plant was conceived and financed. And when Getty defaulted on the contract in 2010, the die was cast for Bionol's demise.

"Getty agreed to a market price that was far too high," Rendell said, "and they got trapped in a bad deal."

Getty claimed it was defrauded by Bionol and sought to settle the dispute through arbitration.

But on July 18, a panel of the American Arbitration Association ruled that Getty had intentionally breached the contract. It awarded Bionol $230 million, the amount it projected Bionol would lose over the contract's five-year term.

"The Getty default led to a cascading series of events - the inability to make debt service, the shutdown of the plant, and the bankruptcy filing," said Anthony A. Bongiorno, a partner in the Boston office of McDermott, Will & Emery, which represents Bionol Clearfield.

The bankruptcy trustee, Alfred T. Giuliano of West Berlin, N.J., has initiated action in U.S. Bankruptcy Court in Delaware to recover the award from Getty Marketing.

But collecting the money presents challenges because Getty Marketing has changed owners.

In February, while the arbitration panel was considering testimony in the case, the Russian oil giant OAO Lukoil, which owned Getty Petroleum Marketing, sold the company to a New York investment firm.

The terms of the sale between Lukoil Americas Corp. and Cambridge Petroleum Holding Inc. were not announced. In a news release, Lukoil identified the buyer as an affiliate of Cambridge Securities L.L.C., "a firm specializing in investments and operations in the oil and gas services industry."

Getty Marketing's new owners do not appear to have deep pockets. They were three weeks late this month paying their rent to their landlord, Getty Realty Corp., an unrelated, publicly traded real estate trust that leases about 78 percent of its 1,052 stations to Getty Marketing.

Analysts who follow Getty Realty have expressed concern that Getty Marketing's new owners might declare bankruptcy, adversely affecting Getty Realty. A bankruptcy by Getty Marketing, by extension, would affect Bionol's ability to recover its $230 million award.

"The collection process here is complicated, to say the least," Bongiorno said.

Representatives of Lukoil did not return calls. A representative for Getty Marketing declined to comment. Phone numbers listed for Cambridge Securities are out of service.

But the 27-page decision by arbitrators J. Owen Todd and David L. Evans contains clues about how Lukoil and Getty officials sought to "get rid" of the "toxic" deal with Bionol.

According to the decision, it was actually Getty officials who conceived of the idea of building an ethanol plant in Pennsylvania.

In 2006, Getty officials were approached by Stephen Gatto, the chief executive officer of Bionol's parent company, BioEnergy International L.L.C., of Quincy, Mass., to buy the output from an ethanol plant that BioEnergy was developing in Louisiana.

At the time, ethanol was in short supply, and Getty was eager to lock in a steady source. But Vincent DeLaurentis, Getty's chief operating officer, said Getty had a greater need for ethanol on the East Coast. DeLaurentis suggested the partners approach Rendell, with whom Getty had access.

According to the arbitrators, DeLaurentis suggested "that a union of Getty's political connections and Mr. Gatto's ethanol expertise be utilized to persuade Gov. Rendell to support the building and expedite the permitting of an ethanol-manufacturing plant in a location in Pennsylvania to be selected by the governor."

The terms of the deal were struck in which Getty would pay Bionol for ethanol using a formula based on the market prices of the fuel's raw materials, the biggest of which is corn.

The deal allowed Bionol to keep all the profit from the sale of the distiller's grains, a byproduct of ethanol production sold as livestock feed. Getty would later claim Bionol deceived it about the value of the animal feed.

In 2006, ethanol cost $6 a gallon. But by the end of 2007, the price had fallen to less than $2 a gallon as a legion of Midwestern ethanol plants came into production to take advantage of federal mandates requiring gasoline to contain some ethanol.

By 2009, with the Bionol plant nearing completion, Getty officials began to realize the contract's deficiencies - that it would be cheaper to buy ethanol on the open market than to live up to the Bionol contract.

In internal Getty e-mails that were submitted in the arbitration case, Getty chief executive Vadim Gluzman calculated that Getty would lose 50 cents per gallon on the Bionol deal - $50 million a year - and that his Lukoil superiors in Russia would be unhappy.

"I think this is a pure gamble for us," he wrote. "If it works, great, but if it doesn't, we would be completely f-ed."

He directed his employees to reassign the contract to other parties. But when Getty found no takers, the arbitrators found, it "threatened to restructure Getty's assets and leave Bionol with a judgment-proof contracting party" whose only asset would be the Bionol contract.

The arbitrators said there was no evidence to support Getty's contention that it had been defrauded. "The records simply reflect buyer's remorse."

Rendell said he tried to intervene and negotiate a compromise - better terms for Getty, but a longer contract for Bionol.

But by that time, both parties were entrenched and convinced they would win in arbitration.

"There was real dislike between them," he said. "I tried to broker the deal. And it failed."