Gates Invests in Ethanol Company

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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.

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.


"[Ethanol] 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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Source: Knight Ridder/Tribune Business News


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