Hawkeye Holdings LLC

views updated

Hawkeye Holdings LLC

21050 140th Street
Iowa Falls, Iowa 50126
U.S.A.
Telephone: (641) 648-8910
Fax: (641) 648-8925
Web site: http://www.hawkrenew.com

Private Company
Incorporated: 2003 as Iowa Falls Ethanol Plant, L.L.C.
Employees: 85
Sales: $89.1 million (2005)
NAIC: 325998 All Other Miscellaneous Chemical Product and Preparation Manufacturing

FOUNDER, A 1978 UNIVERSITY OF IOWA GRADUATE

CREATION OF MIDWEST RENEWABLES: 2003

IPO CANCELED: 2006

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

FOUNDER, A 1978 UNIVERSITY OF IOWA GRADUATE

The man behind the creation of Hawkeye Holdings was Bruce Rastetter. He grew up in Iowa on a small farm near Buckeye, where his family raised hogs and cattle. Because the 280-acre farm was not large enough to support more than one family, Rastetter considered becoming a lawyer. He earned a degree in political science from the University of Iowa in 1978 and then enrolled at the law school at Drake University in Des Moines. He soon soured on the legal profession, however, and after a year returned home and went to work part-time in the Iowa Falls post office. He then took a job selling livestock feed in Alden, Iowa.

In the mid-1980s Rastetter seized a chance to start his own business, taking advantage of a crisis in the farm belt. Because of plummeting farm land values, according to the Waterloo Courier, his feed customers “were in desperate need of adding income without the risk of buying more livestock and land, or getting an off-farm job.” In addition, “consumer demand for lean pork was not compatible with the way many Iowans were raising hogs outdoors.” Hogs were being housed in climate-controlled buildings to cut down on the amount of fat they needed to live outdoors in often brutal winter conditions in Iowa. What Rastetter realized was that these changes created an opportunity for the contract raising of hogs. The farmers needed the income without the risk of buying more livestock, while the companies that owned the hogs did not want to tie up their money in buildings and overhead costs.

Rastetter founded Alden Feed Service in 1984 as a retail feed sales and contract feeding company. In 1988 he began raising hogs himself under the Heartland Pork name. The following year he started Advance Management Systems, a contract hog management, feed, accounting, sales, and transportation company. In 1992 he and a brother established Quality Ag Builders, a construction company that specialized in hog confinement facilities.

Rastetter then brought all of these entities together in 1994 as Heartland Pork Enterprises Inc. The company enjoyed robust growth for a while. In just four years the number of hogs under contract increased from 250,000 to 1.1 million. The hog market was destined to crash, however, as hog production outstripped both consumer demand and the ability of slaughterhouses to process the pork. As a result, hog prices fell to Great Depression–era levels. Rastetter hung on as long as he could, but with pork prices continuing to lag he eventually had to sell his operation, the second largest hog producer in Iowa and 13th largest in the country, to Minnesota’s Christensen Family Farms in March 2004. Shortly before the sale was completed, pork prices finally enjoyed a surge, but it was too late to cancel the deal and Rastetter was in need of a new opportunity.

During his time running Heartland, Rastetter made a number of enemies, mostly people who were concerned about the environmental effects of large-scale pork production, but he also forged some valuable relationships. One of the latter was with a Connecticut-based investment bank, J.H. Whitney and Co., which was interested in becoming involved in renewable energy. While Heartland was being sold, Whitney enlisted Rastetter to set up an ethanol production business in Iowa, along with a wind farm.

CREATION OF MIDWEST RENEWABLES: 2003

In 2003 Whitney formed Midwest Renewables L.L.C. and installed Rastetter as chief executive officer. The company began making plans to build a $65 million ethanol plant, able to produce 40 million gallons of ethanol a year, in Iowa Falls. The town was deemed an excellent location because it was a nexus for both east-west and north-south rail lines, and close to U.S. Highway 20 as well as corn producers. Within a 60-mile radius more than 500 million bushels of corn were grown each year. In addition, Midwest Renewables indicated an interest in building a 135-turbine wind farm in Iowa’s southern Franklin County near Iowa Falls, capable of generating 200 megawatts of power, but the $200 million project was put on hold until a deal was reached with a regional utility company to buy the electricity. While the wind farm idea failed to gain traction, primarily because the winds in Iowa die down around August when power is most needed, ethanol was a very viable idea given the state’s large corn crop and the government’s longtime support of gasohol.

COMPANY PERSPECTIVES

Hawkeye Renewables is a privately owned, Iowa based renewable energy company which uses locally produced corn to manufacture and distribute ethanol in the United States.

In October 2003 Iowa Falls Ethanol Plant, L.L.C., again with Rastetter in charge, was formed to operate the ethanol plant built by Midwest Renewables. It was this new entity that would take the name Hawkeye Renewables two years later. Midwest Renewables received a $400,000 loan from the state of Iowa to build the Iowa Falls plant, but the bulk of the financing came from Connecticut’s Hudson United Capital, making the project one of the first ethanol facilities to be backed by a private equity fund. The facility opened in November 2004 and almost immediately plans were made to expand the plant to more than double its production capacity to 100 million gallons of ethanol a year. At the same time, Midwest Renewables made plans to construct a second and even bigger plant near Fairbank, Iowa. The $100 million plant straddled Fayette and Buchanan counties, but officials from both counties were eager for economic development and paved the way for construction by quickly approving zoning changes.

Although Rastetter avoided the community scraps he had encountered during his days at Heartland Pork, he and his new venture did not lack detractors. Hugh Espey, head of Iowa Citizens for Community Improvement, a longtime opponent of large confinement livestock operations, told the Waterloo Courier, “a leopard doesn’t change his spots. What we know about him is tied up in Heartland, so there’s not a lot of good things to say. (Heartland) was not a good neighbor. If ethanol is such a boon, where is the price of corn? That’s the question family farmers should ask.” By Espey’s estimation, Hawkeye should have been paying more than $3 per bushel of corn instead of the actual $2 range. Rastetter did not respond in kind, however, maintaining, “We don’t believe in burning bridges with people.”

To keep peace with the community, the Fairbank plant would install thermal oxidizers to burn ozone gas before it could escape, thus reducing much of the odor problems long associated with ethanol plants. At the same time, Rastetter challenged residents to take a realistic look at Iowa’s situation: “The rural communities that embrace and support change, like Iowa Falls and Fairbank, are going to have opportunities,” he told the Waterloo Courier. “It’s a disservice to young people who want to stay in rural Iowa for communities not willing to embrace change in a positive way.”

Hawkeye generated sales of $89.1 million in 2005, resulting in an $8.6 million net profit. The company’s production capacity increased dramatically in 2006. First, in March 2006 the Iowa Falls expansion was completed, followed in May 2006 by the opening of the 115-million-gallon ethanol plant in Fairbank. In that same month, Hawkeye Holdings Inc. was formed as a Delaware corporation to become the corporate parent in a preliminary step to making an IPO of stock. Moreover, at this time several investment funds affiliated with Boston, Massachusetts-based Thomas H. Lee Partners L.P. acquired about 80 percent of the company.

Hawkeye was not the only ethanol company targeting Wall Street. Aventine Renewable Energy and Vera-Sun Energy Corporation were also looking to sell stock to raise funds to expand their operations. In its prospectus, for example, Hawkeye indicated that it hoped to break ground on a third plant in 2006 and a fourth one a year later, thereby increasing production capacity to more than 400 million gallons of ethanol per year. There was also talk in the press of a fifth plant that would raise capacity beyond the 500-million-gallon mark.

A major reason for a surge in interest in ethanol could be traced to steps taken by refiners in Texas and some northeast states to phase out MTBE, creating a bigger market for ethanol as an additive to help gas burn cleaner. Moreover, with the price of oil reaching record heights, the economic advantages of replacing a portion of gasoline with the less expensive ethanol were magnified. As a result, sales soared for the three ethanol producers and they were eager to tap into the equity market as soon as possible.

Both Aventine and VeraSun completed their IPOs in June 2006, but Hawkeye, which hoped to raise $325 million, failed to reach the market before enthusiasm waned among investors, who began to question if ethanol was little more than a fad, inspired by high oil prices and hyped by politicians for their own ends. To make matters worse for Hawkeye, the price of corn spiked and with a sudden increase in ethanol production capacity, the price of ethanol collapsed. With even more production capacity about to come on line, the situation looked as if it could only grow worse.

KEY DATES

2003:: Midwest Renewables is formed.
2004:: Iowa Falls plant opens.
2006:: Fairbank, Iowa, plant opens; initial public offering of stock is canceled.

IPO CANCELED: 2006

In September 2006 Hawkeye bowed to market conditions, postponed its IPO, and shelved plans to build more plants. The long-term outlook for ethanol appeared cloudy. Livestock producers were not happy that ethanol producers were driving up the price of corn, making it more expensive to raise livestock. They lobbied for the elimination of the ethanol tax credit, as well as the stiff tariff imposed on imported ethanol, in order to level the playing field and allow the free market to function unencumbered. Environmentalists were also skeptical about the supposed benefits of ethanol to the planet, maintaining that the amount of land, energy, and water needed to produce corn ethanol offset any environmental gains. Furthermore, there was no chance that ethanol alone was going to have much impact on the United States’ dependence on foreign oil. However, all of these factors were dwarfed by raw political considerations. A majority of public officials and individuals running for high office were eager to champion the benefits of ethanol, which many in the heartland believed was a key to their future prosperity. As long as that remained the case, Hawkeye continue to lay a claim on its own future prosperity.

Ed Dinger