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Keystone Biofuels in Chapter 11, planning comeback

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Just a couple of years ago, Cumberland County-based biodiesel producer Keystone BioFuels Inc. was a promising story with plans to expand production and add employees. But today it is in Chapter 11 bankruptcy protection and owes millions of dollars to creditors.

Keystone BioFuels, with its production facility in Lower Allen Township, filed for Chapter 11 in March, according to records at the U.S. Bankruptcy Court for the Middle District of Pennsylvania.

Keystone owes more than $2.8 million to its top 20 creditors alone, according to the filing. The largest debt in that top 20 is more than $800,000 to Petroleum Products Corp., a wholesale fuel station in Lower Swatara Township, Dauphin County.

Although the day looks dark, nails haven't yet been hammered home on Keystone's coffin.

"We're still excited about (our expansion)," said Ben Wootton, Keystone's president and CEO.

That's because the company is working through Chapter 11 to get a better position on its debt, is working toward paying back creditors and has potential investors that could help propel the company further in the biodiesel industry, Wootton said. Keystone could partner with a national company that is expanding its operations, Wootton said, although he declined to identify the potential investor.

In the latest action, on July 22, the court gave Keystone until Sept. 4 to pay its landlord rent for April, July and August for its manufacturing facility at 2850 Appleton St.

Fall from grace

Keystone's June financial report as part of the bankruptcy process shows it had total receipts of $140,800, but accounts receivable were just $1,839. Its operations statement shows no revenue for June.

At the end of the month, Keystone had a net loss of nearly $62,300, with a cumulative loss of more than $145,500, according to filings.

That's a long way from 2011, when the company intended to increase production and hire about 14 people, doubling the company's staff.

The company had moved to the Appleton Street location from a facility in Hampden Township that January, which gave it 60,000 square feet, up from 15,000. At the time, Wootton expected to increase production tenfold.

But as part of the 2010 move, Keystone needed a $5 million upgrade to its production line to remain competitive, Wootton said. However, with the financial crisis and recession, standard credit wasn't an option, he said.

Instead, it used fair market value leasing of the new equipment for the upgrade, he said. That gives the company the option of buying the equipment in two years, but the amortization of the equipment wasn't favorable, and it was going to cost Keystone too much, Wootton said.

Keystone also received about $3 million in state grants going back to 2006, as well as loan guarantees and its share of production subsidies.

The company shut down to do the upgrade and reopened in October 2011. By 2012, there were serious problems with the industry, due in part to a lapse in federal incentives.

"The entire biodiesel market had a downturn in 2012, and about 45 percent of the producers shut down," Wootton said.

Four years ago, Pennsylvania had about eight producers, and today it's down to four, he said.

Keystone had to stop production in December 2012 because of its debt and the downturn, he said.

"Like any other industry, it goes through its growing pains," he said.

The biodiesel industry is dependent on state and federal incentives and mandates. Congress was giving producers a $1-per-gallon subsidy. Pennsylvania added 75 cents to the mix, as well as setting up a schedule for blending increased amounts of biodiesel into petroleum diesel sold in the state.

The initiatives helped. U.S. biodiesel production increased from 25 million gallons annually in 2004 to 700 million gallons in 2008, according to the National Biodiesel Board. When Congress let its incentives lapse in 2009, production dipped to 545 million gallons, then to 315 million in 2010.

With reintroduction of the subsidy and national blending mandates, production jumped to 1.1 billion gallons in 2011, according to the board.

Future market

"2013 is by most accounts the strongest year for the U.S. biodiesel industry in a long time, if not the strongest ever," said Ron Kotrba, editor of Biodiesel Magazine, a national trade publication.

Fuel blenders receive a $1-per-gallon credit that was renewed in January, which helps support the biodiesel industry, and the credit was retroactive, so producers and blenders that mix biodiesel with petroleum diesel received payouts for sales in 2012, Kotrba said.

Also, the federal renewable fuel standard — which requires blending biodiesel into petroleum diesel — was boosted from 1 billion gallons annually to 1.28 billion gallons this year, he said. That means oil companies are obligated to buy biodiesel.

Pennsylvania incentives lapsed in 2011, but the blending mandates still exist. In about two years, enough biodiesel could be produced in Pennsylvania for all diesel to be required to contain at least 5 percent biodiesel, Wootton said.

Through May, the biodiesel industry produced 504 million gallons, putting it on track to be the best year on record, Kotrba said.

The future is what Wootton is banking on, too. Two months ago, Keystone restarted production for test batches of biodiesel for a prospective customer, but the company isn't currently producing, he said. It has customers lined up and could begin producing again by mid-August.

"Luckily, we're not going Chapter 7 and being liquidated," Wootton said.

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