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Los Angeles-Ethanol isn’t just a hot commodity for farmers anymore. Once the specialty of small law firms in the Midwest, ethanol production has sparked interest among Wall Street law firms such as Chadbourne & Parke and Milbank, Tweed, Hadley & McCloy. Some firms-including New York-based Skadden, Arps, Slate, Meagher & Flom and Pacific Northwest firm Stoel Rives-are developing new practice areas in renewable energy to accommodate the rapid demand. “This is an area that has gotten a lot of attention from us, particularly as the size of these projects get bigger and this becomes more like traditional project financing,” said James Alpi, a tax partner in the Washington office of Skadden Arps who plans to head the new practice area. Ethanol, a corn-based additive mixed with gasoline that has been touted as an environmentally friendly alternative fuel, has surged in popularity as oil prices have exceeded $50 per barrel. In August, President Bush signed the Energy Policy Act of 2005, which amended the Clean Air Act to require that ethanol production in the United States be tripled to 7.5 billion gallons by 2012. Several states have passed laws offering tax incentives to entice production. As a result, lawyers are drafting financing deals for new types of private equity investors and banks seeking profitable returns in ethanol production. Other law firms have become involved in the initial public offerings of two ethanol producers. “It’s a booming sector right now, the hottest sector in the energy area,” said Rohit Chaudhry, a partner in the Washington office of New York’s Chadbourne & Parke, who estimates that about 100 ethanol projects are in development in the United States. “A few years back, we didn’t have that many people focused on it. But the last couple of years this industry has exploded.” Bigger deals, bigger dollars For decades, a hodgepodge of small Midwest law firms represented farmer cooperatives and small banks that financed ethanol facilities. Most of those plants produced a limited supply of about 40 million gallons per year. “They’d be smaller, the budget would be smaller, and it would take more time,” said Robert Hensley, a partner in the Minneapolis office of Dorsey & Whitney, which has represented ethanol developers for 20 years. “The legal issues were simpler because not as many parties were involved.” But in the past year, deals have become bigger in both production capacity and dollar value, Hensley said. Hundreds of millions of dollars are being invested in facilities with the capability of producing 100 million gallons per year of ethanol. In February, Dorsey & Whitney represented Dallas-based ASAlliances Biofuels LLC in a $423 million financing project to build three new plants, each of which would produce 100 million gallons a year. The deal, which was the largest ethanol financing in U.S. history, was led by a group of banks and institutional investors that loaned $275 million. Also, several equity investors funded $85 million, and $63 million in subordinated debt was floated. “There are a lot more lawyers involved because the projects are more complicated and there are a lot more dollars involved in building them,” Hensley said. “It’s significantly more work and more involvement because of the way the plants are being built.” The trend has been to combine several new facilities into a single financing project, according to Chaudhry of Chadbourne, which represented the New York branch of German bank WestLB A.G. in the ASAlliances deal. Adding practice areas In 2005, ethanol production reached 4 billion gallons, up from 1.6 billion produced in 2000, according to the Renewable Fuels Association. To accommodate the growing demand, Skadden Arps is planning to start a new practice area in alternative energies. Alpi said the practice group would include project-finance, energy and tax lawyers because ethanol deals involve so many federal subsidies in the form of tax incentives. Since delving into ethanol deals four years ago, he said, “there’s enough of this work now, this is all I do.” Last year, the firm represented Credit Suisse First Boston in arranging a $185 million loan for the builder of a new ethanol plant in Iowa. The plant, to be built by Hawkeye Renewables, is expected to produce at least 100 million gallons per year. In September, Stoel Rives, a 360-attorney law firm with offices in five Western states, formed a new department called the energy ventures and finance group, which comprises as many as 40 lawyers at the firm, said Ted Bernhard, head of the new group and a lawyer in the Portland, Ore., office. “We had an energy practice, tax and corporate business practice, traditional corporate and securities and a strong renewable fuels practice,” he said. “Part of the problem was they weren’t talking to each other as much as they should have been.” Bernhard, who worked in private equity for nine years before coming to Stoel Rives, said he was brought in a few years ago to build the firm’s work in emerging technologies. Ethanol and other renewable fuels, such as biodiesel and wind power, “had more legs on it. We saw the money flow.” Bernhard said that since he joined the firm in February 2004, Stoel Rives has hired about a dozen people who specialize in renewable fuels. New York market contracts Many other law firms that represent large banks and private equity firms are busy doing ethanol deals. William Campbell, a partner in the New York office of Los Angeles’ Gibson, Dunn & Crutcher, said that the firm has about a dozen active or potential ethanol projects. One of the first deals was representing Whitney & Co., a private equity sponsor on the Hawkeye Renewables plant that closed last year. “What was different in that deal was that the construction contract was a more New York market construction contract, which is much more complex in financing terms than a small farmer’s cooperative deal,” Campbell said. Ed Feo, a partner in the Los Angeles office of Milbank Tweed and co-chairman of the energy and project finance department there, said that the firm has about five partners working on renewable energy deals on a regular basis. New York-based Milbank represents large lenders such as Credit Suisse and WestLB Americas on pending ethanol projects. Eighteen months ago, nobody at the firm was doing ethanol deals. “You’re getting bigger projects, and more money is involved,” Feo said. “They are more the client base with which we’ve worked.” Connie Kain, executive director of group communications for WestLB Americas in New York, said the bank hired Milbank on a pending ethanol deal because of its previous relationship with the firm. “They know what our lenders are looking for when we do a large syndication,” said Kain, referring to investments by groups of banks. In March, two ethanol producers, VeraSun Energy Corp. and Aventine Renewable Energy Holdings Inc., filed with the U.S. Securities and Exchange Commission to raise hundreds of millions of dollars in separate initial public offerings. Most ethanol producers are privately held. Davis Polk & Wardwell of New York and Akin Gump Strauss Hauer & Feld are the law firms behind the public offering for Aventine. Stoel Rives and Sidley Austin are handling VeraSun. The catalyst: Congress Much of the push for bank and private equity investing into ethanol comes after federal and state laws were passed in the past year mandating production requirements. On Aug. 8, Bush signed the Energy Policy Act of 2005, which requires that the nation increase its renewable fuel standard of production and provide subsidies in the form of tax credits to ethanol producers. On May 16, a group of U.S. senators introduced a bipartisan bill that would, among other things, increase the renewable fuel standard to 10 billion gallons by 2010, with a long-term goal of producing 60 billion gallons by 2030. “With soaring gas prices hurting Americans right now at the pump, it’s apparent how critical it is we take our dependence on foreign oil,” said Dave Townsend, press secretary for Senator Tom Harkin, D-Iowa, one of the senators who introduced the bill, called the Biofuels Security Act. “We can’t be aggressive enough in promoting renewable fuels.” Some members of Congress have said they will introduce additional legislation that would eliminate a 54-cent tariff on foreign imports of ethanol. Eliminating the tariff would increase supply of ethanol while at the same time, supporters say, provide relief to U.S. drivers from high gas prices. Bush has supported such changes in recent months. “We are in dramatic need of more ethanol,” said Andy Fisher, press secretary for Senator Richard Lugar, R-Ind., who teamed up with Harkin on the Biofuels Security Act. “We have no tariff on imported oil, but a 54-cent tariff on ethanol.” But opponents of eliminating the tariff, such as Harkin, say American subsidies should not be going to foreign ethanol suppliers. Meanwhile, four states-Hawaii, Minnesota, Montana and Washington-have passed laws mandating that at least 10% of gasoline sold in the state contain ethanol. Other states have pending bills on ethanol requirements or have passed tax incentives to produce ethanol within their borders. New complexities But ethanol production comes with some challenges. With so many projects in the works, there aren’t enough contractors to build the facilities, said Hensley of Dorsey & Whitney. “There is a relatively small field of contractors with experience in this area, and most of them, within the last 24 months, have booked to build plants for several years,” he said. “So they’re fairly busy.” Milbank’s Feo said ethanol production deals are more complex than traditional project finance because they are based on the fluctuating prices of two commodities, corn and oil, which often don’t align with one another. Lawyers have to draft contracts that hedge those risks and alleviate the volatility of both industries. With oil prices far above $50 per barrel-they recently broke the $70 per barrel mark-ethanol has become an affordable alternative, but if oil drops to $50 or less per barrel, that could eliminate much of the demand for ethanol, he said. “Right now, ethanol looks fabulous because oil is so high priced,” Feo said. “But you run a risk that if gas prices go down, and oil prices go down, and feedstock goes up, the economics go sideways.”

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