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St. Paul brewery may shut down Tony Kennedy Star Tribune Published Jan 30 2002 St. Paul would lose its second brewery in five years if the city doesn't guarantee repayment of a $2 million bank loan needed to save Minnesota Brewing Co. from financial ruin, the brewery's majority shareholder said Tuesday. "If they say they don't want to do it, we'll just close her down," said Bruce Hendry, the investor who saved the West 7th Street beer plant from demolition in 1991. Despite the addition two years ago of an ethanol plant that was supposed to boost business, the maker of Grain Belt and Pig's Eye beer is $14 million in debt and out of cash. Hendry personally covered the plant's payroll last week. Under a turnaround plan forged by Minnesota Brewing Chief Executive and President Jack Lee, $5.5 million in new loans would be enough to restructure the brewery's finances, fix its bottling line and capture high-volume business that will return the company to profitability and keep the plant's 180 to 225 workers on the job. Hendry, the principal owner of the brewery and ethanol plant, said he leads a group of investors willing to lend $3 million of the needed money. But the group's participation is contingent on city backing for an additional $2 million bank loan, Hendry said. The bank won't lend the money without the city's guarantee of repayment. "I'm not going to put more money into this operation unless we have the city as a partner," Hendry said. Because of neighborhood complaints about ethanol odors and brewery noise, the city has been at odds with the West 7th Street plant for more than a year. The complaints began after the ethanol plant opened in April 2000. Lee said neighbors should realize that if the job-intensive brewery closes, the ethanol plant and a related carbon dioxide operation would stay open. The brewery's parent company, MBC Holdings Inc., is separate from the profitable Gopher State Ethanol Co. "We're looking for acknowledgement from the city that it, too, wants the brewery to continue," Lee said. Dan Smith, project manager for the St. Paul Department of Planning and Economic Development, said the city's credit committee has rated the proposed loan deal and prepared a report for the City Council. Smith said the committee judged the collateral for the loan -- the ethanol plant -- to be fairly strong. But he said the prospects for repayment were viewed as a problem, based on the brewery's history of production problems and possibly unrealistic sales projections. The end result was a "doubtful" rating, which doesn't disqualify it for council consideration. "The city has done 'doubtful' loans before," Smith said. Hendry and Lee acknowledged the restructuring plan has risk. But an outside consulting firm, Twin Cities-based Manchester Group, has endorsed it as sound, Lee said. "There's plenty of risk, yes, but it's reasonable," Hendry said. When Hendry bought the idle brewery in 1991 from G. Heileman Brewing Co., he received an $800,000 loan from the St. Paul Port Authority to help bring it back to life. That loan has been repaid. Several years later, the city of St. Paul granted four acres of land valued at $370,000 to Summit Brewing Co. for a new plant. Summit's founder, Mark Stutrud, said the new brewery is profitable and in the middle of a self-financed expansion of its production capacity. In nearby Wisconsin, the La Crosse City Council has lent $1.8 million to City Brewing Co. in the past two years to revitalize the former G. Heileman plant. City Brewing is a competitor of Minnesota Brewing. Hendry was a vocal opponent of state aid for Northwest Airlines in the early 1990s. Asked how he justifies government help for his brewery, he said: "I'm not asking for help. If they want to keep the jobs, this is what they do. I'm giving them an opportunity to invest in this community. It's not something I'm dying to do." Since Hendry reopened the former Jacob Schmidt brewery, it has incurred combined operating losses of $12 million. Last year, the brewery lost about $3 million. Lee said the biggest problem was a bottling-line upgrade that went bad. Minnesota Brewing bought used bottling equipment to increase production from 30,000 cases of beer a day to 50,000 cases. The investment promised to make the brewery comfortably profitable, especially since the ethanol plant had lowered the brewery's fixed costs. Instead, the bottling line sputtered for most of the year as technicians struggled to keep it working. Production was only 15,000 cases of beer a day. Lee said managing the problem was complicated by the sudden demands of meeting noise and odor limits. By the end of last year, the brewery was more than $1 million overdrawn on its bank line of credit, and it owed suppliers and vendors about $7 million. Meanwhile, the ethanol plant made $4 million in operating profit before interest and taxes. "The vision was correct. We lowered production costs and attracted good business," Lee said. "The ethanol plant saved the brewery. In the year 2000 we made our first profit in nine years." Despite last year's production fiasco, Lee said the brewery still has ample contracts to fill orders for outside beverage companies. It also has its own beer to make. The brewery president said he wouldn't have a restructuring plan to bring to the city if it wasn't for the $3 million loan commitment from Hendry and other ethanol plant investors. The long-term plan is to combine the ethanol plant, the carbon dioxide operation and the brewery into a single business. "Once again, the ethanol investors are saving the brewery," Lee said. Proceeds from the $5.5 million loan package would go to bottling line improvements, debt restructuring and operating capital. Bremer Bank, where Minnesota Brewing is overdrawn by more than $1 million, would get $1 million of the money. (Lee hasn't specified where the additional $500,000 will come from.) Frank Warner, the second-largest beer distributor for the St. Paul brewery, said the turnaround plan is sound because Lee has enough business to fill the plant's capacity. "It's a temporary situation to get over," said Warner, president of Maple Plain-based Day Distributing Co. He said it would be a loss for the entire state to see another old-line brewery close. In November 1997, 350 jobs were lost when the Stroh Brewery closed after 135 years. Minnesota Brewing's West 7th Street brewery opened in 1855. David Berg President, Minnesota Craft Brewer's Guild Head Brewer, Water Tower Brewing Company