A biorefining firm that’s in search of funding, whether from commercial banks, institutional lenders and investors or the federal government, to advance its project to the next stage of development can typically expect to hear the following three questions before any money is doled out. Is there a long-term fixed feedstock supply? Are there medium- to long-term fixed off-take agreements for future finished products? Can the conversion technology perform at a level efficient enough at commercial-scale to support long-term fixed capital and operating expenses to satisfy repayment of debt?
The investment and institutional lending communities know how capital-intense biorefining projects can be, which underscores their inherent risk. Ultimately, lenders and investors want to see price certainty, both for feedstock and off-takes of future product offerings, to ensure that debt coverage service ratios—the amount of cash flow available to meet annual interest and principal payments on debt—are high enough to support debt repayment.
For a biorefining developer, the goal is to “derisk” the project as much as possible. One way of doing this is to satisfy two of the three aforementioned variables within the overall project development model, specifically as it relates to feedstock and off-take contracts. This increases the chances of an investment bank or federal government entity backing to consider lending funds, according to Michael Butler, chairman and CEO of Cascadia Capital LLC, a boutique investment bank headquartered in Seattle, which serves private and public growth companies in sustainable markets, including advanced biofuels and biobased chemicals.
“Both are very important from an investor standpoint, but I would say in today’s environment the feedstock agreements are probably the most important element to getting a deal done,” Butler tells Biorefining Magazine.
The amount of debt provided by a bank or federal debt service provider, like the U.S. DOE or USDA, can hinge on the term or length of a feedstock arrangement. Other factors play into it as well, such as feedstock type, access to feedstock relative to the distance of a plant, creditworthiness of the feedstock supplier, transportation costs, labor costs associated with harvesting, collecting and transporting feedstock, tipping fees and overall economic viability of the feedstock that can sustain a margin high enough to repay debt. Although additional equity can reduce risk exposure by the lender, Butler says he’s typically seeing a 50/50 or 60/40 debt-to-equity ratio for biorefining projects today.
“Under equity, certain mezzanine debt can be factored in as equity, depending on how the loan is structured,” Butler says. “We’re finding that can comprise 10 to 20 percent of the total capital structure.”
An increasing number of investors, according to Butler, are showing preference to projects that have multiple feedstock suppliers, as opposed to those that rely on just one big feedstock company. In other words, he says, investors are attracted to projects that don’t take more than 30 to 50 percent of the available feedstock within a given radius where a project is located.
“Investors have been burned by projects in the past where the developers have signed up 80, 90 or 100 percent of the available feedstock within the area of that plant,” Butler says. “If you can’t get a big guy that has the creditworthiness to stand behind you, you have to have a diversified mix of feedstock suppliers. You almost have to overcompensate by having 120 percent availability. Investors and lenders will go along with that. That’s more financeable than just having one or two suppliers that aren’t creditworthy.”
For biorefining firms like Lakewood, Colo.-based ZeaChem Inc., the advantage lies in locating a plant near abundant feedstock supply, and leveraging existing infrastructure such as the wood products industries, as opposed to convincing multiple feedstock suppliers to grow a dedicated energy crop or aggregate agricultural residues, says president and CEO Jim Imbler. In 2008, ZeaChem locked up a long-term feedstock agreement with Portland, Ore.-based GreenWood Resources Inc. to supply poplars from its tree farm to ZeaChem’s integrated demonstration biorefinery currently under construction in Boardman, Ore., sized at 250,000 gallons a year. When operational, the plant is expected to primarily produce cellulosic ethanol, including limited quantities of biobased acetic acid and ethyl acetate.
“I think that one of the challenges of feedstock supply is actually finding a market mechanism that works, so that you don’t have to reinvent the wheel,” Imbler says. “These farmer-oriented models, not that they’re impossible, but there’s just a degree of difficulty much higher than our model with woody biomass.”
Fulcrum BioEnergy is making progress to break ground later this year on its 10.5 MMgy cellulosic ethanol and biochemical plant near Reno, Nev., and it is tapping into the municipal solid waste (MSW) stream. The company, which has been awarded DOE funding for its project, has secured a 15-year agreement with Waste Management and a 20-year agreement with Waste Connections for its Sierra BioFuels project.
“We think that, by locking up these feedstock contracts, it provides enormous value not only to the project, but also to Fulcrum,” says Rick Barazza, vice president of administration at Fulcrum BioEnergy.
While locking up long-term feedstock agreements are a necessary step to obtain funding so a project can advance to the next stage of development, negotiating off-take agreements, although equally arduous, are also critical to success.
Negotiating and securing off-take contracts can be a little more complex than arranging feedstock agreements. One reason for this is that it’s nearly impossible to obtain a fixed price off-take contract that goes out 10 to 15 years, according to Wes Bolsen, chief marketing officer and vice president of government affairs for Coskata Inc.
“You might be lucky to get a long-term off-take contract that is based on either a benchmark or simply at market price,” Bolsen says. Coskata is developing a 55 MMgy cellulosic ethanol facility in Greene County, Ala., using woody biomass feedstock. “This is critical in the overall aspect of the financing, and it’s critical to the USDA and DOE as they’re looking for the commercial viability of the technology.”
Arnold Klann, CEO of BlueFire Renewables, says that the mentality for many potential off-takers, such as the oil blenders or refiners, is to not go long, but rather to go short on these types of contracts, which has been a bane to the industry for gaining any financial footing. “If you look at the electricity markets, you enter into a very creditworthy contract with a utility to buy the electricity, and that contract will be good for 10 to 20 years,” he says. “The lending institutions want to see the same thing in advanced biofuels like cellulosic ethanol. Many of these projects have been slowed down or even stopped because they can’t get those long-term take-and-pay contracts.”
Imbler echoes Klann’s comments, saying, “You can get a fixed off-take [contract] for a period of time, but the further it goes out, the more challenging it can get to lock it up. Three- to five-year off-takes aren’t a big deal because there is a market for that. But it’s easier for me in my business to get a 20-year feedstock contract on a reasonable basis than a 20-year off-take. Everyone involved in the biorefining space is going to have this same challenge.”
Involving an established oil company such as Valero Renewable Fuels LLC, a subsidiary of Valero Energy Corp., can help mitigate some of the uncertainty involved in the price structure when introducing cellulosic ethanol, biobutanol or any other biofuels to market. Valero, which already owns more than 15 corn ethanol plants in the Midwest, also has a vested interest in off-taking advanced biofuel. This is evidenced by its active participation in several projects, including a 40 MMgy proposed cellulosic ethanol project in Kincross Charter Township, Mich., jointly developed by Valero, Mascoma Corp. and Mascoma’s operating subsidiary Frontier Renewable Resources LLC. Additionally, the DOE offered a conditional commitment in a $241 million loan guarantee to Diamond Green Diesel LLC, a joint venture project between Valero and Darling International Inc., to build a facility capable of producing more than 10,000 barrels per day (more than 153 MMgy) of renewable diesel on a site adjacent to Valero's St. Charles oil refinery near Norco, La.
“What a company like Valero brings to the table is a certain amount of size, the investment involved and name recognition,” says Bill Day, Valero’s media relations director. “That’s typically attractive to some of the advanced biofuel companies because they’re looking for established names to partner with.”
Butler says, to the investment community, involving one or more off-take parties can also increase the chances of financing a project where relying on one deep-pocketed off-taker like Valero may not be enough. “What we’re finding is that when there’s more than one potential off-take, you have a much better shot at getting funding and locking up that off-take to get your product to market,” Butler says.
Rentech Inc. President and CEO Hunt Ramsbottom tells Biorefining Magazine that negotiating off-take contracts in the jet fuel market can be just as difficult as negotiating off-take contracts for advanced transportation biofuel. Last year, Solena Group Inc. based in Washington, D.C., signed a letter of intent with Rentech to incorporate Rentech’s proprietary Fischer-Tropsch synthetic fuel technology platform in Solena’s proposed BioJetFuel project, called GreenSky, in the U.K. The project is expected to convert more than 500,000 metric tons of waste biomass feedstock annually into syngas using Solena’s proprietary plasma gasification technology. From there, the syngas will be converted into 16 million gallons of synthetic biojet fuel using Rentech’s Fischer-Tropsch technology. Construction on the facility is expected to begin in 2012, with commercial operations anticipated by 2014.
Ramsbottom says that potential off-take contracts for the biojet fuel to be produced at the future GreenSky facility depends on oil prices, and how Europe’s impending emissions trading scheme, which is expected to go into effect next year, goes.
“One avenue may be a collared arrangement where we’re protected on a floor and [the airlines] are protected on a ceiling,” Ramsbottom says. “If crude oil flies to a certain number, then they’re protected and we still make a margin and, likewise, we’re protected on the downside. That’s one way to move forward, I think, in this environment.”
The nuances of negotiating off-take contracts for advanced biofuels apply much the same way for off-take contracts of biochemicals, according to Imbler, as it comes down to one principle that both the off-take party and the biorefining firms want and need for a mutually beneficial and lasting partnership. “People want longer term pricing stability for their product,” he says. Imbler adds, “Banks just don’t finance these projects because they’re cool. It’s all about identifying risk and either eliminating it, mitigating it or letting someone else have it so that, at the end of the day, your project looks the most risk-averse as possible to lenders.”
Author: Bryan Sims
Associate Editor, Biorefining Magazine