Optimizing for Better Economics

Incorporating new technologies into existing facilities can be a path to new revenue streams
By John Eustermann | June 20, 2011

In light of the current economic state of affairs, owners of existing biorefineries are looking at ways to reduce costs and boost revenues. Upgrading and optimizing current facilities appears to be at the top of the list.  Incorporating new technologies and equipment into existing facilities can optimize yields and even create new revenue streams. When considering upgrades to technology, management is wise to consider the impact such activities have on previously executed financing or development agreements, technology licenses, or permits.

The following is a list of some common project-related documents, the terms and conditions of which should be considered when exploring technological modifications to an existing biorefinery:

Financing Documents: Existing lenders and capital providers to a facility will, in most instances, encourage optimizing activities that clearly show cost benefits to the plant’s operations, whether it improves efficiencies or adds new revenue streams. Discussions of any of the aforementioned modifications should include a dialogue with the company’s lenders and other strategic capital funding sources. For example, in the case of facilities that are still subject to construction, term and/or working capital loans, there are likely several loan document restrictions that require lender consent to any significant changes to the plant. Also, subdebt/convertible debt providers and/or preferred equity holders likely have rights under their relevant agreements that warrant consideration in advance of any plant modifications. A review of all financial and operational covenants as well as any rights and preferences under preferred equity arrangements is warranted, as a number of provisions might be triggered by such proposed investments in optimizing a facility. Before approving new capital investment, lenders and other stakeholders will want to review all background materials about the proposed project, including revenue enhancing and payback projections to ensure such figures are based on sound assumptions. The last thing any lender will approve is a capital project that costs more than it should or won’t provide the projected financial enhancements to the plant because of flawed assumptions.  If management is seeking to finance plant modifications and grant liens on the new improvements, it is important to recognize that its current secured lenders likely have blanket liens and security interests in all existing and future acquired company assets. In such instances, each lender will likely need to agree to appropriate subordination and intercreditor arrangements. Finally, if financing the optimization activities, most lenders will ask for a collateral assignment of relevant project agreements and warranties, such as any technology license agreements, construction contracts, operational agreements, equipment warranties and off-take agreements.

Technology Licenses: In most instances, a technology license agreement is included in the overall construction or document package. This document is typically executed between the process technology provider as the licensor and the entity developing the project as the licensee.  Technology licenses in this arena generally include language governing the scope of use of the initial process technology. Further, in most instances, such agreements include specific language regarding each party’s rights, duties and obligations related to subsequent technological modifications that the licensee may make or consider making to the initial licensed process.  Such language generally sets forth what modifications can or cannot be made to the process, how the final ownership of such modifications will look and what notice and disclosure activities are required in the face of such modifications. It is not unusual to see provisions in the license agreement where the licensor grants the licensee a limited license to use the technology solely in connection with the initial design, construction, operation, maintenance and repair of the facility. Such language seeks to limit the licensee’s ability to use the process technology to the initial plant design and configuration, and excludes such use for purposes of a plant or process that has been modified. Further, many licenses contain provisions stating that any and all modifications to the process technology are deemed the property of the licensor and that the licensee agrees to assign all rights, title and interest in such modifications to the licensor. Such provisions not only create issues for the licensee, but moreover will create issues for any third party whose optimization technology is being considered for installation by management. Thus, a close examination of the terms and conditions of the applicable technology license agreement and the respective parties’ intellectual property rights thereunder is warranted in the face of optimization strategies that involve technological modifications. A failure to make such and examination of the applicable technology license agreements may result in several unexpected technology ownership issues for both the plant owner and the follow on technology vendor.

Permits and Site Control Issues: The effect that any proposed optimization projects may have on a facility’s environmental controls likewise cannot be overlooked. Although permits are management’s main focus when initially developing and financing a biofuel refinery, they often become a nonissue as the-day-to-day operations of the facility take over. In the face of considering any plant modifications, much like when initially developing the facility, permitting should become top of mind. With regard to both air and water, plant upgrades and optimization activities can trigger management’s need to obtain new or revised permits. Regulatory review is often required when physical changes to the facility or changes in the method of the facility’s operation result in or may result in increased or modified air emissions or changes to water appropriation and/or water discharges at the plant. Such regulatory reviews will determine if additional permitting is required for operational compliance of the facility in its optimized state. Even if the resulting increased air emissions or changes to water appropriation and/or water discharges will meet existing permit limits, such regulatory review is likely required. 

Author: John Eustermann
Partner Attorney, Stoel Rives
(208) 387-4218