2017 December Ethanol Producer Magazine by BBI International

DECEMBER 2017

THE SCALE OF

SAFETY

Policies, Employee Cooperation, Emergency Response All Are Crucial

Page 16

ALSO

Master Your Corn Oil Market Page 24

Emissions Reduction Evolving ' Page 30

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CONTENTS

DECEMBER 2017 VOLUME 23

DEPARTMENTS 8

AD INDEX

EDITOR'S NOTE

VIEW FROM THE HILL

FEATURES SAFETY

Injury Inventory

Strains, lacerations top the list of workers comp claims By Lisa Gibson

Safe Plants, Sound Plans By Tom Bryan Who’s Been Naughty and Who’s Been Nice? By Bob Dinneen

EVENTS CALENDAR

GLOBAL SCENE

ISSUE 12

CHAD WITTENBERG, FREELANCE PHOTOGRAPHER

CORN OIL

Extract or Enrich

Brazil to Launch Ambitious Biofuels Program By Leticia Phillips

High oil content increases DDGS value in some feed markets By Susanne Retka Schill

CLEARING THE AIR

Is E25 Legal in the Mini Cooper? By Dave VanderGriend

BUSINESS BRIEFS

MARKETPLACE

VALICOR

EMISSIONS

Pollutant Powerplay CHP technology uses VOCs as fuel By Lisa Gibson

ENER-CORE INC.

CONTRIBUTION

34 FINANCE ON THE COVER

Jesse Floyd (left) and Bradford Berry, rescue associates with Tactical Safety Solutions, conduct a practice rescue at an ethanol plant.

A New Reality

Changes to accounting standards affect off-take agreements BBI INTERNATIONAL By Lynn Knox

PHOTO: LIFEBOAT CREATIVE

Ethanol Producer Magazine: (USPS No. 023-974) December 2017, Vol. 23, Issue 12. Ethanol Producer Magazine is published monthly by BBI International. Principal Oﬃce: 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. Periodicals Postage Paid at Grand Forks, North Dakota and additional mailing oﬃces. POSTMASTER: Send address changes to Ethanol Producer Magazine/Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, North Dakota 58203.

6 | Ethanol Producer Magazine | DECEMBER 2017

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VOLUME 23 ISSUE 12

EDITORIAL President & Editor in Chief Tom Bryan tbryan@bbiinternational.com Vice President of Content & Executive Editor Tim Portz tportz@bbiinternational.com Managing Editor Lisa Gibson lgibson@bbiinternational.com News Editor Erin Voegele evoegele@bbiinternational.com Copy Editor Jan Tellmann jtellmann@bbiinternational.com

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Art Director Jaci Satterlund jsatterlund@bbiinternational.com Graphic Designer Raquel Boushee rboushee@bbiinternational.com

PUBLISHING & SALES CEO Joe Bryan jbryan@bbiinternational.com Vice President of Operations Matthew Spoor mspoor@bbiinternational.com Sales & Marketing Director John Nelson jnelson@bbiinternational.com Business Development Director Howard Brockhouse hbrockhouse@bbiinternational.com Senior Account Manager/Bioenergy Team Leader Chip Shereck cshereck@bbiinternational.com Circulation Manager Jessica Tiller jtiller@bbiinternational.com Marketing & Advertising Manager Marla DeFoe mdefoe@bbiinternational.com

EDITORIAL BOARD Ringneck Energy Walter Wendland Little Sioux Corn Processors Steve Roe Commonwealth Agri-Energy Mick Henderson Pinal Energy Keith Kor Aemetis Advanced Fuels Eric McAfee Western Plains Energy Derek Peine Corn Plus Mike Jerke

26 20-21

DuPont Industrial Biosciences

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Fagen Inc.

Fluid Quip Process Technologies, LLC

Growth Energy

Hydro-Klean LLC

ICM, Inc.

Iowa Renewable Fuels Association

J.C. Ramsdell Enviro Services, Inc.

Lallemand Biofuels & Distilled Spirits Mole Master Services Corporation

4-5 33

Nalco Water

On Sight Video Surveillance

Phibro Ethanol Performance Group

POET LLC

Premium Plant Services, Inc.

R.S. Stover

RPMG, Inc.

Salco Products, Inc. StoneAge

3 19

Customer Service Please call 1-866-746-8385 or email us at service@bbiinternational.com. Subscriptions to Ethanol Producer Magazine are free of charge to everyone with the exception of a shipping and handling charge for anyone outside the United States. To subscribe, visit www.EthanolProducer.com or you can send your mailing address and payment (checks made out to BBI International) to: Ethanol Producer Magazine Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. You can also fax a subscription form to 701-746-5367. Back Issues, Reprints and Permissions Select back issues are available for $3.95 each, plus shipping. Article reprints are also available for a fee. For more information, contact us at 866-746-8385 or service@bbiinternational.com. Advertising Ethanol Producer Magazine provides a specific topic delivered to a highly targeted audience. We are committed to editorial excellence and high-quality print production. To find out more about Ethanol Producer Magazine advertising opportunities, please contact us at 866-746-8385 or service@bbiinternational.com. Letters to the Editor We welcome letters to the editor. Send to Ethanol Producer Magazine Letters to the Editor, 308 2nd Ave. N., Suite 304, Grand Forks, ND 58203 or email to sretkaschill@bbiinternational.com. Please include your name, address and phone number. Letters may be edited for clarity and/or space.

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8 | Ethanol Producer Magazine | DECEMBER 2017

EDITOR'S NOTE

Safe Plants, Sound Plans Today’s ethanol plants virtually run themselves. With the push of a button

Tom Bryan

President & Editor in Chief tbryan@bbiinternational.com

and the click of a mouse, these high-tech biorefineries run 24-7 under the watchful eyes of plant operators stationed within the factory’s safe interior helm. They monitor the process, as grain enters one side of the plant and ethanol, distillers grains and corn oil exit the other, in almost Jetson-like fashion. That might be the picture some of us would like to have of modern ethanol production, but it’s not quite accurate. While ethanol plants are highly automated, technology still hasn’t replaced the need for humans on the ground. In real life, ethanol plants are busy, industrial workplaces where employees continuously carry out manual tasks. They turn wrenches, move product, stack chemicals, troubleshoot problems, and clean, fix and replace equipment. These workplace activities carry risk, and that means ethanol plant employees can and sometimes do get hurt. Today, thanks to insurance providers that closely track workplace incidents, we know precisely what types of injuries the ethanol workforce is prone to. In this month’s cover story, “Injury Inventory,” on page 16, we learn that the most common ethanol plant injuries are strains caused by, among other things, impacts with heavy objects, improper lifting and slips and falls. Lacerations, contusions and burns also occur with some regularity, while breaks and sprains happen less often. Altogether, the ethanol industry reports about 150 injuries a year—from muscle strains to broken thumbs—but many plants go years without a single reportable incident, which is no accident at all. We refocus on production and markets in “Extract or Enrich,” on page 24. This story examines the balance ethanol producers seek in maximizing corn oil extraction while meeting the needs of their global DDGS customers. Fortunately, the feed industry is making the variable oil content of today’s DDGS work. But as nutritionists dial in their systems and formulations for contemporary DDGS, new technologies—principally, ethanol from corn fiber—could bring on even heavier de-oiling. That sounds like an issue, but experts say tomorrow’s low-oil DDGS could have improved digestibility and, with it, ample energy. After that, “Pollutant Powerplay,” on page 30, revisits an alternative energy system we introduced to readers two years ago. Ener-Core’s Power Oxidizer was still at demonstrationscale when we first reported on the company in 2015. Today, the West Coast company is installing a 3.5-megawatt version of its combined-heat-and-power plant at Pacific Ethanol’s Stockton, California, ethanol plant. When complete, the system will effectively eliminate NOx and destroy volatile organic compounds while simultaneously extracting energy from them.

FOR INDUSTRY NEWS: WWW.ETHANOLPRODUCER.COM OR FOLLOW US:

TWITTER.COM/ETHANOLMAGAZINE DECEMBER 2017 | Ethanol Producer Magazine | 9

VIEW FROM THE HILL

Who’s Been Naughty and Who’s Been Nice? By Bob Dinneen

With the holiday season in full swing, we know Santa’s working on his list; who’s been naughty and who’s been nice? This is Washington, D.C.,

so you know there’s been a leak. We’ve seen a copy and share it with you here. Naughty: • The American Petroleum Institute and the American Fuel & Petrochemical Manufacturers for their anti-Renewable Fuel Standard campaigns, doling out mistruths like Christmas presents. • Sen. Ted Cruz, R-Texas, who placed a hold on a highly qualified nominee for USDA, Bill Northey, simply because ethanol champions had reversed proposals from EPA to weaken the RFS. • Protectionists in Brazil and China who placed artificial trade barriers on global access to U.S. ethanol. These short-sighted policies ultimately harm consumers in those countries by limiting access to the cleanest, lowest-cost, highest-octane fuel on the planet. • The API (again!) for its push polls that mislead consumers on the benefits of ethanol. We can disagree on the substance, but purposely stating falsehoods as truths to steer results in one’s favor is frankly a waste of everyone’s time. • The American Motorcyclist Association for claiming the RFS will force every cycle to use E15 or that there’s an impending E15 mandate. AMA needs to spend a little more time on education and a little less time berating an industry that provides a high-octane super fuel to bikers around the country. • The Wall Street Journal’s editorial board and others that have adopted the oil companies’ anti-RFS narrative. When will the papers learn not to alienate many of their readers by going after a cleaner, domestically produced fuel? Nice: • President Trump for keeping his campaign promise to support ethanol and the RFS. Since his election, Trump has followed through in his support for biofuels. In a letter to attendees at this year’s National Ethanol Conference, the president wrote, “Rest assured that your president and this administration value

10 | Ethanol Producer Magazine | DECEMBER 2017

the importance of renewable fuels to America’s economy and to our energy independence.” Thank you, President Trump, for understanding how vital renewable fuels are to our economy and environment. • USDA for its continued support for ethanol and an understanding of the impact it has on rural America. USDA Secretary Sonny Perdue is only the third head of the agency to have been a farmer, and he clearly understands the vital connection and role that rural America plays in our economy. To have a friend at USDA who understands the numerous benefits that ethanol provides to consumers around the world is priceless. • Congressional champions—Sens. Chuck Grassley, R-Iowa; Joni Ernst, R-Iowa; Deb Fischer, R-Neb.; Dick Durbin, D-Ill.; Tammy Duckworth, D-Ill.; John Thune, R-S.D.; Al Franken, D-Minn.; Heidi Heitkamp, D-N.D.; Amy Klobuchar, D-Minn.; and Joe Donnelly, D-Ind.—who tirelessly defend biofuels and work toward greater industry growth. Our advocates in Congress are fierce and work to ensure consumers continue to benefit from the RFS. • Gubernatorial champions—Iowa Gov. Kim Reynolds, Republican; South Dakota Gov. Dennis Daugaard, Republican; Missouri Gov. Eric Greitens, Republican; and Kansas Gov. Sam Brownback, Republican—for urging Trump to keep his promises to rural America to support the RFS. • Al-Corn Clean Fuel, Flint Hills Resources, The Andersons, Rex American Resources Corp., Novozymes and many others have already or are currently undergoing expansions at their facilities. Expansions mean more consumers will have access to ethanol. • The Crappie Masters Tournament Trail, which highlighted the benefits and power that gives ethanol-fueled boats that extra boost. Have a happy, safe and renewable holiday season! Author: Bob Dinneen President and CEO Renewable Fuels Association 202.289.3835 bobd@ethanolrfa.org

EVENTS CALENDAR

2018 National Ethanol Conference February 12-14, 2018 JW Marriott San Antonio San Antonio, Texas The National Ethanol Conference is the most widely attended executive level conference for the ethanol industry. Since 1996, the RFA’s NEC has been recognized as the preeminent conference for delivering accurate, timely information on marketing, legislative and regulatory issues facing the ethanol industry. In 2017, 1,000 industry leaders and professionals attended the NEC, representing 38 states, the District of Columbia and more than 14 countries. Networking and business development have been the leading factors promoting attendance since the NEC’s inception. 202-315-2466 | www.nationalethanolconference.com

2018 International Fuel Ethanol Workshop & Expo June 11-13, 2018 CenturyLink Center Omaha Omaha, Nebraska From its inception, the mission of this event has remained constant: The FEW delivers timely presentations with a strong focus on commercial-scale ethanol production— from quality control and yield maximization to regulatory compliance and fiscal management. The FEW is the ethanol industry’s premier forum for unveiling new technologies and research findings. The program covers cellulosic ethanol while remaining committed to optimizing existing grain ethanol operations. 866-746-8385 | www.fuelethanolworkshop.com

2018 Advanced Biofuels Conference June 11-13, 2018 CenturyLink Center Omaha Omaha, Nebraska Colocated with the International Fuel Ethanol Workshop, the Advanced Biofuels Conference is tailored for industry professionals engaged in producing, developing and deploying advanced biofuels, including cellulosic ethanol, biobased platform chemicals, polymers and other renewable molecules that have the potential to meet or exceed the performance of petroleum-derived products. 866-746-8385 | www.advancedbiofuelsconference.com

Please check our website for upcoming webinars

www.ethanolproducer.com/pages/webinar

DECEMBER 2017 | Ethanol Producer Magazine | 11

GLOBAL SCENE

Brazil to Launch Ambitious Biofuels Program By Leticia Phillips

Building, in part, on the successes and lessons learned from two signature American policies, Brazil is poised to launch a government program that will support the continued development and use of lowcarbon, clean biofuels. This new initiative, dubbed RenovaBio,

will play a key role in meeting Brazil’s ambitious commitments made at the Paris climate summit in December 2015. Brazil pledged to reduce its greenhouse gas (GHG) emissions by 43 percent of 2005 levels by 2030. Achieving that goal will require biofuels to supply approximately 18 percent of the country’s energy mix by 2030 through greater sugar cane ethanol production, expanded second-generation biofuels and additional biodiesel for transportation. Ethanol and bioenergy produced from sugar cane already constitute 15.7 percent of Brazil’s energy mix, replacing more than 40 percent of gasoline demand and avoiding 600 million tons of carbon dioxide emissions since the beginning of the ethanol program in the 1970s. Growing to 18 percent in a developing country is a reasonable target, but the right incentives and policies will be necessary to support this progress. That’s where RenovaBio comes in.

How It Will Work

Brazilian drivers today consume ethanol in two ways. First, all gasoline sold in Brazil is required to contain 27 percent ethanol. Second, most Brazilians drive flex-fuel vehicles allowing ethanol to compete directly with gasoline on price at the pump. But Brazilian consumers have enjoyed subsidized gasoline prices for many years, which weakens demand for ethanol. RenovaBio will alter this dynamic and encourage fuel distributors to boost sales of ethanol versus gasoline by requiring them to lend a hand meeting GHG reduction goals. The Brazilian biofuel program is expected to incorporate two elements that will be familiar to American policymakers and industry representatives. Similar to California’s Low Carbon Fuel Standard, RenovaBio will assign a carbon intensity rating to the specific biofuel produced at each

mill. This system will reward producers who invest in manufacturing biofuels as cleanly and efficiently as possible. Fuel distributors will then be encouraged to buy more of this clean biofuel through a credit trading program that works much like renewable identification numbers (RINs) under the federal Renewable Fuel Standard. With RenovaBio, distributors will be required to purchase Emissions Reductions Certificates (or CBIOs in Portuguese). Mills that produce fuels with low carbon intensity rankings will receive a larger allotment of CBIOs than mills producing fuels with higher carbon intensity. Just as the U.S. EPA is required to publish renewable volume obligations annually, Brazil’s National Economic Policy Council (CNPE) will adjust the number of available CBIOs and distributor purchasing requirements each year. Fuel producers and distributors will then be allowed to buy and sell CBIOs on the open market, introducing a new price signal that places a value on low carbon emissions. RenovaBio enjoys support not only from biofuel producers but also Brazil’s automotive sector. Earlier this year, UNICA and our country’s national association of automobile manufacturers, Anfavea, signed a joint memorandum aligning each industry’s strategies for delivering efficient transportation that meets Brazil’s commitments under the Paris climate agreement.

What’s Next

Informed observers expect action soon—either by Brazil’s congress or an announcement by Brazilian President Michel Temer issuing what is essentially an executive order to implement the program—that will clarify many key details. What is clear already, however, is that RenovaBio will be another evolution in smart biofuels policy that deserves emulation by other countries. Last year in this space, I argued that successfully meeting Brazil’s climate commitments will depend on three fundamental pillars: predictable policy, sustainable production and technological innovation. With RenovaBio, Brazil’s government will take a major step forward on the first pillar. Meanwhile, biofuel producers remain laser focused on the second and the third. Working together, we can make a cleaner, lower-carbon future possible for our children and grandchildren. Author: Leticia Phillips North American Representative Brazilian Sugarcane Industry Association, UNICA 202.506.5299 leticia@unica.com.br

12 | Ethanol Producer Magazine | DECEMBER 2017

CLEARING THE AIR

Is E25 legal in the Mini Cooper? By Dave VanderGriend

EPA Administrator Scott Pruitt has said many times that he will “follow the law” and “if the statute permits.” This is good for us because the Clean Air Act is favorable to renewable fuels. But as you can imagine, nothing is easy in Washington. When a law is passed, it is not fully flushed out and contains many gray areas. The task to clarify the details and write regulations falls on the governing agency. Those agency regulations end up being the force of law, good or bad. That is why many of ethanol’s roadblocks to a free market are stacked at the EPA’s door. The EPA’s lifelong bureaucrats have chosen to interpret the Clean Air Act in ways that are just flat wrong in some areas, and to say the least, unfavorable to ethanol in others. So, as I look back on the year and review the good things Urban Air Initiative has accomplished, I see the legal work around the “subsim” interpretation of the Clean Air Act as the most critical. It has become one of the pillars of our legal arguments to allow higher blends of ethanol, above E10, into a free market. I want to focus on it here as our industry will be pointing to it in the years to come. In an over-simplified explanation, the EPA has claimed the legal authority to regulate ethanol blends under section 211(f) of the Clean Air Act, known as the “sub-sim” law. Under EPA’s current interpretation of the sub-sim law, it can allow the use of gasoline blended with more than 15 percent ethanol only if the EPA determines that the blended fuel is substantially similar to the gasoline certification fuel, or if the fuel manufacturer demonstrates that the blended fuel would not impair a vehicle’s emission control system. This second route is the process Growth Energy used for the 2010 E15 waiver, which took many years and intense negotiation. The difference between then and now is the new Tier 3 Certification Fuel contains 10 percent ethanol, whereas before it was E0. Effectively, E10 is now the official standard fuel of the U.S. So, there were 400 chemicals in gasoline, now there are 401. Gasoline with 10 percent ethanol is gasoline. Now that this has changed, Urban Air’s legal argument is that the EPA’s choice to use 211(f) to regulate ethanol is no longer valid. Since

the new gasoline certification fuel contains 10 percent ethanol, higher blends are “substantially similar” to a fuel additive already utilized in certification, and thus no longer controlled under section 211(f). Therefore, the EPA must regulate ethanol under section 211(c), just like it regulates all the other components of gasoline such as toluene, xylene, benzene, etc. Before EPA can regulate a fuel additive under section 211(c), it must prove the additive is harmful to emission systems or human health. Our position is that ethanol must be regulated in the same way all the other chemicals in gasoline are. If a refiner wants to add more toluene, then ethanol must be given the same consideration. The other major component of this argument is what we call a “burden shift.” Under the EPA’s outdated interpretation of section 211(f), the burden of proof is on the fuel manufacturer. Under section 211(c), the burden of proof is on the EPA. So, our industry should no longer have to ask permission and then wait for years to prove what we already know about ethanol’s beneficial effect on emissions and performance. Now to the question: Is it legal to fill my BMW Mini Cooper with E25 that the manufacturer has approved in the owner’s manual? According to outdated, nonbinding guidance from EPA, the answer is “No.” Under an updated application of the sub-sim law as laid out above, the answer should be “Yes.” A waiver is not needed. On a side note, BMW can ask for an E25 certification fuel, thanks to a lawsuit Urban Air fought and won against the EPA. I’m proud of what Urban Air has accomplished this year along with the rest of the industry. We have a lot of work still to do, so I know what I will be asking Santa for this year. I hope everyone and their families have a safe and blessed Christmas. Author: Dave VanderGriend President, Urban Air Initiative CEO, ICM Inc. 316.796.0900 davev@icminc.com

DECEMBER 2017 | Ethanol Producer Magazine | 13

BUSINESS BRIEFS

People, Partnerships & Projects

Lallemand acquires Lactic Solutions LLC

RFA board re-elects Mick Henderson chairman

Lallemand Biofuels & Distilled Spirits, a business unit of Lallemand Inc., has acquired Lactic Solutions LLC, which is developing genetically modified lactic acid bacteria products specifically for the biofuels industry. For the ethanol industry, the products will allow higher yields and reduced antibiotics use, according to Lallemand. “We are very pleased to add this new technology to our evergrowing pipeline of innovation,” said Angus Ballard, president of Lallemand Biofuels & Distilled Spirits, in a statement. “Lallemand has been producing yeast for over 100 years and bacteria (for human probiotics and for animal health) for over 30 years, so this new product category will fit well with our production assets, know-how and technical focus.” Jim Steele, cofounder and CEO of Lactic Solutions, said in a statement, “Lactic Solutions is thrilled to be joining the Lallemand team. It is our dream to take the technology developed in our university research laboratories and turn it into products that reduce reliance on antibiotics and enhance yields in ethanol biorefineries. Lallemand is the perfect partner to assist us in realizing this dream.”

The Renewable Fuels Association elected officers for its 2018 board of directors in October at its annual meeting in Des Moines. Mick Henderson, general manager at ComHenderson monwealth Agri-Energy LLC, was re-elected as chairman. Commonwealth Agri-Energy is a 35 MMgy ethanol plant in Hopkinsville, Kentucky. Henderson has been with Commonwealth Agri-Energy since 2003 and has served on the RFA Board of Directors since 2006. “I am excited that my peers have re-elected me as the Renewable Fuels Association chairman of the board of directors,” Henderson said. “I look forward to continuing to help guide our industry as we fight back against our critics. The Renewable Fuel Standard has been an immensely successful program and we want to ensure the energy, air quality and consumer benefits continue, while expanding ethanol’s market domestically and across the globe.” Additionally, RFA elected: • President: Bob Dinneen, Renewable Fuels Association, Washington, D.C. • Vice Chairman: Neil Koehler, Pacific Ethanol, Sacramento, California • Treasurer: Charles Wilson, Trenton Agri-Products LLC, Trenton, Nebraska

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BUSINESS BRIEFS¦

Wilson joins USGC as economics and ethanol graduate fellow

Bioenergy Australia appoints new CEO

Candice Wilson has joined the U.S. Grains Council staff as a graduate fellow in economics and ethanol, based in Washington, D.C. Wilson During her one-year graduate fellow appointment, Wilson will work with Mike Dwyer, USGC chief economist, and other staff on a variety of economic analysis projects ranging from ethanol research to analysis of global supply and demand for coarse grains and products. “We are thrilled Candice is joining the council as a graduate fellow,” Dwyer said. “She has both the academic background and the real work experience in trade policy to tackle ethanol trade policy by working with council staff and our main ethanol partners.” Before joining USGC, Wilson completed both bachelor’s and master’s degrees in agricultural economics at Kansas State University. Additionally, she worked as an international intern with the U.S. Department of Agriculture’s Foreign Agricultural Service in Brussels, Belgium.

Shahana McKenzie has been appointed CEO of Bioenergy Australia, a government-industry networking forum established in 1997. McKenzie Before joining the organization, McKenzie was with the Australian Institute of Landscape Architects, where she successfully led a restructure. According to Bioenergy Australia, since her appointment, she has discussed benefits of and options for bioenergy with Parliament House in Canberra. “In addition to benefits for the environment, retrofitting power stations and changing energy sources will see regional areas benefit from increased jobs and drive needed economic growth,” she said in a statement. “The bioproduct and services market is expected to be worth $1.1 trillion by 2022 and we are committed to ensuring that Australian businesses have a meaningful position there. “Geographically, Australia is ideally (situated) to take advantage of bioenergy. All states and territories enjoy the resources needed to make the most of the clean energy and job opportunities it offers. I’m looking forward to creating that agreement as we begin meeting with key political and industry leaders, along with communities around Australia.”

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SAFETY

INJURY

INVENTORY Insurance claim data show certain incidents occur more often than others in the ethanol industry. Policies, culture and rapid emergency response can help prevent serious injuries. By Lisa Gibson

The most common workers compensation claim in the ethanol industry is for lower back strains, according to ERI Solutions Inc. From November 2006 to August 2017, more than 450 claims were filed for strains, almost 170 affecting the lumbar area. “If you look at over the last 10 years, strains are No. 1 by a long shot,” says Nathan Vander Griend, president of ERI Solutions Inc., which manages an insurance company for the ethanol industry. Many of those injuries were caused by improper lifting, he adds. Materials handling is the third most common cause of all injuries, according to the data. Employees being struck by or against something ranks as the most prominent cause of injury in the ethanol industry, with almost 350 claims in the past 10 years, according to ERI. Slips, trips and falls come in second, with just more than 250 claims. Absolute Energy LLC’s Rick Schwarck, president, and Tyler Schwarck, environmental health and safety manager, say slips, trips and falls are the most difficult incidents to prevent. “It’s tough to mitigate those,” Tyler Schwarck says. Tyler and Rick Schwarck say Absolute Energy, located in St. Ansgar, Iowa, is above average when it comes to plant safety, and it all comes down to workplace culture.

Accident Prevention

“You can have all the policies in place, but it’s a culture thing,” Tyler Schwarck says. Managers and safety officials have two options when it comes to implementing their policies, he says. They can be coaches, or

16 | Ethanol Producer Magazine | DECEMBER 2017

FRACTURE

SPRAIN

WORKERS COMPENSATION CLAIMS (OVER 5%)

30%

STRAIN

13%

LACERATION

11% 10%

CONTUSION

BURN

SOURCE: ERI SOLUTIONS INC. CREATED BY FREEPIK

DECEMBER 2017 | Ethanol Producer Magazine | 17

SAFETY

WORKERS COMPENSATION - INJURY CAUSE

with issues or concerns when they’re aware he won’t be handing 350 $4,000,000 out reprimands. 300 $3,500,000 His coaching style includes 250 $3,000,000 daily interactions, but not in large $2,500,000 200 group meetings. “It’s just being $2,000,000 down at the plant as well as other 150 $1,500,000 members of management,” he says. 100 $1,000,000 “It makes the employees comfort50 $500,000 able talking to management. They’re $0 0 comfortable bringing issues to me.” Aaron Betz, EHS manager for Western Plains Energy in Oakley, Kansas, agrees. “It must start at the top with the management for everyone to buy in. … Our message is to make sure everyone goes home at night. We want employees to be NUMBER OF CLAIMS responsible for safety and own the CLAIM COST program. If we can get them to SOURCE: ERI SOLUTIONS INC. work safely at work and home, they buy into and own the program betthey can be cops; they can look for viola- coaching approach. The coaching approach ter.” tions, or they can coach their employees helps culture.” Absolute Energy and Western Plains on how to follow the rules. “I’m not saying Schwarck says, in his experience, em- Energy, like many ethanol plants in the U.S., one is better than the other, but I take the ployees are more likely to approach him use the safety policies, programs and proce400

$5,000,000

18 | Ethanol Producer Magazine | DECEMBER 2017

ELECTRICAL

SPORTS-RELATED INJURY

MATERIALS HANDLING MECHANICAL

CUT/PUNCTURE

STRUCK BY/AGAINST OTHER

FIRE/EXPLOSION

VEHICLE - IN-PLANT

VEHICLE - REGISTERED

UNCLASSIFIED

ANIMAL/INSECT INJURY

MACHINE

EYE INJURY

BODILY MOTION

MISCELLANEOUS

CAUGHT ON/IN/UNDER/BETWEEN

REPEATED TRAUMA - UPPER EXTREMITIES

BURN

SLIPS AND FALLS - ELEVATION

HAND TOOL - MANUAL AND POWERED

MATERIALS HANDLING - MANUAL

OCCUPATIONAL DISEASES OR ILLNESSES

STRUCK BY/AGAINST

SLIPS AND FALLS - SAME LEVEL

$4,500,000

dures developed by ERI for its clients. “Nobody is in the same stratosphere when it comes to ethanol or grain handling safety,” Tyler Schwarck says of ERI. “It’d be tough to improve upon that.” But every plant is unique and must make its policies its own, Betz says. Western Plains also is in the SHARP program in Kansas. The program goes above and beyond OSHA policies, he says, with inspections and consultations from the Kansas Department of Labor. Betz says pinch point injuries are the most common at Western Plains. The plant has had at least one small claim each year for the past four years, he says. But the facility has gone four years now without a losttime claim. No plant is immune to accidents, and “things just happen,” Tyler Schwarck says. “There is a risk when you get out of bed in the morning,” Rick Schwarck adds. “We’re just proactive in correcting things before they become an issue,” Tyler says.

PRACTICE PERFECTION: Bradford Berry (left) and Jesse Floyd, rescue associates with Tactical Safety Solutions, practice a confined space rescue onsite at an ethanol plant. PHOTO: LIFEBOAT CREATIVE

The Breakdown

According to ERI’s data for the past 10 years, lacerations rank second behind strains in workers comp claims, at almost 200, or 13 percent of all claims. Contusions, burns and sprains come next, with almost 160 (11 percent), 155 (10 percent) and 95 (6 per-

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cent) claims, respectively. Ruptures, dislocations, amputations and poisonings make the list, too, all with less than 50 claims. Lower back injuries comprise 11 percent of the claims, fingers 10 percent, shoulders 9 percent, knees 8 percent, and eyes and hands both stand at 6 percent. Continued on page 22

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ONLY A DRILL: Chance Gale, rescue associate for Tactical Training Solutions, participates in a drill at the companyâ&#x20AC;&#x2122;s training facility in Wichita, Kansas. PHOTO: CHAD WITTENBERG, FREELANCE PHOTOGRAPHER

Continued from page 19

Struck by or against, the highest-ranking cause of injury, comprises 23 percent of claims. Same-level slips, trips and falls account for 17 percent, followed by manual materials handling at 15 percent, with about 235. Occupational diseases, hand tools, slips and falls at elevation, burns and re-

peated trauma to upper extremities follow at decreasing intervals. â&#x20AC;&#x153;Some claims can end up being pretty costly at the end of the day just because of the amount of lost time,â&#x20AC;? Vander Griend says. â&#x20AC;&#x153;It can be ongoing. When someone really hurts their back or something like that,

sometimes itâ&#x20AC;&#x2122;s a nagging they donâ&#x20AC;&#x2122;t really ever get over.â&#x20AC;? The worst incident ERI has ever dealt with at an ethanol plant happened two days after the company opened its insurance practice, Vander Griend says. An electric shock incident cost $2 million, for the shock and subsequent burns and neurological damage to the employee. The next most serious injury had nothing to do with the actual plant, Vander Griend says. An employee was preparing to mow the lawn at the facility, was drenched in gasoline while removing the gas cap, and accidentally ignited, causing severe burns. Another claim involved a foot amputation by a moving train car, and the fourth and fifth largest ethanol industry claims ERI has handled were caused by improper lifting, of a bag of urea and an I-beam, respectively. ERI insures about half of the ethanol industry, and none if its plants have ever experienced a fatality, Vander Griend says.

Onsite Response

Slips, trips and falls are made even more dangerous when they occur in a con-

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SAFETY fined space or at an elevation. Rescues of employees who have fallen within confined spaces are a specialty for the safety crews at Tactical Safety Solutions, located in Wichita, Kansas. The company has about 14 ethanol plant clients, according to Andy Hall, vice president of operations. Confined space and height rescue are crucial at ethanol plants, he says, and require specialized equipment and training. Contrary to popular belief, 80 percent of confined space rescues are a result of a fall or medical event inside the space. “Most people think it’s that they get into the confined space and it’s a hazardous environment. We can mitigate that. The bigger danger is the falls that occur while they’re in there.” Hall says the ethanol industry is lagging in onsite response preparedness for confined space and height rescues. “What we find at ethanol plants is that they have the tendency to want to use the local volunteer fire department because a lot of times, those plants are in rural America, where you have a volunteer fire department who is really good at fighting structure fires, but they’re not equipped or trained to do technical rescue.” OSHA rules permit local fire departments to be the rescue standby for ethanol plants, but the response time must be seven minutes or less, Hall says. “If you’re relying on 911, you’ve really got to find out what’s the response time; what’s their capability,” he says. Tactical Safety Solutions provides onsite crews around the clock for its clients, along with policies and procedures. The company has clients in the ethanol, power, oil and gas, and food services industries. Hall says since most ethanol plants are built similarly, his teams are familiar with the designs. “For the most part, we’ve become a pretty big expert in rescue and safety at these ethanol plants. “It’s an added expense for these places that can get by with just checking a box for calling 911,” he says. “But that added expense can save them in the event of an emergency.” While the crews are specially trained in confined space rescues and height rescues that involve rope systems, they also are

medically trained and can help with other emergencies at the plants, too, Hall says. Most ethanol plant accidents aren’t the result of OSHA noncompliance, Vander Griend says. They often occur in areas outside of OSHA’s purview, such as ergonomics and lifting. ERI’s policies identify those areas and recommend best practices. “It’s good practice to keep your people from getting hurt if you do these things,” he says. ERI polishes its policies and procedures annually based on research on its claim data. And from a culture perspective,

hiring employees who will actively follow said policies is a must. “We hire for attitude and train for skill,” Rick Schwarck says. “It’s how you encourage people to buy into the program willingly.” Author: Lisa Gibson Managing Editor, Ethanol Producer Magazine 701.738.4920 lgibson@bbiinternational.com

DECEMBER 2017 | Ethanol Producer Magazine | 23

CORN OIL

EXTR AC T or

ENRICH Corn oil maximization seems an obvious goal, but some DDGS feed markets prefer a higher oil content for better energy value. By Susanne Retka Schill

With corn distillers oil (CDO) selling for around 25 cents per pound and DDGS for a nickel per pound, extracting as much CDO as possible is the goal for many plants. CDO

sales account for an important, albeit small, revenue stream, particularly when margins are thin. The ethanol industry’s corn oil heads to two markets: feed and biodiesel. According to the U.S. Energy Information Administration, biodiesel producers used 1.3 billion pounds of CDO in 2016, about 12 percent of the total feedstock requirement. Biodiesel consumed 842 million pounds of CDO through July this year, ahead of last year’s pace—673 million pounds. USDA’s Grain Crushings and CoProducts Report says just over 1 million tons of CDO were produced through July this year, compared with 893,000 tons

through July last year. Biodiesel has used about 42 percent of CDO production so far this year. The remaining 60 percent of CDO heads to the feed market, where it is used for energy. Mark Newcomb, senior nutritionist for Iowa-based NutriQuest, explains some diets requiring higher energy levels will add corn oil or other sources of fat. “Think about a young pig diet, for example, sometimes you need extra energy.” On the feed market, CDO competes with other sources of fat used for energy, such as yellow grease (recycled restaurant oils), white grease and tallow. Some feed programs restrict the use of animal fats, opening the market for a vegetable-based oil, such as CDO.

DDGS Impact

Extracting corn oil and selling it separately reduces the oil content in DDGS, of course. “As I think of DDGS, I don’t

categorize high or low oil as good or bad,” Newcomb says. “I think of it as nutrient value and how it competes with other options that are available. I may not love the variability between sources of DDGS, but assuming I can manage that in my formulation correctly, it is what it is.” Newcomb reports oil levels vary between 5 and 7 percent in DDGS in the samples NutriQuest analyzes, with a few coming in as low as 3 percent. The greatest variations come with the new crop. “This time of year, nutritionists like myself worry about the variation we’ll see over the next few months.” Just as toxins get concentrated in DDGS by a factor of three, any changes from crop to crop in protein or other key nutrients are amplified. Clearly, the feed industry is adapting to low-oil DDGS, Newcomb says, “Particularly those of us who have a system to monitor and monetize the variation correctly, so you can discriminate appropri-

CORN OIL CONTENT: Corn oil represents its own revenue stream, but many animal feed markets prefer DDGS with a higher oil content for energy. PHOTO: VALICOR

24 | Ethanol Producer Magazine | DECEMBER 2017

CORN OIL

DECEMBER 2017 | Ethanol Producer Magazine | 25

CORN OIL

charts the variability in nutrients over time at individual plants. Newcomb estimates about 60 percent of the ethanol industry is represented in its databases.

Energy Value

NUTRIENT VARIATION: Customers submit samples of DDGS to be tested by NutriQuest. The chart is an actual plantâ&#x20AC;&#x2122;s nutrient composition over three years. Fat, starch and protein levels are the primary values used in calculating energy value. SOURCE: NUTRIQUEST

ately among the varying oil and nutrient levels that DDGS provide. Itâ&#x20AC;&#x2122;s a matter of having your system synced with your supply of DDGS.â&#x20AC;? Unannounced changes can be a problem, he adds. â&#x20AC;&#x153;We can handle it either way, but subtle process changes where

youâ&#x20AC;&#x2122;re pulling more oil out or adding more or less of the solubles back add to inconsistency that can be tough to track from a user perspective.â&#x20AC;? NutriQuestâ&#x20AC;&#x2122;s Illuminate service tests DDGS samples sent in by customers and

Low-oil DDGS, under 5 percent, might be an advantage in certain rations, such as for late finisher pigs, Newcomb says. High corn oil levels can cause soft fat to be laid down as the pig puts on finishing weight, resulting in soft pork belliesâ&#x20AC;&#x201D;an undesirable trait for bacon lovers. While low fat might be desirable for that one feed ration, far more often high fat content contributes a major component of energy levels in feed rations. Thus, reduced oil can limit DDGS use. When low-oil DDGS first arrived on the scene, the loss in energy value prompted concern. â&#x20AC;&#x153;Weâ&#x20AC;&#x2122;ve been fighting this battle since the start,â&#x20AC;? says Jennifer

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26 | Ethanol Producer Magazine | DECEMBER 2017

Aurandt, director of technical services at Valicor. “We’ve worked with nutritionists, and while oil content contributes energy, it’s not the driver of metabolizable energy. A lot of it has to do with the processing of DDGS.” She cites research done at the University of Minnesota, Auburn University and the USDA Agricultural Research Service that has found a poor relationship between crude fat and metabolizable energy in DDGS sources. The researchers recommend using a formula including crude fat, protein and fiber to calculate the metabolizable energy value more accurately than using the crude fat number alone. Newcomb explains that DDGS under 5 percent present another challenge. “When you get into really low oil distillers products, there is a concern about whether the residual oil is digestible and a true energetic fat,” he says. Crude fat measurements include oil soluble compounds that don’t

PIG PROTEIN: Low corn oil content is desirable for some animal feeds, such as those for late finisher pigs. This pig feeder is at a NutriQuest research facility. PHOTO: NUTRIQUEST

provide energy, such as vitamins. Normally a small percentage, as more corn oil is extracted, the proportion of those fat solubles goes up, throwing off energy calculations. Crude fat levels higher than 5 percent have a “pretty good correlation between fat content and energy,” he adds.

With many feed specs calling for 7 percent oil content and export specs calling for 34 pro-fat (the sum of protein and fat content), it’s important that plants shipping DDGS to distant markets take out the right amount. Ethanol producers can adjust the amount of oil removed, Aurandt says, by

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CORN OIL

EXTRACTION SHIFTS: In 2011, over 40 percent of samples tested by NutriQuest were full-fat DDGS. In 2013, more than 40 percent were 6 percent or less. NutriQuest reports the average fat level since 2014 is just under 8 percent. SOURCE: NUTRIQUEST

dialing down their chemistries—the demulsifiers used to improve extraction rates. Another approach is to turn off the chemistry on one centrifuge, mixing the full-fat stream with the low fat from the other centrifuges. Reduced-oil DDGS might only be the first of many adjustments to DDGS value, Aurandt says. “We really see a shift com-

28 | Ethanol Producer Magazine | DECEMBER 2017

ing on what DDGS are, if you look at the innovators extracting protein or doing cellulosic from corn fiber.” Though only a handful of plants are implementing those innovations at this point, fermentation aids like proteases or cellulases are impacting DDGS now, not to mention enzymes designed for DDGS enhancement. Changes in the front end to help fermentation affect

how the solids behave and require changes down the line, she points out, including adjustments to corn oil extraction. Many of the new processes promise increased oil extraction as a benefit, but that might not necessarily mean issues for feeders, Aurandt says. “As the industry extracts more oil with these changes, we may increase the digestibility of other components within the stillage matrix, therefore increasing the energy content of the DDGS. “Just as in the beginning of the corn oil extraction era there was a concern about lower-oil DDGS and finding a market for them, we are entering into an era that is now redefining the dry-grind ethanol process to extract more value from the coproducts, therefore changing the identity of DDGS,” Aurandt says. Author: Susanne Retka Schill Freelance Journalist retkaschill@yahoo.com

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EMISSIONS

POL L UT A N T

POWERPLAY Ener-Core’s power oxidation system draws energy from volatile organic compounds to produce heat and power, offsetting natural gas use. By Lisa Gibson

Historically, whenever a country passes new rules on air quality, it means many of its industries will need to pump more money into pollution abatement, says Alain Castro, CEO of Ener-Core Inc. But Ener-Core has a gamechanger, he says. “The paradigm shift that’s happening with us is that we’re one of the few solutions coming out that is going the opposite way—the tighter the emissions compliance gets, we can help companies get lower costs while becoming

30 | Ethanol Producer Magazine | DECEMBER 2017

lower-emissions producers of whatever their product is, in this case, ethanol.” Pacific Ethanol in Stockton, California, will be the first ethanol plant to use EnerCore’s Power Oxidizer, a combined-heat-andpower plant fueled by waste gas, using volatile organic compounds as fuel. The unique technology allows destruction of the VOCs, while making use of their energy content, says Guillermo Gomez, lead applications engineer for the company. Pacific Ethanol expects a 20 percent reduction in carbon dioxide emissions and a 57 percent reduction in nitrogen oxide emissions.

“We have a way of generating energy from gases with, basically, virtually producing zero NOx,” Castro says. But the benefits don’t stop there. “You’re allowing them to produce more ethanol from the benefit of being far below the emission regulations,” Gomez adds. “That’s really the name of the game.”

How it Works

A typical gas turbine has limited space for residence time—the time it takes for the fuel to react in a reaction zone, Gomez says. That means the fuel, methane for instance, makes

EMISSIONS

FROM THE TOP: Ener-Core employees assemble a 1.75 megawatt version of the Power Oxidizer, a combined-heat-and-power system that can use volatile organic compounds from waste gases as fuel. PHOTO: ENER-CORE INC.

its initial and rapid conversion to carbon monoxide and other products of incomplete combustion, but does not have ample time to then make its more time-consuming conversion to carbon dioxide and water, he says. But the Power Oxidizer uses a larger vessel, allowing longer residence time and turbulence for almost complete conversion of the fuel to carbon dioxide and water. No flame and a larger vessel mean a nearperfect reaction with low emissions, less than 1 part per million for NOx, which is lower than any permit Castro has seen anywhere in the world, he says. “We’re different from the pol-

lution status quo,” he says, adding the system exceeds regulatory compliance levels, and does it in a financially productive manner. “We can consume and use low-quality fuels like VOCs to actually, not just prevent them from becoming an emission, but actually use them to do something productive, which is generate energy.” Instead of running waste gas VOCs through a regenerative thermal oxidizer, the plant can produce electricity, steam and heat, perhaps even shutting down the RTO. In some applications, the Power Oxidizer can produce sufficient energy from VOCs alone, but that is not the case at Pacific Etha-

nol, Gomez says. Supplemental natural gas is used, so the main financial and carbon offset benefit is from the production of steam, he adds. “Our power oxidizer is able to produce close to 30,000 pounds of steam to offset their steam production by approximately half. They can use less natural gas-fired boilers and, hence, this reduces their carbon footprint and greatly increased the project economics.”

The Driver

Castro says the goal at Pacific Ethanol, whose executives declined to be interviewed for this article, saying the technology is too DECEMBER 2017 | Ethanol Producer Magazine | 31

EMISSIONS

DRAWN UP: This illustration shows a gas turbine with the Ener-Core Power Oxidizer. The standard combustion chamber factory is shaded, as it would be removed in the application. PHOTO: ENER-CORE INC.

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new for them to be able to comment on its benefits, is to complete installation by the end of this year and produce 3.5 megawatts of energy. Castro hopes interest in the Power Oxidization system will spread in the ethanol industry, once Pacific Ethanol’s installation is up and running. “At the end of the day, the ethanol industry is a commodity industry. Cost is king. … If you can find a way—and we have—to enable an ethanol plant to reduce its operating costs by $4 million—which is what Pacific Ethanol has said they intend to save here—while reducing their emissions, that’s really a home run.” Gomez stresses the benefits of heat at ethanol plants for the distillers grains drying process. “Heat has an immense cost, as well.” Ener-Core’s primary markets are the chemical, pharmaceutical, wastewater treatment and oil and gas industries, Castro says. While the Power Oxidizer does make use of pollutants, reduces carbon intensity and ensures regulatory compliance, the main driver behind customers’ choices to implement it is its financial benefit, he says. “Having a low emissions standard may prompt companies to deploy a solution like this faster … but, ultimately, the real underlying reason it’s being done is for the operational, economic benefits.” Ethanol plants both domestically and internationally have expressed interest in the system, Castro says.

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32 | Ethanol Producer Magazine | DECEMBER 2017

The Power Oxidizer isn’t the only option out there, and interest in it and other emissionsreduction technologies could increase with changes in regulations. Some U.S. states are initiating even stricter emissions policies than those in the Clean Air Act. California has its Low Carbon Fuel Standard, and Oregon and Washington are taking on similar initiatives. “Given the trend towards higher credit prices in the California LCFS, as well as developing LCFS policies in other jurisdictions, there could be additional financial incentives for investment in technologies that reduce ethanol carbon intensity,” says Brendan Jordan, vice president of the Great Plains Institute. “California LCFS credit prices are currently high enough to make carbon capture and storage or utilization profitable for an ethanol

THE TEAM: The Ener-Core team poses with its 1.75 megawatt Power Oxidizer. Pacific Ethanol in Stockton, California, is the first ethanol plant to install the system, but Ener-Core hopes to expand within the industry. PHOTO: ENER-CORE INC.

plant, assuming pipeline infrastructure for carbon dioxide can be built out.” Ernie Pollitzer, owner and senior engineer with Clean Energy Consultants, says carbon sequestration is the emissions-reduction tactic with the most potential, and the EPA is working on new regulations for it. “It is more of a guidance and it was not clear if ethanol plants could have a new pathway if they use carbon sequestration, but at least EPA is recognizing the potential for this technology.” Jordan adds that the FUTURE Act would offer a tax credit for carbon capture and storage. A Senate version of the bill has been introduced in both the House and Senate. And across the country, about 85 ethanol plants have achieved efficient producer pathway status through the EPA, enabling them to generate RINs for production volumes above those grandfathered under the RFS, provided they meet the 20 percent greenhouse gas (GHG) reduction threshold. Ethanol plants have taken multiple measures to improve pollution abatement, and their tactics and technologies have evolved with the industry. Vendors have improved thermal oxidation burners and CO2 scrubbers, Pollitzer says, and many plants have invested in CHP. Castro says Ener-Core’s Power Oxidizer CHP system only becomes more beneficial as policies become stricter. “Most pollution abatement today is an insurance tool. You use it to get your emissions down to stay within compliance. It’s seen as a cost center. It’s not seen as a profit center to the operations. We’re achieving a lot: We’re generating power and heat and steam onsite with no NOx and using VOCs as a source of energy.” Author: Lisa Gibson Managing Editor, Ethanol Producer Magazine 701.738.4920 lgibson@bbiinternational.com

DECEMBER 2017 | Ethanol Producer Magazine | 33

FINANCE

EVOLVING AGREEMENTS: Under FASB Topic 842, off-take agreements for proposed projects must be reported on balance sheets. The rule goes into effect at the end of next year, but one lender has already established a program to alleviate its negative effects. STOCK PHOTO

A New Reality

Off-take agreements lose their financial appeal under a new provision taking effect at the end of next year. By Lynn Knox

CONTRIBUTION: The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).

34 | Ethanol Producer Magazine | DECEMBER 2017

FINANCE

Off-take agreements have been commonplace for proposed energy projects for years.

An energy user, or off-taker, kept the offtake agreements off its balance sheet, allowing it to keep its ratios intact on financial statements, which helped maintain its corporate bond ratings and borrowing capacity. That meant the company expensed out 100 percent of its energy or product purchases. After Enron’s 2011 bankruptcy on the heels of years of accounting deception, the Financial Accounting Standards Board began its work changing the required accounting procedures for all contracts, including off-take agreements and leases. FASB adopted its Topic 842 on Feb. 25, 2016, which takes effect on Dec. 15, 2018, and is retroactive to Feb. 25, 2016. All offtake agreements with a duration of more than 12 months are to be reported in accordance with FASB Topic 842. That includes ethanol agreements. The provision requires that off-take agreements entered into before the construction of an energy project now be reported on a purchaser’s balance sheet as both a right-of-use asset and an offsetting liability, both calculated at the present value of all purchases. That has a negative impact on liabilities, as well as on the return on assets, as the company’s net income does not change but its assets increase. For years, off-balance-sheet off-take agreements were preferred by companies over capital leases with $1 buyout. But with the adoption of FASB Topic 842, capital leases (now referred to as finance leases by FASB) are far superior. To avoid the negative fallout of this change, Credit Lease Investments LLC offers what it calls a Lease-Operations &

Maintenance Agreement. In the agreement, 100 percent of project costs are provided, in exchange for an initial annual lease payment, generally calculated at 3 to 3.5 percent. After the 2.25 percent annual lease payment escalations, the implicit rate (the interest rate to amortize the principal to zero by the end of the lease term) is generally 4.3 to 4.75 percent, which still is less than the costs of financing and raising equity under an off-take agreement. The lease structure has three tiers: Tier 1: Developer-operator provides purchaser with the first amounts of energy/product up to the required lease payments at no charge to the purchaser. Tier 2: The purchaser guarantees energy/product purchases in the amount

of the project’s operational expenses and developer-operator’s minimum profit. Tier 3: Developer-operator has the right to sell the balance of energy/product produced to other purchasers at a specific price stated in the Lease-O&M Agreement, wherein the purchaser can also purchase the balance of energy at the same price, if unsold to other energy/product users. The developer/operator has complete control over the design, implementation and operations of the project. The result of this Lease-O&M structure is that the unguaranteed energy purchases should be considered off-balance-sheet for the purchaser, subject to approval of its auditors.

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DECEMBER 2017 | Ethanol Producer Magazine | 35

FINANCE

COMPARISON OF THE LEASE STRUCTURE AND AN OFF-TAKE AGREEMENT Lease-O&M Agreement Term (in years)

Off-Take Agreement

20 years

$10 million

Annual Lease Payment (Guaranteed)

$4 million

N/A

Operational Expenses and Minimum Developer/Operator Profit (Guaranteed Purchases under O&M)

$2 million

N/A

Unguaranteed Energy Purchases

$4 million

N/A

$120 million ($6 million x 20 years)

$200 million ($10 million x 20 years)

Total Annual Energy Purchases

On Balance Sheet

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Under this lease, benefits to energy projects with a useful life greater than the finance lease term include: 1. Only interest paid plus the amortization of the right-of-use asset are expensed. 2. When the company buys out the finance lease at the end of the lease term for $1, the company receives a new asset, without liability, improving tangible net worth, or net assets for nonprofit companies. Other benefits under this lease structure, even for those energy projects with the same useful life as the finance lease term, include: 1. Lower financing costs, which result in purchaser paying less for energy or product. 2. Purchaser guarantees only the amount of the lease payments, project’s operational expenses and developer-operator’s minimum profit. 3. After the purchaser buys out the finance lease for $1 at the end of the lease term, its payments for energy/product significantly reduces under the option periods in the agreement. With new programs such as this one in place to accommodate FASB’s Topic 842, most companies will not find off-take agreements for proposed projects financially attractive.

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36 | Ethanol Producer Magazine | DECEMBER 2017

Author: Lynn Knox President, Commercial Property Lenders Inc. 770.213.4141 cpl1@prodigy.net

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