INSIDE: FUEL ETHANOL: STARTING POINT FOR REVOLUTION JUNE 2015
EPM
NEW CHEMISTRY 21 MMgy Facility Aims for High-Value Biotech Market Page 46
PLUS
June 2015
A Seller’s Market,, Still
Page 36
Strategic Planning for Healthy Finances
Page 52
www.EthanolProducer.com
2015:
THE YEAR OF
THANKS FOR BEING SOME OF THE FIRST RETAILERS TO OFFER E15. Growth Energy commends CENEX, Kum & Go, MAPCO, Minnoco, Murphy USA, Petro Serve USA, Protec Fuel, Sheetz and Zarco USA for their pioneering spirit and efforts to expand consumer access to higher blends of renewable fuels. They offer consumers a choice and savings at the pump, while investing in a homegrown industry that supports farmers across the country. Together we’re making progress toward the next generation of sustainable, renewable fuels.
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CONTENTS
JUNE 2015
VOLUME 21 ISSUE 6
FEATURES
36
BUSINESS
46
PROFILE
How Deals Square Up
‘Back to the Future’ with N-butanol
By Tom Bryan
By Holly Jessen
Ten companies bought 13 ethanol plants in 2013, compared to only five transitions in 2014
52
PROFITABLITY
Riding the Performance Curve
Lessons learned for long-term business viability
By Susanne Retka Schill
A Minnesota ethanol plant will be retrofitted to produce high-value chemicals
62
MARGINS
Follow the Money
Reflecting on what ethanol producers did with money earned during high profitability
By Holly Jessen
MARKETS
Stepping Up to a Currency Model
Companies pursue plans to turn fuel ethanol into renewable chemicals
By Susanne Retka Schill
54 70 4 | Ethanol Producer Magazine | JUNE 2015
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www.uswaterservices.com FEW Booth #413
CONTENTS
JUNE 2015
DEPARTMENTS 8
EDITOR'S NOTE
9
AD INDEX
12
THE WAY I SEE IT
VOLUME 21 ISSUE 6
CONTRIBUTIONS
Matchmaking, Money And Makeovers By Tom Bryan
Present Day Ethanol Trumps Good Ol' Days By Mike Bryan
13
EVENTS CALENDAR
14
VIEW FROM THE HILL
76
INVESTING
DRIVE
18
GRASSROOTS VOICE
Market Tools Help Identify, Manage Margins
By Todd Taylor
By Chip Whalen
Crowdfunding, SEC exemptions and amendments offer different benefits, restrictions
Following the Cool Guys By Ron Lamberty
84
EMISSIONS
GLOBAL SCENE
22
BUSINESS BRIEFS
By Edward “EJ” Juers
24
COMMODITIES
28
DISTILLED
94
BUSINESS MATTERS
96
Considering costs, revenues as a single unit of risk is important hedging strategy
High Hurdle Race By Tom Buis
Small Changes Affect Sampling Methods
20
HEDGING
New Laws, Rules Offer Options For Raising Capital
Waves of Ethanol Misinformation By Bob Dinneen
16
80
End the Food Vs Fuel Debate By Bliss Baker
Weathering Tight Margins By Donna Funk
MARKETPLACE
Seemingly subtle changes in test methodology, plant operations can impact emissions monitoring
88
FINANCE
Long-Term Planning Mitigates Risks from Prolonged Downturns Financial advisors can help with lender communications
By Frank Baumgardt
ON THE COVER
92
LOCAL IMPACT
Ethanol Biorefinery Boosts Local Corn Production Area farmers benefit from new market, new storage option
By Lyndon Anderson
PHOTO: KIMM ANDERSON
Ethanol Producer Magazine: (USPS No. 023-974) June 2015, Vol. 21, Issue 6. 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 | JUNE 2015
VOLUME 21 ISSUE 6
EDITORIAL
Ethanol Producer IS THE
#1 SOURCE
OF NEWS AND INFORMATION ABOUT ETHANOL PRODUCERS AND INDUSTRY PROS With subscribers in more than 46 countries, Ethanol Producer Magazine is the world’s largest and longest-running ethanol magazine. • The only ethanol magazine in the world • 11,250+ circulation • Distributed monthly to every ethanol plant in North America • We’ll create your advertisement for free of charge
President & Editor in Chief Tom Bryan tbryan@bbiinternational.com Vice President of Content & Executive Editor Tim Portz tportz@bbiinternational.com Managing Editor Holly Jessen hjessen@bbiinternational.com Senior Editor Susanne Retka Schill sretkaschill@bbiinternational.com News Editor Erin Voegele evoegele@bbiinternational.com Copy Editor Jan Tellmann jtellmann@bbiinternational.com
ART
Art Director Jaci Satterlund jsatterlund@bbiinternational.com Graphic Designer Raquel Boushee rboushee@bbiinternational.com
PUBLISHING
Chairman Mike Bryan mbryan@bbiinternational.com CEO Joe Bryan jbryan@bbiinternational.com
SALES
Vice President of Operations Matthew Spoor mspoor@bbiinternational.com Business Development Director Howard Brockhouse hbrockhouse@bbiinternational.com Senior Account Manager/Bioenergy Team Leader Chip Shereck cshereck@bbiinternational.com Account Manager Jeff Hogan jhogan@bbiinternational.com 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 of $49.95 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 hjessen@bbiinternational.com. Please include your name, address and phone number. Letters may be edited for clarity and/or space.
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Account Manager Tami Pearson tpearson@bbiinternational.com Sales & Marketing Director John Nelson jnelson@bbiinternational.com Circulation Manager Jessica Beaudry jbeaudry@bbiinternational.com Traffic & Marketing Coordinator Marla DeFoe mdefoe@bbiinternational.com
COPYRIGHT © 2015 by BBI International TM
JUNE 2015 | Ethanol Producer Magazine | 7
EDITOR'S NOTE
Matchmaking, Money And Makeovers The U.S. ethanol industry has appreciably matured in the past six years, but it hasn’t lost its youthful propensity to take chances and explore new things. American ethanol producers are, today, among the most efficient,
Tom Bryan
President & Editor in Chief tbryan@bbiinternational.com
disciplined and financially sophisticated agribusinesses in the world. At the same time, the industry’s 200-plus facilities, still owned by roughly 100 different companies, are hungry for innovation, open to change and flexible enough to look at almost anything. This month’s issue of Ethanol Producer Magazine examines the ethanol industry’s current financial condition against the backdrop of its remarkable affinity for adaptation. Our inspection of money management in the ethanol business begins with an instructive look at recent mergers and acquisitions within the sector. In “How Deals Square Up,” on page 36, we see that ethanol plant M&A has historically been driven by distress and more transactions occur on the heels of downturns than after profitable periods. For comparison, there were nearly three dozen ethanol plants sold after the industry’s well-chronicled 2008’09 downturn, but just five transactions during and after the recent period of record margins (see “Follow the Money” on page 62 for more insight on what producers did, or plan to do, with last year’s earnings). Investment bankers tell us, however, that financial distress isn’t the only thing that prompts ethanol plants to be sold. One recent deal, for example, included a seller that was a nonlong-term investor looking to cash out on a healthy asset. Another transaction was based on a strategy to convert a relatively small ethanol plant into a facility that can produce higher-margin chemicals, which is the focus of our cover story, “‘Back to the Future’ with N-butanol,” on page 46. In this feature, EPM Managing Editor Holly Jessen goes inside Green Biologic’s recent acquisition of Central Minnesota Ethanol Co-op in Little Falls, Minnesota. Green Biologic’s plan is to retrofit the plant to produce n-butanol and acetone while still making some ethanol. The nature of the deal illustrates the incredible versatility of dry-mill ethanol plants and shows us that acquisitions can be carried out with real people in mind. The deal was structured in a way that benefitted existing shareholders, plant employees and area farmers. We look more downstream at biobased chemicals in “Stepping Up to a Currency Molecule,” on page 70. In this piece, EPM Senior Editor Susanne Retka Schill reports on how a growing global demand for sustainable products is opening a huge door for renewable chemicals, some of which can be derived from, or made with, ethanol. Finally, we look closely at the overall financial state of U.S. ethanol plants and how producers are leveraging the hard lessons of their recent past to run their businesses better. We learn in “Riding the Performance Curve,” on page 52, that most producers are still financially comfortable, operating with healthy levels of working capital and generally looking at ways to reinvest in new assets and next-stage technologies.
FOR INDUSTRY NEWS: WWW.ETHANOLPRODUCER.COM OR FOLLOW US: 8 | Ethanol Producer Magazine | JUNE 2015
TWITTER.COM/ETHANOLMAGAZINE
VOLUME 21 ISSUE 6
ADVERTISER INDEX 26-27 2015 National Advanced Biofuels Conference & Expo 97 4B Components, Ltd. 100 ACE American Coalition For Ethanol 19 & 29 Arisdyne Systems 39 BBI Project Development 95 BetaTec Hop Products 10-11 BilďŹ nger Water Technologies 38 Buckman 28 Butterworth, Inc. 54 Cereal Process Technologies 42 Cloud/Sellers Cleaning Systems 78 Direct Automation 50 DuPont Industrial Biosciences 45 Eco-Energy Inc. 79 EcoEngineers 90 Ethanol 101 59 Fagen Inc. 91 Fluid Quip Process Technologies, LLC 17 Fuel Ethanol Industry Directory 33 GEA Westfalia Separator 13 Growth Energy 2 Hengye USA 51 Hydro-Klean LLC 61 ICM, Inc. 86 Interra Global Corporation 66 INTL FCStone Inc. 43 Iowa Economic Development Authority 68 J.C. Ramsdell Enviro Services, Inc. 22 Lallemand Biofuels & Distilled Spirits 34 Leaf Technologies 30 Louis Dreyfus 73 Mason Manufacturing, LLC 55 Minnesota Bio-Fuels Association 65 2015 Fuel Ethanol Conference & Expo
Mist Chemical & Supply Company Nalco, an Ecolab Company Natwick Associates Appraisal Services NCAT, Inc. New Holland Agriculture North American Industrial Services Novozymes Ocean Park Advisors Pan American Hydrogen, Inc. Phibro Ethanol Performance Group POET-DSM Advanced Biofuels Premium Plant Services, Inc. ProQuip, Inc. Renewable Fuels Association RPMG, Inc Seneca Companies Solenis LLC Sukup Manufacturing Co. Swedish Exergy AB Syngenta: Enogen Thermal Refractory Tower Performance, Inc. Tramco, Inc. U.S. Water Services Valicor Separation Technologies WestAgro Executive Brands WINBCO Zeochem LLC
48 74 67 31 15 23 35 41 72 99 98 83 40 87 75 49 21 69 82 60 64 44 3 5 57 56 58 93
JUNE 2015 | Ethanol Producer Magazine | 9
THE WAY I SEE IT
Present Day Ethanol Trumps Good Ol’ Days By Mike Bryan
Some long for the good ol’ days, when cars were simple and you could do much of the repair work yourself. When in the evening the 9 o’clock whistle blew and you had to get home, or writing a letter meant pen and paper. Myself, I’m glad we no longer live in the good ol’ days. I don’t want to work on my car. The cars today are much more reliable and more fun to drive. I really am not terribly concerned that kids spend more time on the computer than they do playing outside. It’s the age we live in and they are preparing themselves for a new and exciting future. Frankly, I like being able to send an email rather than sit down and handwrite a letter, and I am a better communicator as a result. I’ve heard some say that they long for the good ol’ days of the ethanol industry, when it was young and we all felt a sense of comradery and we knew who the enemy was. Frankly, I’m not interested in reliving the past of the ethanol industry either. It was often painful. We are much more sophisticated now, we have years of research under our belts and can stand toe-to-toe with the enemy rather than throw rocks and sticks at them, as that’s all we had back then. I don’t think there is a better time to be in this industry, with technology moving forward at breakneck pace. We have matured and replaced the rocks and sticks with billions of miles of troublefree consumer use and reams of data that substantiate the viability and performance of ethanol. We have a whole new generation of bright young talent working in the industry who will carry us into the next tier of success. Many of us remember when a woman named Roberta Nichols from Ford Motor Co. introduced the first flexible fuel vehicle. Exciting as it was, it seems so long ago now, given where things are with E85 today. The good ol’ days sometimes consisted of organizing corn farmers to stand at service stations handing out
12 | Ethanol Producer Magazine | JUNE 2015
ethanol brochures and offering to fill the customer’s car up for them, just to get product recognition. While it was fun at the time, I don’t want to do that anymore. There are lots of things that had to be done to get the industry where it is today, that most of us who did them would not really want to do again. The young talent in the industry today are creating their own good ol’ days and a decade or two from now will likely write a column reminiscing about those days, glad that they don’t have to relive them. Personally, I’m happy where the industry is today, still with challenges, still with much work to be done, but with the ability to do that work on a much more level playing field. We have set aside the rocks and sticks and replaced them irrefutable facts and a mountain of well-researched data. We have moved from a niche industry to a major contributor to energy security, cleaner air and economic stability. So for me, while I may look back from time to time with fond memories of the battles and the things we did to build the industry, I think now is the best time ever to be in the ethanol industry. Besides, there is little need to look back, because, before you know it, today will be one of the good ol’ days. That’s the way I see it.
Author: Mike Bryan Chairman, BBI International mbryan@bbiinternational.com
EVENTS CALENDAR ACE Conference August 19-21, 2015 Omaha, Nebraska Hilton Omaha
ACE’s annual conference is tailored to the interests and needs of the people of ethanol, the folks in the trenches. It’s a gathering of ACE’s commitment to connect ethanol producers with the farmers, researchers, retailers, and support businesses to continue what all of them started a long time ago. It’s also an excellent place to learn and share ideas. And, it has all the fun of a family reunion. 605-334-3381 www.ethanol.org/events/conference
National Advanced Biofuels Conference & Expo October 26-28, 2015 Hilton Omaha Omaha, Nebraska Produced by BBI International, this national event will feature the world of advanced biofuels and biobased chemicals—technology scale-up, project finance, policy, national markets and more—with a core focus on the industrial, petroleum and agribusiness alliances defining the national advanced biofuels industry. 866-746-8385 www.advancedbiofuelsconference.com
International Biomass Conference & Expo April 11-14, 2016 Charlotte, North Carolina
866-746-8385 www.biomassconference.com
International Fuel Ethanol Workshop & Expo June 20-23, 2016 Wisconsin Center, Milwakee, WI
Now in its 32nd year, the FEW provides the ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-tobusiness environment. As the largest, longest running ethanol conference in the world, the FEW is renowned for its superb programming—powered by Ethanol Producer Magazine —that maintains a strong focus on commercial-scale ethanol production, new technology, and near-term research and development. 866-746-8385 www.fuelethanolworkshop.com
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Organized by BBI International and produced by Biomass Magazine, this event brings current and future producers of bioenergy and biobased products together with waste generators, energy crop growers, municipal leaders, utility executives, technology providers, equipment manufacturers, project developers, investors and policy makers. It’s a true one-stop shop—the world’s premier educational and networking junction for all biomass industries.
VIEW FROM THE HILL
Waves of Ethanol Misinformation By Bob Dinneen
There is nothing quite like the feeling of being on the water on a clear summer day. Tennis champion Rafael Nadal once described it as, “I like fishing. Not actual fishing, I like the peace and quiet of being at sea. It’s different.” Boating is a beloved pastime for many Americans, whether taking part in fishing, water skiing or simply enjoying the exhilarating feeling of cruising on the water. Over the years, a lot of misinformation has been creating waves when it comes to ethanol use in marine engines. In a sign of their desperation, API actually ran ads last year claiming that ethanol— and the renewable fuel standard (RFS)—will strand boaters on the water. Nothing could be further from the truth. But as the summer months rapidly approach, we must once again equip the boating community with the facts they need to cut through the wake of misinformation being churned up by the petroleum industry. All boaters must know that E10 can safely be used in their marine engines. Oftentimes marine publications will exaggerate concerns about E15 marine use to vilify all ethanol blends; but E15 is not approved for use in these engines. However, E10 is perfectly fine for marine engines. It doesn’t matter whether their boat has a two-stroke or four-stroke engine, an in-board or out-board motor, or a built-in or portable fuel tank. But, don’t just take my word for it. Every marine engine manufactured today provides warranty coverage for E10. The Honda owner’s manual for the BF25A/30A Outboard Motor states that “You may use gasoline containing up to 10 percent ethanol by volume.” Additionally, Yamaha owner’s manual for the F115 notes that “Gasohol containing ethanol can be used if ethanol content does not exceed 10 percent and the fuel meets minimum octane ratings.” Manufacturers would certainly not approve a fuel
14 | Ethanol Producer Magazine | JUNE 2015
that would harm the product or the consumer. Similar language appears in the owner’s manuals for Kawasaki, Mercury Marine, OMC (Johnson/Evinrude), Pleasurecraft, Tigershark (Artco) and Tracker marine engines. In addition to the owner’s manuals clearly approving E10, Vernon Barfield, former vice president and technical chairman of the National Boat Racing Association said that “There is a myth out there that 10 percent ethanol is not good for marine engines, but we have been operating for over 20 years and have not had any issues with it whatsoever.” He continues, “…there are absolutely no problems running on 10 percent ethanol.” We now have the facts from manufacturers and experts alike. So how do we disseminate the information? The new digital age offers a plethora of opportunities to easily get the word out at very little cost. It can be as easy as posting the information on Facebook or Twitter. E-mail also offers a quick and easy way to send the information to family and friends. But, let’s not forget traditional media and the power of oneon-one interaction. Individuals or groups can write an op-ed or submit a letter to the editor of the local paper, ultimately reaching a larger audience. But, nothing can compete with one-on-one conversation. Have a conversation with boaters filling up at the local gas stations, strike up a discussion when launching your boat at the boat dock or chat with the local gas station owner to make sure they have the correct facts for their customers. Every little bit helps calm the waves of ethanol misinformation and create a more informed boating community. Author: Bob Dinneen President and CEO, Renewable Fuels Association 202-289-3835
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DRIVE
High Hurdle Race
By Tom Buis
The journey to making E15 the standard fuel option across the country is like a high hurdle race. As soon as we clear one hurdle, we have to focus on the next. Although we are making constant progress with
retailers and E15 is now available at more than 120 stations in 18 states, there are still challenges ahead. The largest regulatory obstacle standing between consumers and access to higher ethanol blends is the absence of a Reid vapor pressure (RVP) volatility waiver for E15. Currently, E15 and higher ethanol blends do not receive the same 1-pound RVP volatility waiver that is granted to E10, which restricts summertime sales of E15 in many states. This regulatory restriction creates a disincentive for retailers to sell E15 or higher biofuel blends and denies consumers access to a fuel that meets their price and performance needs. E15 should not be treated as a seasonal fuel and the American consumer should not have to check their calendar to see if they will have a choice when they pull up to the pump. Since Growth Energy applied for a fuel waiver for E15 in 2009, the ethanol industry has repeatedly asked the U.S. EPA to level the playing field and grant a similar 1-pound RVP waiver for ethanol blends above 10 percent. Unfortunately, when EPA finalized the misfueling mitigation rule for E15, they explicitly stated that they would not grant a RVP waiver for E15, even though E15 is a cleaner, higher performing, less expensive fuel. We commend Sens. Chuck Grassley, R-Iowa, and Rand Paul, R-Ky, Reps. Rod Blum, R-Iowa, and Adrian Smith. R-Neb., for recognizing the need for competition in the marketplace and taking leadership on this important issue in U.S. Congress. These congressmen have introduced legislation in both the Senate and the House of Representatives to remove regulations that limit market access to higher ethanol blends and restrict consumer choice at the pump. They agree that the regulatory treatment of E15 is unfair
16 | Ethanol Producer Magazine | JUNE 2015
and is preventing the adoption of new fuels that could benefit our environment, our economy and our energy security. We know that others will soon follow their lead and work together to move these measures forward. For the ethanol industry, E15 is the low-hanging fruit. It’s the most tested fuel in history and is compatible with more than 80 percent of the cars on the road. Nationwide, moving to E15 would create another 136,000 American jobs that can’t be outsourced, reduce the demand for foreign oil by 7 billion gallons and eliminate up to 8 million metric tons of greenhouse gas emissions per year— the equivalent of taking 1.68 million vehicles off the road—all while saving consumers money at the pump. E15 is projected to save consumers between 5 and 15 cents per gallon. And, because ethanol increases the available fuel supply, it will help to drive down the price of gasoline for all drivers. In a time when roughly 8 percent of our annual incomes are being used for commuting costs, those savings really add up. The oil industry recognizes the obvious benefits to consumers and will continue to throw up every hurdle they can to protect their market share and keep our nation addicted to fossil fuels. But each of those hurdles we clear sends a positive signal that America is ready for cleaner technologies that provide consumers with a choice and savings at the pump. As an industry, we know that hurdles are just a series of barriers that are meant to be jumped over, and in the end, we will win this race. Call your elected officials today and let them know that you support S. 889, H.R. 1944 and H.R. 1736. Author: Tom Buis CEO, Growth Energy 202-545-4000 tbuis@growthenergy.org
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GRASSROOTS VOICE
Following the Cool Guys By Ron Lamberty
Every year, surveys are performed by advertising and marketing companies to try and measure trust.
Who or what do people trust when they are looking for the answer to a question, a recommendation on a purchase, or information about a controversial topic? While the results reshuffle a little bit each year, near the top of the list in every survey is “someone like me,” or “people I know.” In reality, sure, we want to know what people like us think, but come on, if you were offered advice from, let’s say, Pat Hawkins, a guy I grew up with in Hilltop, or noted theoretical physicist Stephen Hawking, you’d listen to the guy who is considered one of the greatest minds of our time, right? Not me. I’m going to listen to Pat, because—I forgot to mention this—the subject is “winning strategies for ‘cans,’” a game that was invented by Pat, my brother Greg and me … and maybe Todd Nussbaum… I don’t remember. Anyway, we would all kick Hawking’s butt in cans. And I bet he can’t give you any tips on hot-waxing a pop can either. Pat could. Pat was awesome at that. If you’re looking for that kind of advice, you can just say, “thanks for nothing, Professor Hawking.” I guess the point is, for most decisions, studies and spokespeople are important, but most of us still want to get the recommendations of “people like me.” However, we prefer the opinions of leaders and innovators, like Pat. Guys who care enough to find out if waxing a pop can makes a difference, and who don’t mind if it doesn’t, because now they know (and it still looked cool). The convenience store industry is often described as one where “everyone wants to be first to be second.” Maybe that’s true of most industries, and the meaning is the same in all of them: Before business owners invest time and money in a new product or new line, they want to see it in action. And, whenever possible, they want to talk to people who have already been there and done that, to find out how it’s really working out. Fuel marketers go to trade shows and petroleum industry events to see that stuff and talk to those people.
18 | Ethanol Producer Magazine | JUNE 2015
The challenge for a new product like E15 is most marketers don’t know a station owner who sells E15, and what they think they know has been warped by the ongoing E15 smear campaign. The American Coalition for Ethanol’s Flex Forward campaign introduces fuel marketers to other real, live marketers, who saw through those ghost stories, added E15, and made more money. We can’t bring experienced E15 marketers with us to every trade show or workshop ACE attends, so we’ve done the next best thing. We’ve brought their stories to ethanol.org and flexfuelforward.com where they will be available 24/7, for marketers who live and work in the 24/7 convenience store world. Beyond that, in the c-store world, just like every other “world,” there are operators who are watched more closely by other retailers. They are the innovators, retailers who try things nobody else has tried. When it works, they reap the rewards, if it doesn’t, they find a way to make it work. That’s why it was a big deal when Sheetz Inc. announced it will be putting E15 in 60 stations this year. Sheetz is one of those companies. They have a reputation for being an innovator. If you doubt that, the next time you’re talking to a prospective E15 retailer, just drop this into the conversation: “Sheetz is going to sell E15 in 60 of their stores.” Watch for the reaction. A lot of time and money has been spent to encourage some high-profile retailers to offer E15. The only way that investment pays off is if other fuel retailers notice and want to “be the first to be second.” Drop those names. Not just Sheetz. Mention Mapco. Murphy. Whoever sells E15 in your area. Every chance you get, let station owners know “someone like you” is selling E15. And it’s one of the cool guys. Author: Ron Lamberty Senior Vice President American Coalition for Ethanol 605-334-3381 rlamberty@ethanol.org
GLOBAL SCENE
End the Food Vs Fuel Debate By Bliss Baker
For several years the biofuels industry has been confronted with misinformation about the role that biofuels production plays in driving up food prices and impairing food security. It has been disseminated in large part
by vested interests that have been threatened by the growth of the industry. While the industry has countered this with the facts, the recent drop in oil prices and global food price index should finally put an end to the food vs. fuel debate. The Global Renewable Fuels Alliance has repeatedly pointed out that the price of oil and energy inputs are the single most important drivers of food and commodity prices. For a number of years the World Bank, International Energy Agency and United Nations Food and Agriculture Organization had been under the misguided impression that food price increases were the result of increased biofuels production. They have since come to the conclusion that the biofuels industry has had a negligible impact on food prices. The World Bank publication, “Long-Term Drivers of Food Prices,” which examined the relative contribution of various macroeconomic drivers on food price increases from 1997-’04 to 2005-’12 concluded “that most of the price increases are accounted for by crude oil prices (more than 50 percent)…” The report goes on to say, “most of the contribution to food price changes from 1997’04 to 2005-’12 comes from the price of crude oil, which for maize and wheat is 52 percent and 64 percent, respectively.” This long overdue “revelation” is not a surprise to the biofuels industry and the GRFA, which published the accompanying chart for the first time five years ago. It compares the global food price index published by the UN FAO with global crude oil prices and the results are undeniable: The recent collapse of global crude oil prices has been followed by the drop in the global food price index. It is interesting to note that this recent drop in the food price index happened while biofuels production grew to over 90 billion liters per year.
SOURCE: GRFA
More recently, the UN FAO concluded that biofuels have actually helped the agriculture sector over the years by stating in a recent publication that “increased agricultural productivity and output has ensured that the global supply of crops available for nonbiofuel uses has continued to grow over the long term.” In a January speech at the Global Forum for Food and Agriculture by Jose Graziano da Silva, director general of UN FAO, he recognized biofuels as a key part of the global agriculture complex with social, agricultural and environmental benefits and the necessity for agriculture to accommodate both food and fuel. Perhaps this is a fitting end to the debate once and for all. Author: Bliss Baker Global Renewable Fuels Association 647-309-0058 info@globalrfa.org
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BUSINESS BRIEFS Vecoplan LLC has promoted Misty Turner to the position of assistant service manager. Responsibilities of her new position include connecting customers and field technicians Turner with Vecoplan’s internal troubleshooting service technicians. She will also oversee the organization and scheduling of Vecoplan’s network of certified service personnel throughout North America. Turner joined Vecoplan in March 2012 as a service administrator. She brings 10 years of management and service experience to her new job, including three years as accounts receivable manager at HEP Direct and four years in customer service with Furniture USA. American Ethanol reached a new milestone at the Phoenix International Raceway in March, when it topped 7 million miles of racing. That equates with roughly 30 trips from the Earth to the moon or 281 laps around Earth. NASCAR began running E15 in 2011. The fuel change was in conjunction with its NASCAR Green Platform, which has become one of the most comprehensive recycling, tree planting and renewable energy programs in professional sports. American Ethanol is a partnership of the National Corn Growers Association and Growth Energy.
22 | Ethanol Producer Magazine | JUNE 2015
People, Partnerships & Deals
Aemetis Inc. has appointed Satya Chillara as vice president of corporate development. Chillara has more than 24 years of experience in the cleantech and semiconductor industries and on Wall Street. He previously served as managing director and equity research analyst working for several investment banks and hedge funds. VAC-U-MAX has announced its 55MW industrial sump vacuum cleaner allows operators to quickly empty machine tool sumps, machining beds, oil/water separators, parts washers, rinse tanks and clean up liquid spills. Included with the complete system, the chip basket and liner separates solid particles from collected liquid at 1 to 2 gallons per second; and, with the turn of a lever, this industrial vacuum will pump out the filtered liquid contents of the drum through the discharge hose to a central filtration system for coolant/oils or approved floor drain at up to 14 gallons per minute. Celtic Renewables has received £500,000 ($746,150) in a new round of investment, taking its valuation to £10 million. The company announced an investment of £250,000 from the Scottish Investment Bank, with an additional £250,000 equity stake acquired by an existing private investor. Scottish Renewables converts whiskey waste into biofuels.
asdfGrowmark Inc. and Magellan Pipeline Co. PL have entered into an agreement in which Growmark will acquire the refined fuels terminal near St. Joseph, Missouri. Terms of the acquisition were not disclosed. Acquisition of the facility will enable Growmark to ensure continued supply of refined fuels. In addition to the current diesel fuel availability at the terminal, Growmark intends to offer ethanol blends of gasoline in the future. asdfIogen has appointed Gordon McLennan vice president of business development. McLennan has 35 years experience in domestic and international sales, revenue generation, McLennan project development, operations management, change management and leadership. As vice president of business development, he will be responsible for developing and delivering new commercial opportunities, including Iogen’s current strategic initiatives both within and beyond cellulosic ethanol. Gordon will play a key role in building upon Iogen’s commercial initiatives. asdfAmerplast has entered into a supply partnership agreement with Braskem to market green polyethylene (Green PE) obtained from a renewable source, sugar cane ethanol. While
environmentally sustainable, Green PE has the performance characteristics of a traditional PE. For Amerplast’s customers, such as tissue producers, it offers an environmentally sound alternative for meeting packaging needs.
Duane Kristensen (left) accepts Ethanol Industry Appreciation Award from Dennis Gengenbach, farmer-director on the Nebraska Corn Board.
asdfThe Nebraska Corn Board recently presented Duane Kristensen of Chief Ethanol Fuels Inc. with its Ethanol Industry Appreciation Award, which recognizes a producer or person in the industry who has worked hard to develop ethanol markets and expand demand for ethanol in the state while appreciating the value of the corn checkoff and its involvement in ethanol market development. Kristensen was selected for his leadership in Nebraska as well as his involvement and engagement in ethanol advocacy groups on a statewide, national, and global basis.
the commercialization, installation and operational servicing of various types of air pollution control and waste treatment systems. asdfMethes Energies International Ltd. recently announced it has received an initial payment for the sale of a Denami 600 biodiesel processor and a PP-MEC pre-treatment system to be installed in Havelock, Ontario, Canada. The buyer, Drain Bros, will become the first facility in the world to use Methes' pretreatment system using the PP-MEC catalyst to process corn oil from a local ethanol plant. asdfEner-Core Inc., a provider of power oxidation technology and equipment that generates clean power from low-quality and waste gases from a wide variety of industries, has appointed John Millard as Millard director of Europe and the Middle East region and Mark Owen as director of sales. Millard and Owen will both report directly to Alain Castro, CEO of EnerCore. Millard has previously served as CEO of a Swiss energy consulting company focusing on demand-side energy management and most recently the development of smart energy systems. Owen is an internationally recognized expert on industrial pollution control systems and processes. He has 30 years experience in
asArcher Daniels Midland Co. has announced several management appointments in its corn business unit. Craig Willis, a 23-year company veteran, has been named president of the ethanol group. He had been a vice president of the business since 2011. Prior to joining the ethanol group in 2007, Willis’ broad-based ADM tenure included experience as commercial manager of three large oilseeds crush plants. He also managed origination and transportation assets within the company’s agricultural services business unit. In addition, Kris Lutt and Andy Moore have been named president and vice president, respectively, of sweeteners and starches; Luther Pohlmann has been named vice president of corn operations, and Gary Towne will continue to serve as president of risk management for the corn business unit. In addition, ADM has announced that Mark Schweitzer has been appointed vice president of investor relations, where he will represent the company to the investment community and act as an advocate for shareholder value creation. Schweitzer previously served as managing director of ADM’s intermodal and international container freight business.
JUNE 2015 | Ethanol Producer Magazine | 23
COMMODITIES
Prices & Market Analyses
Natural Gas Report
Natural gas price outlook positive for consumer April 27— With NYMEX prices for the summer hovering between $2.50 and $2.70 per MMBtu, by how much will supply exceed demand? More to the point, where will inventory levels be by the end of the summer? While it’s still early in the injection season, the data from the U.S. Energy Information Administration are encouraging from the perspective of a consumer of natural gas. Storage inventory gains have been outpacing prior year levels and point toward an inventory level at the high end of the historic range by the end of the summer. High inventory levels tend to keep a lid on prices, so ultimately the outlook for the summer is positive for the natural gas buyer. Throughout the winter, the varying temperatures introduce a bit of noise into the supply-demand relationship that sets natural gas prices. While there were some supply disruptions over the course of this winter, April has ever-so-slightly surpassed the peak production levels of 2014. Further, the momentum of strong supply growth throughout last year sets this summer up for strong production, which has contributed directly to the strong storage injection gains the market has seen in April.
by Ben Straus
For reference, April 2014 brought inventories up by 159 Bcf, and April 2015 is exceeding the prior year by roughly 60 percent, with injections coming in almost 100 Bcf higher. While it’s still early, the combination of a more comfortable starting inventory level and stronger production point to high storage levels by the end of the summer and a good buffer for offsetting next winter’s demand.
Corn Report
Corn, milo markets under pressure
by Jason Sagebiel
April 27—Markets have been under pressure amidst planting progress, bird flu and the overall comfortable feeling with domestic and global corn stocks. Corn for feed demand is projected at 5.250 billion bushels. Traders will expect to see further declines in this sector for feed demand. Overall, corn carryout was projected at 1.827 billion bushels, up from the previous estimates, however, well above last year’s 1.232 billion bushels. Milo exports are projected at 350 million bushels compared to 212 million bushels a year ago. Milo demand into feed decreased by 25 million bushels compared to previous projections. This indicates a strong milo export program has priced itself out of current feed rations. Globally, corn stocks increased and are at comfortable levels. World stocks projected at 188.46 million metric tons vs. 170.84 million metric tons last year and 135.43 in 2012’13. This growth in corn stocks has eased concerns and that is exhibited in how the managed money has them positioned. Managed money has them in a short position not seen since the fall of 2013. For any upward momentum, the marketplace will need a newsworthy event or major weather headline to buoy prices. Comments in this column are market commentary and are not to be construed as market advice.
24 | Ethanol Producer Magazine | JUNE 2015
Regional Ethanol Prices ($/gallon) Front Month Futures (AC) $1.609 Region
Spot
West Coast
1.790
Rack 1.850
Midwest
1.570
1.745
East Coast
1.670
1.774
DDGS Report
SOURCE: DTN
Regional Gasoline Prices ($/gallon)
DDGS priced out of domestic market April 27â&#x20AC;&#x201D;With planting season right around the corner, the conversation about grain prices this time of year normally focuses on soil moisture, and temperatures. This year, though, conversations about DDGS are more focused on Chinese export business, and how sustainable it looks for the summer ahead. The prices that are being paid for distillers grains by exporters is well above its intrinsic value in the domestic market. All this spring, traders were booking a substantial amount of product for the second and third quarters, but only for the export market. Domestic buyers have been using a more traditional corn and soy mix, which DDGS usually supplants, but is not doing so today. For domestic users, DDGS is currently priced about $20 to $25 a ton too
by Sean Broderick
high, versus other ingredients. Protein prices have dropped substantially through this spring, and are competitive with distillers on a per-protein unit calculation. Corn is priced at about 70 percent the value of DDGS delivered prices. It is most efficiently utilized in dairy rations, and the economics for producing milk right now are poor. There will need to be some serious price movement for DDGS to work into domestic rations, and prices, which were higher in February and March, have started to slip. Looking ahead, it will be interesting to watch whether prices move enough to begin to work more readily into the domestic market, or if Chinese demand will continue to pull it offshore.
Front Month Futures Price (RBOB) $2.009 Region
Spot
West Coast
2.490
Rack 2.747
Midwest
2.029
2.438
East Coast
1.863
2.641 SOURCE: DTN
DDGS Prices ($/ton) Jun 2015
May 2015
Jun 2014
Minnesota
170
180
225
Chicago
192
210
255
Buffalo, N.Y.
185
205
270
LOCATION
Central Calif.
234
240
318
Central Fla.
206
226
280 SOURCE: CHS Inc.
Corn Futures Prices (June Futures, $/bushel) Date
High
Low
Close
Apr 24, 2015
3.77 1/4
3.69 1/2
3.69 3/4
Mar 24, 2015
4.01 3/4
3.96
4.01 1/4
Apr 24, 2014
5.13 1/2
5.05 1/2
5.07 1/4 SOURCE: FCStone
Cash Sorghum ($/bushel)
Ethanol Report
Location
Ethanol prices remain range bound April 27â&#x20AC;&#x201D;Ethanol prices have moved around in a choppy pattern over the past month, following the gyrations of gasoline prices as well as short-term moves in the grain markets. The market has been consistently locked in a 10-cent-per-gallon trading range that appears to be willing to hold through the near future. Gasoline prices, on the other hand, have continued to gain buyer momentum with quotes moving to $2 per gallon level in front-month futures contracts for the first time since late 2014. This rebound in buyer support is driven by falling inven-
by Rick Kment
tory levels and the expectation that strong demand for gasoline will continue through the spring and early summer months. Ethanol futures have hit resistance as expected large planted acreage for corn and subsequent falling corn prices are lowering the fuel's production costs and allowing for even more ethanol production through spring months. This will likely add to the already heavy supplies available to the market, and the expected strong gasoline demand will do very little to interest ethanol buyers over the near future.
Apr 17, 2015
Mar 24, 2015
Apr 24, 2014
Superior, Neb.
4.65
4.68
4.40
Beatrice, Neb.
4.50
4.23
4.15
Sublette, Kan.
4.77
4.44
4.58
Salina, Kan.
4.55
5.03
4.74
Triangle, Texas
4.93
4.08
3.79
Gulf, Texas
5.95
5.88
5.60
SOURCE: Sorghum Synergies
Natural Gas Prices ($/MMBtu) Apr 28, 2015
Feb 27, 2015
Apr 29, 2014
NYMEX
2.52
2.73
4.83
NNG Ventura
2.41
3.88
4.75
Calif. Citygate
2.59
2.99
5
LOCATION
SOURCE: U.S. Energy Services Inc.
U.S. Ethanol Production (1,000 barrels) Per Day
Month
End Stocks
Jan. 2015
960
29,755
20,543
Dec. 2014
1,002
31,054
18,739
Jan. 2013
799
24,778
19,894
SOURCE: U.S. Energy Information Administration
JUNE 2015 | Ethanol Producer Magazine | 25
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4B Components, Ltd. A&B Process Systems Corporation Aaron Equipment Company Abengoa ADF Engineering, Inc. ADI Systems, Inc. Aggreko Agra Industries, Inc. Air Resource Specialists, Inc. Alfa Laval Allied Locke Industries Amec Foster Wheeler American Coalition for Ethanol American Lung Association in Minnesota Anderson Chemical Co. Andritz, Inc. Andy J. Egan Co., Inc. Angel Yeast Co., Ltd. Anitox Apache Stainless Equipment Corporation Arisdyne Systems, Inc. Arkema, Inc. Barr Engineering BASF Enzymes, LLC Beta Tec Hop Products Biofuels International Magazine BioFuels Journal Bion Analytical Bismarck State College-National Energy Center of Excellence Bliss Industries, LLC Briggs of Burton, Inc. Brown Tank, LLC Bruker Optics Buckman Bulk Conveyors, Inc. Buresh Building Systems, Inc. Butamax Advanced Biofuels, LLC Butterworth, Inc. Carboline Carter Day International, Inc. CenterPoint Energy Services, Inc. Cereal Process Technologies, LLC ChemTreat Christianson & Associates CHS, Inc. Clayton Industries Cloud/Sellers Cleaning Systems Columbia Pipe & Supply Co. CompuWeigh Corp. Consolidated Water Solutions Conveyor Engineering & Manufacturing Cooling Technology Institue Cooling Tower Depot, Inc. CPM Roskamp Champion CTE Global, Inc. Direct Automation DPC Industries, Inc. DuPont D眉rr Systems, Inc. EAD Corporate EcoEngineers Edeniq
Eisenmann Corporation Emerson Process Management Enerquip, LLC Enviro-Dyne Industrial Services, Inc. ERI Solutions, Inc. eRPortal Software Group, LLC Ethanol Producer Magazine Fagen, Inc. Ferm Solutions, Inc. Flottweg Separation Technology, Inc. FLSmidth Fluid Engineering Fluid Quip Process Technologies, LLC Fremont Industries Frontline Warning Systems GE Water & Process Technologies GEA Flow Components GEA Group GEA PHE Systems Genesis III Global Refractory Installers and Suppliers Golder Associates, inc. GreenShit Corporation Growth Energy Healthmate International, Inc. Hengye, Inc. HTH Companies Hydrite Chemical Co. Hydro-Klean, LLC Hydro-Thermal Corporation IBT Industrial Solutions ICM, Inc. Inbicon/ DONG Energy Industrial Equipment & Parts Innospec Fuel Specialties Integrated Power Services IntegroEnergy Group, Inc. Interpoll Laboratories, Inc. Interra Global Corporation Interstates Companies Intertek INTL FCStone Ivanhoe Industries, Inc. J&D Construction, Inc. J.C. Ramsdell Enviro Services, Inc. Jacobs Corporation Jatrodiesel JMENG Industries, Ltd. JMP K & L Equipment Mechanical, Inc. K路Coe Isom KATZEN International, Inc. Kubco Decanter Services, Inc. Laidig Systems, Inc. LAKOS Separators and Filtration Solutions Lallemand Biofuels & Distilled Spirits Larson Engineering, Inc. Leaf Technologies Lotus Mixers, Inc. Luoyang Jianlong Chemical Industrial Co., Ltd. Maas Companies Magnetec Inspection, Inc.
Mapcon Technologies Mason Manufacturing McC, Inc. Merjent, Inc. Metrohm USA Midland Scientific, Inc. Minnesota Bio-Fuels Association, Inc. Mist Chemical & Supply Company Mole Master Services Corporation Monitortech Corporation MSW Consulting, Inc. MVTL Laboratories Nalco, an Ecolab Company National Corn-to-Ethanol Research Center Nationwide Boiler, Inc. Nelson Engineering, Inc. Neogen Corporation New Age Cryo New Holland Agriculture & Construction New York Blower Company North American Industrial Services, Inc. Novaspect Novozymes Olsson Associates Orbijet, Inc. and Tank Cleaning Technologies, Inc. Pace Analytical Services Painters USA, Inc. Pan American Hydrogen, Inc. Paques, Inc. Paul Mueller Company Pentair Pepper Maintenance Perten Instruments-A PerkinElmer Company Phibro Ethanol Performance Group Pinnacle Engineering, Inc. PK Safety Plant Maintenance Services Pneumat Systems POET-DSM Advanced Biofuels, LLC Polar Clean Praj Industries Limited Premium Plant Services, Inc. ProQuip, Inc. Protectoseal Company, The Pumping Solutions, Inc. Purina Animal Nutrition, LLC Quality Liquid Feeds Rayeman Elements, Inc. Refractory & Insulation Supply, Inc. Refractory Service, Inc. Renewable Fuels Association Renewal Service, Inc. Roadway Worker Training Rotary Airlock, LLC RTP Environmental Associates, Inc. Schimberg Company Schneider Electric-Invensys Schroeder Environmental Cleaning Services, Inc. Scott Equipment Company Seneca Companies
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Siemens Sinobios (Shanghai) Imp. & Exp. Co., Ltd. Solenis Sorghum Checkoff SOS Leak Repair Sponge-Jet, Inc. Sukup Manufacturing Sulzer Pumps Solutions, Inc. Sundial Solar Sunson Industry Group Co., Ltd. Superior Process Technologies Swagelok Minnesota Swanson Flo-Systems Co. Syngenta Tank Consultants, Inc. Team Industrial Services The Cary Company The Walling Company Thermal Energy Products, Inc. Thorpe Special Services Corporation Total Filtration Services, Inc. Tower Performance, Inc. Tracerco TRAMCO (AGI) Tranter, Inc. Trident Automation, Inc. Trihydro Corporation Trillium Industrial Services U.S. Energy Services U.S. Grains Council U.S. Water VAA, LLC VAC-U-MAX Valicor Veolia Water Technologies Vertical Software, Inc. Victory Energy Viking Automatic Sprinkler Co. VistaComm Vogelbusch USA Walinga USA, Inc. Warrior Mfg., LLC Waters Corporation WB Services, LLC WCR Incorporated Westmor Fluid Solutions Whistler Center for Carbohydrate Research, Purdue University Whitefox Technologies Limited WINBCO Zachry Engineering Corporation Zeochem, LLC
DISTILLED
Ethanol News & Trends
Efficient Producer pathways approved for 5 plants
U.S. Ethanol Statistics
In March, the U.S. EPA approved five new corn ethanol pathways under the agency’s Efficient Producer petition process (EP3), including Heron Lake BioEnergy LLC, Heron Lake, Minnesota; United Wisconsin Grain Producers LLC, Friesland, Wisconsin; Guardian Lima LLC, Lima, Ohio; Mid-Missouri Energy LLC, Malta Bend, Missouri, and Green Plains- Atkinson, Atkinson, Nebraska. According to the EP3 approval letters, the greenhouse gas (GHG) reduction for the plants was: Heron Lake BioEnergy, 20.1 percent; United Wisconsin Grain Producers, 24.6 percent; Guardian Lima, 20.9 percent; Mid-Missouri Energy, 21.3 percent, and Green PlainsAtkinson 20.4 percent GHG reduction. A total of 24 corn ethanol plants have received approvals under the new pathway petition process since it was introduced last year. The Efficient Producer petition process was designed by EPA to expedite processing of the large number of petitions submitted by corn starch and grain sorghum ethanol producers.
Feedstock (TBtu)
Production (Mmgal)
Net imports (Mbbl)
Consumption (Mmgal)
2010
1,839
13,298
-9,115
12,858
2011
1,919
13,929
-24,365
12,893
2012
1,814
13,218
-5,891
12,882
2013
1,825
13,293
-5,761
13,216
2014
1,969
14,340
-18,454
13,467
SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION
EIA issues 2014 statistics on US ethanol industry In April, the U.S. Energy Information Administration released comprehensive ethanol production, consumption and trade statistics for 2014 as part of its Month Energy Review report series. According to the report, the U.S. ethanol industry processed 1,969 trillion Btu (TBtu) of feedstock last year, up from 1,825 TBtu in 2013 and 1,814 TBtu in 2012. U.S. ethanol production reached 14.34 billion gal-
Some chemical companies focus on this
lons last year, up from 13.293 billion gallons in 2013 and 13.218 billion gallons in 2012. The U.S. consumed 13.467 billion gallons of ethanol last year, up from 13.216 billion gallons in 2013 and 12.882 billion gallons in 2012. In addition, net imports were -18.454 million barrels last year, compared to -5.761 million barrels in 2013 and -5.891 million barrels in 2012.
or that
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28 | Ethanol Producer Magazine | JUNE 2015
tailoring chemistries to boost production and increase profitability — from evaporator efficiency to corn oil recovery to water treatment issues. To find out more or to schedule a system audit, contact your Buckman representative or email ethanol@buckman.com.
.
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PureVision to scale up operations at ZeaChem’s Boardman site
PureVision Technology has announced plans to scale up its biorefining technology at ZeaChem Inc.’s industrial site in Boardman, Oregon. The two companies expect to break ground later this year on the PureVision building at the Boardman site. PureVision’s patented biorefining technology converts biomass into sugars, pulp, lignin and other value-added materials for making bioproducts. The company currently operates 0.5-tonper-day continuous pilot plant at its Fort Lupton, Colorado, headquarters. “After an 18-month search for a site to develop our commercial demonstration-scale biorefinery, PurVision is excited to team up with ZeaChem Inc. and colocate our advanced biorefining technology at their existing $70 million biorefinery in Boardman, Oregon,” said PureVision CEO Ed Lehrburger. “The significant infrastructure in place at the ZeaChem facility will reduce the costs and timing to develop our 25-ton-per-day biorefining project. The Boardman, Oregon, location will accelerate bringing our technology to market.”
2014 RFS Volume Comparison (in billion gallons) Statutory requirements Cellulosic biofuel Biomass-based diesel Advanced biofuel Renewable fuel
Initial proposed 2014 production rule (No. of RINs)
1.75
0.017 (range of 0.008-0.030)
0.033
No less than 1
1.28
2.700
3.75
2.20 (range of 2-2.51)
0.140
18.15
15.21 (range of 15-15.52)
14.340
SOURCE: U.S. EPA
EPA posts 2014-‘16 RFS rulemaking schedule The U.S. EPA has announced it will issue proposed volume requirements for the 2014, 2015 and 2016 renewable fuel standard, along with 2017 volume requirements for biomassbased diesel, by June 1. All four rulemakings are scheduled to be final by Nov. 30. Regarding the 2014 standard, the EPA said it will repropose 2014 volume requirements by June
1 that reflect the volumes of renewable fuel that were actually used in 2014. A portion of the new compliance schedule is the result of a proposed consent decree in litigation brought against EPA by the American Petrochemical Institute and American Fuel and Petrochemical Manufacturers.
JUNE 2015 | Ethanol Producer Magazine | 29
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Croda to convert ethanol to ethylene oxide Croda Inc. has announced plans to construct a $170 million upgrade at its Atlas Point manufacturing site in Delaware that will convert ethanol into ethylene oxide. Construction is expected to take approximately two years. Once complete, the company will begin converting between 10 MMgy and 14 MMGy of ethanol into ethylene oxide, opening a new market for U.S. ethanol. Ethylene oxide is the primary chemical used in the manufacture of nonionic surfactants. “This will be the first facility of its kind in North America,” said Richard Hanson, managing director of performance technologies and industrial chemicals for the U.K.-headquartered specialty chemical company. Currently, Croda rails in ethylene oxide manufactured on the Gulf Coast from petrochemicalbased ethane or naptha. The new project will provide a renewable alternative to traditional fossil-based ethylene oxide. Customers are increasingly looking for sustainable, renewable materials, Hanson said.
Iowa E85 gallons sold (in millions) Q1
Q2
Q3
Q4
2014
2.71
2.98
3.34
2.93
2013
1.83
2.62
3.61
2.78
2012
2.32
2.31
2.78
1.66
2011
2.52
3.70
2.57
1.94
2010
1.62
2.77
2.85
2.08
SOURCE: IOWA DEPARTMENT OF REVENUE
Iowa sets annual E85 sales record The Iowa Renewable Fuels Association recently announced that data published by the Iowa Department of Revenue shows a record-setting 11.96 million gallons of E85 was sold in the state last year. The nearly 12 million gallons sold in 2014 beat the previous record set in 2013 by more than 1 million gallons. “Another year, and another E85 sales record in Iowa,” said Monte Shaw, executive director of the IRFA.
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reliability
“The most impressive aspect of this record is that retail gasoline prices dropped significantly in the second half of the fourth quarter of 2014, yet Iowa motorists remained committed to the homegrown, cleaner-burning fuel by setting a new fourth-quarter record for E85 purchases. According to the IRFA, E85 is currently sold at approximately 200 fueling stations in Iowa.
performance
yield
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California plant produces low-carbon, whole-beet ethanol
Sunset date removed from Oregon Clean Fuels Program
Mendota Bioenergy LLC’s phase one demonstration plant in Fresno County, California, has successfully produced whole-beet ethanol. Project Manager Jim Tischer said the results that arrived in March were quite favorable. “We’ve made the first whole-beet, low-carbon ethanol in the United States,” he said. The developers now need California Energy Commission approval before moving on to phase two, proving the process in larger reactors and with more complex equipment. Though the demo facility has a 1 MMgy capacity, Tischer said the initial production runs will be smaller, dependent upon the availability of feedstock. The Phase II demonstration is expected to run in mid- to late-summer, when the next crop of energy beets is ready for harvest. Sugar beets are a familiar ethanol feedstock, but until now that feedstock has been produced from the standard sugar extraction process using steam. Mendota Bioenergy’s process sizes down the whole beets, warms them up and liquefies using enzymes.
In March, Oregon Gov. Kate Brown signed S.B. 324 into law. The bill removes the Dec. 31, 2015 sunset date from the state’s Clean Fuels Program. By signing S.B. 324, Brown has allowed the program to be implemented past the end of this year. The program, which is similar to California’s Low Carbon Fuel Standard, requires a 10 percent reduction of greenhouse gases from transportation fuels over a 10-year period. “I strongly support SB 324's goal to reduce greenhouse gas emissions. It is difficult to deny that we are seeing the effects of a warming planet,” Brown said. “This year, 85 percent of our state is experiencing drought, with 33 percent experiencing extreme drought. This directly impacts 1.5 million Oregonians, hitting our rural communities the hardest. With California, Washington, and British Columbia moving forward with their own
Oregon Clean Fuels Standard Required reduction 2016
0.25%
2017
0.50%
2018
1.00%
2019
1.50%
2020
2.50%
2021
3.50%
2022
5.00%
2023
6.50%
2024
8.00%
2025 and beyond
10.00%
SOURCE: OREGON DEPARTMENT OF ENVIRONMENTAL QUALITY
clean fuels programs, which will shape the West Coast market, it is imperative not only that Oregon does its part to reduce greenhouse gas emissions but also that we build a program that meets the needs of Oregonians.”
JUNE 2015 | Ethanol Producer Magazine | 31
DISTILLED
Ceres, Raízen announce sweet sorghum project Ceres Inc. and Brazil-based Raízen S.A. have signed a multiyear collaboration agreement to develop and produce sweet sorghum on an industrial scale. Sweet sorghum can be grown to complement existing feedstock supplies, extending the operating season of Brazilian sugarcane-to-ethanol mills. Under the agreement, the companies will contribute in-kind services and resources and share in the revenue from the ethanol produced from Ceres’ sweet sorghum above certain levels. This season, Raízen has planted Ceres’ sweet sorghum in a single location and plans to expand to multiple mills in the future. “The ethanol industry in Brazil has a history of successfully competing against low-priced oil and we believe that sweet sorghum, which has lower production costs than sugarcane, can be further developed and scaled up as an integral part of the industry’s feedstock supply,” said Richard Hamilton, president and CEO of Ceres.
32 | Ethanol Producer Magazine | JUNE 2015
Ethanol and butanol fuel production revenue (millions) 2013
2014 (estimate)
U.S.
$39,140 $41,730 $40,371
2011
2012
$40,932
Global
$68,140 $84,240 $76,645
$77,956
SOURCE: NAVIGANT RESEARCH, "ADVANCED ENERGY NOW 2015 MARKET REPORT"
Report illustrates value of US, global ethanol market The Advanced Energy Economy recently commissioned a study completed by Navigant Research that found the U.S. advanced energy market grew by 14 percent last year, which is five times the rate of the U.S. economy overall. According to the report, the U.S. advanced energy market was worth an estimated $199.5 billion in 2014. According to the report, fuel production was the fourth largest advanced energy segment last year, with an estimated $148.1 billion in global revenue. The segment grew by an estimated 4 percent from 2013 to 2014, with a 34 percent
increase from 2011 to 2014. “Ethanol and butanol, including both sales of fuel and investment in refinery infrastructure, continued to be the leading source of revenue with a combined $78 billion in revenue, representing 2 percent growth over 2013,” said Navigant Research in the report. Globally, sales of ethanol and butanol reached approximately 25.8 billion gallons last year, up from 23.4 billion in 2011. Ethanol made up the majority of that volume. U.S. sales of ethanol totaled an estimated 14.2 billion gallons, equating to $39.1 billion in revenue.
DISTILLED
Report highlights corn ethanol's role in cellulosic development Third Way recently released a report highlighting the connection between first- and second-generation ethanol and the need for continued implementation of the renewable fuels standard (RFS). According to Third Way, 80 percent of commercial cellulosic ethanol capacity in the U.S. has been developed by companies with extensive backgrounds in corn ethanol. The report stresses investment from these companies is critical to growing U.S. cellulosic capacity, especially in the near-term. First Way also notes that certain proposals to reform the RFS would discourage engagement from the corn ethanol industry, causing delays in the commercialization of cellulosic ethanol in the U.S. and potentially driving investment overseas. Within the report, Third Way said the four cellulosic ethanol companies it examined all have plans to rapidly expand their technologies to additional facilities. This expansion could help bring the cost of cellulosic ethanol down. Efforts to alter the RFS, however, could derail those plans.
One FREE Listing per Company
2014 job announcements No. of jobs
No. of job announcements
23,625
112
Biofuel
813
8
Biogas (generation)
125
4
Biomass (generation)
399
7
46,783
177
Renewable energy jobs
Total clean energy jobs SOURCE: ENVIRONMENTAL ENTREPRENEURS
E2 report tallies 2014 biofuel industry jobs Environmental Entrepreneurs (E2) recently released its fourth-quarter and yearend 2014 jobs report, which shows continued growth of clean energy and clean transportation jobs in the U.S. For the full year 2014, E2 reported 46,783 clean energy and clean transportation jobs were announced at 177 projects. A total of 23,625 renewable energy jobs at 112 projects were announced last year, including
813 biofuel jobs at eight projects, 125 biogas jobs at four projects, and 399 biomass power jobs at seven projects. The remaining renewable energy jobs were announced for geothermal, solar and wind projects. The 46,783 jobs announced last year also included 16,015 manufacturing jobs, 2,266 jobs classified as â&#x20AC;&#x153;other,â&#x20AC;? 2,000 public transportation jobs, 1,932 recycling jobs and 925 building efficiency jobs.
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34 | Ethanol Producer Magazine | JUNE 2015 ©2015 ©20 15 Lallemand Lallem Lal lem mand Bi Biofuels Biofu ofuels ofu els & Dis Distilled Distil tilled til led ed Sp Spiri Spirits. rits. ri t All ts. All rights righ ig ts reserved. resserv r ed.
JUNE 2015 | Ethanol Producer Magazine | 35
BUSINESS
How Deals
Square UP Afterr a long sttretch of proďŹ tabiility, therre are few U..S. ethanol producers "a approa achin ng the table e" to sell. But that could cha ange. By To om Bryyan
36 | Ethanol Producer Magazine | JUNE 2015
BUSINESS
JUNE 2015 | Ethanol Producer Magazine | 37
BUSINESS
Like golf, ethanol mergers and acquisitions (M&A) is game of opposites. A golfer swings right to draw the ball left, left to cut it right, down to send it up. Ethanol M&A, too, work on ironic inverse relationships. Transaction numbers spike after bad times and dip during good times. High margins work against deals. Low margins produce them. Simply put, when profitability goes up, ethanol M&A activity generally goes down. After the 2008 downturn, for example, 29 ethanol plants traded hands in 18 transactions before the end of 2010, according to Mark Fisler, managing director at Los Angeles-based investment banking firm Ocean Park Advisors. “That was a huge amount of volume over a two-year stretch,” Fisler says, explaining that improved margins, starting in 2010, yielded only five ethanol plant acquisitions in four deals in 2011. Then low M&A activity continued through the first half of 2012 following a generally profitable 2011. Production margins sagged in 2012, spurring the sale of six ethanol plants late in the year and setting the stage for doubledigit transactions in 2013. “We saw 13 ethanol plants acquired in 10 transactions that year,” Fisler says. “It was driven mostly by weak balance sheets and distress coming off 2012. “Clearly, the industry sees more transactions on the heels of distressed cycles than it does during or after good times.” That last big M&A run ended when the ethanol industry cycled into an epic 18-month stretch of record margins from
mid-2013 through late 2014. “I would characterize the last year and a half as a period of low M&A activity, but it depends on what you compare it to,” Fisler says, explaining that there were five ethanol asset transactions completed in 2014. “There are a lot of reasons for that, including the fact that ethanol margins Fisler were so good through most of 2013 and 2014.” Most but not all M&A activity in the ethanol industry since 2008 has been a story of leaders acquiring laggards. A vast majority of the deals were financially distressed independent plants acquired by large, integrated ethanol producers. Today, Fisler says, “strategic producers” remain interested in acquiring ethanol plants, but sellers are scarce. “We’re four months into the year and there really isn’t an announced 2015 deal at this point,” he says. “There are whispers about deals—and we are in talks with various people—but ethanol producers just aren’t approaching the table. So there’s a lot of interest in transactions but very few producers looking at a sale.” Fisler continues, “When you talk to a producer who just made 60, 70, 80 cents a gallon last year, it’s pretty hard for them to get excited about where plants are trading. Ethanol plants are [selling for] roughly $1.60 per gallon on nameplate capacity or
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2013-2014 U.S. Ethanol Plant Transactions There have been 22 plants acquired totaling 1,617 MMgy
Aquirer
Target
Plants Aquired
Pending - Pacific Ethanol
Aventine Renewable Energy
4(1)
2014 Flint Hills Resources
Southwest Georgia Ethanol
2014 Green Biologics
Txn. Value ($M)
$/Gallon
315
$325.00
$1.03
1
100
NA
NA
Central MN Ethanol Co-op
1
21
NA
NA
2014 CHS
Illinois River Energy
1
133
$160.00
$1.20
2014 Tyton BioEnergy
Clean Burn Fuels
1
60
$12.20
$0.21
2014 Valero
Aventine Renewable Energy
1
110
$34.00
$0.31
2013 Guardian Energy
Hankinson Renewable Energy
1
130
$170.00
$1.29
2013 Green Plains
BioFuel Energy
2
220
$101.00
$0.46
2013 Flint Hills Resources
Platinum Ethanol
1
110
NA
NA
2013 West Ventures
Purified Renewable Energy
1
18
$5.00
$0.28
2013 Marathon Petroleum
The Andersons
3
86
$75.00(2)
$0.87
2013 Global Partners
Columbia Pacific Bio-Refinery
1
107
$95.50
$0.89(3)
2013 Granite Falls Energy
Heron Lake BioEnergy
1
32(4)
$62.50
$1.08
2013 Ace Ethanol
Utica Energy - Oshkosh
1
60
$16.50
$0.28
2013 Green Plains
Choice Ethanol Holdings
1
50
$15.00
$0.30
2013 Future Fuels
Osage Bio Energy
1
65
$13.00
$0.20
1,617 (5)
$1,085.30
$0.65(6)
TOTAL
22
MMgy Aquired
SOURCES: PUBLIC FILINGS AND OCEAN PARK ADVISORS DATABASE.
(1) Aventine Renewable Energy is comprised of two facilities each in Pekin, Ill., and Aurora, Neb. (2) Represents an acquisition of minority stakes in three ethanol plants from Mitsui. (3) Transaction based on marine terminal value. (4) 32 MMgy of capacity acquired by Granite Falls is pro-rata for its 63.3% ownership stake in Heron Lake BioEnergy. (5) Based on announced capacity. (6) Average of transactions.
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U.S. Ethanol Plant Acquirers (2009 –2014) Seven buyers have bought 64 percent of plants and 68 percent of capacity since 2009. In all there have been 28 buyers in five years.
Top Seven Buyers Flint Hills - 6 Acquisitions in 2010–2014 - 7 plants and 760 MMgy capacity Green Plains - 5 Acquisitions in 2009–2013 - 8 plants and 632 MMgy capacity Valero - 4 Acquisitions in 2009, 2010 and 2014 - 12 plants and 1,220 MMgy capacity Guardian Energy - 3 Acquisitions in 2009, 2010 and 2013 - 3 plants and 304 MMgy capacity Pacific Ethanol - 2 Acquisitions in 2014 and 2010 - 5 plants and 335 MMgy capacity Murphy Oil - 2 Acquisitions in 2009 and 2010 - 2 plants and 225 MMgy capacity Big River - 2 Acquisitions in 2009 and 2012 - 2 plants and 155 MMgy capacity (1) Going private transaction.
Single Acquisition Buyers Green Biologics / 21 MMgy - 2014 CHS / 133 MMgy - 2014 Global LP / 107 MMgy - 2013 Central Farmers Co-op / 100 MMgy - 2009 Poet / 90 MMgy - 2010 SiemKapital & North Atlantic Value(1) /87 MMgy - 2011 Marathon Petroleum /86 MMgy - 2013 Future Fuels / 65 MMgy - 2013 TytonBioEnergy / 60 MMgy - 2014 Ace Ethanol / 60 MMgy - 2013 Aemetis / 55 MMgy - 2012 Pratt Biofuel / 55 MMgy - 2012 The Andersons / 55 MMgy - 2012 Carbon Green / 50 MMgy - 2009 REX / 50 MMgy - 2011 Nebraska Corn Processing / 44 MMgy - 2009 Palmer Energy / 40 MMgy - 2012 Aventine / 38 MMgy - 2010 Granite Falls / 32 MMgy - 2013 Gevo /22 MGPY - 2010 West Ventures /18 MMgy - 2013
SOURCE: OCEAN PARK ADVISORS
JUNE 2015 | Ethanol Producer Magazine | 41
BUSINESS
‘It’s so important to stay the course and send a clear signal that encourages companies to invest the time and capital in next-generation biofuels.’
Chabina
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42 | Ethanol Producer Magazine | JUNE 2015
around $1.30 per gallon on their operating rate. So if you made 70 or 80 cents a gallon last year, that’s not very interesting. Shareholders remember the last dividend check they made, and most of them don’t want to let go of an asset for that low a number right now.” Notably, M&A activity in the ethanol sector doesn’t follow industrial M&A activity in general. “The ethanol industry is characterized by single-purpose assets at location,” Fisler says, explaining how some industries offer more opportunities for transactions than others. “There are a limited number of reasons for ethanol plant acquisitions.” The fact that this year’s lower-margin environment has not spurred appreciable M&A activity could be the result of two things. First, it’s early and transaction activity generally lags behind prevailing market conditions by several months. Second, many U.S. ethanol producers were able to strengthen their balance sheets and reduce their debt last year. “The massive run up in crush spreads provided meaningful liquidity to producers and gave them a number of capital market solutions for the first time in a while,” says Scott Chabina, director at Carl Marks Advisors, a New Yorkbased investment banking firm. Chabina cites three high-profile loans secured by producers in 2014, including a $66 million senior credit agreement completed by Southwest Iowa Renewable Energy, a $225 million senior secured credit facility completed by Green Plains Renewable Energy, and a $40 million loan and security agreement secured by Aventine Renewable Energy before the company moved ahead with its pending merger with Pacific Ethanol. “This was a great time to provide optionality, which is king in the world of ethanol. It’s defensive. It’s strategic. You need to be a low-cost producer and take advantage of the margins when the margins are there.”
BUSINESS
Chabina says ethanol producers, big and small, are still in good positions and able to act on strategic activities including M&A, refinancing and inside-the-fence capital projects. “Producers are looking at projects,” he says. “In many cases, they're dusting off the CapEx books that have been on the shelf for a while because they’re in a position to take advantage of having liquidity.”
middle-of-the-road producers who have “earned their way out of trouble” and are considering selling while they’re in a strong position. “Against the outlook of a more moderate 2015, it might make sense for some of these guys to explore their options and look at a sale,” Chabina says, explaining that nondistressed facilities can command a premium from buyers seeking assets with specific attri-
butes. “Many producers wanted to acquire gallons for scale a few years ago. Now, buyers are more disciplined and seeking assets that fill out their respective network for a number of reasons. Flint Hills’ acquisition of Southwest Georgia Ethanol is a great example of that sort of approach. It was strategic purchase and it made sense for them given their existing resources.”
Nondistress Deals While financial distress may be the surest expediter of ethanol plant transactions, it is not the only thing that makes deals occur. Fisler says multiple ethanol plants have been sold in recent years by what he calls nonlong-term investors. “These are your pure-play investor groups that see an opportunity in ethanol, put dollars into a plant, achieve good returns and want to exit their investment,” he says, citing CHS’s acquisition of Illinois River Energy LLC last April. “That’s a perfect example of a plant that was owned by an offshore investor that didn’t see the asset as strategic to retain. That deal was not driven by distress.” At the other end of the seller spectrum are farmer-owned ethanol plants, arguably the most unlikely transaction participants. Fisler says that about a third of U.S. ethanol plants can still be characterized as “steadfastly independent,” and not interested in giving up control, regardless of margins. “Those types of ethanol plants are usually not going to trade. Even though there might be a real opportunity to merge four or five smaller plants together in a way that creates a greater internal balance sheet, better cash flows, greater ability to invest and grab new technology, they may not necessarily be interested in hearing that because they just want to keep what they’ve got.” Chabina says some near-term ethanol plant transactions could involve
JUNE 2015 | Ethanol Producer Magazine | 43
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44 | Ethanol Producer Magazine | JUNE 2015
BUSINESS
Chabina adds, “The appetite from buyers is still there, but they are more discerning. They know what they want, and it’s often not just a matter of gallons. Buyers are looking at the specific production history of a facility, its transportation and logistics situation, its management team, third parties services, grain storage and more. The attractiveness of each plant is unique to each prospective buyer. That’s always been true, but today’s buyers are more disciplined and won’t simply stretch for gallons alone.” A new X-factor in ethanol M&A is the potential for more transactions to be driven by strategies to convert existing ethanol plants into facilities that can produce nonethanol fuels and chemicals. “We’re seeing the emergence of companies interested in buying and retrofitting ethanol plants for other purposes, one being the possibility of producing higher-value, higher-margin specialty chemicals,” Chabina says. “That tends to lead toward the discussion of the diversified, integrated biorefinery concept against the backdrop of the big second-generation ethanol plants that are coming online.” Having spearheaded the sale of the Central Minnesota Ethanol Co-op to Green Biologics last year (see “Back to the Future with N-butanol” on page 46), Fisler knows firsthand what the value proposition is, for both buyers and sellers, in transactions based on plant conversions. Green Biologics purchased CMEC in a creatively structured deal that gained a lot of attention in the biofuels M&A space. When completed, the reconfigured plant will have the capability to produce acetone, normal butanol and ethanol. “I’d be surprised if we don’t see more deals like that in the future,” he says.
Clear Signals Help At press time, the ethanol industry was awaiting the U.S. EPA’s final 2014 and proposed 2015 and 2016 renewable volume obligation (RVO) numbers, which instruct oil companies on their mandated biofuels blending obligations. Fisler doesn’t expect the RVOs to have a major impact on ethanol plant M&A, but he does think improved policy certainty will invite more capital to the biofuels sector. “The type of improvement projects that a number of producers are looking at are quite large and would require the support of the lender community,” Fisler says. “Better policy certainty might help facilitate that process, particularly if it gives the industry a runway for cellulosic ethanol or plant upgrades.” Chabina agrees that a stable regulatory and policy environment is key for biofuels finance markets. “It’s critical to stay the course and send a clear signal that encourages companies to invest the time and capital in next-generation biofuels and, more broadly, biorefining,” he says, adding that he believes M&A activity will pick up regardless of where the EPA lands on its RVOs. “Absent any truly adverse changes to the RFS or major weather events, margins are largely expected to be moderate. We’re not expecting to see a lot of plants with their backs against the wall. There will still be some distressed asset sales, but they will be less a function of pure crush spreads and more a function of not being the low-cost producers in a normalized market.” Author: Tom Bryan Editor in Chief, Ethanol Producer Magazine 701-746-8385 tbryan@bbiinternational.com
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PROFILE
BRIGHT FUTURE: Scott "Butch" Haggerty, operations manager, pauses outside the 21 MMgy ethanol plant in Little Falls, Minnesota, which is in the process of transitioning to n-butanol, acetone and a small amount of ethanol. PHOTO: KIMM ANDERSON
46 | Ethanol Producer Magazine | JUNE 2015
PROFILE
‘Back to the Future’
With N-butanol A Minnesota ethanol plant is first in line to produce high-value renewable chemicals. By Holly Jessen
Running a 21 MMgy ethanol plant in an industry led by 100 MMgy-plus facilities isn’t easy.
Smaller plants are at a major disadvantage, says Dana Persson, who served as CEO of Central Minnesota Ethanol Co-op for four years. “Being a small plant, you question what your future might be, and what that means to the plant, the corn farmers and shareholders.” Then, along came Green Biologics Inc., a wholly owned subsidiary of a United Kingdom industrial biotechnology and renewable chemicals company, Green Biologics Ltd. The company’s business model is to own and operate or become a majority shareholder in ethanol plants for normal butanol (n-butanol) and acetone production, says Joel Stone, president of Green Biologics. The plan is to add bolt-on production capacity at ethanol plants or retrofit them, like at newly renamed Central Minnesota Renewables in Little Falls,
where Persson now serves as interim general manager of the plant and vice president for Green Biologics. Pulp and paper mills are another potential target, Stone says. Acquisition of the Little Falls facility, which closed in December, was the first step. Detailed engineering to retrofit it for n-butanol and acetone production was ongoing in April, with construction expected to begin in early summer, he says. The plant will continue to produce ethanol with minimal disruption during the transition to renewable chemical production, which is expected to be complete in mid2016. Ethanol, a two-carbon alcohol, and nbutanol, a four-carbon alcohol, can both be produced through fermentation of corn, other crops or biomass. Although new distillation equipment will be installed, most equipment will be repurposed, including fermenters, where Clostridia, small rod bacteria, will replace the use of yeast.
JUNE 2015 | Ethanol Producer Magazine | 47
PROFILE
NEW USE FOR CORN: Plant employees will continue producing ethanol until the transition to renewable chemicals is complete in 2016. PHOTOS: KIMM ANDERSON
Going from ethanol to chemical production is a steep learning curve for the employees, Persson says. The fermentation process is more detailed, for one thing. The facility will also produce another coproduct, high-protein fermentation broth concentrate, in addition to distillers grains. “There are going to be some things that are pretty different but there are some things that will be the same,” he says.
Still, the transition into renewable chemicals has been welcomed with open arms, Stone says. In fact, some ethanol plant shareholders rolled over their investments to become minority shareholders in the new company. That enthusiasm also includes everyone from the former ethanol plant employees, who now work for the new company, to the local community, and all the way up to Minnesota government
officials. In late April, Green Biologics collected the Standout Fundraising Achievement of the Year award from Cleantech Group for raising more than $100 million since December 2013, using a creative combination of of venture debt and equity. The retrofit model is one that Green Biologics thinks could work at additional ethanol plants, Stone says. The bolt-on approach, on the other hand, could be pur-
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48 | Ethanol Producer Magazine | JUNE 2015
PROFILE
QA/QC: Elby Cox, lab manager, center photos, collects and analyzes samples.
sued by ethanol producers who want to continue producing fuel while diversifying risk. For example, a 100 MMgy nameplate facility operating close to 120 MMgy could add on n-butanol and acetone production, allowing the company to operate more efficiently at 90 MMgy and produce renewable chemicals with some of its feedstock. “Our most logical-sized facility would be producing somewhere between 40,000
and 50,000 metric tons of total solvent, which would be the butanol, acetone and ethanol,” he says.
Old Made New Although, currently, nearly 100 percent of the global market for n-butnaol and acetone is petroleum derived, producing it from renewable sources isn’t a new concept. “We say it’s back to the future,” Stone says. The
GREEN FUTURE: Joel Stone, holding a sample of n-butanol, and Dana Persson say the market for renewable-based n-butanol is growing, thanks to interest from consumers and companies like Coca-Cola and Home Depot.
JUNE 2015 | Ethanol Producer Magazine | 49
PROFILE
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TRANSITION TIME: The Central Minnesota Ethanol Co-op has been renamed Central Minnesota Renewables and will begin producing n-butanol and acetone in 2016. PHOTOS: KIMM ANDERSON
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fermentation process to produce acetone, butanol and ethanol (ABE) from corn mash or molasses was commercialized in 1915 in England. It wasn’t until 1938 that a process was developed for petrochemical-derived nbutanol and acetone and, by the late-1940s, the last plant producing the chemicals from renewable sources had closed. In the 1990s David Ramey began to champion butanol as a drop-in replacement for gasoline. In 2005, he drove 10,000 miles in an unmodified 1992 Buick Park Avenue powered by 100 percent butanol. He also founded ButyFuel LLC, which merged with Green Biologics in 2012. While Ramsey focused on butanol or isobutanol, primarily a fuel blendstock, Green Biologics has its sights set on n-butanol. Both are types of butanol with similar characteristics but dramatically different uses. N-butanol is an ingredient in products like moisturizers, fragrances and other personal care products and n-butanol derivatives are used in paints, inks and more. Acetone is a chemical found in nail polish remover and can also be transformed into rubbing alcohol, which can be an ingredient
in flavor and fragrance compounds. “We’re not locked into a single end use for these products,” Stone says. “There are a myriad of uses of normal butanol and acetone through different consumer products.” The global annual demand for n-butanol is more than 8 billion pounds with 4.4 percent yearly growth, Stone says. It has an intermediate market valued at more than $6 billion as well as downstream chemical intermediate markets valued at more than $40 billion. And, there’s a significant demand to replace petroleum-based products with biobased alternatives. “The mix of the normal butanol and acetone that we are producing will be marketed for a value that is probably double what fuel ethanol would market for,” Stone says, adding that chemical markets are not as volatile as fuel markets. “That’s a good rule of thumb. It could be significantly higher, depending on market conditions.” Just as the ethanol industry has optimized operations over time, Green Biologics has improved on the ABE process, and plans to continue to do so. R&D work on ABE fermentation has been done at a pilot plant in Columbus, Ohio, and a demo-
PROFILE
DOWN TO BUSINESS: Scott Warfield, vice president of construction, at left, looks over expansion plans with Stone and Persson.
SOURCE: GREEN BIOLOGICS
scale facility in Emmetsburg, Iowa, which has been operating continuously since 2014, Stone says. At the Little Falls facility, the plant will continue to produce a small amount of ethanol after the conversion to n-butanol and acetone production. However, it’s expected to be only about 2 percent of total production and as the company optimizes its production process, the amount of ethanol produced may go to zero, he adds. In addition, Green Biologics believes
the process is superior to petrochemical processes. It’s at least 45 percent more carbon efficient, produces higher purity materials and results in n-butanol with lower water content and no hydrocarbon impurities, which are intrinsic to the oil refinery produced n-butanol. The acetone produced will also be free of toxic impurities. Author: Holly Jessen Managing Editor, Ethanol Producer Magazine 701-738-4946 hjessen@bbiinternational.com
JUNE 2015 | Ethanol Producer Magazine | 51
PERFORMANCE
52 | Ethanol Producer Magazine | JUNE 2015
PERFORMANCE
Riding the Performance
Curve
A good understanding of financial ratios is essential when making strategic plans. By Susanne Retka Schill
A healthy cash balance is a nice problem to have, though it does present its own challenge. The questions etha-
nol company boards and management face are simple, but crucial to the longterm viability of their businesses: How much working capital needs to be preserved? What level should be reinvested in the business? How much should be paid out to investors? Ethanol Producer Magazine turned to three ethanol industry financial advisors––Christianson & Associates PLLP, Ascendant Partners Inc. and K-Coe Isom––to see what lessons they are sharing with boards and managers as they meet in strategic planning sessions. “EBITDA per gallon is a good place to start,” says Mark Warren, partner and chief financial officer at Ascendant Partners. It encompasses both revenue, how well a plant buys corn and sells ethanol and distillers grain, and operating performance and efficiency. “The net result of those dynamics, by definition, will result in your performance on EBITDA—revenue less cost of goods sold, less operating expenses—gets you earnings before interest, taxes, depreciation and amortization.” The Figure 1 bar chart for EBITDA per gallon since 1990 is calculated using formula-based assumptions and multiple commodity prices. It illustrates the wide swings the U.S. ethanol industry has seen since its early years. It is critical for managers to know where their plants fall on the performance curve, Warren says. Creating another gauge for comparison, Warren has taken the financials from 26 publicly traded ethanol producers and charted in Figure 2 the average EBITDA per gallon over the past three years, which includes some of the leanest and best operating margins seen in the ethanol industry. “The graphic shows the variable from the best to the worst,” he says, pointing out that it includes a range of plant sizes, primarily located in the Midwest but including destination plants. The average EBITDA per gallon for that group is 30 cents per gal-
JUNE 2015 | Ethanol Producer Magazine | 53
PERFORMANCE
lon, ranging from a top performer of nearly 50 cents per gallon, to a low of 15 cents. The chart of publicly traded companies mirrors the pattern seen with plants in the Ascendant Warren benchmarking group, combined with facilities the company has assisted in selling over the years. “You’ll see a swing of 70 to 80 cents a gallon on an EBITDA basis from a top performer to a marginal producer,” Warren says. That goes from a high three-year average of 50 cents per gallon to a low of negative 20 cents per gallon. The 2012 drought dominated the first year of his analysis, when producers struggled with tight corn supplies and high prices. “Everybody had to experience that drought, and it’s telling in terms of who were able to perform better and keep their heads above water and who lost significant amounts of money,” Warren says. Good years like the last one are easier to operate in, but margin swings will continue. “We can expect volatility going forward. That’s part of it, when you’re dealing a commodity-in and commodity-out enterprise.” Digging into the performance is the next step, he continues, to evaluate why the plant
FIGURE 1 : EBITDA margins per gallon are shown since 1990, calculated using formula-based assumptions and historical prices from OPIS and Feedstuffs. SOURCE: ASCENDANT PARTNERS
is positioned high or low on the curve. “Is it a market thing? A plant thing? A technology thing? Is it a combination?” he asks. “And then, what kind of things can you do to improve your position?” Each plant is different, he adds. Some have issues that are difficult to overcome, such as a poor location relative to ethanol or distillers marketing, or a local corn
54 | Ethanol Producer Magazine | JUNE 2015
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basis that has been permanently restructured. As new technologies are adopted industrywide, it puts pressure on all to keep driving costs down and efficiencies up. It is imperative, he stresses, that plants keep up, lest they become the marginal producer with a low or negative EBITDA per gallon, putting it in jeopardy whenever margins are tight. He adds
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lenging year, that could have some cash flow implications with these plants which may limit their ability to be as responsive as they need to be to adjust and improve their position on the curve.”
Benchmarking Insights
FIGURE 2 : The three-year average EBITDA per gallon is charted for 26 publicly reporting ethanol producers, showing a 30-cent range between the top and bottom performer. SOURCE: ASCENDANT PARTNERS
that there is a high risk for that to happen more often, now that ethanol capacity appears to be outgrowing demand. “It’s a continuous process and there’s continual innovation that is occurring in the ethanol space, which is great for everybody involved. That puts more onus on the board and management to make very good, informed de-
cisions on what they’re going to do to improve the asset and underlying performance of that plant, which ultimately improves the evaluation of their asset as well,” Warren says. “We had such a good year last year, but we saw a lot of plants distribute a lot of capital coming out of that. I think that was initially great for shareholders but, if we find ourselves in a chal-
When Christianson & Associates asks boards for their priorities, much emphasis is put on improving ethanol yields, says Connie Lindstrom, benchmarking analyst. She dug into the data to see how well ethanol yield correlates with EBITDA, comparing the EBITDA per gallon from the leaders in ethanol yield—the top 25 percent in yield—from the laggards, the bottom 25 percent. Figure 3 shows the five-year average EBITDA performance in each quarter for the yield leaders in the black line and the laggards in red. “It’s interesting,” she says, “because it shows how little impact it really has whether you’re a leader or laggard in ethanol yield.” In the periods of strong margins, better ethanol yields did translate to higher profitability, she adds, “but it typically isn’t as high as a lot of people think it would be.” The data also illustrates the situation facing those boards in their strategic planning sessions coming off 2014’s strong margins. Looking at the average financial ratios, found in the Figure 4 table, a current ratio of assets to liabilities hovering around two is considered a healthy number, Lindstrom says. “It indi-
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cates there isnâ&#x20AC;&#x2122;t too much capital sitting around waiting to be utilized.â&#x20AC;? In 2014, the current ratio rose to 2.46. â&#x20AC;&#x153;Thatâ&#x20AC;&#x2122;s definitely a high over the past 10 years even,â&#x20AC;? she adds. â&#x20AC;&#x153;What that tells usâ&#x20AC;&#x201D;and what Lindstrom we hear when we go out to the plantsâ&#x20AC;&#x201D;is theyâ&#x20AC;&#x2122;re in a holding pattern. Theyâ&#x20AC;&#x2122;re making decisions on what to do with that capital.â&#x20AC;? That is confirmed in the working capital ratio which has doubled from its five-year low point in 2010 to 31 cents per gallon for 2014. Other ratios add to the story. Long-term liabilities have dropped from 47 cents per gallon five years ago to 19 cents per gallon after 2014. â&#x20AC;&#x153;The plants have paid down their debts,â&#x20AC;? Lindstrom says, â&#x20AC;&#x153;but the negative side to that is that some of these older plants that have been producing 10 to 15 years have not been reinvesting.â&#x20AC;? That is confirmed in looking at
FIGURE 3 : The EBITDA per gallon for ethanol yield leaders in the top 25 percent of benchmarking plants is shown in the black line. In strong margin periods, the better yields result in only slightly better proďŹ tability than that achieved by the yield laggards in the bottom 25 percent. Note, however, that the leaders remain in the positive zone, while laggards dip into the negative. SOURCE: CHRISTIANSON AND ASSOCIATES
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ing. Theyâ&#x20AC;&#x2122;ve got a target for all three of those things: Hereâ&#x20AC;&#x2122;s what weâ&#x20AC;&#x2122;re going to do when weâ&#x20AC;&#x2122;re squeezed and hereâ&#x20AC;&#x2122;s what weâ&#x20AC;&#x2122;re going to do when things are better. So, they are reacting more quickly.â&#x20AC;?
Success Beyond Numbers
FIGURE 4 : Key ďŹ nancial ratios are averaged in the table for the plants participating in the benchmarking program. Between 45 and 60 participate each year, representing a range of plant sizes from across the country. SOURCE: CHRISTIANSON AND ASSOCIATES
the fixed assets ratio, which has stayed pretty stable over time, particularly the past three years. â&#x20AC;&#x153;They havenâ&#x20AC;&#x2122;t been expanding or putting in new technologies,â&#x20AC;? Lindstrom adds, â&#x20AC;&#x153;so theyâ&#x20AC;&#x2122;re looking really hard at doing some of these things now.â&#x20AC;? To answer the question of how much working capital should be targeted, the average working capital in the benchmarking group was compared to the leaders and laggards for that metric. Then to gain further insight, Lindstrom took a subset of the 10 best performing plantsâ&#x20AC;&#x201D;those with consistently top
earnings in every quarter over the past five yearsâ&#x20AC;&#x201D;and compared their working capital. Figure 5 shows those 10 EBITDA best performers keep their working capital close to the average. Average working capital, furthermore, is a moving target. â&#x20AC;&#x153;There isnâ&#x20AC;&#x2122;t a number per se, but there seems to be that ability to not let it pool up too much, but not let it dip down too far either,â&#x20AC;? she says. â&#x20AC;&#x153;What that translates to is that they have a policy in place,â&#x20AC;? Lindstrom explains. â&#x20AC;&#x153;They can distribute [capital] as dividends or they can pay down debt or do some strategic invest-
As important as the financial performance is, Donna Funk, an accountant and principal with K-Coe Isom, steps back to take a longer view of other factors important to a successful business. â&#x20AC;&#x153;You can have the healthiest balance sheet in the world, but if you donâ&#x20AC;&#x2122;t have the right other components to your business, you may not stand a chance of success, especially during difficult times,â&#x20AC;? she says. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s those intrinsic values that really can be the differentiating factor in what your ultimate success is.â&#x20AC;? In her 20-some years in the business, sheâ&#x20AC;&#x2122;s seeing a shift towards a more relational approach in her own profession and in all sectors she follows. One obvious example is to maintain good relations with employeesâ&#x20AC;&#x201D; both existing and potential future employees.
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FIGURE 5 : The 10 consistently top EBITDA performing plants maintain working capital levels close to the average cents per gallon, which fluctuates from year to year. The difference between the leaders and laggards in average working capital is 29 cents at the lowest in 2009 and 42 cents per gallon of ethanol produced in 2014. SOURCE: CHRISTIANSON AND ASSOCIATES
“What do people in the community say about your business, as not only a corporate citizen, but what are your employees saying out there as to what it’s like to work for you?” she asks. Another example would be that interactions with vendors need to go beyond placing orders. Good vendor relations, including with those you don’t currently buy from, can be particularly helpful for learning about and evaluating new technologies. Similarly, regular
58 | Ethanol Producer Magazine | JUNE 2015
communications with customers—the buyers of ethanol and coproducts—are important to developing better understanding of each other’s businesses and heading off issues. Having more than strictly business relations with your banker is important as well, she stresses, and with more than just one person. She has seen an instance where a bank—not a small one, but one that wasn’t a traditional player in the ethanol industry—pulled the line
of credit. “It ultimately came down to there weren’t enough people at the bank comfortable with the industry,” Funk recalls. While that doesn’t mean the banker needs to become a best friend, it is wise for Funk plant management and boards to cultivate multiple relationships within their lending institutions, she advises. “I don’t know that you can say [these intrinsic values] translate directly to the bottom line,” Funk continues, “but I think it definitely can translate into the attitude of people, the willingness of people to do something a little extra for you.” Financial performance numbers are important, she adds, “I would never say they are not, but you’ve got to look beyond the historical numbers reporting and get to those underlying aspects of the business that ultimately do impact your financial results.” It might be difficult to align improved relationships with the bottom line, she says. “But I do think if you ignore all those things, you’d certainly see a negative impact on your financials.” Author: Susanne Retka Schill Senior Editor, Ethanol Producer Magazine sretkaschill@bbiinternational.com 701-738-4922
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62 | Ethanol Producer Magazine | JUNE 2015
MARGINS
After a period of incredible profitability, leaders in the ethanol industry are better positioned for thinner margins. By Holly Jessen
In an industry ruled by volatility, it’s important for producers to position themselves to take advantage of favorable market conditions. “You’ve got to get it while the getting is good,” says Scott Chabina, director at Carl Marks Advisors. The ethanol industry is now on the other side of exactly that type of scenario. In March, University of Illinois economist Scott Irwin pointed out that 2014 was the most profitable on record, in his FarmDocDaily analysis. Looking at a model 100 MMgy Iowa ethanol plant, it lasted 22 months with an average profit of 43 cents per gallon, more than 10 times the average 4-cent-per-gallon profit earned in the previous seven years. Driven by relatively high ethanol prices and relatively low corn prices, the record profits went from March 15, 2013, and ended on Jan. 2, 2015, representing the longest run of uninterrupted profits since the university started keeping records in 2007.
JUNE 2015 | Ethanol Producer Magazine | 63
MARGINS
With that strong profitability now in the rearview mirror, Ethanol Producer Magazine is taking time to reflect on what savvy companies did to prepare for the new normal. “The more sophisticated, strategic producers that were able utilize that window, from September ’13 to September ’14, are the ones that have optionality to explore the capital solutions or capital projects, in house,” says Chabina. “That can really position them for a betJerke ter day in an environment with thinner margins.” As a result, some companies were able to pay down debt while others were given the opportunity to refinance outstanding loans. Lenders haven’t always been receptive to that but, for a period of time, deals were being made. “That window opens and closes pretty frequently, given the margin environment,”Chabina says. Mike Jerke, CEO of Guardian Energy Management LLC, says he heard one particular remark repeated several times at annual meetings. “We can’t expect this to happen with any frequency because it was so unprecedented,” he says. As a result, Guardian Energy, and the ethanol industry as a whole, is set up to better handle the normal volatility that comes with being an agricultural industry. Besides paying down debt or refinancing, Jerke added that putting together a rainy day fund was also a move some producers were making, to prepare for leaner times. Chabina agrees. For those producers able to build up cash, some are thinking about consolidation. “There are definitely producers out there looking for additional gallons,” he says. “We are
aware of people on the hunt for assets at the 100 million gallon level and the 50 million gallon level.” (See “How Deals Square Up” on page 36, for more information about mergers and acquisitions.) Others are looking at “inside the fence,” toward operational improvement projects or even moving to the true biorefinery model, he adds. Mick Miller, president of NuVu FuChabina els LLC, which has management contracts with Carbon Green BioEnergy LLC, Iroquois Bio-Energy Co. LLC and DENCO II LLC, says in times of profitability the emphasis is on continued investment, including equipment upgrades, debottlenecking projects and potential technology improvements. “These investments are usually focused on increasing plant efficiencies, throughput and shareholder return,” he says. Of course, not every producer is in the same favorable position. Some face operational impediments or are located in less desirable geographic areas, Chabina says. The reality is, when times are tough, those plants may idle and come back online depending on the margin environment.
Farmer Roots
When asked what Big River Resources did with the profits the company brought in, Ray Defenbaugh, president, CEO and chairman, says the answer is closely tied to the company’s original goals in entering the ethanol industry. “Those goals were to provide good jobs for people in the community and, secondly, to preserve the community—and you have to have good jobs to preserve rural
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MARGINS
Financial Highlights Although far from a complete list, here are some examples of refinancing deals and record profits announced by ethanol production companies in 2014 and early 2015.
Refinancing deals:
Green Plains Inc. announced June 10, 2014, that a $225 million senior secured credit facility due 2020 was complete and that the proceeds would be used to refinance outstanding debt. On Sept. 17, 2014, Aventine Renewable Energy said it had secured a $40 million loan and security agreement in partnership with AloStar Bank of Commerce in Birmingham, Alabama, and MidCap Financial LLC in Bethesda, Maryland. Aventine used proceeds from the refinancing and its existing stockpile of cash to fully repay debt early, before it matured in 2016. Southwest Iowa Renewable Energy LLC announced that, during its fiscal year 2014, the company paid off $96 million in net debt reduction. In June 2014, the company completed debt refinancing, with a $66 million senior credit agreement and a $26.2 million subordinated term loan.
Record Profits:
On Feb. 4, Green Plains announced record operating income of $286 million for 2014. The company produced a record 966 million gallons of ethanol, earned more than $100 million in nonethanol operating income and was close to achieving its goal of zero net term debt. Aemetis Inc. said March 12 that it had achieved record revenues of $208 million, up from $178 the previous year, and record gross profit of $37 million, up from $18 million. The company also made term debt net cash payments of $29.6 million. On March 30, Rex American Resources Corp. released its fiscal year 2014 results, which revealed gross profits more than doubled to $141.9 million, up from $64.3 million the previous year. The company also said its net sales of $572.2 million were down from $666 million in 2013. SOURCE: COMPANY PRESS RELEASES
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MARGINS
‘When we have a good year like last year, we put even more into [supporting the ethanol industry and the local community].’ Defenbaugh communities—and the third is to provide good returns to our investors,” he tells EPM. “Of course, our subgoals are that we are people of our word—you can take it to the bank if we tell you something— and, secondly, we treat people like we’d like to be treated, so fairness is an important concept.” Looking at the first and second goals, Big River continued to pay good salaries for the people who helped the company reach success and, on top of that, paid out extra bonuses during the time of profitability. Big River also paid local farmers generously for their crops. “Our goal never was for cheap grain, we were put into existence to build up the price of grain, to build up the local farmer,” he says. In reference to the third and final goal, the company paid good dividends to its shareholders. In 2014, return on investment was 126.8 percent and return on equity was 45 percent. The strategy is working for Big River. “We’ve been in existence over 10 years and we’ve never had a loss year and we’ve never failed to pay a dividend,” Defenbaugh says, adding that the company has no debt and more than adequate cash reserves on hand to weather any unexpected downturns or capital requirements. The period of profitability also allowed Big River to put money back into its facilities, with several capital investment projects. One example is improvements being made into the company’s grain procurement infrastructure, which includes six elevators. “We’ve upgraded them with large capacity dryers and bin storage and
66 | Ethanol Producer Magazine | JUNE 2015
so forth,” he says. Then there’s the zein production plant currently under construction at Big River’s Galva facility. “It will be finalized and we will have product for sale this early summer, late spring,” he says. Last but not least, Big River contributes heavily to organizations and causes that support the growth of the ethanol industry, as well as local groups, such as clubs for children and local parks. “When we have a good year like last year, we put even more into those areas,” he says. On Big River’s list is Prime the Pump, a nonprofit group formed to expand the availability of E15 and higher blends, American Ethanol, the group that partners with NASCAR and others to put ethanol on the racetrack, and more. The company is also a member of the Renewable Fuels Association, Growth Energy, the American Coalition for Ethanol and the U.S. Grains Council, to support U.S. and global markets for ethanol and distillers grains. “We think that whatever benefits the industry, will lift everybody up,” he says.
Alternative Viewpoint
Eric McAfee, chairman and CEO of Aemetis Inc., which operates a 60 MMgy corn-ethanol plant in Keyes, California, and a 50 MMgy distilled biodiesel plant in India, sees things a bit differently. Aemetis’ goal has long been to convert corn ethanol plants to advanced biofuels. In 2013, the EPA approved the company’s pathway to produce D5 advanced biofuel RINs using sorghum in combination with biogas and the plant’s existing combined heat
MARGINS
and power system. However, the plans for are on hold due to the high price of sorghum. Policy certainty is needed in order for the industry to invest in next genMcAfee eration biofuels. The profits brought in during 2014 didn’t significantly change lenders’ willingness to increase their exposure to the ethanol industry, McAfee says, at least not at levels that support $20 million to $40 million projects to upgrade or build plants for advanced biofuels production. “Are biofuel producers making a crazy amount of money, rolling in cash and just can’t wait to throw money at the next advanced biofuels technology, or are biofuels producers mostly saying to the EPA and others seeking advanced biofuels, ‘Oh my gosh, stop beating me up, I’m dying here',’” he asks. “I hate to tell you, but the industry is closer to the latter.” For example, there’s the incremental step that corn-ethanol producers could take to convert corn fiber to cellulosic ethanol. It would allow for production of an extra two to three million gallons of ethanol yearly, bringing in $6 million to $7 million in revenue and cost about $10 million to implement. The industry isn’t doing it, he says, because it doesn’t have bank financing or access to equity. “They are struggling to survive,” he says. What looks like big numbers in the 2014 profit column, actually aren’t sustained enough to provide access to growth funding, McAfee says. For example, Aemetis brought in $30 million in positive cash flow last year. While that’s a good number, he points to the fact that the company applied 100 percent of its cash flow to debt reduction, adding that it’s more the rule than the exception in the biofuels industry. He believes the biofuels industry has a curable illness. The cause, he says, is the
U.S. EPA’s failure to enforce the renewable volume requirements as required by the renewable fuel standard (RFS). It’s making the industry anemic. “There is no lender in their right mind that would expose itself to additional funding of ethanol businesses when you don’t have the faintest idea whether federal law is going to be enforced,” he says, adding that because lenders and investors can’t depend on the law being enforced, it’s preventing investment, job creation and strengthening dependence on foreign oil. He called it a “complete screw up” by the EPA and Office of Management and Budget and compared the situation since November 2013 to the repeated robbery of a federal bank, after which law enforcement doesn’t even bother to investigate. The oil industry is stealing about 50 cents a gallon from Aemetis every day, he says, due to surplus inventories caused by lower biofuels demand than the RFS requires. The EPA’s failure to enforce the RFS has cost the company at least $30 million in cash in the last year. McAfee believes a lawsuit for declaratory relief should have been filed against the EPA 18 months ago by biofuels and corn industry associations. “How can you ever run an industry when federal law is not being enforced?” he asks. “I personally think there should be riots in the streets in Iowa.” The question then becomes, is the ethanol industry well-positioned to produce the next 16 billion gallons of cellulosic ethanol and up to 5 billion gallons of advanced biofuels? “Is this industry ready for that?” he asks. “The answer is, yes, if you just enforce federal law.”
Author: Holly Jessen Managing Editor, Ethanol Producer Magazine 701-738-4946 hjessen@bbiinternational.com
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MARKETS
Stepping Up to a Currency Molecule
Sustainability drives growing interest in renewable chemicals from ethanol. By Susanne Retka Schill
Biobased chemicals are two steps closer to the tipping point when the growing demand for sustainable products opens huge global markets for renewables.
Last fall, DuPont announced a deal to sell its cellulosic ethanol to Proctor and Gamble to be used in laundry detergent. This spring, Croda Inc. broke ground on a $170 million upgrade to its Delaware manufacturing campus, preparing to bring in corn ethanol to manufacture the ethylene oxide it uses to make surfactants. DuPont’s Jan Koninckx, global business director of biofuels, is enthusiastically bullish about the future of ethanol for renewable chemicals. “This is a beginning of the reinvention of the manufacturing industry. It’s like the industrial revolution. In the past, we started out with coal-derived chemicals and then it was petroleum-derived chemicals. And now biomass-derived chemicals. Ethanol is going to be a currency molecule—a molecule that’s going to be a starting point for a lot of production.” DuPont has long collaborated with Proctor and Gamble. Last year, P&G introduced Tide Coldwater, “designed to enable a powerful clean in cold water.” About 85 percent of the energy used in washing clothes is for heating up water, Koninckx explains. “The Tide Coldwater uses an enzyme we developed to allow the temperature of laundry wash water to be lower.” On the heels of that introduction, the companies announced an agreement for DuPont to supply P&G with cellulosic ethanol from its soon-to-be-completed plant in Nevada, Iowa, to be used in making the laundry detergent. Ethanol has long been used as a solvent in consumer products, he explains, carrying other ingredients into a formulation. “It’s basically a harmless molecule that, after it’s used, is easy to break down biologically, with low toxicity.” Ethanol can be used for many things other than a solvent, with its potential use in plastics perhaps the most lucrative. The Coca-Cola Co. made headlines in 2009 when it announced it would make its trademarked PlantBottle using biobased, monoethylene glycol (MEG) manufactured from Brazilian sugarcane ethanol. A 2014 USDA report “Why Biobased” reports Coca-Cola has distributed more than 15 billion PlantBottles in 25 countries. About 30 percent of the PlantBottle, by weight, is made from green MEG and
70 | Ethanol Producer Magazine | JUNE 2015
MARKETS
JUNE 2015 | Ethanol Producer Magazine | 71
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the company is working on developing green chemistries to make PTA (purified terephthalic acid), the other 70 percent, from plants as well. “Our ultimate goal is a carbon-neutral, 100 percent renewable, responsibly sourced bottle that is fully recyclable—a bottle we can all feel good about,” the company says. In 2013, Coca-Cola partnered with Ford Motor Co. to use PlantBottle Technology as part of the interior fabric of a Ford Fusion energy plug-in hybrid research vehicle. Coca-Cola is one example of many companies wanting to green their products. Croda’s customers are increasingly asking for sustainable, renewable materials, says Richard Hanson, managing director of performance technologies and industrial chemicals for the U.K.headquartered specialty chemical company. The Delaware facility is Croda’s largest in North America, manufacturing surfactants, emulsifiers and demulsifiers, with about half its production bound for consumer products and the other half for industrial uses. Consumer end products include shampoos, lotions and cleaning products. There is a wide variety of industrial applications, Hanson adds, including the Tween 80 and Polysorbate 80 widely used by suppliers of corn oil extraction aids for the ethanol industry. When construction is completed in about two years, Croda will begin converting between 10 million and 14 million gallons of ethanol each year into ethylene oxide, Hanson reports. “This will be the first facility of its kind in North America,” he says, and one of two or three worldwide. Currently, Croda rails in ethylene oxide manufactured on the Gulf Coast from petrochemical-based ethane or nap-
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Partnership Connecting Your Supply to the Domestic and Global Marketplace. tha. Being in the same hazard classification as chlorine and ammonia, Hanson says, “the issues of shipping ethylene oxide by rail may not make that feasible in the future.” Rather than move its manufacturing facility to the Gulf Coast, the company chose to invest in the ethanol-to-ethylene oxide capability instead. “There’s a lot that goes into the economics of going the ethanol route versus petrochemicals,” he explains. “You have to factor in all of the freight costs, all of the market economic drivers.” How ethanol is positioned in the market versus petroleum will vary, he says. “If corn were to spike, it might cause a temporary blip in the economics. Over the long haul, we think, based on where we are located, it will provide comparable economics. Otherwise, we wouldn’t be doing it.” Hanson adds that chemical production will introduce new business models to the ethanol industry. “When we speak to ethanol producers and start asking about pricing models and pricing trends, they’re not quite sure how to deal with us yet. We’re not really spot buyers. We normally contract for three years on ethylene oxide.” The new facility fits with the company’s sustainability goals, Hanson continues. Croda’s 2015 goal at its 18 manufacturing facilities worldwide is to get 24.4 percent of its energy from renewable sources, source 100 percent of its palm oil raw materials from sustainable operations and 65.2 percent of all raw materials from renewables. When the company begins manufacturing ethylene oxide from ethanol in Delaware, Hanson says, the portion of renewable raw materials used will top 90 percent. “This will be unique,” Hanson said.
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JUNE 2015 | Ethanol Producer Magazine | 73
MARKETS “This is enough volume that it will be a game changer. We assume others will go this route, but we will be the first in the market.” In the big scheme of things, Hanson adds, Croda’s demand for ethylene oxide is a relatively small part of the overall demand for ethylene-derived chemicals.
Global Prospects
Ethylene is the most widely used chemical in the world. Originally made from ethanol when first discovered, petrochemical refiner-
ies are the dominant supplier of the ethylene demand used primarily for polyethylene, although there is a host of other chemicals and plastics made from ethylene. USDA’s July 2014 paper reports the global market for polyethylene, the largest volume derivative of ethylene, exceeds 100 million metric tons per year, and is used extensively in packaging and construction. Over 3.2 million metric tons of ethylene oxide were produced in the U.S. in 1997. Other sources report global ethylene production in 2011 at 141 million metric tons.
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74 | Ethanol Producer Magazine | JUNE 2015
(As a point of reference: If that were 141 million metric tons of ethanol, it would amount to about 47 billion gallons.) In 2013, ethylene was produced by 117 companies in 32 countries. Prices for ethylene have been around $800 per ton in recent years, although new capacity for shale gas-to-ethylene being brought online on the Gulf Coast is expected to keep downward pressure on ethylene prices. Several companies are making biobased ethylene and derivative chemicals. In 2010, Brazil’s Baskem A.S. inaugurated a commercial-scale plant to produce ethylene from ethanol, at an investment of $278 million. The company’s announcement said it would consume about 120 million gallons of ethanol per year at the new facility with the capability of producing 200,000 tons per year of polyethylene. At the time, the company was reporting demand three times greater than the plant’s capacity for green polyethylene. India Glycols Ltd. has been producing ethylene glycol and MEG since the 1980s and claims the distinction of being the first to commercialize sugarcane-based ethylene, its derivatives and glycols. It was the initial source for the MEG used in Coca-Cola’s PlantBottle,
MARKETS made from Brazil-sourced cane ethanol. In late 2012, Coca-Cola announced it was partnering with India-based JBF Industries Ltd. to build a facility in Sao Paulo, Brazil, with a capacity of 500,000 metric tons of biobased MEG. At least one other facility is under construction as well. In 2012, Plastics Engineering Blog Koninckx reported bio-MEG capacity being built in Taiwan. This spring, yet another company, Freudenberg-NOK Sealing Technologies announced it has developed an ethylene propylene diene monomer (EPDM) rubber compound from sugarcane-based feedstock. Freudenberg-NOK Sealing Technologies is the Americas joint venture between Freudenberg and Co. in Germany and NOK Corp. in Japan. The announcement says development began in 2012 on converting sugarcane ethanol to ethylene, to form a substantial portion of the base polymer used to manufacture the biorenewable rubber. The sugarcane base allows the material to be 45 percent biorenewable, which ultimately reduces the manufacturing carbon footprint. DuPont’s Koninckx reports that interest is high in Europe as well. Last fall, the company announced a collaboration with Ethanol Europe to develop a cellulosic ethanol project in the south central European country of Macedonia. After the announcement, Koninckx says, “several companies came to us and expressed interested in our production, and not all were fuel companies. Some are consumer companies that want more sustainable packaging material and some make furniture components, to give a couple of examples.” A major attraction is that DuPont’s life-cycle analysis shows its cellulosic ethanol is carbon neutral. When asked what will unlock ethanol’s potential in green chemistry, Koninckx replies, “Availability, scale and cost.” He points to the example of renewable electricity, which began “very niche, very small. The cost has come down to the point where, in many places in the world, it has reached grid parity from photovoltaics or from wind.” Corn ethanol has been the first step, and
the next is being taken with biomass, he says. “We are unlocking that. We’ve unlocked the technology. We’ve unlocked the supply chain and we’re now going to unlock scale.” Cellulosic ethanol supplies, with their low-carbon appeal, are about to grow and first-generation ethanol is lowering its footprint as supplies continue to expand. “There is a certain tipping point that must be
reached. I am absolutely convinced that when we reach that tipping point, the switch from petrochemicals to renewable chemicals will be fast.” It is far easier to predict how it will happen, however, than when, but Koninckx is confident it will. “We’re not waiting for it. We’re going to make it happen. We’re going to tip it.” Author: Susanne Retka Schill Senior Editor, Ethanol Producer Magazine sretkaschill@bbiinternational.com 701-738-4922
JUNE 2015 | Ethanol Producer Magazine | 75
INVESTING
New Laws, Rules Offer Options for Raising Capital Attempts to bring crowdfunding to industry fall short, but new mechanisms are available. By Todd Taylor
Companies are pressing harder and harder to raise capital to grow or just to survive. As a general rule,
raising money is challenging because federal and state securities laws prohibit the sale of securities without registration with the U.S. Securities and Exchange Commission or an exemption from such requirements. Like an initial public offering, registration is expensive and complex. Three recently passed laws and rules, however, may
help companies raise the capital they need: crowdfunding, Rule 506(c) and Regulation A+.
Crowdfunding
You have likely heard about crowdfunding sites like Kickstarter and Indigogo. Unfortunately, the promise of bringing the “crowd” to regular businesses has so far fallen short. To facilitate broader use of crowdfunding, the JOBS Act added a crowdfunding exemption
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).
76 | Ethanol Producer Magazine | JUNE 2015
INVESTING
that will allow companies to sell equity or other securities to the crowd. In practice, however, the requirements to use the crowdfunding exemption may be too onerous for most. While an overview of the general requirements for crowdfunding is possible, specifics will not be available for companies until the SEC adopts final rules. The aggregate amount of securities Taylor sold under the crowdfunding exemption during any 12-month period may not exceed $1 million. In addition, if either the annual income or the net worth of the investor is less than $100,000, the aggregate amount that can be sold to such investor may not exceed the greater of $2,000 or 5 percent of the annual income or net worth of the investor. If either the annual income or net worth of the investor is equal to or more than $100,000, the aggregate amount sold to the investor may not exceed 10 percent of the annual income or net worth of the investor; and, in any case, the aggregate amount sold to any investor may not exceed $100,000. Additionally, the transaction must be conducted either through a registered broker-dealer or a funding portal registered with the SEC. If a registered funding portal is used for crowdfunding, the portal will not be allowed to offer investment advice or recommendations, solicit purchases, sales or offers to purchase the securities displayed on its website, pay employees, agents or other people based on the sale of securities displayed on its website, or handle investor funds or securities. In other words, companies will not be able to use their own website as a “funding portal.” The company must also disclose information to investors, including: • General information about its business such as location, directors and officers, description of business. • A business plan. • A description of financial condition, including tax returns and financial statements for offerings of $100,000 or less, independent accountant reviewed financial statements for offerings between $100,000 but not more than $500,000 or audited financial statements for target offerings more than $500,000. • The purpose of the offering and proposed use of proceeds. • The target offering amount and deadline to reach such amount. • The price of the securities. • A description of company ownership and capital structure, along with specific information regarding the company’s securities. In addition, the company must provide investors financial statements and reports on the results of operations on an annual basis following the sale.
JOBS Act Crowdfunding at a Glance • $1 million maximum offering in a 12-month period. • $100,000 maximum investment (or less depending on annual income/net worth). • Must use a registered broker-dealer or registered funding portal. • Funding portal may not be used to offer investment advice, solicit sales or handle investor funds or securities. • Several upfront disclosure requirements apply. • Ongoing annual financial reporting required after the sale. Not currently available—awaiting final SEC rules.
The relatively low transaction and investor limits permissible under the federal crowdfunding exemption, coupled with the funding portal limitations and the upfront and ongoing disclosure obligations, could prove to be too much of a burden for many companies. There are several state legislatures that have adopted or are considering their own crowdfunding exemptions that may provide a more efficient means to raise capital from several investors. Got all that? Now for something a bit easier…
Rule 506(c)
Prior to the JOBS Act, Rule 506 was and remains the most used exemption. However, Rule 506 did not permit general solicitation or advertisement, so companies raising capital under Rule 506 could not legally use social media, printed flyers or other channels to solicit investors they did not know. Now, Rule 506(c) allows companies to advertise to find investors. Rule 506(c) does not have a dollar limitation, does not limit the number of investors or their investment amount and does not require specific information be disclosed to investors (but most companies make disclosures to avoid misrepresentation or fraud claims). Rule 506(c) does have certain restrictions, however. A primary restriction is that all investors must be accredited, which generally equates to the investor being relatively wealthy (e.g., annual income in excess of $200,000 for an individual and $300,000 for married couples, or net worth of at least $1 million, excluding the investor’s principal residence). In addition, the company must take reasonable steps to verify the accredited status of such investors. Whether steps taken are
JUNE 2015 | Ethanol Producer Magazine | 77
INVESTING
Rule 506(c) At A Glance • No offering maximum. • General solicitation and advertisement permitted. • No SEC mandated information disclosures to investors. • Sales permitted to an unlimited number of accredited investors. • Company must take “reasonable” steps to verify accredited status of investors. Rule in effect and exemption is available.
Regulation A+
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“reasonable” depends on particular facts and circumstances of each purchaser and transaction. The SEC has provided some guidance as to what constitutes reasonable steps, but this is still relatively unclear and untested. Overall, companies seeking to solicit sales from a large group of wealthy investors may find Rule 506(c) as a viable exemption, but will need to be careful to conduct proper diligence on the investors. Regulation A+ is a complex exemption, and in many ways, reflects a scaled back version of registration requirements and the ongoing requirements of reporting companies. The following summary only scratches the surface of the various requirements and limitations of Regulation A+ and many companies may find this exemption too burdensome and expensive, but for some, it may be the perfect fit. The SEC adopted the Regulation A+ amendments March 25, but they will not likely become effective until sometime in June. Regulation A+ will permit two tiers of offerings. Tier 1 offerings have aggregate sales of up to $20 million during the preceding 12 months. Tier 2 offerings have aggregate sales of up to $50 million during the preceding 12 months. In addition to a larger offering size, the primary advantage of Tier 2 is companies will not be required to also navigate state law registration and exemption requirements. Companies will be able to sell securities under Regulation A+ to accredited and nonaccredited investors. Sales to nonaccredited investors under Tier 2 offerings will be subject to a maximum amount equal to 10 percent of the nonaccredited investor’s annual income or net worth, whichever is greater. To conduct a Regulation A+ offering, companies will need to file Form 1-A with the SEC, which will then complete a process to qualify the offering prior to the company selling the securities. Form 1-A will provide investors with basic information about the company, offering, securities and other general information. Form 1-A will also provide an offering
INVESTING
Regulation A+ at a Glance • Tier 1 Offering—$20 million maximum in a 12-month period. • Tier 2 Offering—$50 million maximum in a 12-month period. • General solicitation and advertisement permitted. • Sales to accredited and nonaccredited investors permitted, with certain limits on nonaccredited investment amounts in Tier 2 offerings. • Extensive offering materials required. • Offering materials must be filed with SEC and must be “qualified” prior to sale of securities. • “Testing the waters” permitted before filing and before qualification. • Ongoing reporting obligations following Tier 2 offerings, including annual reports, semiannual reports and current reports. • State securities laws preempted only in the case of Tier 2 offerings.
gauge investor interest prior to filing Form 1-A and during the qualification process, but securities cannot be sold prior to qualification. After the sale, companies that engaged in Tier 2 offerings will be subject to ongoing reporting requirements, such as filing annual reports, semiannual reports and current event reports. Whatever your company needs to do to raise money, be aware that the rules and regulations are complex and vary from state
to state, so please check with a competent securities lawyer before you start. This article isn’t intended to give anyone legal advice, so don’t try to do an offering based on it. Author: Todd Taylor Attorney, Fredrikson & Byron P.A. ttaylor@fredlaw.com 612-492-7355 Contributing author: Joseph Schauer Attorney, Fredrikson & Byron P.A.
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Not currently available—rules to become effective in coming months.
circular that contains extensive narrative discussion similar to that of registration statements, such as a description of the business, risk factors, use of proceeds, capitalization, description of securities, director and officer information, related party transaction disclosures and other disclosures. Form 1-A will also include financial statements for the two most recent fiscal years (that must be audited for Tier 2 offerings). Subject to certain requirements, companies are allowed to test the waters to
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JUNE 2015 | Ethanol Producer Magazine | 79
HEDGING
Market Tools Help Identify, Manage Margins Volatility, a function of ďŹ&#x201A;uctuating prices for corn and natural gas inputs, is changing revenue values for ethanol, DDGS and corn oil. By Chip Whalen
CONTRIBUTION: The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reďŹ&#x201A;ect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
80 | Ethanol Producer Magazine | JUNE 2015
HEDGING
Managing ethanol plant margins is a challenging endeavor as the factors affecting input costs and revenues are constantly changing and often pulling in different directions to the detriment of the plantâ&#x20AC;&#x2122;s profitability. Ethanol margin
management is the process of analyzing financial risk and considering costs and revenues as a single unit of risk. This differs from a more traditional approach which focuses on minimizing plant expenses and maximizing revenue from ethanol and coproduct sales independently of one another. Fortunately, there are tools available in the market to help identify and manage these margins. A margin management process involves modeling forward curve projected costs and revenues using the futures market as a price discovery mechanism. The daily interaction of a large pool of buyers and sellers in the futures market determines a forward curve of value for a host of commodities, including those impacting ethanol margins. Holding certain fixed cost assumptions static and using futures market prices to represent both input costs and revenue values together, forward profit margin opportunities can be identified in deferred time periods to indicate how that profitability is projected to change from one period to the next. This gives greater visibility to an ethanol producer on how the market, as an unbiased estimate of price, is valuing both input costs and revenue. It may be the case, for example, that current costs and revenues to the plant are generating a loss, while at the same time, forward values for those same costs and revenues are projecting a profit in a deferred time period. And, what was once projected to be a profitable marketing period for the plant
SOURCE: COMMODITY & INGREDIENT HEDGING
may eventually be turned into a loss as the fundamental dynamics of the market shifts over time to the detriment of margins. The accompanying February margin graph displays such an occurrence for a model ethanol plant earlier this year. Profit margins in January and February were breakeven at best and negative for many plants as a function of slumping ethanol prices while corn costs held relatively steady. While the chart shows this negative profitability during that period, you will notice that the market was projecting a positive margin as high as 35 cents per gallon for the month of February during the fall of 2014. In fact, the market was projecting margins above the 90th percentile of the previous five years through November before profitability started to slip. Risk can be managed through the futures market when an ethanol plant
contracts both input costs and revenue values simultaneously using exchangetraded derivatives to lock-in or protect a profit margin level in a forward time period. For example, an ethanol company projecting a positive margin last fall of around 25 cents per gallon for the winter time period of January and February could have locked that margin in by buying a corn futures contract and simultaneously selling an ethanol Platts swap. Alternatively, it may have used an option to protect a minimum margin while allowing the opportunity for improvement. Choosing a strategy will depend on how relatively strong or weak the opportunity is perceived to be. If, for example, the profit margin being projected is very strong historically and represents a good return, the company may be inclined to simply lock it in. If instead the profit margin is projected
HEDGING
SOURCE: COMMODITY & INGREDIENT HEDGING
82 | Ethanol Producer Magazine | JUNE 2015
to be weaker or more average from a historical perspective, the ethanol producer might want to preserve the opportunity for improvement and incorporate more flexibility. The accompanying table of June 2015 statistics shows the ethanol margin and the underlying input costs of corn and natural gas against the revenue value of ethanol. The red box in the table outlines each of the components of the June 2015 margin, along with the open market margin itself. Holding other fixed cost assumptions constant and factoring for local cash basis and ethanol index to the plant, the model is essentially looking at the variable costs of corn and natural gas against the value of ethanol to project a margin during the month of June. The ethanol price index and corn basis represent the difference between the local cash price and the swap or futures price that is being used to manage the risk of that price changing over time. Because cash prices and futures prices do not move in lockstep with one another, there is also a risk of a fluctuating basis or index over time. The projected margin of 22 cents per gallon currently exists at about the 38th percentile of historical profitability when looking back over the previous five years of June margins. The strongest the margin has ever been over the past five years in the month of June was 71 cents per gallon, and the weakest value observed was breakeven. Scanning to the left of the margin column, you can see the individual components starting with the ethanol price at $1.57 per gallon. This value is at the 5th percentile of the previous five years, meaning that 5 percent of the time the June ethanol price has been lower than $1.57, and 95 percent of the time the price has been higher than this level. Moving further to the left, you will notice the input costs for natural gas at $2.74 per million Btu and corn at $3.86 per bushel. These currently exist at about the 6th percentile of historical prices over the past five years for their respective contracts.
HEDGING
In thinking about contracting alternatives, let’s assume that this particular ethanol plant is concerned about summer margins and believes that the 22 cents per gallon projected margin is worth protecting. Because it is only at the 38th percentile however, the plant would like to incorporate flexibility for this margin opportunity to hopefully improve over time. Considering the price levels for each component of the margin, the plant’s risk managers may deem corn and natural gas prices to be historically cheap and therefore wish to simply lock in these values. They may even choose to do this through the cash market with a local intermediary, whereby these costs are fixed and secured, including basis. Moving on to the ethanol piece, because that is also historically cheap, they may want to include flexibility here. Perhaps one contracting possibility might be to place a floor under the value of the ethanol to establish a minimum margin with their input costs now fixed. Another alternative might be to establish this floor under the current ethanol price while also incorporating a ceiling or maximum price above the market. This form of contracting involves two types of futures options. A call option provides the right to purchase a commodity at a fixed price level while a put option provides the right to sell. In exchange for this right, the buyer of the option pays a premium which fluctuates on a daily basis as a function of where the underlying futures price is trading relative to the fixed price at which the right to buy or sell that contract exists. The seller of the option who receives the premium from the buyer takes on the corresponding obligation should the buyer exercise the right to buy or sell at the fixed price level, which is referred to as the strike price. As an example, the plant’s risk managers could purchase a June 155 put option for a cost of around 7 cents, which effectively would establish a minimum price for their ethanol at $1.48 per gallon (the right to sell at $1.55 minus the 7-cent
cost). Alternatively, for a cost of around 5 cents, they could purchase the same 155 put in June while also selling a 175 call option. This combination would give the plant a minimum ethanol price of $1.50 per gallon along with a maximum price of $1.70 per gallon (the right to sell at $1.55 and the obligation to sell at $1.75 minus the 5 cent cost). If we also assume that the input costs have been locked in at the values indicated, with no further fluctuations to the plant’s fixed costs and no changes to the index, this likewise would imply a minimum margin of 15 cents per gallon and a maximum margin of 35 cents per gallon. The latter maximum value would translate to a profit margin at the 80th percentile of historical opportunity, which the ethanol producer might consider attractive.
Obviously, a different matrix of prices and margins would suggest a different approach to contracting. In any case, modeling and managing risk from a margin perspective can provide valuable insight on forward opportunities and help direct contracting decisions. Author: Chip Whalen Vice President, Education and Research Commodity & Ingredient Hedging LLC 312-596-7755 ethanol@cihedging.com
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JUNE 2015 | Ethanol Producer Magazine | 83
EMISSIONS
Small Changes Affect Sampling Methods By Edward “EJ” Juers
Particulate matter (PM) emissions are one of the six major criteria pollutants regulated by the U.S. EPA that are controlled and quantified from point sources at industrial facilities to meet air quality standards.
While particulate testing is a routine sampling procedure performed during air emission compliance testing, it is important to stay abreast of changes that may affect test planning, pollution control operations and compliance status. As regulations have evolved, new methods used to measure PM have been introduced and modified in an effort to more accurately quantify emissions. Some of these changes may affect facility permit limits and compliance tests. It is important to understand the various types and classifications of particulate matter and the methodologies commonly utilized for PM measurements, as well as changes that may cause issues leading to costly compliance mistakes.
Regulation of particulate matter through the EPA, along with state and local governments, is directed by the federal Clean Air Act, with the goal of preserving and improving the ambient air quality that can affect human health as well as the public welfare through such things as PM’s impact on visibility, buildings, crops, vegetation. Over the course of time, as information on particulate matter and its effects has expanded, regulatory mechanisms have evolved to effectively target and control the more harmful forms of particulate matter (primarily very small particles) as well as total particulate matter measurements used as a surrogate to quantify and control hazardous air pollutants (HAPS). Various terms and acronyms are used to describe particulate emissions and emission limits, which can vary across different regulatory agencies, so it is imperative that the exact intent of the language is defined and the methodology is clearly determined in the permitting process. PM, PM state, PM federal, PM filterable, condensable PM, TSP, PM10 and PM2.5 are all acronyms that are commonly used in
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).
84 | Ethanol Producer Magazine | JUNE 2015
EMISSIONS
PM Testing Pitfalls 1. Failing to identify best test methods to fit the source emissions. 2. Facility test sites not meeting method requirements. 3. Failing to execute test methods properly. 4. Underestimating time needed for emission tests. 5. Collecting inadequate sample volumes to ensure detection limits are below emission limits. 6. Facility failing to operate at the proper level during compliance tests, resulting in reduced facility operating limits. 7. Insufficient control device maintenance, resulting in test failures.
Dry Mill Ethanol Processes and Typical Particulate Control Devices Source type
Gas Stream Characteristics
PM Characteristics
Typical PM Control Devices
Grain Receiving/Handling/ Storage
Dry, near ambient temperature and moisture content
Primarily dust
Fabric filter bag houses
Grain Milling
Slightly elevated temperature and moisture due to milling activity and moisture release from seeds
Dust and low amounts of condensable PM
Fabric filter bag houses
Fermentation/Distillation
Cool and wet
Condensable organic vapors
Wet scrubber/RTO
DDGS Drying
Extremely high moisture (>50%), moderate temperatures (150-500F) dependent upon control device
Primarily condensable organic vapors and oils with some dust/ash carryover from drying process and oxidizer combustion
Regenerative thermal oxidizer/ Thermal oxidizer
DDGS Cooling
Slightly elevated temperature and moisture due to cooling of DDGS after drying process
DDGS particulate as well as condensable organic vapors
Fabric filter bag house and occasionally RTO
DDGS Handling/Storage/ Load out
Dry, near ambient temperature and moisture content
Primarily dust with Fabric filter bag houses small amount of organic vapors
the permitting process, and may imply that one or more test methods needs to be used to measure emissions. Careful navigation through the language and terminology within a facility’s air permit often requires a team effort consisting of facility personnel, test consultants and regulatory authorities, to determine the most accurate, efficient and cost effective means to completing emission tests and assuring compliance. Dry mill emissions are vented from multiple sources and controlled using a variety of pollution control technologies. Dictated by the type of source, characteristics of the gas streams, required level of control, as well as cost. The table above shows common emission sources and various particulate control devices. Bear in mind that emission control requirements can vary widely between facilities depending upon regional air quality conditions and facility emission limits.
Testing Methods
In the most simplistic form, emission testing to measure particulate matter consists of extracting a known volume of gas through a filter
from vents exiting an industrial process through a stack. The particulates collected on the filter are rinsed, dried, weighed and quantified to report the source’s emission rate, which is used to demonstrate compliance with allowable levels set forth in the facility’s air permits. In more complex methodology, additional components are introduced to the sample assembly, such as cyclones or glassware, which may allow for particle size fractionation or measurement of condensable (vapor form) particulate matter. Standard methodologies have been developed to sample specific source types, particulate sizes, and/or conditions present within a given gas stream. Common test methods used to sample total particulate matter (PM or TSP) are EPA Methods 5 and 17. In addition, state agencies may require total or partial condensable particulate matter to be measured to quantify total PM using methods equal or similar to EPA Method 202. Fine particulate matter test methods targeting PM10 and PM2.5 (particulate with an aerodynamic diameter matter smaller than 10 and 2.5 microns, respectively) are typically measured using EPA Method
JUNE 2015 | Ethanol Producer Magazine | 85
EMISSIONS
201A, when possible, coupled with EPA Method 202. When sampling limitations or test site constraints do not allow for sampling using EPA Method 201A, other arrangements need to be made, such as reverting to a total particulate method (such as EPA Method 5 or 17) and quantifying all particulate as PM10 or 2.5. The primary points to consider when determining the proper PM sampling methods include the following: • What needs to be quantified? (PM, PM10, PM2.5, condensable PM, etc.) • Does the facility air permit or associated rule(s) require specific methods? • Can new methods yield different results than those that were used to develop permit emission limits? If so, what if results are higher? • Will the chosen method accurately quantify emissions, or are there conditions that may bias the results, prevent the method from being performed properly or meet required quality assurance standards? Examples include high moisture content, uneven flow distribution, high temperatures, improperly sized test ports or inadequate test site design. • There may be allowable method modifications, but if implemented, how can the results and compliance status be affected? • Can one single test be performed to meet all needs of a plant’s PM sampling requirements? If so, are there long term considerations and how could it potentially effect reporting and compliance status now and in the future? All of these questions and points, among others, need to be carefully considered and navigated when determining a sampling strategy for particulate matter. Seemingly subtle changes in methodology or facility operations can have a major impact on test results. The ultimate goal is to complete the sampling in an efficient, accurate manner, in order to prove compliance with the regulatory requirements. This can all be accomplished by thoughtful planning and working with a competent test consultant who can help determine the proper testing methods and bridge communication between regulatory agencies and facility personnel. Author: Edward “EJ” Juers Stack Department Manager, Interpoll Laboratories Inc. 763-786-6020 EJuers@interpoll-labs.com
86 | Ethanol Producer Magazine | JUNE 2015
5 REASONS to Love the RFS
Reason 1 – Ethanol and the RFS save us money In 2013, consumers saved between $700 billion and $2.6 trillion*
Reason 2 – RFS means less imported oil
Last year, ethanol displaced $49 billion worth of imported oil**
Reason 3 – RFS cuts greenhouse gas emissions Today’s conventional ethanol reduces GHG emissions 34-48%***
Reason 4 – RFS creates jobs
The ethanol industry supports nearly 380,000 direct and indirect jobs**
Reason 5 – RFS means investment and innovation The RFS works for everybody
* Energy economist Philip K. Verleger, Commentary, Renewable Fuels Legislation Cuts Crude Prices, pkverlegerllc.com **ABF Economics, “Contribution of the Ethanol Industry to the Economy of the United States,” February 2015. ***Wang et al. (2012) using the Department of Energy’s GREET model JUNE 2015 | Ethanol Producer Magazine | 87
FINANCE
Long-Term Planning Mitigates Risks from Prolonged Downturns
Advisors provide guidance and tools to achieve more sound ďŹ nancial footing. By Frank Baumgardt
Ethanol plants are exposed to market forces over which they have little control, such as the price of commodities (ethanol, the cost of corn and natural gas), transportation rates for feedstock, and government support policies (e.g., potential changes to the RFS). Any commodity-based business is subject to sudden
and prolonged market disruption, as recently experienced when the drop in oil prices put pressure on ethanol prices. In this economic environment, how can a plant stay profitable?
When best laid plans fail and plants encounter financial difficulties, an experienced financial advisor who has worked with ethanol companies and other stakeholders and interested parties, such as lenders and investors, can prove to be indispensable. There are several strategies to mitigate the risks being faced in the current environment and lessons learned on ways to improve the financial position of ethanol plants and ensure the long-term viability of their operations. The ethanol industry had a record-setting year in 2014, with generous crush margins leading to high profitability for many plants. These high margins evaporated, however, toward the end of
CONTRIBUTION: The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reďŹ&#x201A;ect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
88 | Ethanol Producer Magazine | JUNE 2015
FINANCE
2014 as falling crude oil prices resulted in lower gasoline prices that in turn pressured ethanol prices, as illustrated in the accompanying chart. With little economic incentive to increase ethanol blending beyond the regulatory minimum and limited demand from the export market, ethanol producers continue to face industry overcapacity and challenging market conditions into 2015. FTI Consulting has significant experience working with ethanol plants that faced financial distress in recent years and would like to share some lessons learned to help the industry weather the current unfavorable conditions and avoid the fate of companies such as Bionol Clearfield LLC, a 110 MMgy ethanol plant completed in 2010 at a cost of $270 million, which was idled in 2011 as the ethanol buyer breached its contract. The plant was sold in bankruptcy in 2012 for only $9 million. External factors largely determine the profitability of an ethanol plant. When crush margins come under pressure, as they are now, plant managers have the option to reduce production, including idling facilities, to mitigate operating losses. However, depending upon the length of time a plant faces unfavorable conditions, financial reserves may be depleted before markets improve. For a plant with debt in its capital structure, idling production does not alter the debt amortization or interest schedule, which can lead to liquidity issues, covenant breaches or missed debt payments. If not addressed through a planned response to these challenges, the timetable and options available diminish and the company potentially loses control.
Avoiding Financial Distress
MARGINS AND CRUDE: The Center for Agricultural and Rural Development calculates ethanol return over operating costs as ethanol price minus corn cost plus DDGS revenue minus other operating costs (e.g., natural gas) for a representative Iowa dry mill. Capital costs are estimated at 25 cents per gallon of ethanol and must be covered by the ethanol return over operating costs. SOURCE: FTI CONSULTING USING DATA FROM CARD, BLOOMBERG
Leverage (financing a plant with debt) can increase the profitability of a plant by providing a relatively cheap source of money, but it also increases the risk to a plantâ&#x20AC;&#x2122;s viability when operating results deteriorate. Reducing the amount of debt will reduce the risk of financial distress, as a plant is relieved from the cash constraints of a strict debt payment schedule. Having access to sufficient reserves to meet debt obligations during prolonged periods of negative margins is another option to mitigate the default risk. These options require long-term planning which is not a luxury that many possess if already under financial distress. There are other measures that can be taken in advance that may be effective short-term solutions. Conducting a financial analysis of the operating costs relative to sales prices will provide management with meaningful guidance for the business operations. The goal of this exercise is to determine the breakeven point of the plantâ&#x20AC;&#x2122;s profitability, which is driven by various factors, many of which are unique to each plant. In cases where operating economics have deteriorated beyond the breakeven point, a plant can reduce output or idle the plant entirely in order to reduce cash burn and stabilize the overall financial health of the operation. The break-even analysis is similar to a crush margin
analysis but should include the cost of raw materials and the sale prices for all products, not just ethanol. A review of existing contracts and opportunities to hedge certain price risks also should be included in the analysis. Given the continued fluctuation of commodity prices driving an ethanol businessâ&#x20AC;&#x2122; profitability, companies should review and refresh their breakeven analysis on a periodic basis. If an ethanol plant faces difficulties meeting its debt obligations, prompt intervention can significantly improve the outlook for the facility. Interested parties benefit if there is a way to keep a plant in business rather than face the cost and uncertainty of bankruptcy. Dealing with financial distress is a new situation for most ethanol producers who, while experts at converting corn into ethanol and DDGS, are not typically as experienced in navigating day-to-day interactions with lenders that may be required in times of financial adversity. An outside advisor who focuses on financial restructuring will analyze the maturity profile of the existing debt and its alignment with forecast cash flows and asset mix to develop alternative capital structures and refinancing options that meet the needs of the business and lenders for the particular operating environment. Involving an outside party that specializes in distressed situations and has the experience to navigate this process can provide significant value, such as assisting with forecasting cash flows; implementing cash preservation strategies; and identifying, planning and executing
JUNE 2015 | Ethanol Producer Magazine | 89
FINANCE
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on strategic options that preserve the business while demonstrating to lenders that collateral value is being maximized through solutions that avoid bankruptcy. The core of the financial advisor’s work should include analyzing all business aspects of the ethanol plant, recommending change where needed based on biofuels industry knowledge and situation-specific considerations, and presenting that information to lenders in a manner that will foster cooperation. While an ethanol producer may be reluctant to share information in periods of distressed financial conditions, navigating lender debt work out processes requires carefully orchestrated communication of facts, as well as information supporting the preferred way forward for the company. There is a balance between communicating the situation and providing sufficient visibility to allow creditors and investors to make informed decisions. For example, if inventory management can be improved and the corresponding value is demonstrated in refined economic models, lenders may realize that their exposure is mitigated by amending existing loan covenants. One aspect of the role of a third-party advisor is similar to that of a translator: The advisor speaks the same language as the lenders, which allows the advisor to present the information from the ethanol plant in a format that is easily understood by the lenders, ultimately facilitating resolution of the situation in as positive and constructive a manner as is available.
When to Seek Help
Financial difficulties become harder to resolve the longer they linger. Once debt covenants have been breached, many options are off the table. An analogy that rings true comes from experience skiing in my home state of Colorado: If I’m wondering whether I’m going too fast, then I’m probably going too fast. Accordingly, if you think your operation might be headed for financial distress, it is likely a good time to have an initial conversation with experts in that field to see what can be done. While it may be counterintuitive to spend money on advisors when confronting a cash crunch, the ultimate payoff can be significant. Author: Frank Baumgardt Senior Director, Corporate Finance, Clean Technology FTI Consulting Inc. 303-956-9981 frank.baumgardt@fticonsulting.com
JUNE 2015 | Ethanol Producer Magazine | 91
LOCAL IMPACT
COLOCATION SYNERGIES: Blue Flint Ethanol, left, gets steam from Great River Energy’s Coal Creek Station on the right. In 2010, Coal Creek Drying and Storage was added to the site. PHOTO: GREAT RIVER ENERGY
Ethanol Biorefinery Boosts Local Corn Production Blue Flint Ethanol stimulates corn expansion in McLean County, North Dakota. By Lyndon Anderson
When Blue Flint Ethanol came online in February 2007, corn production in North Dakota’s McLean County was about 32,500 acres. In order to purchase the corn needed
to operate the biorefinery, employees had to look far beyond the local market. At that time, the primary corn-producing area in North Dakota was the southeast part of the state, hundreds of miles from Blue Flint Ethanol’s home in Underwood. More than 90 percent of the corn arrived via the Dakota Missouri Valley Western Railroad. Only about 10 percent of corn was purchased locally. That ratio of local to regional corn has changed, and in a significant way, in recent years. Today, over 90 percent of the corn used at the ethanol biorefinery is delivered via trucks within a 100 mile radius of Blue Flint Ethanol.
Location, Location, Location
Blue Flint Ethanol is located adjacent to Great River Energy’s Coal Creek Station, North Dakota’s largest power plant. Instead
of burning fuel to make ethanol, Blue Flint Ethanol uses excess steam from Coal Creek Station to provide process energy and dry distillers grains. That proximity to a power plant is essential to Blue Flint Ethanol becoming one of the most cost-effective, energy-efficient and environmentally friendly biorefineries in the country. Blue Flint Ethanol is a part of Midwest AgEnergy Group, an upper Midwest biofuels enterprise owned by Great River Energy and other accredited investors including banks and international, agricultural and industrial businesses. MAG also includes Dakota Spirit AgEnergy, an ethanol biorefinery under construction near Jamestown, North Dakota According to David Spickler, vice president of marketing and risk management for Midwest AgEnergy Group, the increase in local corn production is due to a number of reasons, including: • The presence of the Blue Flint Ethanol ethanol biorefinery. • The improvement of genetics that has resulted in corn varieties better suited for the climate in western and central North Dakota.
• An increase in corn prices (although prices are lower now). • Abundant rainfall contributing to higher than average yields in western and central North Dakota. The numbers speak for themselves. In 2012, about 64,000 acres of corn were planted in McLean County. That number jumped to 85,800 acres in 2013, according to information from USDA’s National Agriculture Statistics Service.
Local Growers
Steven and Katie Heger operate a thirdgeneration family farm near Underwood. They started raising corn in 2004. Although corn had always been an easy crop to grow, a lack of local outlets to market corn limited any expansion of corn acres on their farm. An increase in corn production for the Heger operation coincided with the start of operations for Blue Flint Ethanol in 2007. “It gave us a readily available and local market, and also a real freight advantage with our farm located just five miles north of the plant,” Heger says. He adds it took a lot of work to get
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).
92 | Ethanol Producer Magazine | JUNE 2015
LOCAL IMPACT
corn production levels to where they wanted them. He benefited from improvements in corn genetics for growing conditions in central North Dakota, along with a better understanding of those genetics. “As a result, we have really seen yields increase in the last 5 to 10 years.” Rob Tweeten, who farms on the west side of the Missouri River near Hensler, North Dakota, has been raising corn since the early 1980s, primarily for livestock feed. He increased corn acreage in 2005 with the addition of more irrigation pivots. After Blue Flint Ethanol came online, Tweeten gained a new market for corn, and the advantage of a local outlet boosting basis, a discount to nearby futures markets that mostly reflects transportation cost as well as local demand. Tweeten’s dryland rotation is now corn, followed by pinto beans or soybeans and then wheat. His irrigated rotation is corn, followed by soybeans. “We needed another crop in our rotation, in addition to wheat and beans. Corn has been a great addition and has taken over a lot of acres in this area,” he says. Tweeten also utilizes another product produced by Blue Flint Ethanol: modified distillers grain. His farm has been purchasing the high-quality feed product since expanding the feedlot in 2008. Tweeten has an abundance of mixed grass forage for his livestock. By adding the modified distillers grains, he is able to provide his cattle a palatable and nutritious ration, and at a reasonable price. “It’s a good cold-weather feed,” says Tweeten. He credits Blue Flint Ethanol with providing a consistent product. “They do a good job with quality control.”
bin space to 2.36 million bushels of storage, in addition to the 1.5 million bushels storage at Blue Flint Ethanol. A second truck scale was also added to accommodate increased truck traffic. “We have provided growers with a place to market and dry their corn, and to get in and out of Blue Flint Ethanol in an efficient manner,” Spickler says. “This has reduced wait times substantially for local growers.” The increase in local corn acreage has led to a dramatic rise in the number of suppliers for Blue Flint Ethanol. Prior to the opening
of Coal Creek Drying and Storage, Blue Flint Ethanol worked with fewer than 100 suppliers. As a result of the surge in local corn production, the biorefinery now has more than 900 suppliers. Author: Lyndon Anderson Leader, Communications Great River Energy 701-442-7036 landerson1@GREnergy.com
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Another major factor that has helped contribute to an increase in corn acreage in the region is the development of Coal Creek Drying and Storage, located adjacent to Blue Flint Ethanol. This 2010 infrastructure enhancement, developed by Knorr Farms and Great River Energy, resulted in the addition of a dryer and 600,000 bushels of crop storage. “This provides local growers with an option to have their corn dried and then marketed at a local facility. Prior to this, there was not an option to have corn dried locally,” Spickler explains. Since 2010, expansions at Coal Creek Drying and Storage have brought the total
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www.zeochem.com JUNE 2015 | Ethanol Producer Magazine | 93
BUSINESS MATTERS
Weathering Tight Margins By Donna Funk
About 12 months ago, I shared the importance of following good margin management practices, even in profitable times. Based on past trends, I encouraged
you to anticipate and prepare for the next economic shift. Well, that shift is here. You know that ethanol margins have declined. Today's environment is basically the opposite of last year. Instead of high gas prices and low corn costs, we face falling crudeoil prices and fluctuating corn costs. Hopefully, you took my advice last year and implemented best practices. For example, some of the ways ethanol producers I work with leveraged the strong economy included: • Increasing capital purchases. • Improving cash reserves. • Restructuring debt. • Reducing debt above the scheduled amount. • Making distributions to investors. These producers took advantage of record profits to create a financial cushion. If you didn't, or the padding isn't quite where you'd like it to be, there's still hope. But you have to be diligent. Now that margins are tighter, it's even more important to run your business efficiently. Financial data is essential to making good business decisions. Based on years working with ethanol producers, here are five tips to improve profit margins through financial management: 1. Employ the capital equipment invested during the last year to introduce new revenue streams or more efficient processes. 2. Use cash reserves to pay interest and principal on debt or pay off loans entirely. 3. Focus on production efficiencies. Take time to review all the steps within your production cycle. Concentrate on small, incremental savings. Encourage employees across your entire organization to look for savings and share efficiency ideas. Then, commit to evaluate all suggestions, executing on those that make sense. This also fosters a continuous improvement mindset. 94 | Ethanol Producer Magazine | JUNE 2015
4. Master margin management. Take steps to control expenses and maximize sales. Pre-buy when costs are lower. Purchase comparable resources at reduced costs, provided they meet your quality standards. Make sure you understand your cost structures and break-even, not only direct costs, but fixed and overhead costs, too. Compare actual costs against your budget and calculate your break-even. How much do you have to sell to get a return on your investment? Different prices, input purchasing programs and even varying philosophies can greatly impact expenses. 5. Maximize operational efficiency. By evaluating both production and cost efficiencies, and implementing small changes in each, you will realize a higher overall return. This isn't the first time you've experienced this kind of economic cycle. The drivers are different, but the things that worked during previous periods of low margins still apply. You can be financially successful if you implement the tips above. For help weathering today's tight margins, consult with your financial services partner. Author: Donna Funk, CPA Principal, K-Coe Isom 913-643-5000 funk@kcoe.com
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