BioCycle November 2007, Vol. 48, No. 11, p. 54
Business model places ethanol facilities near population and livestock centers, not in the nation’s corn belt.
ETHANOL producer Cilion is banking on the proximity of cows and cars to gain a competitive advantage over its rivals. Instead of locating its ethanol plants near corn supplies, the company’s destination-based business model places ethanol facilities near population and livestock centers. This strategy, coupled with energy efficient technology, is designed to produce ethanol that is greener and less expensive then traditional corn ethanol plants.
The company was formed in June 2006 when Khosla Ventures, a Silicon Valley-based venture capital firm, joined forces with Western Milling, California’s largest grain milling company. By September 2006, Cilion had amassed over $200 million in equity capital from an impressive roster of investors, including Sir Richard Branson’s London-based Virgin Group, the Yucaipa Companies of Los Angeles and Advanced Equities Inc. of Chicago.
Historically, ethanol production facilities have been located in the country’s corn belt. Both the fuel and distillers grain (a coproduct of the process) not utilized in the region are shipped to the East and West coasts, explains Jeremy Wilhelm, Cilion Executive Vice President. Before shipping the distillers grain, which is sold as feed to dairy and cattle operations, it must be dried to prevent spoilage.
Cilion was founded on the premise that strategically locating ethanol plants near the demand for the fuel and livestock feed will result in cost advantages. “It really makes sense to produce the product where the consumption is,” Wilhelm says. “Typically we like to locate the plants within a 30- to 50-mile radius of the livestock center. We can haul the ethanol via truck up to 150 miles pretty easily.”
Construction is underway on the company’s first 55-million gallon/year facility in Keyes, California. The $100 million plant is near 200,000 head of dairy cattle and several large population centers. Locating plants near dairies and cattle operations eliminates the need to dry the distillers grain. “We are using one-third less natural gas than our competitors, which is a significant savings,” Wilhelm explains. The company also avoids incurring the capital and production costs associated with the dryers.
Additional savings result from the use of energy efficient technology. The Keyes plant is employing three boilers, with a cogeneration unit that produces almost all of the electricity required by the facility. The cogeneration unit is a letdown steam turbine that uses the high-pressure steam from the boilers to first produce electricity, then to cook the corn mixture for fermentation, explains Kerri Hammerstrom, Manager of Environmental Permitting and Legislative Development at Cilion. “The unit produces up to 4.7 megawatts of electricity with no associated increase in air emissions over the boilers, which are necessary for the cooking operation.”
Lower production and distribution costs more than offset the slightly higher capital cost for the cogeneration system and higher prices for the corn feedstock. The price of the corn rises along with the distance to transport it. However, notes Wilhelm, “at the end of the day we feel we are 5 to 8 cents a gallon cheaper on a cost of production basis.”
ENERGY BALANCE STUDY
Reduced energy use is expected to result in a higher net energy balance for the ethanol produced at the plant. A study by the U.S. Department of Agriculture (USDA) calculated the net energy balance of a traditional corn ethanol plant to be 1.67 to 1. For every BTU dedicated to growing, harvesting and transporting the corn, and producing the ethanol, there is a 67 percent energy gain.
Cilion recently commissioned the Renewable and Appropriate Energy Laboratory, Energy and Resource Group at the University of California, Berkeley to perform an energy balance study on the company’s three proposed facilities in California. The study, which used the same methodology as the USDA study, found the Cilion facilities to have a net energy balance of 2.6 to 1, explains Hammerstrom. The same study found a 29 percent reduction in global warming intensity (GWI) compared to corn ethanol produced in a natural gas fired dry mill. GWI measures the global warming impact of both the feedstock and ethanol production processes.
In the future, the company is considering using biomass feedstocks, such as waste products or wood chips, to fire the boilers. Issues related to the consistency and availability of biomass feedstock, along with technology considerations, are being addressed, says Wilhelm.
DEBT FINANCING PACKAGE
Construction of the Keyes facility began before Cilion secured the debt financing for the project. This follows a pattern seen during 2006 with venture capital investors funding biofuels infrastructure projects, traditionally the realm of firms specializing in project finance (see “Venturing into Biofuels and Biomass Energy,” BioCycle June 2007).
Financing of a $105 million debt package closed in August 2007. Farm Credit Services of America, MetLife and CoBank were co-lead lenders in the transaction. The corporate debt, with a 10-year amortization, is structured as a construction term loan that moves into an operating term loan, Wilhelm says. Pricing is at 300 basis points over Libor. (Libor, or the London Inter-Bank Offer Rate, is the interest rate at which banks can borrow funds from other banks, and is a widely used benchmark for short-term interest rates.)
The debt financing combined with the previously raised equity will fund the construction of Cilion’s first three plants. “With a little bit of increased equity or increased leverage we can build a fourth plant,” Wilhelm adds.
Shane Frahm, Vice President of Agribusiness Finance at Farm Credit Services of America (FCSA), saw the destination-based business model and the people running the company as compelling elements of the financing. FCSA is part of the farm credit system and is currently involved in 52 ethanol projects. “It certainly helps when the financing is done with people that we have a relationship with and understand,” Frahm says.
The efficiency of the operation was also a plus. “We obviously see the company as very competitive,” he adds. “We want to be involved with the best-positioned, lowest-cost production plants in the industry. That is critical for success.” When considering the Cilion financing, FCSA looked at industry risks primarily associated with ethanol supply and demand issues, which are creating profitability concerns in the market. “Industry risk is one that we understand,” Frahm says. “Either you are going to take it or you’re not.”
Conversations with the equity investors provided an added level of comfort with regard to industry and project risks. Frahm points to the level of commitment of the equity investors beyond the equity they have in place. “These people are in the forefront of wanting to see this industry succeed,” he notes. He was also impressed by what the investors have done in other industries and their ability to react if necessary. Starting construction prior to the completion of the financing demonstrated a willingness by both the investors and the company to get the project done, Frahm adds.
FCSA also considered the political risks associated with building a plant in California. “What if California changes its mind about ethanol?” Wilhelm asks. “All of a sudden you have a facility in a location that does not use ethanol.” The political risk was mitigated when the state passed measures to increase ethanol usage in the future. As a lender located in the Midwest, Frahm also needed to establish a comfort level with California regulatory requirements.
Unlike most ethanol companies, Cilion is serving as the general contractor for construction of its facilities. Wilhelm points to the industry experience of the team, which has managed multimillion-dollar capital projects for 25 years. “Being our own contractor saves us time and saves us money and we think we have the experience in house to do it better than anyone else out there,” he says.
This is the only financing done by FCSA where the customer is acting as its own general contractor. “I think it is a tribute to the management team and the equity providers that they put together at Cilion that really made us comfortable with the situation,” Frahm says.
Cilion currently is planning seven projects. The Keyes facility is 50 percent completed and is expected to go online sometime during the second quarter of 2008. Another California facility, located in Famosa, is in the process of finalizing permits. Two other West Coast sites are located in Imperial Valley, California and the state of Washington. On the East coast the company is planning two sites in upstate New York and a facility in Lancaster, Pennsylvania.
Wilhelm believes the current financing package is very conservative and provides flexibility to leverage the company even further in future projects. This is particularly important in an industry where margins are depressed due to higher corn prices and lower ethanol prices. “We have the ability to draw down more debt in the future and releverage the plants where we feel it prudent to do so.”
Future financing will obviously depend upon the company’s cash flow position and the status of the equity and debt markets. “Right now we are targeting a 50/50 debt to equity ratio,” Wilhelm explains. He thinks the company may be able to increase leverage up to 70 percent once a few plants are completed and become operational.
Diane Greer is a Contributing Editor to BioCycle. She can be reached at email@example.com.
PROJECT AT A GLANCE
Developer: Cilion, Inc.
Location: Keyes, California
Size: 55 million gallon/year
Project Cost: $100 million
Financing Package: $200 million in equity; $105 million in term debt from Farm Credit Services of America, MetLife and CoBank. (Note: funding will finance at least two additional facilities.)
Technology: Praj, an India-based Biofuels Technology company
Estimated Start Date: 2nd Quarter 2008
November 19, 2007 | General
Ethanol Production Goes To The Cows, Not The Corn
BioCycle November 2007, Vol. 48, No. 11, p. 54