Jim Lane
The second technology focused on unlocking value in municipal
solid waste comes to the public markets.
Here’s our 10-minute version of the filing, with a translation of
the risks into English.
In Canada, Enerkem has filed an F-1 registration statement for a
proposed $125 million initial public offering. The number of shares
to be offered in the proposed offering and the price range for the
offering have not yet been determined. The lead book-running
managers for the offering are Goldman Sachs, Credit Suisse and BMO
Capital Markets.
The company is currently ranked #7 in the world in the 50 Hottest
Companies in Bioenergy. The rankings recognize innovation and
achievement in fuels and are based on votes from a panel of invited
international selectors, and votes from Digest subscribers.
Enerkem, which in the first three quarters of 2011 lost $19.1
million while recording $887K in revenues (primarily government
grants) becomes the 15th company to file for an IPO in the
industrial biotech boom, which began with a successful listing on
the NASDAQ by
Codexis
(CDXS) in 2010. IPOs by
Amyris
(AMRS),
Gevo
(GEVO),
Solazyme
(SZYM), and
KiOR
(KIOR) have followed. In recent months,
Coskata,
PetroAlgae
(
PALG.PK),
Bioamber,
Myriant, Ceres, Genomatica,
Mascoma
and
Elevance
Renewable
Sciences and
Fulcrum
Bioenergy have also filed S-1 registrations for proposed IPOs.
Here’s the F-1 registration, in a conveniently downsized 10-minute
Digest version – with some commentary along the way as to what is
driving value in the Enerkem model, opportunities for the intrepid
investor, and some risks which we have translated from the ancient
and original SEC into modern English.
Company Overview
From the F-1: “We
develop renewable biofuels and chemicals from waste using our
proprietary thermochemical technology platform.
We intend to take advantage of the abundant supply of municipal
solid waste, or MSW, which we expect to be paid to use as feedstock,
to profitably produce cellulosic ethanol, a second-generation
biofuel. We believe that our waste-based biofuels provide one of the
most advanced solutions to the growing world demand for renewable
sources of energy, while also addressing the challenges associated
with waste disposal and greenhouse gas, or GHG, emissions.
Our pilot facility in Sherbrooke, Canada has been in operation since
2003 and has a throughput capacity of 4.8 metric tons per day. We
have successfully increased, or scaled-up, our throughput capacity
tenfold, or 10x, to 48 metric tons per day in our commercial
demonstration facility in Westbury, Canada. The Westbury facility
has a production capacity of 1.3 million gallons per year, or MMGPY.
Our first standard 10MMGPY commercial facility is currently under
construction in Edmonton, Canada. We have developed a modular,
copy-exact and scalable approach for equipment production and
installation that we anticipate will allow us to have our systems
manufactured by third parties as pre-fabricated, replicable modules
under fixed-price contracts.
The Technology
From the F-1: “Our
proprietary technology platform converts MSW and other heterogeneous
waste feedstocks, consisting of mixed textiles, plastics, fibers,
wood and various other forms of waste, into a pure, chemical-grade
synthesis gas, or syngas. This syngas is then converted into
biofuels and chemicals through well-established catalytic reactions.
Feedstock preparation. The
MSW we plan to use as feedstock is first sorted, using equipment and
processes used in existing sorting and recycling facilities in order
to remove unusable materials. During this process, typically
approximately 40% of the MSW is removed from the waste stream and
approximately 60% of the MSW is shredded to be used as feedstock.
Gasification through a bubbling
fluidized bed. Our proprietary bubbling fluidized bed
gasification reactor breaks down the feedstock into its constituent
parts or molecules, a process that is called thermal cracking. In
the same reactor, these broken-down molecules are then blended with
steam to produce syngas.
Syngas cleaning and conditioning.
Our bubbling fluidized bed gasification process yields a crude
syngas that is fed into our proprietary syngas cleaning and
conditioning process. This process upgrades the crude syngas to a
chemical-grade syngas that can be refined into liquid fuels and
chemicals.
Catalytic conversion into final
products. We typically start by reacting a portion of our
syngas with a commercially available catalyst to produce methanol,
which we can either sell as an end-product or use as an intermediate
to make other products. To produce ethanol, we react methanol with
carbon monoxide from our syngas with a commercially available
catalyst to produce methyl acetate. The final conversion step in our
ethanol production process entails splitting the methyl acetate by
inserting a hydrogen molecule that is extracted from the produced
syngas.”
The Market
MSW Market. The United
States generated 435 million metric tons of MSW in 2009, of which
approximately 289 million metric tons, or 66% was landfilled. The
company projects that approximately 140 million metric tons is
suitable for ethanol production through gasification, yielding up to
14 billion gallons of ethanol annually.
The remaining landfill capacity for MSW in the United States as of
2009 equates to approximately 19 years of remaining life at 2009 MSW
disposal rates, down from 26 years in 1995. 30% of Canadian
landfills reported having an expected remaining life of fewer than
ten years.
Tipping fees. According to
the Waste Business Journal, an industry publication, average tipping
fees for landfills in the United States were $47 per metric ton in
2009. The company projects that every $10.00 dollars per metric ton
of tipping fees that they receive will generate revenue of
approximately $0.12 per gallon.
Global fuels market.
According to the Energy Information Administration, or EIA, global
crude oil and liquid fuel consumption of approximately 87 million
barrels per day, or bbl/day, equates to approximately a $2.5
trillion market in 2010, at an average price of approximately $79
per barrel.
US Renewable Fuels Market.
The U.S. Renewable Fuel Standard mandates 16 billion gallons per
year of cellulosic biofuels, which include cellulosic ethanol, be
blended by 2022. The company projects cellulosic ethanol in the
United States at operating costs, before depreciation and
amortization, of $1.50 to $1.70 per gallon in a 10MMGPY
facility. They estimate that they can reduce costs to
approximately $1.05 to $1.25 per gallon by building 40MMGPY
facilities (four of our 10Mgy units).
Price floor. In the US, the
EPA creates cellulosic biofuel waiver credits, or CWCs, for purchase
for that year. The CWCs to be made available for sale to obligated
parties in 2012 for the higher of (1) the amount by which $3.22 per
gallon (in 2011 prices) exceeds the average wholesale price of a
gallon of gasoline in the United States or (2) $0.27 per gallon (in
2011 prices).
Chemicals. Methanol can act
as a building block for acrylic acid, with a market size of $3.1
billion in North America and $10.9 billion globally; n-Propanol,
with a market size of approximately $1.5 billion in North
America and $3.0 billion globally; and n-Butanol, with a market size
of approximately $2.4 billion in North America and $7.5 billion
globally.
The Risks, Translated from SEC-speak
Among the lowlights of reading S-1 registrations are the endless
pages of risk disclosures couched in an alloy of SECspeak and
legalese.
We offer these excerpts from the original S-1, and a translation
into English, prepared by our Digest lexicologists.
In SECSpeak: We have not yet
completed the manufacturing of our first standard 10MMGPY
prefabricated module and design defects may occur in our equipment
and/or modules, which may adversely affect our business and
financial results.
In English: Oy vey, build-out, schmild-out, vat could be de problem?
In SECSpeak: Our, or any of our
partners’, inability to obtain an adequate supply of MSW may
adversely affect our business and financial results.
In English: “Waste is a Terrible Thing to Mind.”
In SECSpeak: Changes in government
regulations, including mandates, tax credits, subsidies and other
incentives, could have a material adverse effect on our business
and results of operations.
In English: G-Man, give me some lovin’.
In SECSpeak: Infrastructure
constraints pose uncertain market barriers for ethanol.
In English: “Alex, I’ll take ‘Blend Wall’ for five hundred, please.”
In SECSpeak: We may need
substantial additional capital in the future in order to expand
our business.
In English: That giant sucking sound you hear: that’s our CAPEX
fund.
In SECSpeak: We have not produced
ethanol at a scale needed for the development of our business or
built the facilities needed for such production. Furthermore, the
conversion of methanol into ethanol in large commercial volumes
may prove to be more challenging than we anticipate and may not
initially be possible in a cost-effective manner.
In English: Psst! The secret phrase is “Range Fuels.”
In SECSpeak: Our partners may not
adequately operate the systems utilizing our proprietary
technology platform or safeguard our intellectual property and
confidential information, which may adversely affect our business.
In English: Dang it Zeke, how do you work this darn thing anyway? Is
this right? Oops. Eew, that’s not right.
In SECSpeak: Our ability to
compete may decline if we are required to enforce or defend our
intellectual property rights through costly litigation or
administrative proceedings.
In English: Psst! The secret phrase is “Butamax and Gevo.”
In SECSpeak: We rely in part on
trade secrets to protect our technology, and our failure to obtain
or maintain trade secret protection could adversely affect our
competitive business position.
In English: Psst! The secret phrase is “INEOS Bio and Coskata.”
The Strategy
From the F-1: “1. Build, own
and operate new facilities.
2. Pursue development opportunities with select industry-leading
companies.
3. Focus on reducing our costs.
4. Expand internationally.
5. Innovate and develop new products.”
The Commercialization Plan
From the F-1: 1. Westbury, Canada
demonstration, 2009-2011.
We completed the installation of methanol production equipment in
Westbury in 2011, and the facility commenced production of methanol
in June 2011. We intend to add ethanol production equipment to the
Westbury facility in 2012 to enable a production capacity of
1.3MMGPY.
2. Edmonton, Canada first
commercial plant.
In 2010, we commenced construction of our first standard 10MMGPY
commercial facility in Edmonton. We intend to build, own and operate
this facility, which is located on a municipal landfill to provide
us proximity to feedstock. We have secured a 25 year MSW feedstock
supply agreement with the City of Edmonton. We expect to ready our
Edmonton facility for methanol production in the first quarter of
2013.
3. Pontotoc, Mississippi second
commercial plant.
We plan to commence construction of an additional 10MMGPY commercial
facility in Pontotoc in the fourth quarter of 2012. The Pontotoc
facility will be located on a landfill site and will be constructed
by our wholly-owned subsidiary Enerkem Mississippi Biofuels LLC. We
estimate that it will take approximately 18 months to build the
facility.
In December 2009, we were awarded U.S. Department of Energy, or DOE,
conditional financial assistance of $50.0 million under the American
Recovery and Reinvestment Act of 2009 — Demonstration of Integrated
Biorefinery Operations Program, for the development of the Pontotoc
facility.
4. Varennes, Canada third
commercial plant.
We also plan to commence construction of a 10MMGPY commercial
facility in Varennes as early as the first quarter of 2013. We
estimate that it will take approximately 18 months after
commencement of construction to build the facility. This facility
will be constructed by Varennes Cellulosic Ethanol L.P., a 50/50
joint venture with GreenField Ethanol Inc., one of the largest
ethanol producers in Canada. The Varennes facility will be located
on the site of GreenField’s grain ethanol facility in Varennes.
5. Waste Management and Valero
Our term sheet with an affiliate of Waste Management (
WM)
contemplates the sale of systems utilizing our proprietary
technology platform for the potential development of up to six sites
with a combined ethanol production capacity of 100-120MMGPY. With
Valero, we have entered into a non-binding term sheet to sell our
systems for the development of up to six stand-alone facilities with
a combined ethanol production capacity of 80-250MMGPY and additional
facilities to be co-located with existing Valero facilities. We
expect that our arrangements with Waste Management and Valero would
also provide us with an option to own up to 49.5% or 50.0% of these
facilities, respectively.
6. Other Projects and
Considerations
We have prioritized, based on specific selection criteria, 68
landfills in the United States as potential sites for development by
us or our strategic partners. These locations represent a combined
waste inflow of 40 million metric tons of unsorted MSW, which
represents a potential production of 2 billion gallons of ethanol
per year using approximately 200 of our standard 10MMGPY modules.
Enerkem as it sees itself: 6 Competitive Strengths
From the F-1: “Converting
heterogeneous waste to biofuels and chemicals. We believe
that we are the first company to produce a pure, chemical-grade
syngas using heterogeneous waste in a commercial demonstration
facility. Since 2003, we have tested and validated our technology
with MSW from numerous municipalities, as well as a broad variety of
other feedstock, at both our pilot and demonstration facilities.
Lowest scale-up among cellulosic
ethanol producers. The scale-up from our commercial
demonstration facility in Westbury to our planned standard 10MMGPY
commercial facilities represents approximately a 2x scale-up in
gasification and gas conditioning equipment size and approximately a
7x scale-up in throughput capacity.
Large market opportunities and an
attractive cost structure. Our primary product focus is
cellulosic ethanol, a significant market opportunity that is driven
by a rapidly growing market demand for renewable biofuels, and is
further bolstered by government mandates and incentives. In
addition, we believe our cost structure benefits from the ability to
locate our compact facilities on or near landfill sites, the
abundant supply of negative cost MSW feedstock and our competitive
production costs.
Tangible commercial pipeline.
In addition to our first standard 10MMGPY commercial facility under
construction in Edmonton, we have two 10MMGPY commercial facilities
under development in Pontotoc and Varennes. Beyond these projects,
we have prioritized 68 landfills in the United States as additional
potential sites for development by us or our strategic partners,
representing a potential production of 2 billion gallons of ethanol
per year using 200 of our standard 10MMGPY modules.
Key strategic relationships with
industry-leading partners. We have entered into a
non-binding arrangement with an affiliate of Waste Management (
WM)
to sell systems using our proprietary technology platform for the
potential development of up to six sites with a combined ethanol
production capacity of 100-120MMGPY.
With Valero, we have entered into a non-binding term sheet to sell
systems using our proprietary technology platform for the
development of up to six stand-alone sites with a combined ethanol
production capacity of 80-250MMGPY and additional facilities to be
co-located with existing Valero facilities.
Experienced management team.
Our executives and senior managers have built our business from the
ground up and have extensive experience in research and development,
business development, project financing, procurement and plant
operations.”
Financing to date
Enerkem has incurred substantial net losses to date, losing $C5.9
million in 2008, $C3.7M in 2009, $11.8M in 2010 and 19.1M for the
first nine months of 2011.
From the F-1: “On March 13, 2009, in connection with a $4,000,000
loan from Atel Ventures, Inc., we issued a warrant to Atel Ventures,
Inc. pursuant to which it is entitled to purchase 9,682 Series 3
Class A preferred shares at an exercise price of C$46.00 per share.
“On January 27, 2010, we issued 828,667 Series 4 Class A preferred
shares at C$46.00 per share, for an aggregate purchase price of
C$38,118,896.
“On April 25, 2011, we issued 475,559 Series 1 Class B preferred
shares at C$124.17 per share for an aggregate purchase price of
C$59,050,161.
The bottom line
As essentially pre-revenue companies go, here’s a gem. The right
partners, a low-cost, locked-in, always available, non-commodity
feedstock. The upstream is gold. Downstream? Who better than Valero,
which has been turning its own ethane production and distribution
arm into a corporate shining star.
All of which brings us to the midstream. There are three and only
two concerns, but they are, how do we put it, items to watch and
note.
First, like so many others
who have come to market in this IPO wave, Enerkem has not completed
a commercial scale facility – so there is what is becoming “the
usual” scale-up risk. In Enerkem’s case, it’s a 7X scale-up, far
less than many others who have made it across the IPO chasm.
Second, bringing down the
costs. Enerkem emphasizes its ability to manage down the operating
costs – , absent an execution at scale, that will have to be taken
on faith. Again, a common feature of the IPOs in this sector.
The third? Yikes, Enerkem
hasn’t made ethanol yet at its demonstration plant. Now, methanol to
ethanol is not exactly rocket science – the catalysts and technology
have been around for some time. But, there it is – they haven’t made
a drop of the intended product at the Westbury plant.
Ethanol is selling in the 2013 futures market for $2.11 per gallon,
and there’s about $0.27 per gallon in cellulosic waiver credits
available – that gives the company a target, today, of around $2.38
for its operating costs, capex and margin. Right now, it’s a light
margin – but with some work down on cost through scale, the margins
look sweet.
The complete S-1 registration statement.
All 250-or-so pages in all their glory. The
complete
F-1 registration statement is here.
Disclosure: None.
Jim Lane is editor and publisher**
of Biofuels Digest where this***
article was originally published. Biofuels Digest is the most widely read
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