BioEnergy of AMERICA'S Rise and Fall
Tom Davanzo should be angry. In 2007, his burgeoning biodiesel empire slid into an agonizing death spiral, then bankruptcy. Now he's being kicked out of bankruptcy court because he doesn't have any money. He can't even raise exit financing. What happened? To sum it up: feedstock prices gone through the roof, fickle financiers, razor-thin capitalization of projects if you can corral a financing package, brutal construction costs, you name it. Yet Davanzo emerges from the ashes with cautious optimism. "I'm an entrepreneur," he says. "I'll be back."
The tale started in 2006, a banner year for the former BioEnergy of Colorado. Davanzo and other investors had purchased a loan from a Chicago bank two years earlier. Part of that acquisition included an asphalt cleaning facility and tank farm on its Colorado property situated near dozens of rail lines. They spent several months cleaning the site, developing production technology and a rigorous quality assurance program, and building relationships with their target market-local fuel distributors.
By late 2005, the facility, dubbed "Colorado 1," was producing 700,000 gallons of biodiesel per month. Work began on Colorado 2, another Denver-area plant. It was on line by February 2006. The two facilities throughout much of 2007 produced 18 MMgy.
Davanzo meanwhile was tinkering with cold-weather blends and heating oil applications for biodiesel because sales dropped off sharply during the winter. BioEnergy trademarked Gold-n-Green, a BQ-9000 certified fuel alternative. It contained a cold-flow additive that prevented the biodiesel from gelling in frigid temperatures, and typical winter shut-downs.
Finally, he set his sights on building a plant in the Northeast region of the country because U.S. DOE studies identified that area as containing 78 percent of all home heating oil consumers in the country. As oil prices rise, customers begin looking to other heat sources. Davanzo's fellow investors reasoned that they could recapture that market by combining heating oil with B100.
Moving East: The Downward Slide Begins
The company headquarters for the new venture, BioEnergy of America, was in Edison, N.J., where BEA had plans to develop a 45 MMgy biodiesel plant, with three 15 MMgy lines, that would serve the Northeast.
In August 2006, BEA announced a joint venture with Able Energy Inc. to produce and distribute biodiesel at plants constructed at truck stops, home heating depots and terminals used to house petroleum products for distribution or resale. The venture, owned in equal shares by each company, was called USA Biodiesel. The facilities would use BEA production processes. Able Energy, a New Jersey-based company that provides home heating oil, diesel fuel and kerosene, would purchase much of the fuel produced for resale at truck stops.
Meanwhile, Davanzo was trolling for financiers for the Edison biodiesel plant. He landed a venture capital fund founded by Michael Dell, owner of Dell Computers. Dell and his wife, Susan, formed MSD Capital LP in 1998. MSD, based in New York and Los Angeles, exclusively manages the Dells' fortune and was established to engage in a broad spectrum of investment opportunities. Davanzo has never met Michael Dell.
MSD and Paragon Energy Holdings formed a joint venture called Paragon BioFuels LLC, an intermediary whose primary role was to fund the construction. MSD earmarked about $21 million in three installments to build the Edison plant. Construction began in 2006 after the first installment of $7 million was received. When the second installment of $7 million was due in January 2007, there was no check in the mail. "It certainly created a problem for all us contractors," says Russ Richard, whose company, Mechanical Preservation Associates Inc., was the primary contractor. Richard and Davanzo say they viewed the withholding of funds as a temporary glitch, so contractors soldiered on. Turned out it wasn't just a glitch.
On the advice of his engineers and because of technological breakthroughs, Davanzo agreed during construction to install two 40 MMgy lines, expanding overall capacity to 80 MMgy. That caused increased costs and MSD balked, Davanzo says. "MSD's decision was based on a combination of the market and the cost of the plant," he says. "Because of the cost of the plant and the economics of the business, they didn't really want to continue to invest and contractually, as odd as it is, they actually had the right [to stop funding the project]. Of course, we never thought there was a possibility that we weren't getting all the money." MSD spokesman Todd Fogarty declines to say why investors pulled out. "As a matter of policy, we do not comment on our investments," he says.
The project faced difficulties that many projects face: cost overruns, missed deadlines and, in BEA's case, the detraction of the simultaneous venture with Able Energy, which may have diverted attention away from the refinery. These issues may have violated the lending covenants.
Some contractors had made major investments in BEA's progress, including MPA, which is owed $2.3 million. "We were responsible for providing equipment, installing the systems, the tanks, the pumping systems, the pumps and all the process-related, production-related equipment in the systems," Richard says.
In June 2007, the project faced the continued silence of MSD and work stopped. The plant was not quite 30 percent complete, Richard estimates. BEA scrambled to obtain alternate financing, but surrendered to bankruptcy court when it looked futile. "In my mind, they had a great business plan, they had a great process that was well thought out and well-engineered," Richard says of BEA. "It was a very efficient process that was able to produce a product." Michael Losch, BEA's chief financial officer, was reluctant to discuss what would transpire. In January 2008, he acknowledged that a sale of the partially-completed plant was possible, along with the continued pursuit of financing mechanisms. But by February Davanzo had been evicted from the property and plans to convert the Chapter 11 filing into a total liquidation Chapter 7 failed. "Because we couldn't get enough funding [to settle with creditors], they'll kick it out of court," Davanzo says of the New Jersey bankruptcy judge. "That means it'll die without the dignity of a Chapter 7. It'll just be the demise."
Paragon BioFuels is BEA's largest creditor, owed $7.6 million. The bankruptcy also absorbed the two Colorado facilities along with Davanzo's patents, which were collateral for the MSD loan. "It sucked the whole company down the tubes," he says.
A buyer is interested in the trans-load equipment at one of the Colorado plants, which is used to load and unload rail cars. A Las Vegas buyer may strip the other Colorado plant for parts to use in a waste treatment business, Davanzo says. The deal with Able Energy is kaput, he says. He expects to be evicted from the Colorado properties any day now.
The Illusive Art ofFinancing: Finding Investors With Staying Power
A case can be made for the fact that BEA's Edison plant was thinly capitalized. A third of the funds had been released, but progress had not quite reached a commensurate level of completion. The $21 million price tag didn't leave room for any errors, mechanical mishaps, change orders or contingencies in general, including the $1.5 million that went for code compliance, environmental compliance and fire trenches to satisfy local fire officials. None of those items were anticipated.
A similar situation occurred in Mead, Neb., where an undercapitalized ethanol plant encountered start-up mechanical problems, wasn't able to finance its way out and filed for Chapter 11 protection. It is currently seeking a financial bailout. Critics of the Nebraska venture have claimed that issuance of $50 million in municipal bonds for the untested "closed-loop" technology was folly.
In January 2008, the American Council on Renewable Energy held a Web symposium to address the pitfalls and promises of securing financing for alternative energy projects. All the panelists stressed the importance of matching the right financier to the right project. But one panelist noted that in today's capricious climate "sometimes the only ones making money are the lawyers."
And some failed biodiesel ventures have left attorneys with unpaid legal bills. Kermit Nash, a Minneapolis energy attorney, says funding biodiesel ventures is a different animal than funding an ethanol plant, mostly because in the early years, ethanol developers were paying back senior debt much more quickly than anticipated. Although that may not be the case today, Nash says ethanol enjoys "much more broad-based appeal than biodiesel."
Nash says times have changed for biodiesel producers and banks lending to producers and developers. "Twenty years ago when I was growing up in rural North Dakota, the banker would ask what you were going to put in for crops and that was it," he says. "Now you've got some sophisticated lenders asking you what you're doing and if it's soybeans they'll actually give an opinion."
Many banks are syndicated or in participation with other lenders, Nash says, so the scrutiny is magnified. "If you're lending to a biodiesel [facility], they're looking at the market and saying, 'Gosh, soybeans are at an all-time high, corn's at an all-time high and you're going build a biodiesel facility?'"
Nash says the current situation is a "perfect storm" because there's a credit crunch nationally impacting on soybean crushing facilities and biodiesel facilities and "an advanced ethanol-lending market, more critical."
Farmer co-ops that pooled together to build a destination for their crops have nearly gone the way of the dinosaur. "You're seeing more hedge funds, more venture capital funds and international funds looking at investment opportunities and they've been good in some respects but they view a project a little bit differently than producers," Nash says. "Venture capital money and investment fund money is a bit more expensive. You're starting a biodiesel facility? How much equity do you have? The debt-to-equity ratio is much tighter in the biodiesel market than the ethanol market so a bank is going to look very closely at your investors and they may have an opinion on what makes up your equity sources."
Impatience is also a key factor. Out-of-state investors want to see results-quickly, Nash says. And many projects, like BEA, are being funded on a shoestring budget. "You're seeing quite a few plants that are blowing up-not literally-but the margins are razor thin to upside down," he says. He predicts that some biodiesel plants currently on the drawing board may never materialize until there's a renaissance in the market that will boost demand.
MSD is one of those results-oriented investors. Its Web site stresses that it engages in "opportunistic investments" in strong and sustainable markets. "Our experience allows us to quickly identify desirable investments and move rapidly to close," site information states.
One plant critic, a financier named Bill Kolodziejczyk, says obtaining financing became impossible because BEA lacked a process and instrumentation design, which all the interested parties asked for. Without one, he says investors were left with the impression that the developers were flying by the seat of their pants. Davanzo and other construction principals have no idea who Kolodziejczyk is. They named a dozen engineers, architects and other professionals on the project. "We didn't just sit down with a crayon and decide to build a plant," Davanzo says.
What the Future Holds
Because BEA's case won't go through bankruptcy proceedings, "it leaves a big mess" for the creditors, Davanzo says. The East Coast creditors are aware of the situation and results. The trade debtors that supplied the Colorado plants may individually try to sue, but "they won't even be able to serve their lawsuits because the companies will be off the properties" and defunct, says Davanzo, who has no plans to sue MSD. "I just don't think there's much to gain by that," he says. "It's been a total, total catastrophe for everybody that got involved with this," MPA's Richard says. "We are very much upset by this. It's created a financial hardship for a lot of people." But, at the same time, he marvels at Davanzo's strength under pressure. "I've never seen him lose his cool," he says. Despite his situation, Davanzo still has faith in the biofuels industry. "I've been very flattered to have a lot of job offers and one of them was from Able Energy," Davanzo notes. "I'll probably stick around for something [in the biofuels industry]. I haven't quite figured it out yet." n
Sarah Smith is a Biodiesel Magazine staff writer. Reach her at firstname.lastname@example.org or (701) 663-5002.