“O

nly with the informed participation of the global financial community can this dream be realized."
   So wrote the U.S. Renewable Fuels Association in its 2006 report "From Niche to Nation." As the number of ethanol projects builds, and as the breadth of state and federal assistance for such projects grows, alternative fuel projects – like their biotech and nanotech brethren – are beginning to see interest from financiers beyond the venture capital and seed financing community. Investment funds and banks are taking a keen interest and sizable stake in the industry, which has seen U.S. ethanol production triple in the past five years to approximately 6.5 billion gallons a year. As of the end of November 2006, there were 107 ethanol plants operating in the U.S., with 49 of them owned by farmers themselves. Fifty more plants are under construction. /
   Some say that capacity increase is out of control, given the limited network of ethanol and flex- fuel distribution to consumers in the U.S. A modest renewable fuels standard capacity goal has been set (7.5 billion gallons by 2012), but judging from industry sector participants, there's every chance that mandated standard will increase substantially. With that increase will come increased participation by investors. /
   The terms and shape of that participation were the subject of the Ethanol Americas Finance & Investment conference in early December in New York, sponsored by Project Finance and Trade Finance magazines. /
   The limits on financing may be determined by limits on feedstock. Corn's contribution to total ethanol production is expected to level out at around the 19 billion gallon mark. Cellulosic ethanol (derived from wood chips, stalks and switchgrass) is something the Bush Biofuels Initiative wants to see made practical and competitive by 2012, with the goal of replacing 30 percent of gasoline consumption with biofuels by 2030. Cellulosic biomass in the U.S. approaches 1 billion tons per year. Part of the move toward cellulose is full federal funding of biorefinery demonstration projects, pending fiscal year 2007 appropriations. /
   In the meantime, the Energy Policy Act of 2005 provides for such technology commercialization tools as loan guarantees (up to 80 percent of project costs), reverse auctions (an incentive for production of the first 1 billion gallons of cellulosic ethanol) and the extension of the 51 cents- per- gallon blender tax credit through 2010. /
   But that's just three years away, and biodiesel credits expire even sooner, in 2008. Those sunsets are part of the risk that financiers must assess. Daniel Welt, an associate with the utilities, energy and project finance ratings team at Standard & Poor's, identified those sunsets among the credit risks for producers. Others include a lack of correlation between ethanol output price and feedstock prices; few barriers to entry; competitive market exposure (with bigger players like Cargill and ADM entering the market); and the likelihood of construction delays and longer lead times, in addition to higher project costs. Among the credit risk mitigants, however, is "location in the corn belt." /
   The "gold rush mentality" may also inhibit favorable financings: Venture capital funds, IPOs, equity funds and federal loan guarantees might tend to push projects to commercialization without proper due diligence, leading to "unsuccessful pioneer plant launches." /
   One further factor in the mix is the transport of the ethanol and feedstock. Susan Stockstill, manager of ethanol planning for BNSF, pointed out that if the industry continues on its current growth trend and if rail continues to be the dominant way to move it, there could be demand for as many as 480,000 more railcars by 2010. /

A RATIO WORTH BACKING: Panda Ethanol's 100- million- gallon- per- year ethanol plant in Hereford, Texas, will be fueled in part by 1 billion pounds of cattle manure a year. When in full production by late 2007, the plant's output will replace the equivalent of 2.4 million barrels of imported gasoline per year.

   Welt identified public ethanol producers as "low spec grade." The rating of Dallas- based Panda Ethanol is helped in part by the fact that its largest single shareholder is Panda Energy International Inc., a privately- held company which has built over 9,000 MW of electric generation capacity at a cost of $5 billion. /
   As documented in Site Selection's May 2006 issue, the company has ethanol projects ongoing in Colorado, Kansas and Texas, where in August 2006, it successfully completed debt financing for its 100- million- gallon plant in Hereford. /
   Construction is under way on the 380- acre site, with production expected in the latter part of 2007. Once operational in 2007, the plant's ethanol output will replace the equivalent of 2.4 million barrels of imported gasoline per year. /
   Société Générale Corporate & Investment Banking arranged the project's senior debt financing consisting of a $158.1- million senior secured credit facility which includes a $5 million working capital facility and a letter of credit supporting $50 million in tax- exempt bonds that were issued by the Red River Authority of Texas. /
   Additionally, the project has arranged a $30 million subordinated debt credit facility. Prior to those arrangements, Panda had announced it had closed a a private equity placement of approximately $90 million, in addition to announcing it had entered into a merger agreement with Cirracor, a publicly traded firm. /
   Representing Panda in the financing was New York–based law firm Chadbourne & Parke LLP. According to the firm, Chadbourne is working on deals with two billion gallons of ethanol production in the works. The firm has a 40- percent share of the legal market for complex ethanol financing deals. Todd Alexander, an attorney with the firm, was quoted in Ethanol Producer in November as saying that the top hurdle for ethanol producers seeking project financing is the permitting process. /
   Earlier in 2006, the firm closed a deal for a bank syndicate that marked the biggest ethanol financing deal in U.S. history at $423 million. West LB was lead arranger and agent for a syndicate of 17 senior lenders for the financing for three ethanol plants.