KiOR files $100M IPO – the complete Digest analysis

April 13, 2011 |

Khosla-backed pyrolysis venture heads for the public markets. Is the IPO window still open? Will this one fly? Should it? The Digest looks at the technology, the team, the progress, the economics, the proof, and the prospects.

In New York, KiOR filed its $100 million IPO with Credit Suisse, UBS and Goldman Sachs as underwriters. Kior Inc. plans to trade on the Nasdaq under the symbol KIOR.

Shareholders of the company include entities affiliated with Khosla Ventures, Artis Capital Management, Alberta Investment Management Corp. and Bioecon B.V.

The KiOR background

Last May, we profiled the early-stage pyrolysis venture, which was producing 15 barrels per day of biocrude (229,000 gallons per year) using its fast pyrolysis technology and a proprietary catalyst which produces fuel with 80 percent lower carbon emissions fossil-based crude oil. The company raised a total of $110 million in a Series B funding round, and aimed to license its technology to oil companies and biomass feedstock developers, based on a technology originally pioneered by Bioecon in 2006.

$500M from KiOR, $75M from Mississippi

In August, the Mississippi state legislature approved Governor Haley Barbour’s special session request for a $75 million loan to KiOR for a proposed development of five biofuel plants in Mississippi by the Houston-based pyrolysis group.

The state approved $51 million in new bonds to support a total of $81 million in incentives supporting the project, even as legislators question the viability of a process that has, to date, been proven only at pilot project levels. $30 million was available from a previous state-level authorization.

The total package included $4 million in workforce training, and $2 million to Alcorn State University and Mississippi State University to develop methods to harvest and acquire additional feedstocks, such as corn stover, for biofuels production.

Overall, KiOR committed to invest a total of $500 million of its own funds towards its first three projects, including sites in the northern city of Columbus, in the center of the state in Newton County, and near the city of Bude in the struggling southwestern section of the state.

The Houston-based pyrolysis company committed to constructing five plants in the state. The projects will create 1,000 direct and indirect jobs over a five-year period and will generate $85 million in incremental payroll for the state, according to KiOR. In addition, timber feedstock for the woodchip-based pyrolysis process will be acquired in the state.

The $1B DOE Loan Guarantee (term sheet)

In February, KiOR announced that  it has received a term sheet for a loan guarantee supporting  over $1 billion biofuels project from the U.S. Department of Energy’s Loan Guarantee Program, to support the construction of our first four planned standard commercial production facilities and the centralized hydrotreating facility at an estimated project cost of over $1 billion.

The project would convert wood biomass into drop in biofuels such as gasoline and diesel fuel. KiOR’s project under the DOE loan guarantee program will consist of four biorefineries that will contribute approximately 250 million gallons of cellulosic biofuel to the Renewable Fuel Standard. The first two plants are expected to be in Mississippi, with additional sites planned in Georgia and Texas.  This represents one step in a chain of steps needed to finalize the loan guarantee, and as the press release notes, there is no guarantee of a successful application.

From the S-1: “To receive the full DOE loan guarantee and the underlying loan, we must receive DOE loan guarantee approval, obtain the underlying loan and commence construction for our project by September 30, 2011. To date, we only have received a term sheet from the DOE for a loan guarantee to support the construction of these planned four standard commercial production facilities and the centralized hydrotreating facility at an estimated project cost of over $1 billion. We now are in the due diligence phase of negotiation with the DOE for the loan guarantee. The DOE conducts due diligence on all projects, including a rigorous investigation and analysis of each project’s technical and legal strengths and weaknesses. Each project is reviewed in consultation with independent consultants.

The offtake agreement with Hunt Refining

In March, KiOR signed an offtake agreement with Hunt Refining of Tennessee for biofuels produced at the facility KiOR is developing in Columbus. The company is planning to invest $500 million in three wood chip-to-biofuel plants in Mississippi and the Columbus plant is expected to be online in 2012. The state’s development authority is granting KiOR $75 million based on the deal with Hunt.

The technology

From the S-1: “We have developed a process that converts cellulosic biomass into a renewable crude oil that can be refined in a conventional hydrotreater into light refined products, such as gasoline and diesel blendstocks. Our biomass-to-renewable fuel technology platform combines our proprietary catalyst systems with well-established fluid catalytic cracking, or FCC, processes that have been used in crude oil refineries to produce gasoline for over 60 years. Our BFCC process operates at moderate temperatures and pressures to convert biomass in a matter of seconds into the renewable crude oil that we process using standard refining equipment into our gasoline and diesel blendstocks. As of March 31, 2011, we had 77 pending original patent application families containing over 2,000 pending claims.”

Cost-competitive with petroleum on an unsubsidized basis

“Based on the technological and operational milestones we have achieved to date, we believe that when we are able to commence commercial production at our planned first standard commercial production facility, primarily using Southern Yellow Pine whole tree chips, we will be able to produce gasoline and diesel blendstocks without government subsidies on a cost-competitive basis with petroleum-based blendstocks produced from various crude oil resources on- and offshore worldwide at current pricing.”

The 67 gallon per ton yields at $1.80 per gallon

“Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per-unit unsubsidized production cost below $1.80 per gallon, if produced in a standard commercial production facility with a feedstock processing capacity of 1,500 BDT per day. This unsubsidized production cost equates to less than $550 per metric ton, $0.50 per liter and $1.10 per gallon of ethanol equivalent.

“We have increased our overall process yield of biomass to renewable fuel from approximately 17 gallons per BDT to approximately 67 gallons per BDT. Our research and development efforts are focused on increasing this yield to approximately 92 gallons per BDT.

The $72.30 per ton woodchip costs

“This per-unit cost assumes a price of $72.30 per BDT for Southern Yellow Pine clean chip mill chips and anticipated operating expenses at the increased scale and excludes cost of financing and facility depreciation. Over time, we expect to improve our overall process yield by enhancing our technology and to significantly reduce our feedstock costs by using lower grade chips, logging residues, branches and bark and lower our operating expenses through various initiatives.”

The Digest’s Take

The IPO window is open, KiOR needs to raise a lot of money, and as the company notes in the S-!, “the financings contemplated in May 2010 had not occurred.”  So, not entirely surprising that the company has come to the public markets.

Strong points? A compelling set of economics – cost-competitive on an unsubsidized basis, well that’s Nirvana on every level. Pyrolysis is a hot technology. The management team has a slew of experience. The offtake agreement with Hunt is impressive. There sure is a lot of Southern Yellow Pine in the Southeastern US.

Weak points? We’re seen some shifty-shifty in the strategy as the company has evolved from (well, first, from the troubled BioeCON venture) a licensing strategy to “build, own, and operate”. But doubtless someone is going to call the Digest from KiOR’s PR firm and suggest that the early reports of a licensing strategy were erroneous and premature. The company had originally hoped to avoid building a hydrotreating plant – that has not worked out, so there’s some impact there on the return on capital.

The X-Factor? We’re not entirely sure about the long-term pricing for woodchips. We have heard reports that some European buyers are paying up to $110 per ton for US wood, driven by EU renewable power mandates and the need to feed something, anything renewable to the boilers that run the power turbines. The emergence of more mandates – such as a US Renewable Power Standard – would challenge the economics here as soon as companies obligated to use renewables go through the challenges of finding affordable wind and solar options in some markets that have poor wind curves and insolation.

The Finance Factor. The forward outlook for the company is going to be predicated on its ability to finance expansion, and we note that the 500 ton per day facility costs $190 million, which suggests even higher costs for the four additional 1500 ton per day facilities. It wouldn’t be out of whack to suggest a cost in the $300 million range for those larger projects – no matter what, the company is going to have to find more than $1B to fund out even the first five plants in its rota, far more than the $500 million it mentioned when it landed a $75 million loan from the state of Mississippi last year.

The Proof at Scale Factor. None of the companies hitting the public markets are proven at scale, so KiOR’s lack of same is not too troubling – presumably, the market will price in the risk. Having said that, they’ve amassed a ton of hours in the Houston, Texas-based pilot plant.

The Capital Cost per gallon Factor. While the opex is compellingly low, the capex is high. $190 million for a 12 million gallon facility – that’s $15 per installed gallon. Hmmm.

The Bottom Line:
Winner? Loser? We think winner. Pyrolysis’ time has come. A long-term feedstock agreement, that DOE loan guarantee, and proof at scale are all, really, this company needs, to become another of the “renewables monsters” with some significant first-mover advantages in terms of tying down support from the likes of DOE and Mississippi. Of all of these, its (ironically) the government support in the form of a DOE loan guarantee that is likely the most risky at this point. It’s a speculative investment, of course, but if KiOR can manage the financing and avoid getting into an auction situation with feedstock, it should go far.

More on KiOR

Drop-in biofuels. “Our technology produces high-quality hydrocarbon blendstocks that we believe will “drop in” to the existing transportation fuels infrastructure for use in vehicles on the road today.”

80 percent greenhouse gas emission reductions. “According to a February 2011 analysis performed by TIAX LLC, a leading technology processing and commercialization company, gasoline and diesel blendstocks produced from our proprietary biomass fluid catalytic cracking, or BFCC, process in our planned commercial production facilities are projected to reduce direct lifecycle greenhouse gas emissions by over 80% compared to the fuels they displace.”

The Texas Pilot. “We constructed a pilot unit outside of Houston, Texas to continue developing and validating our technology. This pilot unit has amassed over 9,000 hours of operation and evaluated more than 250 catalyst systems. We subsequently commenced operation of a larger demonstration unit also outside of Houston that is designed to process 10 BDT per day and represents a 400-times scale-up from our pilot unit. Our demonstration unit has amassed over 3,000 hours of operation and produced over 32,000 gallons of our renewable crude oil.”

First commercial facility – 500 tons per day. “We commenced construction of our initial-scale commercial production facility in Columbus, Mississippi in the first quarter of 2011, which we are financing with a combination of existing cash on hand, equity commitments from our existing investors and a $75 million interest-free loan from the Mississippi Development Authority. We estimate that the total cost to construct this facility, including a hydrotreater, and place it into service will be approximately $190 million, with an estimated 15% to 20% of these costs attributable to the hydrotreater.”

“We engaged KBR, Inc., a global engineering, construction and services company, to conduct the engineering, design and construction of this initial-scale commercial production facility. We are designing this facility to process 500 BDT per day, representing an additional 50-times scale-up from our demonstration unit.

Four more facilities – 1500 tons per day. “We also plan to construct four standard commercial production facilities in Mississippi, Texas and Georgia over two stages beginning in the second half of 2011. Each of these standard commercial production facilities will be designed to process 1,500 BDT per day, representing a three-times scale-up from our initial-scale commercial production facility, but will use a separate centralized hydrotreater co-located at the first standard commercial production facility to process our renewable crude oil into gasoline and diesel blendstocks.”

Feedstock – Southern Yellow Pine…for now “Based on data from the USDA Forest Service from 2005 to 2008, there was an estimated 18% surplus of softwood in the South, over 95% of which is Southern Yellow Pine. This surplus represents an excess supply of nearly 60,000 BDT per day, which we believe far exceeds what is necessary to execute our initial commercialization plan. Each of our planned standard commercial production facilities is expected to use 1,500 BDT per day, or approximately 500,000 BDT per year.”

“Over time, we also plan to explore co-feeding other types of renewable cellulosic biomass, including other woody biomass, such as poplar and eucalyptus tree chips, agricultural residues, such as sugarcane bagasse, and energy crops, such as sorghum, switchgrass and miscanthus. Ideal crops vary by region and climate. For example, certain energy crops like sorghum are more appropriate in drier regions with low rainfall, while others like miscanthus are higher yielding but also require more rain and may be sensitive to cold; however, both offer significant opportunities for per-acre yield improvements.

“Since 1976, the 2010 inflation-adjusted stumpage price of Southern pulpwood has hovered around $20 per dry ton and has ranged between $14 to $33 per dry ton. Historical data shows that spikes are more likely to occur when harvests exceed growth but tend to normalize within a few years. The price of delivered woodchips has been much less volatile than other food-based biofuel feedstock or product markets. For example, from 1992 to 2010 the maximum 12-month price increase was 15% for pine woodchips versus 67% for corn and 139% for West Texas Intermediate crude according to average quarterly data from Timber Mart-South, the Chicago Board of Trade and the EIA.

International expansion opportunities. “Over time, we expect to investigate a variety of feedstock opportunities in other parts of the United States and in Canada, Brazil and other international locations.

“Over time, we intend to expand internationally through direct operations and joint venture structures. We are actively exploring opportunities to expand internationally in countries with abundant, sustainable, non-food feedstocks available at costs lower than or competitive with domestic feedstocks. In March 2011, we hired a President of International with executive experience in international operations to lead our global expansion efforts.

Strategy – Build, Own, Operate. “We have adopted a build, own and operate strategy.  We plan to build, own and operate our commercial production facilities in the United States. We began constructing our 500 BDT per day initial-scale commercial production facility in Columbus, Mississippi in the first quarter of 2011, with production expected to begin in the second half of 2012. We intend to begin constructing our planned 1,500 BDT per day standard commercial production facilities beginning in the second half of 2011.”

“Copy exact” expansion strategy. “We plan to deploy BFCC facilities using “copy exact” principles.  We plan to employ a modular design that can be replicated for our subsequent standard commercial production facilities. Utilizing learning from our initial commercial production facilities, we plan to deploy a “copy exact” strategy of standardized modular 1,500 BDT per day designs to reduce our capital costs, implement best practices, reduce operating costs, increase personnel flexibility and facilitate fast deployment of new production facilities. We also expect to develop a remote electronic facilities management control center in Houston, Texas. •

Khosla at the Wheel. “Khosla Ventures controls a majority of our outstanding common stock and will continue to control a majority of our common stock upon completion of this offering. As a result, we are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for, and our Board of Directors may and intends to rely upon, exemptions from several corporate governance requirements, including requirements that  a majority of the Board of Directors consist of independent directors…Additionally, Khosla Ventures will be able to have its nominees represented on our compensation committee and our corporate governance and nominating committee.”

$0.18 per share in 2009. “Factors that the Board considered in valuing our common stock at $0.18 per share on September 30, 2009, were as follows: we issued Series A convertible preferred stock and Series A-1 convertible preferred stock generating an aggregate of $14.4 million in net proceeds at $0.3625 per share and $0.9725 per share, respectively; we successfully achieved “proof of concept” of our biomass-to-renewable fuel technology platform and planned to construct a demonstration facility; our business plan was predicated on manufacturing and selling our intermediate renewable oil product directly into the refinery market, thereby avoiding the capital intensity of installing hydrotreating equipment at our BFCC plants; our capital requirements were predicated on a 500 BDT per day facility cost without a hydrotreating unit.”
$3.96 per share in May 2010

“Based on intervening developments since the September 30, 2009 valuation, on May 31, 2010, the Board increased the valuation of our common stock from $0.18 per share to $3.96 per share based on the following developments: we completed construction of our demonstration unit and commenced operations at that unit. We issued Series B convertible preferred stock in two separate, arms’ length transactions during April 2010 generating an aggregate $110 million in net proceeds at an equivalent of $9.804 per share; we arranged a subsequent $45 million Series B financing round expected to close in July 2010; we internally assessed our probability of an initial public offering at 60% (up from 25% previously) and of a residual dissolution or other non-favorable terminal event at 40% (down from 70% previously); a probable $55 million Series C financing round in the first quarter of 2011.”

Changes in the plan, year-end 2010. “In granting options at year-end 2010, our Board determined that no material intervening developments had occurred since the May 31, 2010 valuation that were viewed as likely to appreciably impact the prior valuation. In reaching its conclusion, the Board considered the following:
the financings contemplated in May 2010 had not occurred…our business plan evolved to contemplate substantial additional capital costs for the construction of hydrotreating facilities decreasing the future cashflows expected to be generated from each project relative to our prior plan and creating additional financing risk…we had yet to attain any of the following milestones …entering into one or more offtake agreements for our product…submission of our EPA fuel registration petition.

“In connection with the construction of the Company’s initial-scale commercial production facility in Columbus, Mississippi, in January 2011 the Company entered into a 15-year lease agreement for a four million cubic foot per day hydrogen plant. The hydrogen plant will be located at the Company’s facility in Columbus, Mississippi. Monthly lease payments of $173,000 per month commence upon installation and start-up of the facility.

$66.3 million invested to date. “As of December 31, 2010, we had an accumulated deficit of approximately $66.3 million. We have never generated any revenue. We expect to continue to incur operating losses through at least 2013 as we continue into the commercialization stage of our business. Commercialization of our technology will require significant capital expenditures. Funding construction and startup of our initial-scale commercial production facility under construction in Columbus, Mississippi. We estimate that this initial-scale commercial production facility, including a hydrotreater, will cost approximately $190 million to complete, of which we had paid $14.6 million as of December 31, 2010.

“Funding the construction and startup of our planned four standard commercial production facilities and centralized hydrotreating facility at an estimated project cost of over $1 billion. We plan to begin construction of the first of these facilities in the second half of 2011.

Cash in hand sufficient for next 12 months. “We believe that our current cash and cash equivalents, equity commitments from our existing investors, borrowings under our $75 million interest-free loan from the Mississippi Development Authority and the net proceeds from this offering will be sufficient to fund our current operations for the next 12 months and to fund completion of our initial-scale commercial production facility in Columbus, Mississippi. We will need substantial additional capital resources to complete the subsequent four standard commercial production facilities we plan to build in Georgia, Mississippi and Texas. If we are unable to obtain sufficient additional financing, we will have to delay, scale back or eliminate construction plans for some or all of these four facilities, any of which could harm our business, financial condition and results of operations.”

The KiOR Management team

“Fred Cannon is our President and Chief Executive Officer and a member of our Board of Directors. Mr. Cannon joined KiOR as President and Chief Operating Officer and as a director in June 2008 and was elected Chief Executive Officer in July 2010. Prior to KiOR, Mr. Cannon was president of AkzoNobel Catalysts LLC from 1997 until the divestment of the business in August 2004. In his role, Mr. Cannon had full profit and loss responsibilities for the company’s Americas business and managed various joint ventures around the world. In August 2004, AkzoNobel’s refinery catalyst business was sold to Albemarle Corporation. Mr. Cannon served in several executive roles in transitioning the business until June 2008 when he joined KiOR.

John H. Karnes has been our Chief Financial Officer since joining us in February 2011. From February 2010 until February 2011, Mr. Karnes was Chief Financial Officer of Highland Oil & Gas, LLC. From September 2006 to November 2009, he served as Senior Vice President, Chief Financial Officer and Treasurer of Mariner Energy, Inc.

Joseph S. Cappello has been our President of International since joining us in March 2011. Prior to joining KiOR, Mr. Cappello spent nearly 15 years with Praxair, one of the largest industrial gases companies worldwide. From October 2008 to March 2011, Mr. Cappello was President of Praxair Asia, responsible for the growth and profitability of Praxair’s businesses in China, India, South Korea and Thailand as well as several joint ventures, including Singapore.”

“John Kasbaum has been our Senior Vice President of Commercial since joining us in June 2010. Previously, Mr. Kasbaum served as Division Vice President of the Fluid Catalytic Cracking (FCC) division of Albemarle Corporation, a leader in refining catalysts and specialty chemicals manufacturing, from September 2009 to May 2010. He also served on the Board of Directors for Albemarle’s joint venture with PetroBras, the Brazilian energy company, for the manufacture, sales and marketing of FCC catalysts in South America.”

“Christopher A. Artzer has been our Vice President, General Counsel and Secretary since joining us in March 2011. From December 2004 to March 2011, Mr. Artzer served as Vice President, General Counsel & Secretary of TPC Group, Inc. Prior to joining TPC Group in December 2004, Mr. Artzer was counsel at the law firm of Akin Gump Strauss Hauer & Feld LLP in Houston, Texas.”

More on Pyrolysis and the Pyromaniax

Pyromaniax: Mississippi State’s SERC group, among 18 others, developing advanced biofuels from pyrolysis

Another Wonder Down Under: Ignite Energy develops low-cost biomass conversion using supercritical water

New breakthrough in pyrolysis sector promises to speed commercialization

Transformative Technologies 2010 nominees: Pyrolysis

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