Waste Management invests in Fulcrum, provides $70M debt for first commercial project

November 21, 2011 |

Waste Management steps up with another investment in advanced biofuels from MSW. This time, the IPO-bound Fulcrum Bioenergy.

Decks now cleared for Fulcrum’s first commercial project? Smooth sailing ahead for the IPO?

In Texas, Waste Management announced that it has closed an equity investment in Fulcrum BioEnergy.  In connection with this investment, WM agreed to a secured loan facility that provides for WM’s funding of up to $70 million for Fulcrum’s proposed Sierra BioFuels plant upon the satisfaction of certain conditions.

The parties also entered into a master project development agreement to collaborate on the joint development of Fulcrum projects in various locations throughout the United States using municipal solid waste supplied by subsidiaries of Waste Management under long-term feedstock agreements.

About Fulcrum’s project, again?

Fulcrum recently began construction activities on its Sierra BioFuels plant, located in Storey County, approximately 20 miles east of Reno, Nevada. The plant is expected to begin commercial operations in the second half of 2013 and is designed to process 147,000 tons of waste per year and produce approximately 10 million gallons of ethanol annually.

Coming online in 2013 and located in the Tahoe-Reno Industrial Center approximately 20 miles east of Reno, Nevada, the cost of constructing the 10 million gallon Sierra project is estimated at $180 million, which will be financed through existing equity capital and proceeds from this IPO.

The State of Nevada currently has a demand for ethanol of more than 50 million gallons per year. Today, there are no ethanol producers in the state of Nevada. About 40 miles west of the plant is the California border, gateway to 950 million gallons of ethanol per year and a Low Carbon Fuel Standard that will smile much more mightily on Fulcrum fuel than, say, corn-based ethanol coming in on unit trains from the US Midwest.

The kibosh on further comment – The Fulcrum IPO

Expecteth not a great deal of further deal commentary from Fulcrum or Waste Management, for now, owing to the quiet period associated with Fulcrum’s IPO.

In late September, Fulcrum Bioenergy filed an S-1 registration statement for a proposed $115 million initial public offering.

They intend to use a substantial portion of the IPO proceeds of the offering to fund the construction of its first commercial-scale ethanol production facility, the Sierra BioFuels Plant. At this facility, they expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits.

What the principal actors said

“This investment underpins our commitment to supporting innovative technologies that extract the value in waste and converts it into clean renewable energy,” said Joe Vaillancourt, managing director for Waste Management’s Organic Growth Group. “We look forward to the development of Fulcrum’s commercial-scale plant that is designed to convert over one hundred thousand tons of waste a year into clean, renewable transportation fuel.”

“We’re excited to enter this strategic relationship with Waste Management that enhances our financial resources and provides access to additional feedstock. This allows us to expand our national development program that includes projects with the total capacity to produce more than one billion gallons of fuel annually,” said E. James Macias, president and CEO of Fulcrum BioEnergy. “Waste Management joins a list of strategic partners that share our vision for turning waste into clean, domestic, advanced biofuels.”

“The loan facility provides us with additional value as a back-up source of debt capital in the event we are not able to finalize a federal loan guarantee that we are pursuing,” said Eric N. Pryor, vice president and CFO of Fulcrum BioEnergy. “This investment provides us the financial resources to move forward with the construction of our Sierra BioFuels plant.”

“Fulcrum is deploying an innovative proprietary system to convert post-recycled municipal solid waste into advanced biofuels. Beginning with a thermochemical gasification system that converts the MSW into a syngas, Fulcrum has developed a proprietary alcohol synthesis process that efficiently and economically converts the syngas into advanced biofuels,” added Macias.

The deal background

OK, let’s not think that this Waste Management and Fulcrum tie-up came from way out in left field. Consider it, instead, a Texas Leaguer in shallow left-center. Novel and welcome, but not entirely surprising.

Previously, Waste Management of Nevada had committed in a separate feedstock agreement to supply the Sierra BioFuels plant with municipal solid waste, for starters. There’s been a long conversation between Fulcrum and WM, in other words.

The deal point this week on a “master project development agreement to collaborate on the joint development of Fulcrum projects in various locations throughout the United States using municipal solid waste supplied by subsidiaries of Waste Management under long-term feedstock agreements,” ties in nicely to  a reference in the company’s S-1 IPO filing that  Fulcrum had “identified more than 20 potential site locations across the United States for future development, located in the 19 states in which they have contractually secured zero-cost MSW.”

The InEnTec angle

And, let’s not forget that a few weeks ago, WM announced that it sold its interest in the S4 joint venture it had with InEnTec, and then turned around and took an equity stake in InEnTec itself. Significant, because InEnTec’s plasma gasification system provides the front end for the Fulcrum process. (InEnTec itself originally acquired rights to develop the technology commercially, from R&D efforts at MIT and the Pacific Northwest National Laboratory).

In September, Fulcrum said in its S-1: “In collaboration with a leading global engineering, consulting and construction company, we conducted an extensive review of more than 100 technologies and processes for producing large volumes of advanced biofuel and concluded that thermochemical technologies offered the most commercially viable solution. Based on this review, we developed a two-step process that consists of gasification followed by alcohol synthesis to produce ethanol from MSW. For the gasification step, we worked with InEnTec, to combine two gasification technologies into a single energy-efficient process to produce syngas from MSW.”

The end of the S4 joint venture presumably freed up time and scope for Waste Management managing director Joe Vaillancourt, who had been overseeing the S4 JV, and it is Vaillancourt who is backing this deal out of WM’s in-house venture capital arm, the Organic Growth group.

The DOE loan guarantee angle

One thing that is fascinating to note in this announcement. Despite all the heartache associated with the US government and its federal loan guarantee programs, Fulcrum is still pursuing one. In the Fulcrum announcement,  Fulcrum CFO Eric N. Pryor described the loan facility as “a back-up source of debt capital in the event we are not able to finalize a federal loan guarantee.”

What’s that mean?

First, presumably, that the cost of capital for a US-backed loan is lower than the proposed financing from WM. Apparently, Waste Management has not fallen in love with Fulcrum so far as to offer sweetheart financing terms that rival the rates available for loans backed by Uncle Sam’s loan guarantees.

Second, that the loan guarantees have enough of a “risk” sign around their necks that Fulcrum had needed a backup financing source.

The sneaky Series C amendment

From an amended S-1 registration statement filed last week by Fulcrum: “In November 2011, we amended our Series C preferred stock financing agreements, pursuant to which we will raise an aggregate of approximately $93.0 million from both existing and new investors, including affiliates of USRG Management Company, LLC and Rustic Canyon Partners. The financing also includes an investment by a subsidiary of Waste Management, Inc., or Waste Management, the largest waste management company in the United States. In connection with this equity investment, we will also enter into a credit agreement with a subsidiary Waste Management to provide a loan facility of up to $70 million to be available to fund a portion of the construction costs of Sierra.”

The original Series C from last year, in which Fulcrum announced a $76.0 million capital raise, has been upped to $93.0 million. But here’s the catch: it was funded only in part, an undisclosed remainder is contingent on the IPO. Meanwhile, the IPO is probably dead in the water if it contains a significant dependency on the federal loan guarantee.

For sure, no one wants to get stranded inside Uncle Sam’s “now you see it, now you don’t”, occasionally imploding, traveling Valley of Death show known as the Loan Guarantee program.

A mystery that will await the Fulcrum roadshow…why raise $280M for a $180 million project?

Well, you do the math. The original series C was $76 million, now its $93 million. There’s $70 million in the Waste Management credit facility. $10 million raised from Barrick in February towards the Sierra project. And the IPO itself, $115 million before the fees to all the sharks in the water, maybe $100 million net to the company if all goes well. That’s something like $280+ million, or about $100 million more than the company says it needs for the project.

It’s not as if Fulcrum is a burn-rate behemoth packed with expensive PhDs. At IPO filing time, there were just 17 people on the payroll.

Funds for future expansion? Other? Standed as we are in the IPO quiet period, we’ll be watching the Fulcrum story as it evolves, for more detail.

But for sure, the story took a giant leap forward last week by yanking itself off the DOE loan guarantee requirement, with the WM commitment.

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