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Death Valley Days: The Biofuels Financing Saga

| June 28, 2012

As bio-based companies race across the Valley of Death, in the dash for scale, who’s getting financing now, and how?

The path to financing success in bio-based project development used to be a little less complicated.

Raise seed money from friends and family.  Series A and B with your friendly local VC, to prove the concept and build a pilot. Bring in a strategic for the Series C and D and the demo plant, then over to NASDAQ for plant one at commercial scale.

These days, financing comes with plot twists and a cast of characters that Charles Dickens would have been proud of, as “Great Expectations” have given way to a plaintive “more please, Sir?” right out of Oliver Twist, or a “bioenergy is a humbug!” right out of A Christmas Carol.

Yet we’ve seen a number of creative financing efforts getting traction. From the story of Myriant’s unrated bonds, to Gevo leaping into the secondary share offering market. Over in California, Pacific Ethanol is working on a new issue of shares, notes and warrants; yesterday, the DOE announced its Phase II SBIR grants; meanwhile, the USDA is beginning to unveil its strategy of integrated public-private supports.Let’s take a look.

The Gevo financing gambit

In Colorado, Gevo announced this week that it intends raise up to $100 million through a secondary offering of common stock and convertible senior notes, due 2022.

Gevo said that it will use the net proceeds from the offerings to repay a portion of its outstanding long- term debt obligations, to fund the cash consideration payable to complete the retrofit of its Luverne, Minn. plant, and to partially fund the Redfield Energy retrofit. To the extent that the net proceeds are not used for these purposes, the Company intends to use them to fund working capital and for other general corporate purposes.

The move was expected – as the company had signaled earlier this year that it would seek to raise up to $100 million to cover the completion costs at its Redfield project site.

In connection with the offerings, UBS Securities and Piper Jaffray & Co. are acting as joint book- running managers. Robert W. Baird is serving as co-manager for the common stock offering.

Over at Pacific Ethanol

Meanwhile, Pacific Ethanol announced that it intends to offer units consisting of shares of common stock and warrants in an underwritten public offering. The company also expects to grant the underwriter a 30-day option to purchase additional shares of common stock to cover over-allotments, if any. Lazard Capital Markets is acting as the sole book-running manager for the offering.

The company did not cite a specific financing goal, but did describe a hypothetical sale of 24 million shares in the prospectus, and also disclosed that it had signed an agreement to increase its interest in its New PE Holdco subsidiary for $20.0 million, payable at least $10.0 million in cash and the balance in principal amount of Senior Unsecured Notes, or Notes.

The $10 million in cash required for the deal is broadly consistent with the sale of some 24 million shares, given the company’s current share price of $0.53.

Over at the DOE

Aerodyne Research and Lygos were among the winners in the DOD’s Phase II Small Business research awards.

Aerodyne, based in Massachusetts, was a winner for its Biomass to Hydrocarbons by Catalytic Fast Pyrolysis project. “This work will develop technologies that target direct conversion of inedible, waste components of biomass into chemicals that can be used as additives or replacements to gasoline or to synthesize plastics,” the company said in describing the project.

Lygos, based in California, was a winner for its Microbial production of dicarboxylic acids project. “This project will develop renewable routes to produce commodity and specialty chemicals currently made from petroleum. Lygos’ processes can be applied domestically to convert waste agricultural material into chemicals that are predominantly manufactured abroad today,” the company said in a project outline.

Over at GE

In Ohio, in a project cooperation with USDA Rural Development, the Ohio Aerospace Institute, air carriers and producer groups, GE Aviation confirmed that it expects to purchase up to 5 million gallons of renewable-jet fuel beginning in 2015in support of production engine testing at GE Aviation’s sprawling Cincinnati-area facilities.

In a statement on the collaboration, Agriculture Secretary Tom Vilsack today highlighted the efforts to develop a Midwest-regional strategy for renewable-jet fuel. “We have an incredible opportunity to create thousands of new jobs and drive economic development in rural communities across America by developing innovative ways to use agricultural products to help reduce our reliance on foreign oil,” said Vilsack.

USDA recently awarded a Value Added Producer Grant to the Ohio Soybean Council to help initiate a pilot project through Ohio State University’s Bioproducts Innovation Center to refine bio-jet fuel from soybean oil produced by farmer-owners of Ohio’s Mercer Landmark cooperative in western Ohio.

In addition, USDA’s Farm Service Agency also has a groundbreaking energy crop production initiative underway in northeastern Ohio and northwestern Pennsylvania through the agency’s Biomass Crop Assistance Program (BCAP). About 115 contracts are signed to grow nearly 3,700 acres of the energy crop Miscanthus, a perennial grass that grows on previously underutilized lands in the area.

The Bottom Line

Death Valley days don’t have to end with bleached skulls by the side of the road. Sure, when crossing, hardiness and innovation count for a lot – it was ever thus.

But, slowly, surely, projects are starting to get across, to the sunny uplands on the other side.

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