Nick Andrews Takes His Hat Off: The making of the historic Southwest Airlines/USA BioEnergy SAF pact

In the world of the bioeconomy, USA BioEnergy CEO Nick Andrews is known as “the guy with the cowboy hat”. He’s almost never seen without it, on the sidelines of ABLC or other major events. He’s the Tim McGraw of the bioeconomy. 

I caught up with Nick as the historic 680 million gallons offtake deal for sustainable aviation fuel was announced (here’s our spot report on that). Historic not just for the large volume, but for the 20-year length of the agreement, something called by the financial industry the “tenor of the loan”. 

As tenors go, this one is right up there with Pavarotti, Domingo and Carreras for power and market impact. That 20-year deal, no one ever had one before, it’s going to change the trajectory of SAF deployment, for sure.

Hats Off

As Nick Andrews does, he spent most of our call taking his hat off to others, mentioning all kinds of players in all kinds of roles that don’t usually get a minute in the spotlight, CEOs being generally more focused on conveying strength and building shareholder value than asking the sidemen to take a bow. It was fitting that, unusually, when we joined on WebEx for our call, Nick wasn’t wearing his hat. Too busy doffing it, I suppose. 

Nick took his hat off to his team at USA BioEnergy. He took the hat off to the team at Southwest Airlines led by Michael AuBuchonand Bob Jordan — he paid them the rare compliment of being excellent listeners, curious to understand what would unlock SAF deployment and to play the necessary role if needed that the offtaker will have to play. Nick took his hat off to Citigroup Global Markets Inc. as lead underwriter and exclusive investment banker — David Livingston, Alison Larr, Steve Carson and a dozen in that team in all — especially crediting them for the critical modeling skills that clarified to all why the 20-year offtake that no one had yet agreed to was so financially superior to the 15-year agreement that had previously been the best that anyone could achieve. Nick took his hat off to co-underwriters Stifel Nicolaus & Co., to credit monetization consultants, the BDO Zone team at Ecostrat who developed the AA rating for Bon Weir Texas feedstock.  It takes a village to build a project, there’s so many hats to doff by the time a project breaks through, you want to own a hatter. 

As many would expect, joining Nick in the call was Mark Riedy who with Patrick McShane and the Kilpatrick Energy Practice Group represent USA BioEnergy in negotiating and drafting project financing agreements, advise tax and corporate structuring, federal governmental affairs, including federal energy, environmental tax policy initiatives. Mark is to many a project as Tonto is to the Lone Ranger, never in the front, but essential to the scene.

The fine art of bioeconomy projects

In the latest film version of the Lone Ranger story, the title role was played by Armie Hammer, and it always makes me rather old to reflect on my encounters in years gone by with Armie’s great grand-father, Armand Hammer.

Quite a few Soviet Communists thought Hammer was an American spy, and  quite a few Americans through he was a Communist stooge, somewhere in the gap between the two was where he worked, and I learned from him the vital quality of large project development, that you have to keep powerful interests just slightly off-balance, never quite sure which way you’ll go — keeping them sure that they need your project to realize their own bold goals, but not so sure of your project that they feel they can get by without offering a painful level of support. That was Hammer’s party trick, I think. The best bioeconomy developers have it. Walt Disney. 

Disney was a master of that fine art, of keeping powerful supporters just a little off-balance. He didn’t do it with deception or sleight-of-hand — actually, the tool is candor. Understanding exactly what you need and conveying your needs with precision, honesty and with a real interest in finding the win-win. It wasn’t inevitable that Disney World would be located in the smallish agricultural town of Orlando; could have been in New Orleans, or Santee, South Carolina. The failure was not weather, or accessibility, it was the inability to get the right structure.

You can see that same quality in the USA BioEnergy deal. Everyone wants the project, everyone wants the SAF. Conveying clearly, transparently — open kimono, as they say — what the project needs and why. That’s what got this 20-year offtake to happen. Once the necessity is clear, all the nice-to-have players fall away, and most of the need-to-haves. What’s left is the I’ll-find-a-way-to-work-with-you’s. Southwest came to the party, as almost everyone did, they listened, stayed, understood and eventually agreed. Not overnight, mind you, this has been more than a year in the making.

But that’s how it happens in the bioeconomy, as in petroleum in days gone by. Candor and clarity are the mothers of invention. There’s a long history that USA BioEnergy is leaning in to.

The deal structure, what’s new about it?

As with great music — and with the recent Bold Actions to Accelerate the Bioeconomy announced by a huge number of companies working as a coalition of the willing to change the pace of deployment — the key to greatness lies in the harmony as much as the melody, and harmonizing the term of offtakes with the term of loans has been a hitherto yearned-for but not achieved industry goal. 

When you model a 20 year loan against a 15 year offtake agreement, on first of kind technology in a market that is expected to be huge but is currently tiny, that screams risk. Extraordinary risks demand extraordinary returns, and that drives up the cost of borrowing, equity, and fuel. No one wins — because of those uncovered years where a lender might have a plant with no customers to buy fuel. It’s a building with the prospect of no tents in the future — but the building industry is not new, housing demand is well-established since the dawn of the Neolithic. Not so, the SAF market.

So, here we have it. Perhaps 12 years from the very first SAF offtake contact, the first where a 20 year loan is covered with a 20 year off-take. 

That’s what’s put USA Bioenergy on the fast-track towards commercial scale for its F/T technology that produces an ultra low-carbon SAF, renewable diesel, and renewable naphtha from sustainably sourced forest thinnings. Once blended with conventional jet fuel, the 680 million gallons SAF in this agreement could produce the equivalent of 2.59 billion gallons of net-zero fuel and avoid 30 million metric tons of CO2 over the agreement term. 

Southwest plans to begin purchasing SAF from USA BioEnergy’s facility near Bon Wier, Texas, as early as 2028. Additionally, as part of the offtake agreement, USA BioEnergy and Southwest have established a long-term strategic relationship offering Southwest the opportunity to purchase up to another projected 180 million gallons of SAF per year from future planned production facilities.

We’l see about that “Southwest may purchase” because it doesn’t have quite the impact of “Southwest will purchase” but could be something that’s well-covered off in the contract details. And we’ll see about the equity and debt when it’s gets finalized. But progress indeed, here.

The USA BioEnergy backstory

USA BioEnergy intends to lead in the energy transition by consecutively developing a series of 12 advanced biorefineries. USA BioEnergy will capture and sequester over 50 million tons of CO2 over the useful life of each advanced biorefinery.

The Bottom Line

Randy Newman wrote the anthemic “You Can Leave Your Hat On” which was heard to advantage via Tom Jones’ version in The Full Monty. Well, Southwest is going the full monty on this one. But, in this case, you can take your hat off.

Reaction from the stakeholders

“Southwest is focused on achieving our goal to replace 10 percent of our total jet fuel consumption with SAF by 2030,” said Michael AuBuchon, Managing Director of Fuel Strategy and Management at Southwest Airlines. “This offtake agreement with USA BioEnergy marks important progress in the development of our SAF portfolio, furthering our environmental sustainability goals with the opportunity to grow our strategic relationship and potentially purchase more SAF in the future.”

“Our agreement with Southwest Airlines is a perfect fit because it aligns Southwest’s goal of reaching net zero carbon emissions by 2050 and USA BioEnergy’s goal of becoming the leading producer of carbon-negative fuel. USA BioEnergy is excited to work with Southwest on this initial project and, potentially, future sites we may add in our pipeline,” said David Prom, Chairman of the Board, Co-Founder of USA BioEnergy.

“USA BioEnergy has been working with Michael AuBuchon and his team to create this strategic SAF offtake agreement. Southwest has an industry-leading balance sheet and investment-grade credit ratings from all three leading credit rating agencies. We could not be prouder of Southwest Airlines and the entire team who worked to make this happen,” said Nick Andrews, CEO, Co-Founder of USA BioEnergy. “With our plan to produce significant quantities of SAF, USA BioEnergy looks forward to the opportunity to help Southwest get closer to its goal of net zero carbon emissions by 2050. We plan to work with Southwest for decades as we add new biorefinery locations and scale our SAF volumes. This offtake agreement is a monumental step for USA BioEnergy in our goal of becoming the world’s leader in advanced biofuels.”