Enerkem seeks to join growing list of companies going public

Source: Amanda Peterka, E&E reporter • Posted: Monday, April 16, 2012

Canada-based Enerkem Inc. is seeking to join a growing group of companies attempting to use the public market to commercialize advanced biofuels and biochemicals.

The company was expected to begin to trade publicly this week after a delay from last week but has not yet seen a closing on its initial public offering. Enerkem is hoping for an injection of up to $137.8 million to help build two commercial biofuel facilities in Canada and the United States, according to the company’s filing with the Securities and Exchange Commission.

Over the past year, approximately 10 biofuels and biochemical companies have filed to go public to finance technologies that are going from demonstration-scale to commercial scale. After Enerkem, the most recent filing was Coskata Inc., which is developing a biorefinery in Alabama to produce cellulosic ethanol.

Eight other advanced biofuel and bio-product companies — including KiOR Inc., Solazyme Inc. and Gevo Inc. — have closed deals over the past 18 months.

The move toward the public market comes as advanced biofuel companies are pursuing projects that would turn cellulosic materials and municipal solid waste into energy. Many of the operations are expected to come online in the next few years.

With costs running in the $200 million to $300 million range, companies are looking at a variety of financing structures beyond venture capital.

“The venture capital community is actually quite good to seed technology but actually doesn’t have the resources it takes to scale up our industry,” John Melo, CEO of Amyris Biotechnologies Inc., said at a recent conference in Washington, D.C. Amyris closed its IPO in 2010.

In Enerkem’s case, the company is looking for the public injection of money for three commercial facilities, two in Canada and the other in Pontotoc, Miss.

The company hopes to begin construction on the Mississippi plant at a landfill site by the end of the year. When completed, it will produce 10 million gallons of biofuel a year.

Enerkem plans to convert municipal solid waste into ethanol using a thermochemical method that produces an intermediary product known as syngas. The technology is being used at a pilot facility in Canada.

“We believe that our waste-based biofuels provide one of the most advanced solutions to the growing world demand for renewable sources of energy, while also addressing the challenges associated with waste disposal and greenhouse gas, or GHG, emissions,” Enerkem said in its most recent SEC filing on April 2.

Enerkem plans to sell 7.25 million shares at $17 to $19 apiece in its initial public offering, while giving its underwriters the option to purchase an additional million shares. The deal is being underwritten by Goldman Sachs & Co., Credit Suisse and BMO Capital Markets.

After deducting expenses and underwriting discounts, Enerkem expects net revenue from the deal to be approximately $116.8 million.

The company, though, comes with substantial risks.

“We have incurred substantial net losses since our inception,” Enerkem notes in its SEC filing. “We expect these losses and negative cash flows from operations to continue.”

Enerkem racked up losses of $3.7 million (Canadian) in 2009, $11.9 million in 2010 and $26.2 million in 2011. As of Dec. 31, 2011, it had accumulated a deficit of $51.7 million.

Other risks for biofuels companies come in scaling up technology, securing feedstock and off-take agreements, paying capital costs and operating under unstable government policy.

Because of the risk, there haven’t been many investment-grade ratings in the biofuels sector, meaning there is a lack of confidence that biofuel companies will be able to repay debt.

“Biofuels is riskiest of all renewable energy technologies, in terms of performance risk and completion risk. So a lot of investment-grade financing is being seen in solar, not in advance biofuels,” Greg Remec, an analyst at Fitch Inc., said last week.

John May, managing director at Stern Brothers & Co., said there is interest in using the U.S. Department of Agriculture’s loan guarantee program as a mechanism to reduce risk because it guarantees debt sold into the bond market. Enerkem in January received a conditional commitment for an $80 million USDA loan guarantee.

But government funding will likely be greatly decreased in the next farm bill currently being written by Congress.

Despite the risks, several biofuels companies have managed to secure what they call “strategic partnerships” with large firms. Enerkem counts Waste Management of Canada Corp. and Valero Energy Corp. among its shareholders.

Those private relationships can pay off. In a recent round of private funding, Fulcrum Bioenergy raised $76 million from investors including Waste Management and U.S. Renewables Group. Just last week, Sapphire Energy Inc. announced it had secured $144 million in private investment for a planned algae-to-energy demonstration plant in New Mexico. Monsanto Co. was among the investors (Greenwire, April 2).

To date, Enerkem has generated only “limited revenue” by relying on private equity, government financial assistance, investment tax credits, convertible loans and debt, according to the company’s SEC filing.

For renewable energy companies, the IPO market may not be the panacea to funding woes. BrightSource Energy Inc., a solar company that had planned to go public this week, withdrew its registration with the SEC yesterday, citing adverse market conditions.

At the conference last week in Washington, Stern’s May expressed some skepticism in the IPO market.

“My question about the IPO market as an investment banker is, is it really there? Are we approaching it as developers too early?” he said. “Should we be doing project financing and getting projects built and starting to prove up the technology and develop some cash flow before we go to the IPO market? Or is it the reverse?”