One company’s financial woes send shock waves throughout the industry

Source: Amanda Peterka, E&E reporter • Posted: Monday, March 24, 2014

The push to build a domestic cellulosic biofuel industry endured a new setback this week as one of the industry’s former success stories announced it was on the brink of bankruptcy.
KiOR Inc.’s bleak outlook comes as the industry is hoping 2014 will finally be the breakout year for biofuels made from nonfood feedstocks. The 2007 renewable fuel standard mandated increasing levels of cellulosic biofuel, and several companies are completing construction on their first plants.Experts this week said KiOR highlights the difficulties with building up a capital-intensive industry from the ground up. KiOR has struggled with balancing the high expectations needed to gain financing with reality on the ground; shareholders sued the company twice last year for not hitting goals.And KiOR is a reminder for the industry that the economic downturn still has ramifications.

“Nobody bargained for the economic downturn in 2008, and that is a very difficult environment to try to do the incubation and technology and first commercial project, whether it’s KiOR or everybody else,” said Mark Riedy, counsel at Kilpatrick Townsend & Stockton LLP.

Cellulosic biofuels are made from plant-based materials such as agricultural residues, grasses, trees and municipal solid waste. How the troubles at KiOR will affect the cellulosic industry is still unknown, but experts said they likely give more ammunition to critics. The industry has produced a small fraction of the levels envisioned by the 2007 renewable fuel standard.

“It’s a negative overall impression on the industry,” said Bruce Babcock, an energy and agriculture economist at Iowa State University.

Backed by venture capitalist Vinod Khosla, KiOR launched in 2007. The company developed a proprietary system that uses catalytic pyrolysis, a thermochemical reaction devoid of oxygen, to convert woody biomass into gasoline and diesel. Unlike ethanol, KiOR’s fuel can be dropped in directly into existing fuel infrastructure.

KiOR received attention as one of the first U.S. companies to break into next-generation biofuels. In 2011, the company raised $150 million in an initial public offering and in 2012 completed construction at a $225 million plant in Columbus, Miss. It began producing the nation’s first-ever commercial quantities of cellulosic gasoline and diesel last year.

Only one other company in the country, INEOS Bio, has since begun commercially producing cellulosic biofuel: ethanol from lawn clippings and other types of waste.

KiOR, though, struggled to meet production targets and failed to run the plant consistently in its first year. Plagued by structural design bottlenecks, reliability issues and mechanical problems, the company produced 894,000 gallons of cellulosic gasoline and diesel.

In January, KiOR said it was temporarily idling the plant to make improvements. On Monday, KiOR said in a Securities and Exchange Commission filing that its problems had grown dire: It never received enough funding to make the improvements and was down to its last financing hope, a $25 million boost from Khosla contingent on performance targets (Greenwire, March 18).

Analysts blame KiOR’s troubles on both company errors and broader issues outside its control.

Andrew Soare, a Singapore-based energy analyst at Lux Research, said that from the outset, KiOR set overly ambitious goals. The company, for example, claimed it could produce fuel for $1 a gallon. KiOR got in trouble with shareholders when it consistently failed to meet goals.

“It’s really a catch-22,” Soare said. “You need extremely lofty plans to raise money. But once you raise money, you have to hit those lofty plans. That’s why the venture capital model has not worked in most cases in clean tech.”

Alexandra Zelubowski, a senior research analyst in global refining and products markets at IHS Inc., said that KiOR has a unique approach with the potential of a big reward but that the technology is not ready for prime time. Since the plant is the company’s only source of revenue, idling it to make improvements has been a massive cash burn.

“The company was too aggressive in trying to commercialize its product without doing the necessary R&D,” Zelubowski said. “This is a technology issue.”

Riedy, who advises renewable energy companies on financing, said KiOR’s technology would likely be able to cope if it was able to receive adequate funding. But the company is still being affected by a slowdown in investment stemming from the recession, he said.

KiOR chose the venture capital and initial public offering route to finance its operations — a very different approach compared to the next slate of cellulosic biofuel companies with plants coming online this year.

POET-DSM Advanced Biofuels, DuPont Biofuel Solutions and Abengoa Bioenergy — all large companies with experience in biofuels and agriculture — will likely be better positioned financially. Unlike KiOR, the companies are aiming to produce ethanol that must be blended into petroleum-based fuel. All three are deep-pocketed and can afford to lose money on their first cellulosic plants.

Zelubowski compared the makeup of the cellulosic industry to the electric vehicle industry.

“You have the established players like Chevy, trying to work off a base of core [internal combustion engine] technology that they are comfortable with and expand into advanced technologies. Is Chevy making money on the Volt? Not yet,” she said. “On the other side of the coin are dedicated EV players like Fisker and Tesla. Tesla is profitable, and Fisker is bankrupt.”

KiOR said the funding from Khosla would allow it to operate through August. If it does not find more funding, KiOR would be the second high-profile Khosla-backed biofuels company to go bankrupt. Georgia-based Range Fuels, which had promised to produce cellulosic ethanol, shut its doors in 2011.

Pavel Molchanov, an energy analyst at Raymond James & Associates, said that KiOR could still bounce back but that it won’t be easy.

“The technology platform is still potentially valuable, but the company must provide tangible evidence that the Columbus plant is capable of producing at significant scale,” Molchanov said. “And time is not infinite given the company’s ongoing cash burn.”

A blemish for the entire industry

KiOR’s troubles are enhancing an already negative light on the cellulosic industry as a whole, which opponents in the oil industry have sought to exploit.

“If KiOR fails, then one might ask, what is it going to take for a cellulosic biofuel company to succeed?” said Jay Kesan, a law professor who focuses on biofuels at the University of Illinois.

Salo Zelermyer, a senior counsel at Bracewell & Giuliani and a former senior counsel at the Department of Energy, said KiOR’s troubles reinforce the view expressed by critics of the RFS program that EPA’s annual targets for the industry have been “optimistic at best.”

EPA has consistently overestimated the amount of cellulosic biofuel that will be produced each year. The agency lost a court case over its 2012 target.

“The prospect of another cellulosic company not fulfilling the promise that was initially thought of at the start — I think it’s another indication that the cellulosic market is not certainly filling the expectations of the statutory language of the RFS or that the regulatory bodies have set for it,” Zelermyer said.

EPA, which relied on KiOR’s production in setting last year’s cellulosic target, earlier this year said it would reconsider the target, citing the troubles at KiOR.

In its 2014 renewable fuel standard proposal, EPA projected KiOR would this year produce between zero and 9 million ethanol-equivalent gallons. EPA has yet to finalize its 2014 RFS proposal, and industry analysts said they would be watching to see whether the agency lowers its overall 17-million-gallon cellulosic target on the news at KiOR.

Christopher Grundler, director of EPA’s Office of Transportation and Air Quality, said recently that the agency has tried to be more conservative.

“I’m not happy that the EPA has been wrong every year about this,” Grundler said. “We are looking at what processes we’re using to estimate future cellulosic production. And it’s hard. There’s a considerable amount of uncertainty.”

KiOR highlights the perils of setting a mandate based on projected, rather than actual, volumes of production, said Bob Greco, director of downstream activities at the American Petroleum Institute. His group has complained that oil companies have previously paid penalties for not using cellulosic fuels that do not yet exist.

“I think it’s one company, clearly it’s one company, but it’s symptomatic with the problem we’re facing with how EPA sets these mandates,” Greco said.

Brooke Coleman, executive director of the Advanced Ethanol Council, said he believed the oil industry would go “out of its way” to make KiOR a symbol of the cellulosic biofuel industry.

But Coleman, who represents DuPont, POET and Abengoa, said KiOR was “no more relevant” to other biofuel companies than the BP PLC oil spill was to other oil companies.

His group is more worried about EPA’s proposal for 2014, which represents the first overall rollback of the renewable fuel standard (E&ENews PM, Nov. 15, 2013). The proposal has slowed investment in advanced biofuel companies.

“What EPA is doing is a much bigger risk from the perspective of advanced biofuels than what is going on with KiOR,” Coleman said.