A Historical Perspective
June 6, 2008

2005-06 – Promising outlook for biodiesel captured investor’s attention

As excitement over the emerging potential of alternative fuels gained nationwide momentum in 2005, a group of Wisconsin investors assembled in hopes of developing a locally-owned and operated biodiesel plant.

The plant would take advantage of southern Wisconsin’s rapidly increasing soybean production and farmers’ need for a competitive processing facility in the region. The concept for the project quickly drew support from the agricultural community and North Prairie Productions was formed to explore the possibilities. By February 2006, the enterprise embarked on a fundraising effort with the goal of obtaining $1.2 million to $2 million in seed capital.

Organizers successfully completed the seed equity drive during May and in mid-June, members of the board of directors were chosen as work began on the details of a limited public offering. In July, a Rock County site proposed by Landmark Services Cooperative was selected as an ideal location, thanks in part to efforts to attract a planned soybean crush plant and the fact that the surrounding counties accounted for more than 40 percent of the state’s soybean production.

As efforts to define the scope of the site work and the ideal configuration for the plant progressed, organizers determined they would need to secure $25 million to $31 million worth of equity financing. To enhance the economics of the plant, the directors voted to explore the possibility of obtaining tax incremental finance support from the city of Evansville. By late August, Boldt Construction provided a construction cost estimate of $48.9 million and in September 2006, the general equity fundraising drive began amid a show of public support for the project.

Investors quickly seized upon the opportunity to take a stake in the future of alternative energy in the state and committed $8 million in capital during the first month alone. The limited public offering allowed investors to buy into the project for a minimum of $10,000 in Class B units, or $25,000 in Class A units—levels that invited broad participation.

Apart from the emotional appeal of supporting the 45 million gallon-per-year project, investors were attracted by the compelling financial portrayal of the plant’s operations and the growing worldwide market for biodiesel fuel.

North Prairie organizers based their financial calculations on historically conservative prices estimated at 24 cents per pound for soybean oil—the raw ingredient for biodiesel—and $2.60 per gallon for the resulting diesel fuel. Additional analyses depicted profitable scenarios with soybean oil prices topping 35 cents per pound accompanied by a proportionate rise in the wholesale prices for diesel fuel.

2007 – Nationwide interest in biodiesel fueled many start-up efforts

In other states, too, developers were working to achieve the promise of biodiesel with plans for more than 90 plants at various stages of development in 2006, according to the National Biodiesel Board. From Alabama to Wyoming, agricultural producers, energy industry experts and other groups were racing to secure financing and begin production.

A series of promising developments followed in early 2007, with an agreement from Landmark to provide $1 million of additional equity. With this commitment and additional capital from individual investors, equity totaled $24 million by February and the directors moved to negotiate a formal target price and construction contract with Boldt in March. A final engineering and construction estimate in April pegged total costs at $52 million and the equity drive closed after securing $26.2 million.

Directors focus on finances, gain assurances for financing

Mindful of the need to manage the project efficiently, in May 2007 efforts intensified to analyze the scope of the project and ensure it would fall within the existing financial framework. Board members approved using $1 million of equity to complete work on a revised target price and proceed with the debt financing effort.

Boldt’s work toward a new target construction price with reduced design parameters produced a new cost estimate of $46 million in July—down $6 million from the April projection.

A subsequent letter of commitment for financing from Marshall Financial Group addressed many of the board’s concerns and provided a strong sense of reassurance to proceed with construction given the lender’s experience with alternative fuels projects and assurances they would be able to fund the project.

Careful deliberations lead to positive outlook for construction

By late July it was evident to board members that further delays would only escalate costs. At this point, the board worked to address all issues that could further delay or derail the project. In consultation with the construction managers, the board agreed that the commitment letter from Marshall and their 100 percent success rate of participating in similar loans made it prudent to commence work necessary to get the plant up and enclosed before the onset of colder weather.

Construction continued into September when Marshall Financial Group unexpectedly informed the board they were withdrawing their term sheet for a working capital line of credit while making further assurances they would fund construction and term financing. The board addressed this new issue by securing an agreement with M&I Bank to provide $8 million in working capital. However, as board members were successfully working through these financial negotiations and continuing with construction, a rapid run-up in commodity prices created a rising sense of concern about the potential operating margins upon completion of the plant.

Growing volatility in feedstock prices changes financial equation

Driven in part by speculation related to soaring crude prices and a weakening dollar, the price per pound for soybean oil began an unprecedented rise in early fall, resulting in prices that were nearly double their historic range. By October 2007, soybean oil contracts for May 2008 began trading in the 44 cent-per-pound range on the Chicago Board of Trade. Yet the wholesale price of biodiesel had increased much less.

To help ascertain the likelihood of a price correction that might improve the outlook, project leaders traveled to visit the companies’ risk management consultants, First Capital in Galena, Ill., and commodity marketers, Eco Energy in Nashville for additional commodity forecast data. Both groups provided reassurance that in their opinions, the recent price run-up was a temporary spike and they expressed expectations of a near term return to more historical pricing. Yet even as this research effort moved forward, board members received notification that Marshall Financial Group had failed to achieve full participation of the financing package and would withdraw its loan commitment.

Reacting quickly to this turn of events, board members moved to protect investor equity and implement a strategic plan that included initiating communications with key stakeholders ranging from investors and government officials to members of the news media. Consistent with the goal of preserving the remaining capital, North Prairie leaders opted to suspend construction in a closely coordinated effort with contractors to enable a potential restart at a later date.

2008 – Intense efforts to identify alternatives produced few attractive options

Throughout the fall and winter months, board members and project leaders aggressively pursued alternative financing and the possibility of using substitute feedstocks in the refining process while preserving member equity. Discussions also followed about the potential to use batch processing or convert to a smaller plant. Remaining staff salaries were reduced in February 2008 and the possibility of combining with another biodiesel or ethanol producer also received consideration, although no obvious match emerged.

By May 2008, with soybean oil prices trading in the 64 cent-per-pound range, directors recognized that few viable options existed and the board voted to terminate the project. Under the last financial scenario reviewed by the board, it was estimated a minimum of an additional $30 million of new equity would be required to restart the project. The additional equity would be required to cover escalation in construction costs, increased working capital requirements driven by rising commodity prices and a significant decrease in the percentage of the project that could be expected to be financed with long term debt. The board also considered that even if an additional $30 million of new equity could be raised, it would dilute the value of existing investor equity by more than 50 percent.

Thanks to the prudent decision to suspend construction due to rapidly changing conditions, the North Prairie board anticipated in May that it would be possible to return 35 percent of the original equity to investors in the near term with an additional disbursement following liquidation of the remaining assets and settlement of all liabilities The board intends to liquidate the remaining assets in a prudent and timely manner. Once the final liquidation is complete, a follow-up check will be mailed along with a complete accounting of the liquidation.

As specified in the land purchase agreement, Landmark retained ownership of the land on which the biodiesel plant was started because debt financing was not completed. Landmark had agreed to allow the start of construction without closing the land sale as an accommodation to North Prairie to decrease the anticipated construction schedule.

In consultation with city of Evansville officials and the North Prairie board of directors, Landmark has agreed to be responsible for paying special assessments levied on the property for the costs associated with the tax incremental finance district established for the site and reimburse the city for other costs in exchange for the value of improvements North Prairie contributed to the site that may have future use or value.

Despite the deteriorating market conditions and many unexpected developments, the fiscally responsible manner in which the project was managed enabled North Prairie’s board to project the return of approximately 50 percent of investor equity. Many of the other biodiesel projects underway at the time the North Prairie project commenced are not expected to fare as well. In a number of cases, these other projects were halted only after investor equity was expended and it is expected bank foreclosures and repossessions will leave investors with little or nothing to show for their support.