Biofuel Boom Leads Some to Caution: "Let Investors Beware"

[The following is an interview with Thee Rivers Biofuels CEO Forrest "Bud" Stacy with a word of caution on the current biofuels boom posted at EnergyPulse. The interviewer happens to be my uncle, Alan Jenkins...]

With every boom market comes the potential for excess, and the current biofuels market is no exception -- to paraphrase an old adage: “Let the investor beware!”

What follows is an interview with Forrest “Bud” Stacy, the President and Chief Executive Officer of Three Rivers Biofuels LLC, a company that is currently developing a 30 million gallon per year biodiesel production plant in Northeast Mississippi. Mr. Stacy was previously President and Chief Executive Officer of Oglethorpe Power Corporation, a Fortune Top 50 Utility with annual revenues of $1 billion. He also has experience developing merchant power plants and biomass electric generation.

What is your appraisal of the current biofuels market?

As I think everyone is aware, the biofuels market, including ethanol, biodiesel, and biomass conversion, is red hot. Every day it seems we have one or two new announcements of projects.

Do you have any concern with this booming market?

Yes, it reminds me of the market a few years back for new natural gas-fired electric generation plants. While a legitimate market opportunity existed that attracted significant investment, as the dollars flowed in so did developers with more general sales experience than electric generation experience.

What was the end result?

As may be expected from such a frothy market, too many plants were built. The increased demand caused natural gas prices to soar and many gas-fired generation projects were no longer economically viable. Investors were left high and dry.

So you think the same might occur in the biofuels market?

Unfortunately, yes and unwary investors may again get caught. Significant government credits and soaring energy prices have provided a wonderful opportunity to develop sound biofuels projects. However, many of the proposed projects that I see advertised in press releases are little more than hopes of projects with little substance. The developers have not yet even applied for the permits that are necessary to construct and operate the plants. This has led state permitting officials to be wary of potential developers that try to secure tax incentives from state agencies without having a project ready to go. Nevertheless, investors are pouring hard-earned dollars into these potential projects.

Do you have any examples?

Yes, without naming names, I saw just last week a large, publicly traded company announce a huge ethanol production facility just days after releasing disappointing earnings. The project announcement drove the stock price back up, but we understand the proposed project has not applied for or secured any of the necessary permits. Therefore, I wonder if it will ever be built. We have also seen developers coming into rural areas and raising funds from local farmers and other members of the community for biofuels projects. Unfortunately, some investors have been emptying their 401Ks to invest in projects where the only thing that is guaranteed is the upfront development payment to the developers. In my mind, these are very troubling developments.

I understand one of the companies you are involved with is developing a biodiesel project. Is that project any different from the others you have cited?

First of all, I don’t mean to imply that all current investment opportunities in the biofuels market are fly-by-night. That’s simply not true. There are many very sound projects out there and sound investment opportunities. I think the recent strong earnings report of Archer Daniels Midland based largely on its biofuels feedstock business is only one such example. That being said, there are a lot of projects out there in name only. Three Rivers Biofuels LLC is currently developing a 30 million gallon per day biodiesel project in Northeast Mississippi for which we expect to achieve financial closing in June 2006.

Has Three Rivers issued any press releases for this project?

No. We have focused on securing our environmental permits, negotiating our project development and finance documents, and getting all our ducks in a row before we get anyone’s hopes up by issuing press releases and the like.

How is Three Rivers financing this project?

We are currently finalizing the project and finance documents necessary for bond financing whereby project revenues and assets secure and are pledged to cover bonds that will be issued to finance the costs of acquiring, constructing, and operating the facility. Our project site is located on one of the inland waterways that connects to the Mississippi River and the Gulf of Mexico through Mobile. As such, transportation costs for the feedstock material and biodiesel produced will be greatly reduced.

Do you have any other future development plans?

Yes. We are considering additional projects in a number of locations but will be cautious about the project sites we select and the potential investors and project partners that may be involved.

Do you have anything further to add?

Yes. I would really caution investors to do their homework. As I said before, there are many legitimate investment opportunities in this market, and there is money to be made. However, I get heartsick when I see good-hearted investors taking unnecessary risks based simply on the untested promises of project developers. Unfortunately, there are several people around the country inviting prospective investors to an investment dinner and making a presentation that sounds like there is no way the proposed project can lose money. In many of the cases, however, no independent market study, independent technical review, or independent economic analysis has been performed, and the feasibility study was done by the equipment manufacturers - who have an obvious bias - or by a less than qualified party. As mentioned above, all too often, no permits have been received and so all the risk is on the investor. The presentations are usually closed with a statement disclaiming what was said during the meeting and the investor must rely only on the Offering Statement. Of course, most of the people present at such an investment dinner are not qualified to understand the complexity of an Offering Statement.

My advice then to any potential investor is to proceed with great care if the developer does not have in hand the above information. In today’s biofuels market, I certainly think the adage “let the buyer beware” is appropriate.