Industries Energy/Green

A cautionary tale

Enough barley, but not enough capital, for ethanol plant in Hopewell

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Print this page by Robert Burke

The Appomattox Bio Energy plant in Hopewell was going to be a big deal for the city and for Virginia. It would have been the first commercial plant in the U.S. to make fuel-grade ethanol from barley and a bragging point for supporters of making Virginia the “energy capital of the East Coast.”

But that hasn’t happened. Last May, just days before the plant was to open, the owners pulled the plug. Most of the 55 employees were laid off and the plant’s major investor — Connecticut-based equity firm First Reserve — said it was going to sell the whole thing. “It will just be transitioned to a potential new owner that will come in and run this company and produce ethanol,” a company spokeswoman told the Richmond Times-Dispatch after the closing was announced.

There is no new owner so far, though. The plant sits idle, its future uncertain. Why didn’t it open as planned? The project’s problems so far suggest that the business plan was weak from the start, and that the plant can’t turn a profit.

L. Craig Shealy, a co-founder of the plant’s owner, Osage Bio Energy, says it’s too early to judge. “I don’t really know what the verdict is yet,” says Shealy, now a managing director with Cary Street Partners in Richmond. “It never really got a chance to do what it was designed to do.”

Instead of producing up to 65 million gallons of ethanol per year, the plant is caught up in a lawsuit between Hopewell and the owners. The city filed suit in Hopewell Circuit Court last November against Osage Bio Energy, saying the company had failed to produce a promised letter of credit that would have guaranteed the city at least $5 million in tax revenue. “What they’ve told me is, basically First Reserve said, ‘We’ve put in $220 million, and we’re not putting in another penny,’ ” says Hopewell City Attorney Thomas Lacheney. In its response, Osage has denied that the city deserves compensation.

The plant was supposed to use barley, instead of corn, to make ethanol. Much of the corn for ethanol production comes from upper Midwest states, while winter barley can be grown by mid-Atlantic farmers. Shealy says that the plant had lined up enough local farmers to supply barley, and that “the [profit] margins would have been good enough” to run the plant profitably. The plant’s owners also were expecting to sell the carbon dioxide produced during the production of ethanol.

What stopped the plant’s progress, he says, was a lack of operating capital. The company couldn’t get a bank to extend a line of working capital, something Shealy says “was very common when we started the project … The company didn’t have enough cash to start up and run by the time it was ready to do so.”

Shealy says First Reserve was not willing to put more money into the project. The plant was put up for sale after the closing, Shealy says, but it’s his understanding that it is no longer on the market and could be restarted if the market improves. First Reserve, through a spokesperson, declined to comment on its plans for the Osage plant.

Another factor, Shealy says, was that the Environmental Protection Agency didn’t rate the ethanol the plant would have produced as an advanced biofuel. Advanced biofuels trade “at a premium,” he says. “That certainly would have changed the economic prospects and even changed a bank’s decision to provide operating capital,” and might have persuaded First Reserve to put in more cash.
The plant was offered a state-funded incentive of 10 cents per gallon of biofuels sold, up to $4.5 million starting in January 2008, but it didn’t collect a cent because it never sold any fuel.

Brian Autry, Osage’s current special counsel, used to be its general counsel. After the company shut down last year, he went back to the law firm in North Carolina where he’d worked before joining Osage. He also declined to discuss the plant’s future. “Somebody’s going to have to build their own business model,” he says, “and decide if it’s going to work for them.”

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