Friday, October 07, 2005

CCC Bioenergy Program Credits

I see a lot of biodiesel business plans and unfortunately far too many of them are still including the CCC credits in their financial models. In the interest of clearing things up, here is the lowdown on the disappearing CCC credits.

The following is a recent press release I put out on the topic. Following the press release is more background on the CCC program.

BIODIESEL CCC CREDITS DISAPPEARING:

Sigma Capital Rings Alarm on Potential Disruption to Biodiesel Industry.

The Commodity Credit Corporation (CCC) Bioenergy Program has been a key enabling factor for the infant biodiesel industry. The CCC biofuels program has provided up to $0.90 per gallon to biodiesel producers recently. These CCC funds are likely to shrink substantially this year and are scheduled to disappear altogether at the end of the 2006 Federal fiscal year (August 31, 2006). The loss of this financial support from the Federal government could have devastating effects for the biodiesel industry, just as the industry is gaining momentum.

The funding available for the Bioenergy Program for 2006 fiscal year (which began Sept.1st) could be as little as $25.5 million, a dramatic reduction from previous years. In the 2003 and 2004, the Bioenergy Program provided $150 million to the biodiesel and ethanol industries to reduce the cost of feedstock. In the 2005 fiscal year, the program provided $100 million. The appropriation for the 2006 fiscal year has not been finalized, but will likely be between $60 million and $100 million. Unfortunately, the program ran up a $34.5 million deficit in prior years and this deficit will need to be repaid from the 2006 fiscal year appropriation. In other words, if the appropriation is $60 million, after the $34.5 million deficit is repaid, only $25.5 million will be available for all of the 2006 fiscal year.

To make matters worse, the program expires at the end of the 2006 fiscal year. This vast reduction in the amount of money available coincides with the greatest growth the biodiesel industry has ever seen in the United States creating a perfect storm: increased claims, lower appropriation, and a program deficit, all of which will contribute to greatly reduced payments to biodiesel producers.

But wait a minute you say, what about the biodiesel excise tax credits, which provide for up to $1.00 per gallon? Good question, but unfortunately, those credits are only available to a biodiesel “blender,” which in the majority of cases, is the petroleum company distributing the biodiesel. Accordingly, the biodiesel producers are not seeing any direct benefit from these credits.

The loss of the CCC Bioenergy Program payments may seem okay now, with diesel prices at historic highs. But if diesel prices come down, as is likely, biodiesel producers could quickly find themselves in a financial crunch as feedstock costs continue to rise and biodiesel excise tax credits are absorbed by petroleum distributors. Blenders, with little risk, are getting the full benefit of the biodiesel excise tax credits, while producers, with large capital investments and long paybacks, are shouldering all the risk.

“We are very concerned about the loss of this important revenue stream” said Eric Bowen, Sigma Capital’s Vice President, Energy and Director, Biofuels. “The CCC Bioenergy Program has been the principal Federal program directly benefiting biodiesel producers. The loss of the CCC Bioenergy Program has the potential to have a significant adverse impact on the supply of biodiesel in the United States and will make financing new biodiesel plants more difficult".

“If you are an existing biodiesel producer and your business model is dependant on the CCC credit, we would recommend you develop alternatives to offset this potential loss of credit with new revenue sources or cost reductions ” said Bruce Woodry, Sigma Capital’s CEO. Mr. Woodry continued “As a result of the disappearing CCC Bioenergy credits, sharpened business models and astute financial structuring for proposed biodiesel plants will assure investment grade returns are delivered and funding can be raised in this highly competitive financial marketplace.”

“Catastrophes like Katrina highlight the value and importance of a diversified fuel source, and programs such as the CCC Bioenergy Program are instrumental in creating a level playing field for new entrants. The CCC Bioenergy Program enables biodiesel to come to market at a reasonable price point regardless of the price of petroleum. This in turn assures fuel availability and price stability by have a choice of fuels at the pump should there be a price spike or supply disruption in traditional petroleum fuels” said Anna Halpern-Lande, Principal, Cyrnel, LLC, a California based biodiesel consulting company.

About Cyrnel, LLC:

Cyrnel, LLC is a consulting firm specializing in go-to-market and market development strategies and execution for renewable energy and clean technology companies. For more information, please contact Anna Halpern-Lande, Telephone: (916) 265-0206, Email: anna@cyrnel.com or Web: www.cyrnel.com.

About Sigma Capital:

Sigma Capital Group is a ten-year-old boutique investment bank located in Raleigh, North Carolina, adjacent to Research Triangle Park that has built a strong reputation for improving shareholder value through corporate development activities. Sigma Capital Group provides advisory and representational services to clients in the Energy, Real Estate/Destination Resorts, Telecommunications & Information Technology sectors with transaction values in the $5M to $200M range.

***

Here is some additional information for those desiring more background on the CCC program.

Commodity Credit Corporation Payments

The Bioenergy Program was adopted to help expand industrial consumption of agricultural commodities by promoting their use in the production of biofuels. As such, payments are based on input commodity prices rather than biodiesel output prices. The program began in 2001 as a two-year program, and was extended through 2006 in the 2002 Farm Bill. It is not clear as of this time if the program will be extended beyond the end of 2006. The National Biodiesel Board has made extending the Bioenergy Program a top priority.

Program payments for biodiesel producers have historically been divided into two sections, payments for base biodiesel production (base equals the prior year's production) and payments for increased production (production beyond last year's production). Beginning with the 2006 fiscal year (October 1, 2005), payments for base biodiesel production are no longer available.

The maximum amount of money that may be disbursed through the Bioenergy Program in any given year is $150 million. The $150 million is shared by both the biodiesel and ethanol industry.

$150 million was appropriated for each of the 2003 and 2004 fiscal years. $100 million was appropriated for the 2005 fiscal year. Appropriation for the 2006 fiscal year will not occur until later this year, likely November. The Bioenergy appropriation is part of the larger agriculture appropriation. CCC staff believes that the 2006 appropriation could be as little as $60 million and that it is unlikely to be greater than $100 million. To make matters worse, the 2006 appropriation will have to cover a deficit of $34.5 million from prior years. Accordingly, if $60 million were appropriated, after subtracting the $34.5 million deficit, only $25.5 million would be available for the 2006 fiscal year.

A biodiesel producer must apply in August of the prior year to qualify for payments in the current fiscal year. Accordingly, a new producer can only qualify for the 2006 fiscal year if they applied in August of this year. No new applications can be made.

Program payments for biodiesel are calculated as follows: the number of gallons of increased production is divided by 1.4, the result of which is divided by the feedstock conversion factor (2.5 for a bushel of soybean), the result of which is multiplied by the USDA posted county price for the commodity. For example, 1 gal. of increased production of soybean biodiesel would be calculated as follows:

1 / 1.4 / 2.5 * $6.20 (soybean bushel price) = $1.77143

According to Bob Brown at the CCC, the credit for recycled cooking oil, yellow grease and animal fat feedstocks is equal to approximately 40% to 65% of the soy oil payments, or $0.71 to $1.15 based on the above example. The CCC calculates the percentage as follows (San Joaquin Valley yellow grease example): Jacobson yellow grease price (San Joaquin Valley) $0.145 / $0.2592 (price of soy oil - USDA crush report) equals 55.9%.

For the last several years of the program, there have been more biodiesel and ethanol producers applying for the credit than funds available. Accordingly, payments for all program participants are pro-rated. The pro-ration for the second quarter of 2005 was 50.1% and the pro-ration for the first quarter of 2005 was 39.6%. Accordingly, for the soybean example above, the second quarter of 2005 per gallon payment would be reduced from $1.77143 to $0.88749.

The value of the CCC credits will almost certainly be substantially less in 2006 as a result of significantly less money being available in the program (as little as $25.5 million versus 2005’s $100 million), and the large amount of additional ethanol and biodiesel capacity coming online, both of which will resulting in increased pro-ration.

As previously stated, without an extension, the program terminates at the end of the 2006 fiscal year, August 31, 2006.

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