It has taken nearly 15 years, but Dave Rubenstein is on the verge of realizing his vision of building Sugar Valley Energy, an ethanol plant in California’s Imperial Valley — with the help of municipal bonds.
His firm, California Ethanol + Power, plans to price $575 million in bonds through a municipal conduit in June or July to fund construction of the alternative fuel and energy plant to convert sugarcane into ethanol.
If all goes as planned, the project will reach financial close in August on a mix of publicly sold and privately placed bonds. Three years later, the plant would open for business.
The push to ramp up electric vehicle adoption by California Gov. Gavin Newsom and the Biden administration won’t impact the robust demand for ethanol fuel, said Rubenstein, president and CEO of the firm.
The plant proposed for Imperial County, an agricultural stronghold in the southeastern corner of the state on the Mexican border, would also include an electric plant and wastewater facility.
“The idea originally came from a few local farmers in Imperial County who were looking for a good crop they could count on,” Rubenstein said. “As the farmers looked for an alternative in 2000, corn ethanol started taking off, but they preferred the idea of growing sugar cane like the farmers in Brazil.”
There was talk back then of converting a sugar beet plant to process sugarcane into ethanol, he said, but the project never took off.
Rubenstein, who had been researching the ethanol market for several years, sold his company, Pacific Diazo Products Inc., a distributor of aqua ammonia, to Airgas in 2007.
He founded CE+P the next year.
The area's unemployment rate floated between 17% and 26% for several months in 2019, even before the pandemic, according to a report from the state’s Employment Development Department.
The project, branded Sugar Valley Energy, would provide “full-time jobs, a profitable and sustainable crop for farmers and a new tax base for the community,” said Kestrel Verifiers, in a report certifying a tranche of the bonds as green.
The project represents a significant economic boost for Imperial County and the region, as the $1 billion investment into its development and construction would create roughly 15,100 jobs, Rubenstein said.
CE+P will contract with local farmers ultimately establishing 48,000 acres of sugarcane production in the county. A completed 15-year exclusive offtake agreement with CHS Inc. to market and sell the ethanol ensures growers will have a stable, long-term income from providing sugarcane for the project, according to the firm.
The $1.038 billion project will be funded using $800 million in debt and $200 million in equity.
Roughly $575 million of senior lien bonds will be sold through the California Public Finance Authority conduit issuer.
The CalPFA bond financing would be divided into three parts: $175 million for the solid waste component that are tax-exempt but subject to the alternative minimum tax; $250 million in taxable debt for the power plant, and $150 million in taxable debt for the wastewater plant. Another $261 million in second-lien debt for the ethanol plant will be privately placed.
The private firm will repay the debt, but the solid waste facility will be owned by CalPFA, reverting to Imperial County when the debt is paid.
RBC Capital Markets is the lead structuring investment bank on the deal and joint senior manager on the municipal bonds and joint placement agent on the privately placed debt with JPMorgan. Citigroup will be co-manager on the municipal bonds. KNN Public Finance is municipal advisor.
Orrick, Herrington & Sutcliffe is bond counsel, Nixon Peabody is disclosure counsel and Stradling, Yocca Carlson & Rauth is underwriter’s counsel.
"We are hoping for an investment grade rating of BBB-minus or greater on the CalPFA debt and BB on the privately-placed debt," said Ian Parker, a managing director with RBC.
The equity is split between $100 million in preferred equity-equity, $75 million in tax credits and $27 million in development equity raised to date.
The plant owners have also applied for government tax credits and grants.
They are awaiting final approval from the Internal Revenue Service on $90 million in investment tax credits. They are also anticipating $10 million in state income tax credits from The Governor's Office of Business and Economic Development; a $37.2 million sales tax waiver for equipment from the California State Treasurer’s office and a $2.5 million grant from the Imperial Irrigation District.
Kestrel Verifiers provided a second party opinion in a January 13 report designating the privately-placed debt being issued to build the ethanol segment of the plant as green.
The ethanol plant qualifies as a green project using International Capital Market Association’s green bond principles in the category of pollution prevention and control, because the facility produces ethanol, which meets the eligibility criteria of reduced air emissions compared to conventional gasoline, according to Kestrel.
Sugar Valley also has committed to “meeting low emissions thresholds for different asset types for the climate bonds standard bioenergy sector criteria,” according to the report.
The multi-use facility will also produce electricity and the waste produced at the plant will be used to produce biomethane, but Kestrel’s report said it didn’t analyze whether the adjoining facilities’ bonds qualified as green.
“We found that Sugar Valley Energy is designed to maximize environmental benefits through multiple stages — producing low-carbon ethanol, electricity, and biomethane,” said Monica Reid, CEO of Kestrel. “Meeting the low carbon intensity requirements of California’s Low Carbon Fuel Standard for the sugarcane ethanol provides verification of the positive impact of the biofuel, and the integrated recycled water and wastewater treatment systems are a particularly innovative aspect of the project.”
Sugar Valley Energy’s production would help the state, which imports 1.2 billion gallons of ethanol each year, be more ethanol independent, he said.
Most cars coming off the production line today can handle 20% to 25% ethanol fuel with zero changes or modifications, Rubenstein said.
In California, the governor
But Rubenstein said electric vehicles aren’t likely to take off until battery charges last for longer than a day and the several hours it takes to charge an electric vehicle is reduced.
“No one wants to buy a vehicle that they aren’t certain can make it from Los Angeles to San Francisco without needing to be recharged,” Rubenstein said.
Even if electric vehicles achieve widespread adoption, low-polluting biofuels can play a role in reducing carbon emissions in the transportation sector during the long transition, according to a 2019
Even so, there are some headwinds from the EV market.
Bloomberg New Energy Finance
Nevertheless, GPI’s report makes a case for a dual role of EV’s and biofuels in reducing carbon emissions from vehicles.
In addition to producing sugar cane, the plant will also use the waste produced to generate power for the plant and the community.
Ethanol production supports California’s goal of reducing emissions from transport by 20% by 2030 through a low carbon fuel standard, according to Kestrel Verifiers.
The firm has obtained all the permits and environmental certification for development of the project, which is in the 5,000-acre master-planned Keystone Industrial Complex near Brawley.
The power plant connected to the ethanol plant will produce 48 megawatts of power, some of which can serve future businesses at the industrial park.
