In May 2000, Badger State Ethanol, LLC was founded based on the vision of its two founders, John Malchine and Gary Kramer. The primary driving force shared by both of these men was a mutual passion to help develop American agriculture and to do so following sound business principles. The fact that no one else had ever built an ethanol plant of this magnitude in Wisconsin created some interesting challenges for both of these developers.
The company started as a green field project so it was necessary to first create a business plan, budget, find an acceptable plant location, establish contracts, obtain permits, establish financing, create a prospectus through a registered offering and sell the equity. Gary and John accomplished all of the above in 15 months. With all of this behind them, construction of the plant started in July of 2001. Construction was completed in October of 2002 with the plant startup right after that. The plant reached name plate capacity in five days and passed all performance guarantees in just 12 days.
Listed below is an abridged version of the executive summary as published in the first draft of the business plan dated June 2000.
Badger State Ethanol intends to build a corn-based grain processing facility that will produce ethanol and two (or three) other co-products. The project will be located in Monroe, Wisconsin, 40 miles south of Madison. Upon completion during the fall of 2002, the project expects to produce 40 million gallons per year of denatured fuel grade ethanol for sale to the Midwest markets.
Some of the attributes of the project are enumerated below:
1. Badger State Ethanol expects be a top-twenty ethanol producer after the project is completed.
2. Badger State Ethanol will be a low cost ethanol producer. BSE will achieve this by building a plant with good economies of scale and by locating its plant close to the markets for its products.
3. Badger State Ethanol will enter into a design/build contract with reputable design/build firms with strong experience in building ethanol plants, ICM Inc./Fagen, Inc..
4. Badger State Ethanol will enter into a combination of off-take contracts that will provide a high degree of certainty for sale volumes and a commodity risk-hedging program that will control the majority of input commodity price risk.
5.The commodity risk mitigation plan will include a specific corn purchasing policy, in combination with volatility dampening sale contracts for products and the use of a hedging policy protecting dynamic margin instability.
Badger State Ethanol will have a mix of products that place it in two distinct industries with attributes that are commodity in nature, fuel component and livestock feed.
All companies, and especially those that are start-up in nature, need a future vision that will ensure them profitability in the long haul. This vision must not only encompass the successful execution of the business plan as stated, it must also lay a path for future growth which is realistic, has measurable milestones, and is based on advantages either not available or not obvious to the competition.
The processing of agricultural commodities into higher-value products has a long and diverse history. Mankind has always had a growing need for increased production of crops from a fixed amount of land and for ever-improved nutrition from those crops. The agricultural industry has responded well with high-technology farming and a wide variety of derivative foods such as cooking oil, pasta, and vegetable protein substitutes such as tofu and "soyburger". There is much to learn from the successes and failures in the agricultural-derivative industry. Most of the first-generation derivatives, such as corn syrup, soybean oil and the resultant soybean meal, have themselves become commodities. Industry rationalization has taken place to the extent that the only survivors are those that have pursued a position of low-cost production based almost entirely on economies of scale.
The products offered by Badger State Ethanol including fuel ethanol fit a classic commodity role. Despite the apparently large size of the ethanol industry, it represents only one percent of the US gasoline market. With 10% blends, the market could theoretically grow to ten times its current size, plus additional growth is possible from fuel cell cars, diesel blends, and aviation gasoline replacement.
While not ignoring the advantages of economy of scale relative to the majority of the new farmer-owned ethanol plants that have proliferated in the Midwest, Badger State Ethanol has taken another tack to position itself as a low cost producer. Specifically, Badger State Ethanol has chosen a location in a state with a producer incentive that will reduce its up front capital cost. In addition, there is a high local demand for the livestock feed ingredient that it produces, thereby decreasing the need to move its product long distances.
Badger State Ethanol will compete effectively in an ethanol industry currently comprised mainly of producers who generate small amounts of ethanol and limited co-products annually. Specifically, the typical Mid-West based ethanol plant currently produces twenty million gallons annually with co-products of DDGS and CO2. By contrast, Badger State Ethanol will produce forty million gallons per year of ethanol with greater economic efficiency. Additionally, by building a plant with significant economies of scale and the most current technology, Badger State Ethanol will effectively compete with the most successful producers in the market.
Badger State Ethanol's seven-year financing plan is both viable and effective with sufficient safeguards built in to provide the investors and lenders with a degree of certainty of repayment.
The project will involve the construction and operation of a grain processing facility which produces 40 million gallons/year denatured fuel grade ethanol and other co-products to be located in the Central States Region. The plant will produce this ethanol from approximately 14.286 million bushels of corn. The co-product streams include Dried Distiller's Grains with Solubles (DDGS) and Distillers Wet Grains (DWG).
Ethanol is a fuel component utilized to enhance gasoline performance properties and abate gasoline exhaust emissions. It is derived primarily from processing corn into alcohol. Because it is derived from corn, a readily available agricultural commodity, ethanol is a renewable source of energy. Its creation and use as a gasoline additive generally involves less toxic emissions than the other principle gasoline additive, methyl tertiary butyl ether ("MTBE"). MTBE is a petroleum-based additive that has begun to fall out of favor in many areas because of environmental risks. California recently began to phase in a ban on MTBE after detecting unacceptable levels of MTBE in groundwater. To assist in the development of ethanol production and stimulate demand for domestically produced corn, the federal government and certain state governments, including Wisconsin, have created incentive programs to encourage ethanol production. These incentive programs involve tax credits at the federal level and producer payments to ethanol producers at the state level. The Clean Air Act Amendments of 1990 also require that gasoline used in nine metropolitan areas suffering air quality problems must use reformulated gasoline. Reformulated gasoline is gasoline that contains additives such as MTBE or ethanol to reduce environmentally harmful emissions.
We believe that perceived increased risks associated with MTBE, the growth in the number of larger gasoline consuming vehicles in many metropolitan areas, federal and Wisconsin subsidies for ethanol producers, and an abundant supply of corn, creates an opportunity for a large-scale ethanol plant in southern Wisconsin. Good rail and highway transportation networks serve the Monroe, Wisconsin area, where the plant is proposed to be located. This network provides access to Milwaukee, Wisconsin, Chicago, Illinois and various other locations. We believe that these industrial centers will be attractive markets for ethanol.
Processing corn into ethanol produces three natural by-products known as Distillers Dried Grains with Solubles ("DDGS"), Distillers Wet Grains with Solubles ("DWS") and Distillers Modified Wet Grains ("DMWS"). These are animal feed products. The area in the immediate vicinity of the proposed plant is generally an agricultural area that we believe will generate strong demand for these feed products.
The proposed plant is expected to convert, on an annual basis, 14.8 million bushels of corn into approximately 40 million gallons of ethanol, 128 thousand tons of DDGS, DWG, DMWG and 128,000 tons of raw CO2 gas. The City of Monroe, Wisconsin has agreed to provide us with at least 25 acres of land for the project if we satisfy certain conditions, including securing debt financing and completing the offering. We expect to commence construction, depending upon the season and weather, approximately 60 days after we close on the escrow funds from this offering, which is contingent upon our receipt of written agreements from lenders to provide debt financing. We call this the financial closing. We expect that the construction will take approximately 14 months, with an additional two months of post-construction testing and engineering. We plan to begin accepting shipments of corn and producing ethanol, DDGS, DWS DMWS, and raw CO2 gas approximately 16 months after the close of this offering. We expect that we will begin operating in the fourth quarter of 2002.
Under the terms of our letter of intent with Fagen and ICM, Fagen will serve as the general contractor and ICM will be the primary subcontractor on the project. Fagen has been the principal contractor on thirteen ethanol projects and has performed significant work on a total of 29 projects. These two firms have developed, designed and built numerous ethanol plants throughout the country. Both Fagen and ICM also have representatives serving on our board of directors.