investmaster
12 Sep 2018
Interesting Q&A with David Pummell Q&A with Velocys CEO, David Pummell On the topic of Velocys’ announcement about ceasing operations at the ENVIA Energy plant. David, thank you for joining us. To start with, why are you suspending operations at the plant and does it mean that operations will never recommence? We have announced that the Board of ENVIA has decided to suspend operations at the Oklahoma City plant and to undertake a review of strategic alternatives in order to preserve the value inherent in the facility. This decision was driven by financial circumstances following a leak at the plant which we announced several months ago. ENVIA’s appointed insurance company has independently confirmed that the leak was not the result of any flaw in our core technology, nonetheless the incident was a setback. During this period ENVIA has been operating the plant at reduced capacity using a single reactor to generate products, but in this configuration the plant does not meet the specific process energy requirements applicable under its RFS pathway to generate RINs, which further exacerbates operating losses. Following careful consideration of the facts, projections and available financing, the ENVIA board decided to suspend operations at the facility. We fully support the ENVIA board’s decision given the likely capital requirements of the plant and believe that Velocys’ capital is better invested in progressing our two biorefinery projects in the US and UK, which have the potential to generate significant value for our shareholders. We are focused on finding a strategic alternative that will preserve the value inherent in the facility and we intend to provide additional updates as appropriate. Why resort to a shutdown? Why not continue to operate the plant while the insurance settlement plays out? There is simply too much uncertainty around the timing and the potential amount of the insurance settlement. The projected costs required to get the plant to sustainable cash generation is likely to be many millions of pounds. It’s simply not a prudent business decision to do this, when we have much more significant opportunities with our next plants in the US and the UK. Let’s talk about those other plants. How will this affect the process to find a strategic investor in the MS project? Will it impact your UK facility? We don’t believe this decision will negatively impact prospects for our planned Bayou Fuels or our UK facilities. A significant amount of learning has been taken from ENVIA and the design of our US and UK plants are very different. We will use process technologies which are superior, carefully chosen and designed to meet the process requirements for these new plants. Most importantly we will engage EPC’s that have the right experience, standards and track record of delivery. In addition, we have generated significant amounts of data and demonstrated successful operation of our F-T technology from commissioning and start-up through full commercial operation. We’ve produced fuel that qualifies for the highest level of credit from the US government. All of this is critical to taking the next steps in our planned facilities. What do you say to investors or others who will call this a failure? First, we don’t consider the ENVIA project a failure by any means. We achieved significant milestones and learnings that demonstrated that our technology can operate at commercial scale. The setbacks we encountered were unfortunate, but common with new technology development. Probably the single most important learning from ENVIA is the importance of selecting the right EPC. We joined ENVIA initially purely as a licensor of our technology and so we had no influence on the selection of Ventech XTL Oklahoma City, LLC, as the EPC nor access to assessing the detailed plant design and the specifications for the unit process operations in the plant. What was evident, is that the design and engineering execution by Ventech created many operational issues that led to significantly more capital to be invested and considerably longer timeline to get the plant fully operational. Many of the issues were resolved or work around solutions found, but the reactor leak incident had the root cause of a poorly designed ancillary coolant system. We must now deal with the reality of the situation. This decision was difficult, but it is the right financial decision for Velocys, now that we have collected our valuable commercial scale data for our technology. Finally, the operation of the ENVIA plant for over two years without a lost time accident speaks to the culture of quality and safety which are fundamental to Velocys and the operational leadership we provided the ENVIA plant. We can now fully direct capital and teams on our Mississippi and UK projects, where we are in the position to leverage our teams’ extensive experiences across engineering, technology, operations and project management. What is the financial impact on Velocys? As we said during our recent fundraise process, we intended to set aside funds to continue to operate ENVIA during the claims process – and those are still being deployed. There are already funds set aside by ENVIA to use to fund a wind-down, should that be necessary. Additional funds could be required to achieve the best net return to Velocys, but these would be small and only deployed if this resulted in delivering greater asset value. In the long term, this means we have essentially eliminated the uncertainty surrounding the need for additional, potentially significant, funding. By taking these steps we ensure that we will no longer need to continue supporting the facility, and we can turn our full efforts and capital to our two planned facilities. We expect to communicate additional details in due course, likely in conjunction with our interim reporting during 3Q18. What about lost revenue from the plant? Won’t that negatively impact the balance sheet? While we had been projecting that ENVIA would become cash-flow positive during 1H 2018, prior to the leak incident, the reality is that we now simply can’t predict when that will be given the uncertainty around the claims process. What I can say is that even at cash-flow positive status, the plant is not likely to be a significant generator of financial returns. When we weighed the risk/reward profile of continuing to fund this plant with all the uncertainty around it, we determined that it was best to reallocate the funding to projects with bigger upside, now that we have acquired significant commercial scale operational data from the plant. Did you know this was a possibility when you went out and raised the money? At the time of the fund raise the best information we had from ENVIA was that the insurance claims would be quickly resolved. The resolution of these claims has taken much longer than ENVIA expected and remains uncertain at this time. The inability to establish a reliable timeline for reactor replacement and operation was only recently made available to us by ENVIA. During our fundraise we clearly stated that proceeds of the raise would be used to continue to support the ENVIA project to the point where the Company understands the financial plan to restore the second reactor to operation and get the plant to sustainable cash generation which we have just now become aware of. What do you say to those who are extremely concerned about the share price? I say to them that we understand their concerns. I believe the steps we’re taking today are the right ones because they will remove uncertainty around the ENVIA plant and enable us to put all our efforts into our US and UK plants. I believe we are making fiscally prudent decisions because they will strengthen our balance sheet in the near term and better position us for success in the long term. The data we have taken from the plant is an extremely valuable asset to the Company and will be essential information that will support the successful delivery of our US and UK projects. What do shareholders have to look forward to? Let me use this as an opportunity for a quick update on our three key projects. First, our Mississippi biorefinery project remains on track. In fact, we recently announced that we obtained a ‘Finding of No Significant Impact’ from the U.S. Department of Agriculture on the project’s Environmental Assessment report. This is a key regulatory milestone for the further development of the site and we believe it reflects the quality of our design and overall approach. In the meantime, we continue with our process to secure the necessary development capital investment by one or more strategic partners. We have a number of extremely attractive strategic investors who have joined the process and have begun their detailed due diligence on the project. This process will lead to a commercial deal with one or more of these investors and I hope to have news for you on that before the year is out. Second, the UK waste-to-renewable jet fuel plant project is also progressing to plan. We announced recently having received £434k from the Department for Transport (DfT) under the Future Fuels for Flight and Freight Competition (F4C), as part of an overall £4.9m funding from project partners. We were very pleased that Shell joined us and British Airways as project partners. Pre-FEED work on the project is ongoing and we plan to announce a site location in the coming weeks. Third, the Red Rock Biofuels’ project is continuing on track with its biorefinery project. We participated in their ground-breaking event several weeks ago and we wish them all the best for continued successful development. Last, I do want once again thank all of our shareholders for your support. Please know that the entire team is working tirelessly to bring our next projects online and begin delivering on the future that we all believe is possible.
JAMMY
10 Sep 2018
Where are ENVIA's D7 RINs? IM: I want to give you credit for your statement that ENVIA at half capacity is not able to generate RINS as was stated in today’s RNS: “… in this configuration (running on one reactor) the plant does not meet the specific process energy requirements applicable under its RFS pathway to generate RINs.†This answers the question I asked you earlier.
JAMMY
10 Sep 2018
ENVIA Update Now we have a 4th RNS on ENVIA and it is indeed not good news. The situation is worse than anticipated. The loan information clarifies how much cash Velocys sent to ENVIA this year. The Annual Report states that as of December 31, 2017, £9.6M of the loan note was drawn down. It is now £15.2M! That means that Velocys funded ENVIA to the tune of £5.6M this year which is about the last raise…The result is an idled plant! I hope that Velocys will come clean and give us a clear explanation of the events which led to the decision to suspend plant operations.
spannermonkey
10 Sep 2018
ENVIA Update This is terrible news. The very fact that noone is prepared to stump up the funds tells me that its not worth doing atall. This will send shock waves through the rest of our projects and seriously jeopardise the chances of getting that loan guarantee and any more funding for the UK project. The only upside at this point is that they don’t really have any competition on the tech side (I think they are the only small scale GTL company out there) so at least they will have the time to get their ducks in a row.
theprior
10 Sep 2018
ENVIA Update So, ENVIA suspended indefinitely. Not good news. RNS tries to look on the bright side but it’s unfortunate to say the least that the other partners could not chip in to keep the project going. Maybe once the insurance is settled things will look different. TP
JAMMY
08 Sep 2018
ENVIA Update I thought so too… The JV partners invested according to their original participation, but that changed when Velocys provided the loan and when NRG Energy left. Depending on the damage to the reactor cores, the replacement cost should be under $1M. Peanuts for Waste Management but painful for the others. Looking at the numbers, I have a hard time believing that this is all. There must be more behind all this.
Mikemine
08 Sep 2018
ENVIA Update Sound like they have been listening to Trump. Are the JV partners jointly responsible for Envia’s debt and costs? Shutting down the plant is the least good option IMHO but I guess its partly dependent on what the insurance company will agree to pay for. Until that is known I can’t see how they can go forward.
JAMMY
07 Sep 2018
ENVIA Update One sentence of the RNS seems to clarify Velocys position: “Such options include seeking financial contributions from the joint venture partners including the Company which, if not supported by the Company and/or its JV partners could result in a majority decision to shut down the plant, sell to a third party or liquidate the joint venture.†This sounds like a warning to Velocys’ JV partners: if you don’t pay up we close shop. Keeping in mind that Velocys financed via loans the commissioning, start up and operation of the plant, I think this is the right way to push the partners into participation.
spannermonkey
07 Sep 2018
ENVIA Update One could argue that the ENVIA plant was never going to be a cash cow and was primarily aimed at being a commercial demonstrator. The technical issue we are now seeing may just bring a planned closure forward. I agree that we could say that the reactors are proven and are not to blame for the fault. However, these systems are complex and for all we know, the reactors could have influenced the cooling circuits in such a way that they failed, but fundamentally, the core technology works - which is what VLS keep saying. Integration of these facilities is the real challenge imho, so I dont think VLS are any where near being cleared of any fault just yet.
Mikemine
07 Sep 2018
ENVIA Update The problem for investors is that we have been given no figures for the repair or even what, if anything, was damaged and how extensive it was. Clearly it would help if the insurance company made a decision which would leave Envia’s JV partners with decisions to make. The possibility of shutting the plant has always been an unstated option and I’m sure most of us thought about that especially as time went on. At this stage I believe that option is a very weak possibility although it is a risk but VLS were right to state this in the RNS. Unfortunately it was given higher emphasis by PIs that it merited IMHO. The closure possibility would not have been lost on investors in the latest placing. I haven’t seen the placing offer documents but I’d bet it would be cited as one of the risks yet the placing succeeded we are told. Until the insurance position is clear I can’t see any decision being made although I’m sure the JV partners have gone over various scenarios. I don’t think there is a will to close the plant but you never know.
JAMMY
06 Sep 2018
ENVIA Update It looks like the 3 JV partners are in a stalemate situation after 4 months of discussions. Waste Management is the only partner flush with cash. Ventech Project Investments might have some funds left – they started with $200M in 2011. So far, those two partners have not contributed beyond their initial investment and it was Velocys which provided ENVIA with loans to finish construction and go into the commissioning, start-up and operational phase. This is the 3rd RNS on the leak and it is the first time the insurance claims and the option to shut down/sell the ENVIA plant, if the JV partners do not contribute, are mentioned. An interesting evolution. Although Velocys core technology is not the root cause of the leak, its reactors must be seriously damaged. The repair or replacement of the reactor assembly is a costly affair and the insurance company might balk at paying for it. Maybe Velocys should declare victory and claim that its technology inside the ENVIA plant has passed all qualification tests and is ready for full commercial deployment. That would allow them to fully concentrate on the Natchez and the UK projects.
Mikemine
06 Sep 2018
Where are ENVIA's D7 RINs? The RNS today at least clarified the position. It was pretty much what we thought it to be and there was always a chance that they would close the plant entirely although I thought and still think thats not going to happen. It wouldn’t affect the other partners much but it would obviously be bad for VLS who have much riding on it. Its not a done deal though and I think much depends on what the insurance company says. There are still lots of options including VLS becoming the sole owner of Envia although I think that would stretch VLS’s finances too far even if they were give the 2/3 shares for nothing. Its been a pity that this has been allowed to fester and we have greeted this news with SP so low.
spannermonkey
06 Sep 2018
Where are ENVIA's D7 RINs? ouch. [link] huge drop today on the potential of the ENVIA plant sale. We need this facility to run our reactors to prove their worth!
JAMMY
06 Sep 2018
VLS Burn Rate 2018 cash burn was £1.33M. We’ll know their cash position at the end of the month.
spannermonkey
05 Sep 2018
VLS Burn Rate Does anyone know the monthly cash burn rate? And therefore, how long we have left based on current cash reserves?
