Energen/GEM to inject US$125-200m into sugar factories - Makes down payment on Bernard Lodge, Monymusk

Published: Wednesday | June 10, 2009

Mark Titus, Business Reporter

Stephen Hawkes, chairman of Energen Development Limited. - Photo by Mark Titus

The alliance that Jamaica's Energen Development Limited has with Global Emerging Market (GEM) will give the New York-based private equity firm a majority share in the sugar factories the two have partnered to acquire.

The Energen/GEM partnership - one of four priority bidders shortlisted by Jamaica's sugar divestment team - last week made a down payment of US$3 million on the Monymusk and Bernard Lodge factories, according to Energen chairman Steven Hawkes.

But GEM will in the first 18 months pour up to US$200 million into the venture.

"We will be owners of the factories but will lease the cane lands from the Government," Hawkes said.

Preparatory engineering works

The down payment was financed from the US$5 million fronted by GEM. The other US$2 million, to be spent in the first two months of start-up, is earmarked for preparatory engineering works.

The consortium was, however, denied the Petrojam Ethanol Limited plant, for the production of dry or fuel-grade ethanol, which was included in its initial bid, but Hawkes sought to downplay that outcome as inconsequential.

"Such a decision would not impact on our plans at all, because most of the equipment we have acquired already have the dehydration with it," said the Energen chairman.

"In the initial stages, we will put a 40 million gallon a year distillery with a dehydration plant at Monymusk, another one at Bernard Lodge, along with the biogas facility and the co-gen plants."

The co-generation plants will each have the capacity of 6 to 7 megawatts of electricity, Hawkes told Wednesday Business.

Energen plans to pump US$125 million to US$200 million into the project in the first 18 months to transform both factories' facilities from sugar production to ethanol, steam and electricity, using sweet sorghum.

"The factories hardly have anything worth saving. Some will have to be rebuilt completely or the entire infrastructure replaced," said Hawkes.

"That will be needed for both locations."

Bernard Lodge is in St Catherine and Monymusk is located in neighbouring Clarendon.

"We will be producing ethanol and electricity, in relation to the grid ... in three years we could probably be exporting (ethanol)," Hawkes said.

Ownership split

He did not specify the ownership split of the sugar assets, but said GEM, an investor in alternative energy businesses, would be the majority owner, contributing US$30 million to US$50 million of equity, and another US$150 million of debt to the partnership - suggesting that the entire financing needs in the first year and a half will be covered by GEM, a self-described deal-maker which works with partners around the world to manage its investment.

But Hawkes also said the American company may bring other partners into the deal in order to share those costs.

"The final amount to be spent by GEM depends on whether or not we bring in another partner," Hawkes said. "Currently, we are looking at Westwood Investment as a potential partner."

Westwood is based in Austin, Texas.

Stock exchange

Otherwise, if no deal emerges, the partners may eventually take the company public and float it on the stock exchange.

Energen is proposing to cultivate hybrid sweet sorghum, a fast-growing plant that thrives in agricultural conditions that are suboptimal for sugar-cane growth, requiring less than one-third the water and fertiliser.

The juice is extracted from the sorghum stalks and then fermented into ethanol.

"If we can get 40,000 acres in cultivation, we can be producing over 300 million gallons a year," Hawkes said.

"The goal would be produce a lot of ethanol and add 150-200 megawatts of electricity to the grid."

Hawkes, a chief engineer by profession, says the credit line from GEM - the majority of which will flow to the project within 18 months - will fund the crop conversion and farm infrastructure, along with the construction and start-up of the ethanol distilleries and a biomass-powered cogeneration plant.

Repayment of the debt portion will occur in the 26 months thereafter, financed by income from the plants.

Within that two-year period, the investors say the plan is to pump US$350 million of capital back into the business, also financed from operations.

And by the fifth year of the project - by which time the sugar operation hopes to have cleared all debts - Hawkes said it is projected that the business would be generating net cash flows of US$300 million per year or J$27 billion at current exchange rates.

Those plans are predicated on a sustained market for ethanol, which now sells at about US$1.70 per gallon and rests on the sustained supply and economic viability of sorghum as feedstock.

"The difference with the sugar cane is that sorghum grows between 83 and 92 days so there can easily be three crops a year versus one crop of cane," Hawkes said.

"We have spoken to a few companies that are growing hybrids and they are putting out 120-140 tonnes per hectare per cutting. Sugar cane is only producing 75 tonnes per hectare."

One such company is Glutec Investments, said the Energen chairman, which operates out of Germany and Switzerland and grows hybrids in India and Israel where the conditions are similar to Jamaica's.

Energen is also in discussions with a number of overseas universities, but is hoping that a partnership can be forged with the local universities, to research sorghum yields.

Consistent production

Hawkes said three crops per year greatly increases yields of ethanol and biomass allowing for consistent production year-round.

By 2014, he said, his company projects its annual production will crest 200 million gallons of ethanol at a wholesale price of US$1.60 and over 1.2 billion kilowatt-hours of electricity to the national grid at a sale price of US$0.125 - all from 25,000 hectares of land.

Energen is a five-year-old company formed in 2004. Its principals include Hawkes, Peter Horn, the chief executive officer, and Donald Kerr, an engineer who specialises in water treatment and processing.

GEM has a global reach having invested in some 200 or more businesses in 29 companies.

Under the deal, Energen will have day-to-day responsibility for running the plants.

The Jamaican Government is expected to officially announce the winning bids and the terms of the deals struck with Energen and the other three bidders - Fred M Jones/Seprod Limited and the Hussey family of Jamaica and Eridania Sadam of Italy - sometime this month.


This May 2006 file photo shows a section of the Bernard Lodge sugar factory in St Catherine. - File