Burns & McDonnell not discouraging small-project investors

Nobles: 'Niche synergies can blow away economy of scale'
By Tom Bryan | July 01, 2002
The ethanol industry's recent triumphs and failures have shown us there are several ways to build an ethanol plant, but only a few ways to build one right.

Contracting an experienced design-build firm and utilizing a proven process-design technology is a step in the right direction, but even a flawless startup does not guarantee success in today's market. "Economy of scale" has become the industry's most popular buzz phrase: "Anything under 40 mmgy won't cut it" some say.

So why is at least one design-build firm still asserting that 25, 20. . . even 15 mmgy ethanol plants can be good investments?

"Economy of scale is important for all process plants," said John Nobles, president of Burns & McDonnell's Process & Industrial division. "But probably no one will have Archer Daniels Midland-size economy of scale. And that's why we believe a far greater competitive advantage awaits those who seek out unique opportunities for ethanol plants. Niche synergies can blow away economy of scale."

According to both Nobles and Burns & McDonnell Process & Industrial division Vice President Rowland Nofsinger, an ethanol project can find competitive advantages in several ways, including: integrating a cattle feedlot that utilizes a substantial amount of wet feed, integration with another chemical plant or bioprocesing plant, cogeneration, or simply applying advanced process technologies (such as improved separations).

"More and more, we hear about contractors asking rural investors to build 40-plus mmgy ethanol plants," Nobles said. "And that's great if they can afford it, but these investors cannot always raise that kind of equity. Not everyone has deep pockets, and Burns & McDonnell is willing to work with clients who have set their sights on smaller projects. We can find ways to offset the economy of scale factors."

An experienced company,Kansas City-based Burns & McDonnell is 104-year-old business that has grown from a two-man operation into an international engineering, architectural, construction, and environmental services firm that employs over 1700 people in offices around the world. The firm acquired the C.W. Nofsinger Co. in 1983, and has been involved in the ethanol industry ever since.

Nobles calls the company an "owner's engineer that has grown into an EPC/design-builder."

Along with ethanol plant design and construction, Burns & McDonnell is involved with an assortment of chemical and agricultural processing projects, power and cogeneration plants, water/wastewater treatment, airport design, and an array of other engineering and construction projects.

"The roots of our company is serving communities that needed basic infrastructure such as power, water, and wastewater treatment," Nobles said. "So there is an affinity with what we are doing in the ethanol industry today. Working with rural residents and farm groups so they can control their own destiny is right up our alley."

From comprehensive design to construction review, the company has been involved with a number of ethanol projects over the last two decades, including the following: Nebraska Energy (Aurora, Neb.), Chief Ethanol (Hastings, Neb.), Farmland Industries (Aberdeen, S.D.), Williams BioEnergy/formerly Pekin Energy Company (Pekin, Ill.) and several confidential projects including cellulose conversion pilot plants.

Currently, Burns & McDonnell is contracted with Central Kansas Renewable Energy (CKRE) LLC to design and build a 25 mmgy plant in Lyons, Kan., utilizing Katzen process technology. The company is also in the early stages of negotiations with another prospective future producer group in Kansas, and two others in Nebraska.

Capabilities & business approach
Burns & McDonnell is a full-service provider that employs hundreds of engineers, technicians, and designers, providing complete ethanol plant engineering and construction services. Whenever possible, the company works with local and regional constructors when building an ethanol facility. Aside from its design-build capabilities, Burns & McDonnell has the resources and experience to conduct studies and business plans, lead the permitting effort, manage environmental compliance, structure business deals, steer equity drives, and assist with electrical, natural gas and water negotiations.

"We are a professional service provider to the ethanol industry," Nobles said. "And we can do it all under one roof - along with our design-build project execution."

Depending on the needs of its clients, Burns & McDonnell utilizes either Katzen International process technology or Vogelbusch process technology, Nobles said.

Unlike some of the other top design-build firms in the industry, Burns & McDonnell does not permanently invest its own equity in the ethanol plants it builds. They believe owning ethanol plants while, at the same time, building ethanol plants, presents a conflict of interest down the road.

"We do not want to compete with the plants we build," Nobles said. "As soon as I build a plant next door (to a former client), I am competing with them. . . We want our clients to beat their competition, and that competition won't be us."

But that doesn't mean the company does not have "skin in the game," Nobles said. Burns & McDonnell offers a "guaranteed maximum contract" and operates on an "open book basis."

"If the price of the project ends up over (the guaranteed maximum contract), we pay for it," Nobles explained. "If it ends up under our price, the client receives the savings. . . For example, if we find an inexpensive piece of equipment, our client saves money."

Nofsinger explained that Burns & McDonnell encourages clients to spend significant portions of owners' seed capital "judiciously."

"Owners seed capital, prior to the major capital fund drive, should be used for feasibility studies, business plans, site selection, permitting and financial assistance in getting a commitment for one or two significant investors," Nofsinger said. "Only a small portion of these funds should be used for preliminary engineering."

Furthermore, Nobles said, "equity before debt."

"Leading with equity investment demonstrates the strength of a project's merit as an ongoing business. Acquiring debt is significantly predicated upon the strength of other factors such as securitization of the assets underlying the ongoing business. Leading with equity affords the opportunity to lower the weighed cost of capitol."

What's around the corner?
Burns & McDonnell has thrived for a century by being a leader. And it plans to be at the forefront of tomorrow's ethanol/bioprocessing industry. The company's leaders believe strongly in the commercialization of cellulose-to-ethanol technology, and they see Burns & McDonnell as a natural leader in that area.

"Cellulosic ethanol technology is not rocket science," Nobles said. "It involves the skill of separation, and our business is separations."

Nobles said he believes the ethanol industry is rapidly moving toward lower value feedstocks and higher value products.

"We believe an ethanol plant is a gateway to a biorefinery," he said.

As for the near future, Nofsinger added, "The industry is such that the future is looking very bright in the long term. A renewable fuels standard would propel this industry to a new level, but in the short term, I am concerned about plants that are coming online in the next 8 to 12 months. However, by 2004 - or even sooner - I think the market will be very favorable again. Burns & McDonnell is in a unique position to help the industry prepare for the unprecedented opportunities that awaits it."