Khosla-Backed Coskata Shelves IPO, Shifting Focus to Gas

Coskata Inc. (COSK), a biofuel company backed by venture capitalist Vinod Khosla, shelved its $100 million initial public offering and is seeking investors for a plant that will convert natural gas into ethanol.

Unfavorable market conditions were the main reason for putting the IPO on hold, Chief Executive Officer Bill Roe said. The closely held company, which also counts Total SA (FP) and Blackstone Group LP among its investors, registered Dec. 16 to sell shares.

Coskata is the second biofuel company this year to reconsider an initial share sale, after Canada’s Enerkem Inc. withdrew its offering in April. Other biofuel developers that have completed deals in the last two years have lost value, and “that hasn’t helped,” Roe said in an interview yesterday. “It has soured a lot of the investors.”

The company, based in Warrenville, Illinois, will attempt to raise the same amount through a private placement with investors and a deal may be completed during the fourth quarter, Roe said.

“We don’t believe that the markets are open for new issuers at the moment,” he said. “It’s just not the right time.”

The backing will support Coskata’s first commercial facility, which will use gas as the main ingredient in a process that yields ethanol.

Coskata initially planned to use the proceeds from the IPO to build a facility in Alabama to produce ethanol from wood waste. The company converts carbon-containing materials into hydrogen and carbon monoxide with gasification technology licensed from Alter NRG Corp. (NRG), then uses its proprietary microorganisms to process the gases into ethanol.

‘Significant Pivot’

The new plant will be at a different location, Roe said. “This is a fairly significant pivot for our company,” he said. “Up until fairly recently we had been intending to commercialize on a biomass-conversion platform.”

Coskata is shifting to gas because it has plunged in value, he said. Prices hit a 10-year low in April.

Ethanol was about six to eight times more expensive than gas last year per million British thermal units, presenting “compelling economics” for companies that convert gas to transportation fuels, Coskata said on its website.

“When we use natural gas as opposed to any other carbon- containing material, it’s a much, much simpler process,” Roe said.

Shifting Requirements

The planned transition to gas-based ethanol is also due to uncertainty about federal biofuel mandates, Roe said.

The Renewable Fuel Standard, or RFS, a U.S. Environmental Protection Agency regulation, requires oil refiners to blend 36 billion gallons (136 billion liters) of biofuels a year with their products by 2022. The industry is unlikely to produce enough to meet some of those requirements, including so-called cellulosic biofuels made from non-food plant material.

That’s prompted House Republicans to introduce a bill calling for the RFS to be modified or repealed. The American Petroleum Institute sued the EPA in March, saying some RFS requirements are unachievable.

Given the potential the the RFS will be changed, investing in cellulosic-biofuel plants is “not a risk that we’re willing to take,” he said, though “we’re not at all abandoning the notion of biomass as a feedstock.”

Biofuel IPOs

Two other U.S. biofuel IPOs are still pending. Fulcrum BioEnergy Inc., which produces ethanol from gasified trash, registered Sept. 22 to raise as much as $115 million.

Mascoma Corp., another of Khosla’s biofuel investments, filed Sept. 16 to raise as much as $100 million to develop technology that produces ethanol from wood using genetically modified bacteria. Neither company has said how many shares they plan to sell or at what price.

Coskata hasn’t withdrawn its IPO registration with the U.S. Securities and Exchange Commission, spokesman Matthew Hargarten said by e-mail. “They will still consider a public offering at some point in the future, but they do not want to have the public markets dictate their commercialization timeline.”

To contact the reporter on this story: Andrew Herndon in San Francisco at aherndon2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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