By PETER HUSSMANN
Operators of the Newton biodiesel plant were put on notice earlier this week that its management services agreement with Renewable Energy Group (REG) will end a year from now, making the future of alternative fuel production at the plant in question.
A Securities and Exchange Commission filed by Central Iowa Energy today states that a "notice of termination of the Management and Operational Services Agreement (MOSA)" entered into between CIE and REG in August 2006 is expected to come to an end May 1, 2010.
The terms of the contract between CIE and REG stated it would continue for three years following the first month of biodiesel production at the Newton plant and would continue until either party gave 12-month advance notice of termination.
"The April 7th letter from REG states that it shall constitute such twelve (12) month advance termination notice," the SEC filing states. "Because CIE commenced biodiesel production at its plant in April 2007, CIE expects that the MOSA will terminate on May 1, 2010."
Previous SEC filings have indicated the precarious position of the Newton biodiesel operation.
Since its inception as an operational biodiesel production plant, the company has generated net losses of $9.3 million, the company's last quarterly report indicated. For the three-month period the report covers, the plant had net losses of $2.9 million. In addition, the plant is no longer operating continuously, ceasing all biodiesel production activity between mid-November and the end of the year. Earlier this year, Central Iowa laid off six administrative and plant employees.
"We are no longer continuously operating our facility," the financial report notes. "Instead, we produce biodiesel only when we have received a biodisel purchase contract and when we have sufficient cash on hand to purchase the necessary feedstock to produce the amount of biodiesel required by the contract.
"Our plant was producing biodiesel for the first half of the quarter ended Dec. 31, 2008, but ceased producing biodiesel from mid-November through the end of the quarter ended Dec. 31, 2008. Our decision to cease producing biodiesel during this time was due to our lack of biodiesel purchase contracts and the general reduction in demand for biodiesel. We expect to continue operating on an as-needed basis for the foreseeable future until general biodiesel demand increases and our liquidity situation has improved."
Today's SEC filing indicates that REG instituted the termination of its service contract "due to changes in the biodiesel market since the MOSA was originally signed."
"REG has proposed that the parties cooperate to negotiate a new contract on terms mutually beneficial to CIE and REG; however, there is no guarantee that a new agreement will be entered into between the parties," today's SEC filing states.
The current management services contract obligates REG to manage the overall operations of CIE's biodiesel plant. In addition to placing a general manager and operations manager at the plant, the agreement calls for REG to procure all the necessary feedstock and chemical inputs necessary to produce biodiesel, market and sell all the biodiesel, glycerin and fatty acids produced at the plant and perform all administrative services for the operation. In exchange, CIE pays REG a fixed fee per gallon of biodiesel produced at the Newton plant, plus a bonus based on CIE's annual net income.
In addition to the management contract, CIE also entered into an agreement that allowed Central Iowa Energy's use of REG's state-of-the-art biodiesel plant construction technology.
More than 500 individual investors own more than 26,000 shares in the Newton biodiesel plant.
Additional reporting by the Newton Independent on the biodiesel plant can be seen here.
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