The principal investors and key board members in a company
proposing to build a large-scale solar farm in southern San Benito
County have little experience in significant solar projects and
little success working together in founding or managing viable
energy-related businesses, a Dispatch analysis showed.
The principal investors and key board members in a company proposing to build a large-scale solar farm in southern San Benito County have little experience in significant solar projects and little success working together in founding or managing viable energy-related businesses, a Dispatch analysis showed.
A review of five energy-related companies involving the principals of Solargen Energy – which hopes to build a solar farm in San Benito County – highlights the difficulties of the industry but also could potentially raise concerns about Solargen’s limited financial resources and track record with successful energy projects.
Solargen is proposing to build a 420-megawatt solar farm on nearly 5,000 acres in southern San Benito County. Its latest cost estimate was $1.2 billion and the company’s plans hinge on obtaining 30 percent of the capital start-up funds from federal and state subsidies for alternative energy ventures. Solargen must get a county approval by December to get the outside funding.
As for three of its principals’ prior history in the energy industry, three of the five companies examined – Blast Energy, Particle Drilling Technologies and Pacific Ethanol Holdings – have been the subject to Chapter 11 bankruptcy proceedings over the last three years. One company, AE Biofuels, has declared it might be forced to file for bankruptcy.
The fifth company, Evolution Petroleum, has a well-performing stock but lost a total of almost $6 million in the last three annual filing periods – on $12.3 million in total sales during that time – as reported on Evolution’s reports.
The three principal investors involved in those prior energy companies include founder Eric McAfee, Chief Executive Officer Michael Peterson and Laird Q. Cagan.
Additionally, McAfee was the subject of a serious complaint by the U.S. Securities and Exchange Commission. McAfee is Solargen’s largest shareholder, with a 19 percent stake in the company.
Such an investment history normally would not be a focus for county government officials in considering a project approval, said Supervisor Anthony Botelho. In this case, though, he said it is “a lot more relevant,” and he noted how the proposal covers a “big, wide area of the county” and would require a zone change.
“What we do control is the long-term land-use policies of that area,” Botelho said. “I certainly want to make sure we do this right. We have to do it right.”
Peterson, the CEO, responded to queries over principals’ history in energy by underscoring how McAfee is not active in the company, defending those prior dealings and contending that funding for the solar farm is in “very good hands.”
The following is a breakdown of Solargen investors’ experience in the energy industry:
– Blast Energy Services, Inc. (BESV): In July, 2006, the SEC filed an anti-fraud complaint against Blast Energy Services, Inc., formerly known as Verdisys, Inc., alleging that former director McAfee “caused Verdisys to make misleading disclosures regarding its expenses and revenues,” according to the litigation release on the matter. The SEC commenced a civil penalty action against McAfee in court. He consented, on a neither admit-nor-deny basis, to the entry of the SEC order. McAfee then paid a civil penalty of $25,000, according to the SEC.
Blast Energy filed for Chapter 11 bankruptcy protection in January 2007. In early 2008, the court allowed the company to emerge from bankruptcy after securing additional funding from Clyde Berg and McAfee Capital, two parties related to the company’s largest shareholder, Berg McAfee Companies.
– AE Biofuels, Inc. (AEBF): McAfee, Cagan and Peterson – all Solargen principals – and others founded AE Biofuels in 2006. According to AE Biofuels’ December 2009 annual filing, there is substantial doubt about the company’s ability to “continue as a going concern.” AE Biofuels incurred a loss of $10.9 million in 2009 and ended the year with a negative working capital of more than $17.9 million. AE lost $25.8 million in 2008.
According to the filing: “A continued lack of liquidity from biofuel plant operations in 2010 may have a material adverse effect on our liquidity and may result in our inability to continue as a going concern, and or force us to seek relief from creditors through a filing under the U.S. Bankruptcy Code.”
– Particle Drilling Technologies, Inc. (PDRT): McAfee took Particle Drilling public by a reverse merger in 2005. Particle Drilling claimed to have developed a patented oil- and gas-drilling service for penetrating hard rock faster than current technologies. In May 2009, the company filed for Chapter 11 bankruptcy. In September 2009, the company announced that it voluntarily had stopped filing SEC documents for its common stock. The next month, the company emerged from bankruptcy with the backing of a private investor.
– Pacific Ethanol Holding (PEIX): In 2005, McAfee took Pacific Ethanol public by a reverse merger with a publicly-traded shell company and executed an alternative public offering – APO – which allowed the company access to the stock exchange. Bill Jones, former California secretary of state, was appointed director and chairman of the board.
In late 2008 and early 2009, Pacific Ethanol idled production at three of four ethanol facilities due to adverse market conditions and a lack of adequate working capital, according to a company news release. In May 2009, the holding company and each of its four plant subsidiaries, with an aggregate debt of $250.8 million, filed for Chapter 11 bankruptcy. Net losses attributed to Pacific Ethanol were $146 million in 2008 and $308 million in 2009.
In June 2010, Pacific Ethanol Holding announced that its reorganization plan had been approved by the bankruptcy court. The plan will erase about $290 million in unpaid debts while leaving its four wholly-owned plants in the hands of lenders. The company no longer owns its facilities, although it has options to repurchase.
– Evolution Petroleum (EPM): Former chairman and current director of the board, Laird Cagan is a managing director of Cagan McAfee Capital Partners, LLC (CMCP). McAfee, also a managing director of CMCP, currently owns or controls, directly or indirectly, about 4.7 million shares or around 18 percent of outstanding common stock, according to Evolution’s financials. But he is “neither an officer, employee nor a member of our board of directors,” according to Evolution’s annual report.
The report goes on to say EPM is a thinly-held stock. Over three years – 2007 to 2009 – Evolution Petroleum’s stock did well although the company’s net annual losses during that period, with around $12 million in revenue in that time frame, totaled close to $6 million.
CEO explains history
In explaining the history of Solargen’s principals, Peterson’s initial response was to stress how McAfee is “not that involved in the company” – to the point where he has “never been to meetings” for Solargen. But Peterson also defended the record of those other companies, such as pointing out how Pacific Ethanol for a time was a “leader in the industry.”
“Mr. McAfee is not an executive board member (of Solargen). He sits on the board,” said Peterson, when asked about the bankruptcies of Blast, Particle Drilling and Pacific Ethanol Holding, and the SEC fine involving Blast. “He’s not involved in the day-to-day anything with this company. His activities in other companies are not germane to what Solargen is doing. The funding of the company is in very good hands.”
Peterson went on to express confidence in Solargen’s ability to build liquidity, noting how “these types of things get funded sequentially.”
“A lot of people want to invest in this project,” said Peterson, adding how it doesn’t make sense to move ahead with a lot those transactions this early in the process. “That’s just the way it is. We’re creating value. I have many investors who want to invest. They’re lined up at the door to invest.”
Many of those financiers could come from overseas, though. As Peterson acknowledged last month, he had been visiting Asian countries to solicit investors through the EB-5 federal visa program. It allows foreign financiers and their families an opportunity for green cards and permanent residency by investing at least $500,000 toward development of jobs in designated high-unemployment areas such as San Benito County.
Peterson responded more specifically to the bankruptcies.
Regarding Pacific Ethanol, he mentioned how the “industry went bad” and noted that the governor’s office had approached McAfee “to help restart those” plants.
“If it points out ethanol went bankrupt,” Peterson said, about this story, “that’s like saying Henry Ford was a failure. Ford actually had a lot of financial troubles last year.”
Regarding Evolution Petroleum, he called it “very successful,” saying it had traded at nearly $6 per share and it was worth almost $200 million.
Blast Energy “did declare” bankruptcy, he acknowledged, but attributed it to a group that had illegally purchased a service contract. He said Blast later won a lawsuit against the firm.
For Particle Drilling Technologies, Peterson said it started with $20 million from Goldman Sachs and he cited a “technology-oil-drilling issue” in spurring its financial problems.
Overall, Peterson said McAfee has founded more than 25 companies and that he has been “successful on all of them except for those couple you mentioned there.”
Still, Peterson insisted: “He’s not that involved in the company. He’s one of the founders. He hasn’t been to Hollister. He’s never been to meetings. From time to time, I just kind of tell him what’s going on.”
Even if McAfee does not attend meetings, he does have a stake in several “related party transactions,” as detailed in Solargen’s latest quarterly report.
The following are Solargen’s related party transactions with McAfee connections, as listed in the annual report.
– Solargen is billed by McAfee Capital – wholly owned by Eric McAfee – for expense reimbursements, mostly for paralegal and administrative personnel. Solargen has paid McAfee Capital a total of $219,043.
– CM Consulting bills Solargen for use of its charter airplane service. Since inception, Solargen paid the company $20,725. McAfee owns 50 percent of CM Consulting.
– As a Solargen board member, McAfee receives $10,000 per month, or a $120,000 salary.
– Solargen has been billed $14,233 by Cagan McAfee Capital Partners for expense reimbursements, for services from McAfee and “his administrative personnel.”
– In July 2009, Solargen started leasing $3,000 square feet of office space from AE Biofuels. It is a non-cancellable lease through 2012, and Solargen is set to owe AE Biofuels – which has had liquidity problems of its own – a total of $185,600 though the life of the agreement.
