Colony’s Lease Extended, Deal Dead in Tulare

Tulare’s Board of Public Utilities (BPU) will give Colony Energy a third break on the rent for its 20-year lease of city land but wont reopen negotiations to sell the company gas collected at the city’s waste treatment facility.

Representatives of Colony have called the gas purchase essential to getting their larger project–a $25 million plan to convert 200 tons a day of organic waste into fuel–off the ground quickly. They also say the lease may have to be broken because the BPU is refusing to talk further. Their plans, they now say, were contingent on receiving the gas sales contract, which the BPU appears ready to award to rival company Fuel Cell Energy.

Overly Optimistic

In 2015, Colony and City Hall were in discussions regarding Colony’s plan to build a waste conversion plant on land adjacent to the waste treatment plant. It was then Colony put forth the idea of trapping waste gas currently being burned at the plant for conversion into fuel. City Hall was welcoming to the idea, and the official request for proposals (RFP) was published inviting interested companies to submit their ideas. Three companies’ proposals were considered, but acceptance of Colony’s seemed like a sure thing, company reps told the BPU at its May 18 meeting.

“That’s when we decided to sign the lease,” said Matt Schmidt, Colony’s vice president of development. “We were feeling pretty optimistic about getting the project done.”

The lease was a 20-year contract that included a year of reduced rent that would give Colony time to bring its plant online. Terms include payments of $5,250 a month to Tulare, but only after a 1-year entitlement period ended in May of 2016. During the entitlement period, Colony would pay a reduced rent of just $883 a month until its business was running.

In May 2016, Colony was back in front of the BPU looking for another year of entitlement–at a cost of $52,404 to the city–which the BPU granted. Some time in the summer of 2016, however, negotiations broke down and the gas sale deal seemed to be off the table, and Colony came back last month looking for another year-long extension on its entitlement. The BPU gave them one month.

Withdrawal Symptoms

BPU directors seemed to think Colony had already had enough time, but they eventually agreed to grant a 10-month extension on Colony’s rent break to give the company a chance to start construction.

“I think you’ve had a lot of time since then (2015) to get this thing going,” said BPU President James Pennington.

Pennington expressed at length his frustration with attempts to negotiate with Colony during his six months on the Board. Conflict surrounds how City Hall and Colony stopped talking. Colony’s reps maintain the proposal they floated was contingent on being able to use certain equipment, and that the proposal simply expired when the city didn’t respond in a timely manner.

The city’s staff says it didn’t happen that way. Negotiations were suspended while an evaluation of needed equipment was performed, City Hall says, and Colony ended talks before results of the evaluation were in.

“It was (in) your letter that you basically withdrew from things. When someone says they want to remove themselves from the process, that’s pretty clear, unless they’re speaking a different language,” Pennington said. “You were also clear that you might want to continue on and separate completely and just do your own thing out there, and you wished the city well, which was nice of you, but at the same time it was a complete removal from everything on the RFP.”

“That is one interpretation,” Schmidt responded, later adding: “We never intended to withdraw.”

Down to Business

The 10-month entitlement extension is intended to give Colony enough time to start construction of its larger project. The lease was worded to allow the company to start its revenue stream before rent hikes went into effect, Colony’s reps said. If they have to pay the full amount, it may mean they’ll have to terminate the lease, which they are allowed to do if their plans prove unprofitable.

The extension should provide enough time to increase the amount of waste the company collects, allowing it to start conversion. Colony reps say 200 tons a day are needed. Currently, they are collecting just one-third of that but are in talks to increase their numbers.

“I think within six months, we could be at a threshold where we can go to our partners and investors and say, ‘We’re ready to break ground, we’ve got the volume, we’ve got the economics, regardless of processing the city’s gas,’” Schmidt said.

If Colony’s leadership is still being too optimistic, they have a plan for that as well: breaking the lease.

“We would probably terminate the lease and let it expire, and then work towards building that excess capacity,” said Colony’s managing partner, Kent Hawkins. “And once we had, to be happy to come back and negotiate a (new) lease with you.”

Deal or No Deal?

After granting the entitlement extension, the Board was left to decide if it would reopen negotiations on selling its waste gas to Colony, a topic that has sparked heated exchanges at past meetings of the BPU and the City Council.

The only issue is who ended talks regarding the sales contract, with staff members and the BPU board presenting strong arguments Colony stepped out first. BPU member Gregory Blevins read part of Colony’s letter from August 2016 into the record.

“‘We will now independently implement our digester and bio-gas project. We wish you every success in your project,’ meaning the city’s project, and so that’s pretty clear language,” he said.

Schmidt maintains the letter is being taken out of context. Blevins disagreed.

“If we look at the context, I think there were some emails that went back and forth on August 16th also that could be interpreted as being consistent with completely pulling out of the project or the RFP process,” he said.

Schmidt says Colony had no desire to leave the talks.

“Our intention was never to do that,” he said. “If you read the withdrawal letter that we’re talking about, it says right on it: In response to the suspension of the RFP process.”

No Deal

After retiring to closed session to discuss the matter with its attorney, the Board then voted 5-0 not to negotiate with Colony further.

“If you have a disagreement on something, that’s what you negotiate,” Pennington said. “That’s why you do this stuff. You sit down and you have discussions.”

Colony’s reps say they still hope to get their project running. That, they said, will take about another year, provided they can secure enough raw materials.

“We don’t want to make the lease a big issue here,” Schmidt said.

Only time will tell if the lease will be the straw that breaks the camel’s back. Unless Colony and the BPU renegotiate the lease in the meantime, or the lease is broken, the full payments will become due in May of 2018.

 

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