5 August 2019

Media: Rotorua Daily Post

Topic: TERAX project

Enquiry

I was hoping to do a bit of a big read about Terax next week.

I haven't really done anything on it in my time with the paper but it has been mentioned to me a whole bunch of times and I looked up its history in our archives and think I should do something about what the future holds as the daily post covered it a lot when established.

I have a fair few questions so was hoping for a response by C.O.B on Monday May 20. That will allow me to send any necessary follow up questions too.

My questions are:

- What stage is the winding down of the Terax Limited Partnership at? And what does the process look like?

- What was behind the decision to wind down the partnership five years after its establishment?

- Can I please have the partnership's most recent annual report?

- How much was spent on the partnership between 2013 and now?

- How much did the company earn in that time?

- How much is being spent dissolving the partnership?

- What does the future hold for Terax?

- Is Terax technology in use in Rotorua currently?

- If so, has it met predictions of saving the council about $700k per year? A prediction made in August 2012 by the then chief exec?

- In 2017.18 the council was "actively pursuing leads" into China and India but one party decided not to continue while the second's offer was rejected. Has the council been pursuing any other leads? If so where?

- Will the council pursue any other leads in the future? Ie is the council still looking to commercialise the project?

- As part of winding down the partnership the council talked about negotiating a new ownership structure that would protect council's investment at little cost going forward. Has a new ownership structure been negotiated? If so what does that look like?

Response

The 'story' of Terax, including decisions and the reasons for those, was outlined in a comprehensive report which went to elected members in July 2018 - the report was published on Council's website HERE and includes a link to presentation slides + you can view the recording of this presentation (given during the July 2018 Operations & Monitoring Committee hui) via Council's YouTube channel HERE (go to 2.24 on the recording, presentation given by CFO Thomas Coll).

The O&M Committee supported a recommendation that was subsequently approved by the Full Council:to instruct the Chief Executive to start the process of winding up the Terax Limited Partnership, Terax 2013 Limited by working with Scion on the future ownership, or sale, of the intellectual property and to take all steps necessary to protect Council's investment should future value be able to be extracted from the TERAX intellectual property.

That process is ongoing but nearing completion and will be reported to elected members at the appropriate time.

Some key facts to assist you:

• The purpose of the Terax Limited Partnership was to commercialise the Terax waste conversion technology and thereby generate returns to its investors. This has to date not eventuated.
• The partnership is 50% owned by RLC and 50% owned by Scion and owns the intellectual property for its patented Terax Waste Conversion Technology which is designed to convert sludge from a wastewater treatment plant into useful products.
• The Terax technology destroys sewage treatment plant sludge and other organic wastes that are typically landfilled. It combines hydrothermal and biological processing to break materials down, eliminating the organic solids content of the material.
• Opportunities were explored with potential customers and with potential partner investors to build a demonstration plant (in Australia, the United States, Northern America, China, Japan and India).
• We are finalising details regarding the transfer of the intellectual property to Scion.
• At this stage there are no future plans for the technology.
• If there were any further developments these would be led by Scion with any commercial value derived being shared 50/50 between Council and Scion.Daily Post questions:What stage is the winding down of the Terax Limited Partnership at? And what does the process look like? The process of winding up the partnership is still underway but nearing completion. The process includes dispersing the assets including intellectual property (IP). Council and Scion share the IP 50/50 but Council has assigned its share to Scion with agreement that if the technology is commercialised in future Council will receive a 50/50 share.What was behind the decision to wind down the partnership five years after its establishment?See update provided last July which provided detailed background and reasons for winding down (link above)Can I please have the partnership's most recent annual report? See attached [https://www.rotorualakescouncil.nz/our-council/news/Documents/Terax-Limited-Partnership-Annual-Report-for-year-ended-30-June-2017.pdf]How much was spent on the partnership between 2013 and now? $1,287,932How much did the company earn in that time?A minimal amount which was revenue for minor consulting work.How much is being spent dissolving the partnership?As the process is still underway that hasn't yet been finalised but the cost of winding up the partnership is expected to be approximately $5000.What does the future hold for Terax?That will be dependent on anything Scion decides to undertake in terms of pursuing commercialisation. You would need to speak to Scion about any plans they may have in this regard.Is Terax technology in use in Rotorua currently?NoIf so, has it met predictions of saving the council about $700k per year? A prediction made in August 2012 by the then chief exec?As above, TERAX technology is not in use.In 2017/18 the council was "actively pursuing leads" into China and India but one party decided not to continue while the second's offer was rejected. Has the council been pursuing any other leads? If so where?Council did not pursue leads, this was undertaken by the Terax Limited Partnership as the partnership entity tasked with pursuing commercialisation of the technology. Leads that were pursued are outlined in the July 2018 update (see above)Will the council pursue any other leads in the future? Ie is the council still looking to commercialise the project?As above, the partnership established to commercialise the TERAX technology is being wound down. Any future activity is a matter for Scion to consider. You will need to speak to them regarding any plans they may have.As part of winding down the partnership the council talked about negotiating a new ownership structure that would protect council's investment at little cost going forward. Has a new ownership structure been negotiated? If so what does that look like?As above, Council is assigning its share of the intellectual property (IP) to Scion with a secondary agreement that Council will benefit 50/50 from any future commercialisation gains if there are any.In July 2018 Council approved a recommendation from the Operations & Monitoring Committee to work with Scion to wind up the Terax Limited Partnership.The Chief Executive was instructed to start the process of winding up the Terax Limited Partnership, Terax 2013 Limited, by working with Scion on the future ownership, or sale, of the intellectual property and to take all steps necessary to protect Council's investment should future value be able to be extracted from the TERAX intellectual property.See below the report which was considered by the committee which provides a full background and the reasons for the recommendation to wind up the company.BACKGROUNDRotorua Lakes Council (RLC) and the New Zealand Forest Research Institute Limited (Scion) have been in partnership since 2008 for the purpose of commercialising the TERAX waste conversion technology (TERAX). The Terax technology aims to destroy waste water treatment plant residual biosolids (sludge) and other organic wastes that are typically landfilled. The design scope combines hydrothermal and biological processes to break down complex organic materials into simpler molecules. The benefit of this process, when successful in scale, is the conversion of the organic solids content to beneficial use materials that would otherwise go to landfill.RLC and Scion have jointly invested into maturing this process since 2008. This joint venture was previously successful in attracting grants from the Ministry for the Environment to evaluate, build and process a pilot plant. This work was successfully completed in 2012.In 2012 RLC and Scion believed the science, technology and engineering combined in TERAX provided a cost effective way to divert biosolids waste to beneficial use in a commercially viable solution for in an environmentally sustainable manner.Early 2013 RLC and Scion formed Terax 2013 Limited and the Terax Limited Partnership and moved into the design of a commercial application for a waste water treatment plant in preparation for a full scale plant to be built at the Rotorua waste water treatment plant.In July 2013 Council's then Infrastructure Services Committee recommended to Council the adoption of the business plan for Council to construct a TERAX demonstration plant and to make funding available in the 2013-14 Annual Plan and to proceed to a detailed design stage.Following the 2013 Council elections, the new Council approved a partial continuation of the project pending further work to be undertaken on the financial model and the business case for the TERAX demonstration plant. This work was completed and reported back to in May 2014 and funding for the demonstration plant for $10.9m was included in the 2015-2025 Long Term Plan and the 2017 Annual Plan.In April 2015 Council delayed the progression of the demonstration plant pending a further and more detailed review and investigation of tertiary treatment options and desired effluent to the lake quality for the new waste water treatment plant design that would replace the forest based effluent land disposal system. The Waste Minimisation Fund (WMF) advised Council that pending that review the funding stream would be placed on-hold.In December 2015 the deed of funding from Ministry for the Environment expired and a reapplication was made. The new application was declined in August 2016 by the WMF. Due to technical issues with the new proposed waste water treatment plant and the lack of external funding, Council removed the construction of a demonstration plant from its plans.The sequence of events led Council and Scion to condition any future funding allocation into Terax. This recognised that an external investor would be required to help fund a demonstration plant to enable the value of the TERAX Intellectual property to be realised going forward. Funding contributions from both partners ceased December 2017 and Council has not provided any further funding in the 2018-2028 Long Term Plan.DISCUSSION AND OPTIONSDuring the last nine months the TERAX Company has been actively pursuing two solid leads, one into India and the second into China. Funding was provided from a third party to enable a value engineering exercise to assess whether the capital costs of a demonstration plant could be brought down to fit the Indian markets. While this exercise was successful, the third party has elected not to continue on towards construction of a plant.An offer to acquire shareholding of the company was received from a Chinese consortium but it was rejected due to the poor quality of the offer.There is still considerable interest in the potential of the technology, but due to a lack of a demonstration plant it has been difficult converting this interest into tangible future sales. With the India and China leads dissipating the Company Directors, Scion and RLC have started the discussion of winding up the formal partnership and company structure in a way that protects Intellectual Property and each partner's value and having an arrangement where value can be extracted in the future, both Scion and RLC would do so on an agreed basis.Management seeks the committee's approval to continue with the discussions and to negotiate commercial terms with Scion on the following:
• Formal disestablishment of the Limited Partnership and Company to reduce compliance costs.
• Negotiate new ownership structure of the TERAX intellectual property in a way that protects Council's investment to date at little to no cost going forward.
• Recognises that any future value from the Intellectual Property would likely be done on the future efforts of Scion.
• Extraction of any future value would be shared on a basis that recognises the investment to date of each partner and the future efforts of Scion and RLC if required.