addressing anaerobic digestion financial issues
DESCRIPTION
Michael Dunn - Director, Iona Capital Michael is a Director with Iona Capital, a private equity company that manages retail and institutional funds targeting the energy from waste sector and specifically seeks to invest in anaerobic digestion projects that require external funding. Iona Capital has recently completed a £6m investment, with Biogen Ltd as the operating partner, in an SPV co-owned with Biogen Ltd. He has held senior level positions with Shanks Group , Veolia Group and Amey Group. He currently holds a variety of sector-related non executive director roles including sitting on London Waste Ltd's board. He has a Masters in Finance degree from the London Business School. This presentation was given on 27 September, 2012 at "Anaerobic Digestion: Accelerating the Rollout" eventTRANSCRIPT
Iona Capital Ltd
Addressing AD finance issues
Agenda
• About Iona Capital
• Market Overview
• Principal Sources of Income
• Project Specific Issues Structures
- a funder’s perspective
• Sources of Funding
About Iona Capital Ltd
• The UK’s Environmental
Renewables Investment Fund
• Asset Managers with
specialist funds targeting both
the Local Authority and
Merchant markets
• Particular focus on AD
infrastructure across UK
• £16m committed to three
Local Government AD
projects
• Financing target: non
correlated returns to investors
of 15-20% IRR’s
UK total waste volumes
0
50
100
150
200
250
300
350
2004 2006 2008
Mill
ions o
f to
nnes
DEFRA, waste data
Secondary, sewage and
other
Households
Commercial and
industrial
Mining and quarrying
Construction
Electricity generation from
Bioenergy (GWh)
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
20072008
20092010
2011
Plant Biomass
Anaerobic digestion
Animal Biomass
Co-firing with fossil fuels
Biodegradable municipal solid
waste combustion
Sewage sludge digestion
Landfill gas
Data source: DECC. Renewables Statistics
Principal sources of Income I
45 52
57
43 41
0
20
40
60
80
100
2008 2009 2010 2011 2012
AD
Gate
Fees, £
WRAP Gate Fees Reports 2008-2012
AD Gate Fees
High
Low
Median
Principal sources of Income II
0.0
5.0
10.0
15.0
20.0
25.0
2007 2008 2009 2010 2011
FITs (AD >5kWh) 9.9 9.9
LEC 0.4 0.5 0.5 0.5 0.5
ROC (Nominal)x1 4.9 5.3 5.4 5.2 5.1
Average consumer 5.4 6.8 7.3 6.5 6.9
Pence p
er
kW
h
Government incentives
Typical Project Assessment
• Plant objectives: process number of tonnes, produce methane and
electricity etc
• Technical specification: waste type, site specific (planning etc)
• Project considerations (timeframe, resources, skilled labour)
• Cost considerations (designs, controls required, documents and
safety training)
• Income generation: realistic pricing of supply and off take, strength
of counter party, contract durations and % secured of annual
feedstock assumptions
• Financial assumptions: capital, debt/equity split, (no) bank debt
• Project level return (IRR 15% with upside to 20%)
Deal structure
SPV
Waste contractor Utility
Investor/Operator
Operating Contractor
Construction Contractor
Investor Debt Equity
Project
agreement
Construction
contract
Operating
contract
Power Purchase
Agreement
Key Investment Risks
Engineering, Procurement, Construction
• Site
• Planning
• Environmental permits
• Performance Guarantees
• Fixed Prices
Technology
• Proven process
• Scalability
• Due Diligence
• PAS 110
• Plant maintenance
Supply
• Waste Quality: composition & chemical content
• Contamination levels
• Continuity
• Contracts/Terms: Local Authority vs C&I
Output
• Electricity contracts, FITs, ROCs
• Heat contracts, RHI
• Digestate Disposal
• Biomethane injection to grid
• Rejects: % tonnage and hazardous waste
• Emissions: odour, noise, gases etc
Finance
• Loan note: repayment and priority ranking
• Equity: early valuation
• Interest rate protection
• Security: debenture, land, assets
• Parental Guarantees
• Indexation of inflation rates
1 MW AD plant
Annual Operational Costs breakdown
16%
14%
11% 18%
5%
22%
4%
10%
59%
Waste Overheads
Life Cycle expenditure Management & Staff
Rates & Utilities Equipment & Maintenance
AD related costs Site related costs
Facilities Management
Total Construction Costs breakdown
1%
3%
13%
11%
11%
61%
28%
Planning & Permitting Costs
Utility Connections (incl. grid connections)
Tank Bases, Underground Tank & Bund Area
Other Site related costs
Building
Plant & Machinery
Civils
Gate Fees depend on project costs
FM , 35%
Insurance, 6%
Overheads, 5%
Capex, 16%
Financing, 24%
Tax,
7%
Life cycle, 5%
Assume £100 per tonne
processing costs.
25,000 tpa facility
Small AD
Economics of a typical Local
Authority facility
Mid Range AD
Economics of a typical Local
Authority facility
Investment Sensitivities
Value change Base Case Electricity
price
decrease by
20%
20%
increase in
FM
RPI - 1%
Increase in
third party
waste gate
fee by £10 to
£40
Project
post tax
IRR
14.29%
13.48%
12.08%
13.97%
14.71%
Blended
return
13.90%
13.13%
13.90%
13.63%
14.32%
Investor
blended
return
12.68%
12.19%
12.68%
12.51%
12.97%
Pecking order Theory
Private Equity
Target IRRs! Debt/equity split Iona, Albion, Novus Modus, Investec,
Octopus, Foresight, Equitix
Banks
Access the risk levels Proved operational
track record Returns
HSBC, Barclays, Investec, Triodos
Internal Funding
Universities – R&D Established operator
Special Funds
WRAP (AD Loan fund, £10 m) GIB (£3 billion)
Grants Local Government European organisations Charities
Summary – How to succeed with
VC’s
• Quality Business Plan addressing issues
contained in these slides
• Team – External and Internal
• Financial Model but don’t get hung up on
finance and tax – target your audience
• Limited funding options in current market