reinventing biogas financing - american biogas...

January 28th, 2015 11:00 am-12:30 pm ET

Reinventing Biogas Financing Successful and Innovative Strategies to

Finance Biogas Projects

Special Thanks

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American Biogas Council: The Voice of the US Biogas Industry

The only U.S. organization representing the biogas and anaerobic digestion industry

Over 220 Organizations from the U.S., Germany, Italy, Canada, Sweden, Belgium and the UK

All Industry Sectors Represented:

project developers/owners

anaerobic digestion designers

equipment dealers

waste managers

waste water companies

farms

utilities

consultants and EPCs

financiers, accountants, lawyers and engineers

Non-profits, universities and government agencies

Join Us! www.AmericanBiogasCouncil.org OR [email protected] OR 202.640.6595

0

50

100

150

200

250

2010 2011 2012 2013

ABC Membership

Organizations

4

2014

http://www.americanbiogascouncil.org/

mailto:[email protected]

239

on Farm (Dairy AND Swine)

1,241

Wastewater (860 using their biogas)

636

at Landfills

2,000+ Operational

Biogas

Systems

11,000+ Potential

Biogas

Systems

8,002

on Farm (Dairy AND Swine)

2,400

Wastewater (incl. 381 making biogas but not using it)

450

at Landfills

U.S. Biogas Market – Current and Potential

Presenters

Moderator: Mike Land, Director, Baker Tilly

Todd Campbell, Alternative Energy Advisor, USDA

John May, Managing Director, Stern Brothers

Roger Feldman, Of Counsel, Andrews Kurth

Axel Hester, EVP Investment Management, Natural Systems Utilities

Agenda 1. Introductions

2. How have biogas projects been financed recently?

- Mike Land, Baker Tilly

3. USDA Update on Biogas Opportunity Roadmap and Funding Programs

- Todd Campbell, U.S. Department of Agriculture

4. Innovative Financing Strategies

John May, Stern Brothers

Roger Feldman, Andrews Kurth

5. How can project developers use new financing tools?

Axel Hester, Natural Systems Utilities

6. Audience Q&A

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,

an independently owned and managed member of Baker Tilly International. © 2010 Baker Tilly Virchow Krause, LLP

How Have Biogas Projects Been Financed?

January 2015

Agenda

> Introduction

>Typical investment arrangements in US biogas

>Example Project

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Disclosure

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated

by the United States Department of the Treasury, nothing contained in this

communication was intended or written to be used by any taxpayer for the purpose

of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue

Service, and it cannot be used by any taxpayer for such purpose. No one, without

our express prior written permission, may use or refer to any tax advice in this

communication in promoting, marketing, or recommending a partnership or other

entity, investment plan, or arrangement to any other party.

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and

managed member of Baker Tilly International. The information provided here is of a

general nature and is not intended to address specific circumstances of any

individual or entity. In specific circumstances, the services of a professional should

be sought. © 2012 Baker Tilly Virchow Krause, LLP

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Baker Tilly at a Glance

Baker Tilly is the 8th largest accounting network worldwide

> Top 15 largest firms in the U.S. consisting of more than 2,500

professionals

> Established in 1931

> Offices throughout the Midwest and East Coast

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Connecticut

Delaware

Illinois

Maryland

Michigan

Minnesota

New Jersey

New York

Pennsylvania

Texas

Washington DC

Wisconsin

BT Experience

Since 2008, Baker Tilly has been involved with over $3 billion of

renewable energy projects that are either operating or under

construction

» Over 15 biogas projects (food processors and agricultural

feedstock) and $220 million of funding

Our role:

> Financial Advisory and Funding Procurement

> Accessing Federal Incentives (ITC, PTC, 1603 grants, NMTC’s)

> Development Support

Feedstock agreements, PPA’s, heat sale agreements, etc.

EPC, O&M and Technology procurement agreements

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Drivers for Business Case

> Local disposal of organic materials

> Long-term pricing stabilization for

locally managed:

– Waste Disposal

– Electrical Costs

– Transport Fuels

> Industry’s ability to expand on

existing footprint

Recent Drivers

> Food waste landfill diversion laws

> Resilancy for Critical Infrastructue

> Renewable Natural Gas Vehicles

Assessing the business case –

Integrated planning is required to obtain

the highest value biogas project

Typical Investment Arrangements in US Biogas

> Senior debt sized to contracted levels of cash flow

> Federal and state incentives maximized

> Equity

– Use of “straight equity” to increase velocity of funding cycle

– Use of “structured equity” to retain upside for developing party

Usually end up somewhere in between

> CNG/RNG Considerations

– CNG/RNG is new for lenders relative to traditional electrical power purchase

agreements

– RIN value is for equity returns

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Investment Arrangements…

15

Potential Cost of

Funding Options Funds Comments

Grant Funds* Nearly 0% 1603 program expired for biogas, some states have grants available.

NMTC Proceeds Nearly 0% Not an "entitlement program", must secure allocation from CDE

Utility Rebates/Grants Nearly 0% Depends on project deliverables and timing for "yearly" program goals/funding

Federal Loan Guarantees/TIF/Other 4-6% Specific to project location, availabilty and owner's overall profile of need

Tax Equity** 8-15% Supply/demand driven and is a fluid market

Senior Debt 6-9% Depends upon Sponsor's background and contractual "de-risking" of the project

Equity 12-20+% Depends upon technology's stage of development

* May require bridge investment (for cases where funds received post COD).

** Cost of funds represents return provided by combination of tax benefits and cash flow.

Federal Incentives – Capital Expenditure Based

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The most significant federal incentives in the US for biogas projects are driven by capital

expenditure levels of a given project:

> Section 48 Investment Tax Credit (ITC)

– Only for biogas projects that create electricity

– 30% of eligible costs

– Must have met “begun construction” requirements prior to 12/31/2014

> New Markets Tax Credits (NMTC)

– Designed to spur investment in economically disadvantaged areas (census tract

driven)

– Not an entitlement. CDE’s control “allocation” of credits

– Net benefit to project is approximately 20% of capital spend in the form of cheap

capital, most of which is not repaid ($2.0 million benefit on $10 million project)

Project Finance for Biogas in US Today…

> Realities of financing Biogas projects today

> Very few “biogas lenders” or “biogas tax investors” with a national focus

> Regional banks are natural fit for the size and types of credit that must be underwritten, most have not

created this wheel yet

> Biogas projects can be more attractive to Private Equity (as compared to other renewables)

due to upside!

> Often must get creative to get funding done:

> Find funding parties with strategic reason to be involved:

> Lenders that have existing relationship to the project

> Stakeholders in the project (feedstock providers, vendors, etc.) that have tax appetite

> Helps dramatically if these parties are C-Corporations

> Passive vs. active income concerns

> Structure project agreements to reduce risk:

> Pre-payment provisions for revenue streams

> Credit support from outside parties (USDA, insurance for process guarantees)

Private development of high strength liquid waste digester

with 3.2 MW from 5+ large food manufacturers’ feedstocks

> Primary Driver – long-term cost and environmental risk associated with

land application of waste water

> Assembled long-term (10-years) feedstock contracts w/tipping fees

> Able to procure power purchase agreement at adequate rate

> Utilized proven technologies with 2 year performance guarantees

required by lender (non recourse debt)

> Utilized combination of equity, mezzanine funds, vendor financing state

loans, NMTC funds and debt to finance (approx. $28.5 MM project)

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Example Project











6. Audience Q&A

Todd Campbell Energy Policy Advisor

A M E R I C A N B I O G A S C O U N C I L W E B I N A R

J A N UA R Y 2 8 T H , 2 0 1 5

Biogas Opportunities Roadmap

• Part of the President’s Climate Action Plan – Strategy to Reduce Methane Emissions

• Deliverable in USDA’s Partnership with the Innovation Center for U.S. Dairy supporting the dairy industry’s goal of reducing GHG emissions 25 percent by 2020

• Working group members from USDA, USDOE, USEPA, dairy, biogas industry

• More information: – Biogas Opportunities Roadmap – Fact Sheet – Blog

http://www.usda.gov/oce/reports/energy/Biogas_Opportunities_Roadmap_8-1-14.pdf

http://www.usda.gov/oce/reports/energy/Biogas_Opportunities_Roadmap_8-1-14.pdf

http://www.usda.gov/wps/portal/usda/usdahome?contentidonly=true&contentid=2014/08/0166.xml

http://blogs.usda.gov/2014/08/01/new-biogas-opportunities-roadmap-is-part-of-climate-change-solution-emerging-biogas-industry-offers-new-revenue-opportunities-for-americas-farmers/

https://ac.psav.com/apc/session.phtml?key=1152_westin_crown_md-aabe4ce595f62fa3ac6b9a41c9ca4d92

Biogas Opportunities Roadmap

• Tremendous potential for growth in U.S. biogas systems

• Currently more than 2,000 systems operating in the U.S.

• Opportunity for more than 11,000 additional biogas

• Could produce enough energy to power more than 3 million homes

• Could reduce CO2 emissions equivalent up to 54 million metric tons of greenhouse gas in 2030, the annual emissions of 11 million passenger vehicles (not including dedicated energy crops).

• To accelerate the use of cost-effective methane energy technology, the Roadmap details a number of steps to help improve return on investment and expand America's biogas industry including:

– Promoting Biogas Utilization through Existing Agency Programs

– Fostering Investment in Biogas System

– Strengthening markets for biogas systems and system products

– Improving communication and coordination

Agriculture Act of 2014 -Title IX Authorization

• BioPreferred Program: $3M each year FY 2014-18

• Biorefinery Assistance Program: $100M FY14, $50M FY15,16

• Repowering Assistance: $12M available until expended

• Bioenergy Program for Advance Biofuels: $15M each year FY 2014-18

• Rural Energy for America Program: $50M each year (Rule published on Dec 29th, Effective February 12th)

• Biomass Research and Development Initiative: $3M each year FY 2014-17

• Biomass Crop Assistance Program: $25M each year FY 2014-18

https://www.federalregister.gov/articles/2014/12/29/2014-30133/rural-energy-for-america-program

USDA Energy Web Portal

Energy Investments Map 2.0

• Interactive

• Research by state or county

• More than 14,000 visible energy projects from across USDA Mission Areas

www.usda.gov/energy


Biorefinery Stakeholder Information System (BioSIS)

http://www.usda.gov/energy/maps/maps/biosis.htm


Biorefinery Stakeholder Information System (BioSIS)

• Advanced tool for evaluating feasibility and opportunities for new biorefinery

• Presents information on demographics, land use, feedstocks, economics, and financial management

• The system allows users to research the market, economic, technical, and financial aspects of starting a new biofuels venture

• Instruction Manual found at: www.usda.gov/energy/maps/html/biosis_help_document.htm

http://www.usda.gov/energy/maps/html/biosis_help_document.htm



Thank you! For more information on USDA Energy

and Bioeconomy Programs, visit:

www.usda.gov/energy

[email protected]

http://www.usda.gov/energy











6. Audience Q&A

January 2015

ABC Finance Webinar

Project Company (Borrower)

Off-take Agreements

Feedstock Agreements

O&M Agreement EPC Contract (construct)

Technology License Agreements

Sponsor’s Equity Project Level Equity

Investors Senior Project Debt

Providers

Equity Investors

Typical Project Finance Structure

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SOUND PROJECT

ECONOMICS

Leads to Adequate

Debt Service Coverage

And

Acceptable

Equity Returns

Market Risk Assessment Competitive positioning. Supply / demand forecasts. Competing suppliers. Government policies – tax and income.

Sponsors Experienced & financially strong investors with demonstrated track record of investing & operating similar projects. Ability to provide financial support to Project.

Management Strong managerial, financial, operational, & technical capabilities with demonstrated track record of implementing similar projects. Continuity of senior management.

Technical Feasibility Reviewed by independent engineer.

Construction Risks Fixed price, date certain, turnkey EPC contract with liquidated damages. Completion guarantee by Sponsors.

Operations Risks O&M contract with efficiency bonus provisions. Adequate Maintenance Reserve Account.

Feedstock Supply Adequacy of available feedstock. Long-term quantity supply agreement.. Long-term fixed price supply agreement (or at least a price ceiling). Adequate on-site storage.

Offtake Long-term quantity offtake agreement. Long-term fixed price offtake agreement (or at least a price floor). Adequate storage & transportation infrastructure.

Project Structure Mitigates Project Risks

Technology Risk / Feasibility Perpetual technology licenses and performance warranties. Technology / project feasibility reviewed by Independent engineer.

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Development Company Funding Strategy • DevCo between ParentCo and ProjectCo(s)

• Solves immediate problem and provides equity at project level to commercialize

first plant.

• DevCo raises debt and equity with parent for non-recourse project capital or infrastructure fund capital with back-end leverage

• Identify fund (or funds) to provide financing for a series of projects owned by DevCo • Fund becomes the JV partner of Parent in DevCo • Less dilutive than corporate level investment • No ownership interest in Intellectual Property • Participates in EBITDA of ProjectCo • Provides liquidity event via MLP

Establish Development Company

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Project Company 1st Commercialization

Development Company/ Intermediate Holding Company

Project Level Equity Investors

Senior Project Debt Providers

Parent Company (Investors)

Structure

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Project Company Project Company

Private Equity Investors

Strategic Investors

Loan Guarantee / Insurance

100% Infrastructure Fund Capital with Back-end leverage

Not All Investors Are Created Equal Family Offices • Investment horizon: Flexibility • Governance expectations: May accept a non-control position • Pros/Cons: Not tied to strict LP Agreements/Family

Private Equity Funds / Sovereign Wealth Funds • Investment horizon: 5 t0 7 years • Governance expectations: Mixed-non-control position • Pros/Cons: Invest through portfolio company/Strict LP Agreements •

Infrastructure Funds • Investment horizon: 5 t0 7 years • Governance expectations: Mixed-non-control position • Pros/Cons: Non-dilutive at parent, 12% to 15% cost of capital, structured for MLP

liquidity event

Venture Capital Funds • Investment horizon: Short to medium • Governance expectations: Control position • Pros/Cons: Risk Takers/Liquidity Demands

Hedge Funds / Money Managers • Investment horizon: Flexibility • Governance expectations: Flexibility • Pros/Cons: Flexibility

Strategic Investors • Example investors: MLPs ( mid & down stream), PE portfolio companies 34

John M. May

Managing Director

Co-Head of Alternative Energy Finance

Group

Stern Brothers & Co.

(Office) 314.743.4026

(Cell) 314.583.2130

8000 Maryland Avenue Suite 800

St. Louis, MO 63105

[email protected]

IT TAKES A PIPELINE:

Structured Finance of Biogas

In The New Sustainability Era

American Biogas Council Webinar

Reinventing Biogas Financing:

January 28th, 2015

Roger D. Feldman

Of Counsel, Andrews Kurth LLP

[email protected]

(202) 662-3048

36


37

It Takes a Pipeline

I. Stock The Pipeline: Conforming Project

Development to Project Finance Models

II. Fill The Pipeline: Shifting Biogas Project

Finance Opportunities

III. Grow The Pipeline: “Sustainability,”

“Resiliency,” and “P3s” – Effect on the

Structured Finance Models of the New Biogas

Project Finance Marketing Mantras

I. Stock The Pipeline:

Conforming Project

Development to

Structured Models

38

Why It Takes Time to Fill the Pipeline

39

Preliminary Planning

• Technical and Financial Feasibility, e.g., AD System Components

• Estimate Revenue – Methane Production, RECs, Carbon Credits, Higher Value

By Projects

• Estimate Expenses – Capital Operations and Maintenance

• Consider Sources of Federal Assistance

See: epa.gov/agstar/tools/financing/index.html

40

Replicability: The Quest For The Cookie Cutter Deal

41

Replicability: The Quest For Deal Risk Allocation

• Risk must be assigned to the party who is better prepared to

deal with it!

42

One Size Does Not Fit Financing For All Projects

• Where do P3s Fit Best?

II. Filling The Pipeline

43

Key New Trends

• Adding Food Waste;

• Making Vehicle Fuel

• Making Projects from Digestate

44

48

• Question for applicability to structured finance models

• Will it lead, support, follow or get out of the way

• What is the time horizon

49

• What Else Will the Roadmap Add?

• Affects Homogeneity Of Projects – how

important is that?

• Different Cash Flow Profiles And Risks For

Projects

• Different Uses Of Available Incentives From

Public Sources: e.g., EPA; USDA; States

• Need for Contractual Risk Portfolio Balancing

50

Who Stole My Cookie Cutter:

How Trends Affect Innovative Financial Structuring

III. Growing The Pipeline:

“Sustainability,”

“Resiliency,” and “P3s”:

Effects On The Structured

Finance Ownership Model Of

The New Marketing Mantras

And Supporting Programs

51

• Investing in Drinking Water and Wastewater Systems through a new Center at EPA. To

help address more than $600 billion in needs for drinking water and wastewater

management over the next 20 years, today the Administration is launching a new Water

Finance Center at EPA. The Center will work closely with municipal and state

governments, utilities and private sector partners to use federal grants to attract more

private capital into projects and promote models of public private collaboration that can

address the real needs of cities and towns to provide safe water, rebuild sewer systems

and keep streams and rivers clean.

• Driving Investment to Rural America via a New USDA Rural Opportunity Investment

Initiative. The Administration is announcing the Rural Opportunity Investment Initiative at

the U.S. Department of Agriculture, which will identify opportunities for investment in

promising rural water, energy, and broadband projects, reduce barriers to investment and

connect projects with investors.

• Leveling the Playing Field for Public-Private Partnerships. Today the Administration is

leveling the playing field for municipalities seeking public private partnerships by proposing

the creation of an innovative new kind of municipal bond, Qualified Public Infrastructure

Bonds (QPIB).

52

U.S. EPA/USDA: The Key New Initiatives (1/16/2015)

• Leveling the Playing Field for Public Private Partnerships: New municipal bond,

Qualified Public Infrastructure Bond (QPIB). Today, public private partnerships

that combine public ownership with private sector management and operations

expertise cannot take advantage of the benefits of municipal bonds. QPIBs will

extend the benefits of municipal bonds to public private partnerships, like

partnerships that involve long-term leasing and management contracts, lowering

the cost of borrowing and attracting new capital.

• A similar existing program, Private Activity Bond (PABs), has already been used

to support financing of transportation infrastructure. QPIBs will expand the scope

of PABs to include financing for solid waste disposal, sewer, and water, as well

as for more surface transportation projects. Unlike PABs, the QPIB bond

program will have no expiration date, no issuance caps, and interest on these

bonds will not be subject to the alternative minimum tax.

• Increase QPIB’s impact as a permanent lower cost financing tool to increase

private participation infrastructure. QPIBs would not be available for privately –

owned facilities or privatizations of public facilities.

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The Proposal For Qualified Public Infrastructure Bonds

55

Food “Resiliency” Invention: A New Factor to Consider

Roger Feldman

Roger Feldman's practice focuses on the project finance of all types of energy,

sustainability and environmental facility infrastructure projects. He also advises on the

impact of regulatory matters; the formation of public-private partnerships; and the

formation of non-profits and funds in the sustainability energy field.

He is on the Board of the American Council for Renewable Energy; is Chairman

Emeritus of The National Council for Public-Private Partnerships; and has served on the

U.S. EPA Financial Advisory Board.

• He has been listed in Who's Who in American Law since 1990; Best Lawyers in America

since 2004; and by Martindale-Hubbell as AV Preeminent since 2003.

• Roger received his A. B from Brown University, M.B.A. from Harvard Business School;

J.D. from Yale Law School.

Roger D. Feldman, Of Counsel

Andrews Kurth LLP

[email protected]

(202) 662-3048

56

It takes a lawyer to build a structured pipeline…












6. Audience Q&A

ABC: Financing Biogas Projects January 2015

Leader in Sustainable Infrastructure Systems

59

Contents

NSU: A Market Leader in Distributed Infrastructure

Types of Finance

Most important consideration in project finance

Financing Structures

Financing Sources

Trends and Developments of Interest

(1) Source: American Water Works Association.

60

NSU: A Market Leader in Distributed Infrastructure

NSU is a developer of and service provider to sustainable distributed

infrastructure projects at the water and energy nexus

NSU Provides:

esign, uild, and perations & Mgmt

Services to 3rd party projects

wnership and inancing to projects

developed with partners 160 systems under management across 9 states Pioneers in the integration of water and energy infrastructure w/ dedicated R&D

B-Corp certified with triple bottom line mission

61

Types of Financing

Corporate Financing:

• Requires available credit from other operations

• Available collateral for cross collateralization

• Brings risk onto the balance sheet

Project Financing:

• Isolated legal entity

• Self-supported credit worthiness

• Credit worthiness of sponsors and other interests still relevant

• May still require high risk development capital from sponsor

Parent Co.

Project Co.

Parent Co.

Project Co.

62

Most important consideration in project finance

SECURE YOUR PROJECTS

Markets Change: Assumptions and expectations for markets are inherently inaccurate and reality tends to have much more volatility

Contracts and creditworthiness are both critical

What needs to be secured:

The one certainty is: whatever you project won’t happen

Project, LLCIncentives (RINs,RECs, LCFS, etc.)

Technology

Feedstocks

Energy

Performance Guarantees,

GMPs, Licenses

PPAs

Feedstock

Agreements

DigestateWater Products

Rights of Use/Access Leases,

Easements, Title

63

Financing Structures

The more complex the structure, the lower the probability of closing

Avoid the house of cards

Don’t predicate financing on a highly complex structure that may be difficult to source capital into

Over long development cycles, incentives and financing markets are subject to change

Simple capital structures are more resilient, and more comfortable for investors

Debt requires secured cash flows, Equity can assume some market risk

Optimize grants and equity, minimize leverage and tax credits

Flexible capital structures can be recapitalized and levered up once the project is operational, to enhance returns to equity – Tax credits reduce flexibility and increase complexity

Hiccups in construction and commissioning are well served with low leverage and friendly debt

64

Financing Sources

Grants (State and Federal)

Subsidized loans (State and Federal)

• Still require underwriting although can be more accommodative

• Potential to have forgiveness provisions

Traditional debt

• Taxable and non-taxable – underwriting criteria similar

• Financial lender vs. strategic – underwriting criteria can vary

• Technology provider / equipment financing

• Support from feedstock or off-take

Equity

• Financial investors vs. Strategic investors

Mezzanine Capital

Tax Credits

65

Trends and Developments of Interest

Financing Trends:

• EPA Water Finance Center

• Qualified Public Infrastructure Bonds (QPIBs)

• Addressing non-point source pollution

• Resiliency Funding

Developing Project Trends:

• Integrated solutions (water, energy, products)

• Solid Food Waste

• Vehicle Fuel and CNG for pipeline injection

• Products from Digestate

(1) Source: American Water Works Association.

66

For More Information Contact: Axel Hester, EVP Investment Management

[email protected]

Leader in Sustainable Infrastructure Systems

Q&A Ask questions using the Questions Panel on the right side of your screen. All questions and comments will be recorded.

A recording of the webinar and slides will be available by Friday, January 30th to all ABC Members and all attendees of the webinar.

http://www.biocycle.net/



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Upcoming Events

• Digestate Standard Workshop, April 13, 2015 Biocycle West Coast Conference Portland, Oregon | April 13-16, 2015

• BioCycle REFOR15: Official Conference of the American Biogas Council Boston, MA | October 19-22, 2015

For more information, visit https://www.americanbiogascouncil.org/media_events.asp

or call (202)640-6595

68

https://www.americanbiogascouncil.org/media_events.asp

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reinventing biogas financing - american biogas...

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