Reinventing Biogas Financing Successful and Innovative Strategies to Finance Biogas Projects. January 28 th, :00 am-12:30 pm ET

Transcription

1 Reinventing Biogas Financing Successful and Innovative Strategies to Finance Biogas Projects January 28 th, :00 am-12:30 pm ET

2 Special Thanks

3 Quick Notes Two Audio Options: Streaming Audio and Dial-In. 1. Streaming Audio/Computer Speakers (Default) 2. Dial-In: Use the Audio Panel (right side of screen) to see dialin instructions. Call-in separately from your telephone. Ask questions using the Questions Panel on the right side of your screen. The recording of the webinar and the slides will be available after the event. Registrants will be notified by .

4 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 ABC Membership anaerobic digestion designers 250 equipment dealers 200 waste managers waste water companies farms utilities consultants and EPCs 0 financiers, accountants, lawyers and engineers Non-profits, universities and government agencies Join Us! OR info@americanbiogascouncil.org OR Organizations

5 U.S. Biogas Market Current and Potential 239 on Farm (Dairy AND Swine) 1,241 Wastewater (860 using their biogas) 636 at Landfills 2,000+ Operational Biogas Systems 8,002 on Farm (Dairy AND Swine) 2,400 Wastewater (incl. 381 making biogas but not using it) 11,000+ Potential Biogas Systems 450 at Landfills

6 Presenters Moderator: Mike Land, Director, Baker Tilly Todd Campbell, Alternative Energy Advisor, USDA Roger Feldman, Of Counsel, Andrews Kurth Axel Hester, EVP Investment Management, Natural Systems Utilities John May, Managing Director, Stern Brothers

7 1. Introductions Agenda 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

8 How Have Biogas Projects Been Financed? January 2015 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP

9 Agenda >Introduction >Typical investment arrangements in US biogas >Example Project 9

10 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 Baker Tilly Virchow Krause, LLP 10

11 Baker Tilly at a Glance Baker Tilly is the 8 th 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 Connecticut Delaware Illinois Maryland Michigan New York Pennsylvania Texas Washington DC Wisconsin Minnesota New Jersey 11

12 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 12

13 Assessing the business case Integrated planning is required to obtain the highest value biogas project 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

14 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 14

15 Investment Arrangements 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 % 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. 15

16 Federal Incentives Capital Expenditure Based 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) 16

17 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)

18 Example Project 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) 18

19 1. Introductions Agenda 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

20 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 TH,

21 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

22 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

23 Agriculture Act of Title IX Authorization BioPreferred Program: $3M each year FY Biorefinery Assistance Program: $100M FY14, $50M FY15,16 Repowering Assistance: $12M available until expended Bioenergy Program for Advance Biofuels: $15M each year FY Rural Energy for America Program: $50M each year (Rule published on Dec 29 th, Effective February 12 th ) Biomass Research and Development Initiative: $3M each year FY Biomass Crop Assistance Program: $25M each year FY

24 USDA Energy Web Portal Interactive Research by state or county More than 14,000 visible energy projects from across USDA Mission Areas Energy Investments Map 2.0

25 USDA Energy Web Portal Biorefinery Stakeholder Information System (BioSIS)

26 USDA Energy Web Portal 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: ml/biosis_help_document.htm

27 Thank you! For more information on USDA Energy and Bioeconomy Programs, visit:

28 1. Introductions Agenda 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

29 January 2015 ABC Finance Webinar

30 Typical Project Finance Structure Equity Investors Sponsor s Equity Project Level Equity Investors Senior Project Debt Providers Project Company (Borrower) Feedstock Agreements Technology License Agreements EPC Contract (construct) O&M Agreement Off-take Agreements 30

31 Project Structure Mitigates Project Risks Sponsors Experienced & financially strong investors with demonstrated track record of investing & operating similar projects. Ability to provide financial support to Project. Construction Risks Fixed price, date certain, turnkey EPC contract with liquidated damages. Completion guarantee by Sponsors. Market Risk Assessment Competitive positioning. Supply / demand forecasts. Competing suppliers. Government policies tax and income. 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. SOUND PROJECT ECONOMICS Leads to Adequate Debt Service Coverage And Acceptable Equity Returns Management Strong managerial, financial, operational, & technical capabilities with demonstrated track record of implementing similar projects. Continuity of senior management. Technology Risk / Feasibility Technical Perpetual Feasibility technology licenses and Reviewed performance by independent warranties. engineer. Technology / project feasibility reviewed by Independent engineer. Operations Risks O&M contract with efficiency bonus provisions. Adequate Maintenance Reserve Account. Offtake Long-term quantity offtake agreement. Long-term fixed price offtake agreement (or at least a price floor). Adequate storage & transportation infrastructure. 31

32 Establish Development Company 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 32

33 Structure Private Equity Investors Strategic Investors Parent Company (Investors) Development Company/ Intermediate Holding Company Project Company 1 st Commercialization Project Company Project Company Senior Project Debt Providers Loan Guarantee / Insurance Project Level Equity Investors 100% Infrastructure Fund Capital with Back-end leverage 33

34 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

35 John M. May Managing Director Co-Head of Alternative Energy Finance Group Stern Brothers & Co. (Office) (Cell) Maryland Avenue Suite 800 St. Louis, MO

36 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 rogerfeldman@andrewskurth.com (202)

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 37

38 I. Stock The Pipeline: Conforming Project Development to Structured Models 38

39 Why It Takes Time to Fill the Pipeline 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 39

40 Replicability: The Quest For The Cookie Cutter Deal 40

41 Replicability: The Quest For Deal Risk Allocation Risk must be assigned to the party who is better prepared to deal with it! 41

42 One Size Does Not Fit Financing For All Projects Where do P3s Fit Best? 42

43 II. Filling The Pipeline 43

44 Key New Trends Adding Food Waste; Making Vehicle Fuel Making Projects from Digestate 44

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48 Question for applicability to structured finance models Will it lead, support, follow or get out of the way What is the time horizon 48

49 What Else Will the Roadmap Add? 49

50 Who Stole My Cookie Cutter: How Trends Affect Innovative Financial Structuring 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

51 III. Growing The Pipeline: Sustainability, Resiliency, and P3s : Effects On The Structured Finance Ownership Model Of The New Marketing Mantras And Supporting Programs 51

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

53 The Proposal For Qualified Public Infrastructure Bonds 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. 53

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55 Food Resiliency Invention: A New Factor to Consider 55

56 It takes a lawyer to build a structured pipeline 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 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 rogerfeldman@andrewskurth.com (202)

57 1. Introductions Agenda 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

58 Leader in Sustainable Infrastructure Systems ABC: Financing Biogas Projects January 2015

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. 59

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 3 rd 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 60

61 Types of Financing Corporate Financing: Requires available credit from other operations Available collateral for cross collateralization Brings risk onto the balance sheet Parent Co. Project Co. 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. 61

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: Feedstocks Technology Rights of Use/Access Performance Guarantees, GMPs, Licenses Leases, Easements, Title Feedstock Agreements Project, LLC Incentives (RINs, RECs, LCFS, etc.) PPAs Water Digestate Energy Products The one certainty is: whatever you project won t happen 62

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 63

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 64

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. 65

66 Leader in Sustainable Infrastructure Systems For More Information Contact: Axel Hester, EVP Investment Management 66

67 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 30 th to all ABC Members and all attendees of the webinar.

68 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 or call (202)

69 Thank you! Don t forget to fill out our survey after the webinar! Consider Joining ABC --Receive regulatory and policy intelligence --Connect with other biogas and anaerobic digestion leaders --Support the industry s growth and outreach