Reinventing Biogas Financing Part III: Strategies to Attract Capital to Agricultural Projects. June 17 th, :00 3:30 PM ET

Transcription

1 Reinventing Biogas Financing Part III: Strategies to Attract Capital to Agricultural Projects June 17 th, :00 3:30 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 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! Organizations ABC Membership OR info@americanbiogascouncil.org OR

5 U.S. Biogas Market Current and Potential 247 on Farm (Dairy AND Swine) 2,000+ Operational Biogas Systems 1,241 Wastewater (860 using their biogas) 636 at Landfills 11,000+ Potential Biogas Systems 8,002 on Farm (Dairy AND Swine) 2,440 Wastewater (incl. 381 making biogas but not using it) 450 at Landfills

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

7 Agenda 1. Financing Community s Perspective of Agriculture Mike Land, Baker Tilly 2. Development Strategies to Enhance Bankability Axel Hester, Natural Systems Utilities 3. Overview of Biogas Opportunities Roadmap Funding Programs Todd Campbell, USDA 4. Strategies to Attract Capital John May, Stern Brothers

8 Financing Community s Perspective on Ag Projects June, 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 >Value Proposition of Ag Projects >Impactful Attributes of Ag Projects 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 > 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 11

12 Value Proposition of Ag Projects > Have the potential to change the way large quantities of material is disposed» 2,000 biogas sites in U.S. now, potential estimated at 11,000» 630 landfill gas sites vs. 239 on-farm > Value proposition is fairly intuitive More efficient to harvest value components (energy and nutrients) contained in waste vs. land application Increasing levels and types of environmental regulations are enhancing the value proposition» Can be solution to nutrient loading issues, especially in areas where urban / agricultural land uses are increasingly at odds» Tip fees and monetizing environmental attributes are becoming more meaningful 12

13 Impactful Attributes of Ag Projects > Tend to be smaller projects ($3-10+ million) Improves ability of State and Local funding/incentive programs to enhance financial feasibility (incentives are greater portion of overall cost) Can make it more difficult to utilize robust front-end and back-end processing unless projects can be aggregated together > Advances in technology are enhancing economics Making it more plausible to augment manure infeed with other sources of feedstock:» Food production residuals» Food waste» Organic fraction of MSW Nutrient recovery options beginning to become more robust / proven 13

14 Agenda 1. Financing Community s Perspective of Agriculture Mike Land, Baker Tilly 2. Development Strategies to Enhance Bankability Axel Hester, Natural Systems Utilities 3. Overview of Biogas Opportunities Roadmap Funding Programs Todd Campbell, USDA 4. Strategies to Attract Capital John May, Stern Brothers

15 Leader in Sustainable Infrastructure Systems ABC: Development Strategies to Enhance Bankability June 2015

16 Contents NSU: A Market Leader in Distributed Infrastructure Review Challenges to Financing Biogas Projects Secure Your Projects What needs to be secured Strategies Contracts Feedstock Electricity / Gas Products Strategies Location Feedstock and Offtakes (1) Source: American Water Works Association. 16

17 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 17

18 Review Challenges to Financing Biogas Projects Unlike solar or wind projects, Biogas projects inherently have a high degree of risk from an investor s perspective Each project is customized and therefore no reliable track record of performance Local feedstock markets are specific to location Local market effects on energy and product sales Varying local regulations Varying incentive structures from state to state Scale effects on performance Projects have longer duration than most investors are accustomed to No proven market to provide liquidity for project interests No reliable exit strategy for investors Project assets are often immobile and thus hold relatively low collateral value 18

19 Review Secure Your Project Secure your project Mitigate risks through contracts Contracts transfer risk to other parties Lowering risk profile Creditworthiness of the counterparty Multiple dimensions to securing (ie. volume, price, duration, timeliness, performance, etc.) Generally, costs more to secure revenues 19

20 Review What needs to be secured Cash flow items require securing on Volume, Price, Quality, and Duration dimensions: Feedstocks Gas/Electricity offtakes Product offtakes Significant operating expenses Production Incentives Non-Cash Flow Items Technology performance Site access Permits Technology Rights of Use/Access Construction delivery schedules and pricing Performance Guarantees, GMPs, Licenses Leases, Easements, Title Water Feedstock Agreements Digestate Feedstocks Project, LLC PPAs Energy Incentives (RINs, RECs, LCFS, etc.) Products 20

21 Review Strategies Find the natural buyer for the risk The natural buyer for a risk is a party that has the most experience in managing the risk Ideally has an offsetting risk they manage Obtain contracts or at least EOIs/LOIs as early as practicable Leverage existing infrastructure for competitive advantage The stronger the competitive barriers, the more secure a project is perceived Keep your capital structure simple to avoid the house of cards Create Exit Opportunities 21

22 Contracts - Feedstock What Needs to be Secured Quantity, Price, Quality, Duration Natural Buyer of Risk (Generators vs. Haulers) Haulers Exposed to market effects Small haulers can have weak credits, and large haulers tend to have too much pricing power Generators Waste disposal often is impediment to more production Credits can vary Trade-Offs Without secured feedstocks, offtakes can t be considered secured Longer durations = worse pricing, but will lower risk profile and attract capital 22

23 Contracts PPAs/Gas What Needs to be Secured Quantity, Price, Duration Secured feedstocks are necessary for securing offtakes Natural Buyer of Risk (host vs. utility / gas company) Host Net metering and host demand improves pricing Easier to fix pricing, credit is relevant Utility /Gas Company Likely only receive wholesale pricing More difficult to fix pricing, Credit generally a non-factor Trade-Offs Longer durations = worse pricing, but will lower risk profile and attract capital 23

24 Contracts Product Offtakes What Needs to be Secured Quantity, Price, Duration Generally a new concept for counterparty Natural Buyer of Risk (host vs. 3 rd Party) Host May have use, but pricing may not be optimal Credit may vary 3 rd Party May be resistant to long-term pricing May require multiple contracts Credit may vary Trade-Offs Longer durations = worse pricing, but will lower risk profile and attract capital 24

25 Strategies - Location Strategy Consider Benefits and Drawbacks to Location: Transportation is expensive for large volumes associated with biogas projects Proximity to anchor feedstock Proximity to digestate disposal Proximity to other product demand Proximity to population and industrial centers Co-locate for ready offtake demand at good prices Pipes for transport as opposed to trucking Proximity to electricity/gas demand Proximity to waste heat demand Proximity to infrastructure can be valuable pipelines, transportation corridors, power lines, sewer lines Reduce transportation costs and infrastructure build-out requirement LOCATION CAN PROVIDE A VERY STRONG COMPETITIVE ADVANTAGE AND INCREASE THE PERCEIVED SECURITY OF THE PROJECT 25

26 Strategies Feedstock and Offtakes Strategy Feedstock Take advantage of efficiencies of scale Secure sufficient feedstock Some times it will be necessary to pay for feedstock Strategy Energy and Product Offtake Seek contracts that take all production without guaranteeing a quantity Consider floors and caps Longer duration is better and seek renewal options Pipeline gas injection is exception Consider securing production incentives (RINs, LCFs, RECs, etc.) if project is under secured Monetize and consider securing ancillary offtakes Enhance value of products through post processing 26

27 Leader in Sustainable Infrastructure Systems For More Information Contact: Axel Hester, EVP Investment Management 27

28 Agenda 1. Financing Community s Perspective of Agriculture Mike Land, Baker Tilly 2. Development Strategies to Enhance Bankability Axel Hester, Natural Systems Utilities 3. Overview of Biogas Opportunities Roadmap Funding Programs Todd Campbell, USDA 4. Strategies to Attract Capital John May, Stern Brothers

29 Todd Campbell Policy Advisor, USDA A B C R E I N V E N T I N G B I O G A S F I N A N C E W E B I N A R J U N E 1 7 TH,

30 Bioeconomy Definition The bioeconomy is defined as: The global industrial transition of sustainably utilizing renewable aquatic and terrestrial biomass resources in energy, intermediate, and final products for economic, environmental, social, and national security benefits. --From 2014 Report commissioned by USDA BioPreferred: Why Biobased? Opportunities in the Emerging Bioeconomy

31 The Bioeconomy Concept Revenue and economic growth Broad spectrum of new jobs Rural development Advanced technologies and manufacturing Reduced emissions and Environmental Sustainability Export potential of technology and products Positive societal changes Investments and new infrastructure 31

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33 Biogas Opportunities Roadmap Currently operating and potential biogas systems in the United States creating renewable energy, energy potential* Livestock Manure Landfill Gas Water Resource Recovery Facilities Facilities Total Currently Operational Biogas Systems Total Potential Number of Biogas Systems Equivalent Residential Electricity Use (1000 homes/year) ,241 2,116 8,241 1,086 3,681 13,008 1,089 1, ,492 Potential Vehicle Fuel Gallons Displaced (million GGE) 1,031 1, ,499 *does not account for crop residues or dedicated energy crops

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35 Agricultural Act of Title IX Energy and Beyond Biobased Markets Program (9002, BioPreferred) Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Program(9003) Repowering Assistance Program (9004) Bioenergy Program for Advanced Biofuels (9005) Biodiesel Fuel Education program (9006) Rural Energy for America Program (REAP ) Biomass Research and Development (9008) Feedstock Flexibility Program (9009) Biomass Crop Assistance Program (9010) Community Wood Energy Program (9012)

36 Establishment, Harvest, Storage, Transportation Risk Mitigation for Growers of Energy Crops Through the Biomass Crop Assistance Program, USDA has incentivized more than 800 producers on over 47,000 acres across 188 counties in 12 states to establish and produce seven different dedicated energy crops since 2009, $8M for 2015 existing expansion; NEW Project Area Proposals this summer with submission period through November In 2014, Farm Service Agency county offices supported BCAP contract approvals for $4.4M to deliver approximately 220,000 dry tons to 19 facilities in 10 states, $11.5M through December 2015 USDA offers insurance coverage for farmers growing biofuel crops like switch grass and camelina and we are helping identify farmland most suitable for energy crops. Noninsured Crop Disaster Assistance Program expanded in 2014 Farm Bill for bioenergy crops not covered under crop insurance program. USDA invested $332M since 2009 to accelerate research under NIFA AFRI ranging from genomic research on bioenergy crops, to development of conversion processes and costs/benefit analysis

37 Advanced Biofuel Payment Program (9005) The Advanced Biofuel Payment Program provides payments to producers to support and expand production of advanced biofuels refined from sources other than corn kernel starch. The program supports and helps to ensure the expanding production of advanced biofuels by providing payments to eligible advanced biofuel producers. Advanced biofuels are produced from renewable biomass crops such as cellulose, sugar and starch (other than ethanol derived from corn kernel starch), hemicelluloses, lignin, waste materials, biogas, butanol, diesel-equivalent fuel, sugarcane, and nonfood crops such as poplar trees or switchgrass. Since 2009, USDA has made payments through the for over $286M to over 300 companies in 47 states.

38 Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program (9003) Provides guaranteed loans to fund the development, construction, and retrofitting of commercial-scale biorefineries using eligible technology and of biobased product manufacturing facilities that use technologically new commercial-scale processing and manufacturing equipment to convert renewable chemicals and other biobased outputs of biorefineries, including biofuels, into end-user products. Program established with 2008 Farm Bill is supporting efforts to build six new pioneer plants, in addition to two existing facilities. Applicants may qualify for up to $250 Million in government backed loan guarantees, up to 80 percent of total eligible project costs. Total Federal participation will not exceed 80 percent of total eligible project costs. The borrower needs to provide the remaining 20 percent from non- Federal sources to complete the project. New regulation out in near future

39 Environmental Quality Incentive Program (EQIP) Voluntary program that provides financial and technical assistance to agricultural producers to implement conservation practices that address natural resource concerns and for opportunities to improve soil, water, plant, animal, air and related resources on agricultural land and non-industrial private forestland. Owners of land in agricultural or forest production or persons who are engaged in livestock, agricultural or forest production on eligible land and that have a natural resource concern on the land may participate. Program participants may not receive, directly or indirectly, payments that, in the aggregate, exceed $450,000 for all EQIP contracts entered into during the period 2014 to Updated regulation and other program detail can be found at: and See a summary of the changes on the NRCS Farm Bill website.

40 Conservation Innovation Grant (CIG) Voluntary program intended to stimulate the development and adoption of innovative conservation approaches and technologies while leveraging Federal investment in environmental enhancement and protection, in conjunction with agricultural production. Under CIG, Environmental Quality Incentives Program funds are used to award competitive grants to non-federal governmental or nongovernmental organizations, Tribes, or individuals. CIG enables NRCS to work with other public and private entities to accelerate technology transfer and adoption of promising technologies and approaches to address some of the Nation's most pressing natural resource concerns. CIG will benefit agricultural producers by providing more options for environmental enhancement and compliance with Federal, State, and local regulations.

41 Rural Energy for America Program (REAP) Eligible Applicants and Borrowers Agricultural Producer Rural Small Business Individual or entity that receives 51 percent or more of their gross income from agricultural production crops, livestock, aquaculture, forestry operations, nurseries, dairies For-profit small business - as defined by the Small Business Administration (SBA) Rural area or non-metro community of < 50,000

42 Improve Profits for Your Farm or Ranch with REAP Energy Efficiency Lighting Heating Cooling Ventilation Fans Automated Controls Insulation Renewable Energy Solar Wind Small Hydroelectric Anaerobic Digesters Biomass Geothermal Wave/Ocean Power The technology must be commercially available. Research and development projects do not qualify.

43 Eligible Project Costs Equipment: Purchase & installation New or refurbished Post-application construction & facility improvements Retrofitting Professional service fees Permits & license fees Working capital, land acquisition (Guarantee loan ONLY with restrictions) Ineligible Project Costs Residential energy projects Equipment: Farm tillage equipment Used equipment Vehicles Pre-application construction & facility improvements Application preparation or grant writer fees Line of credit Lease payments Payment to the applicant/business owner, beneficiary, or relative

44 REAP Grant Assistance Up to 25% of Eligible Project Costs Renewable Energy Systems Minimum Grant Request Maximum Grant Request $2,500 Total eligible project costs > $10,000 $500,000 Total eligible project costs > $2 million Energy Efficiency Improvements Minimum Grant Request Maximum Grant Request $1,500 Total eligible project costs > $6,000 $250,000 Total eligible project costs > $1 million

45 REAP Guaranteed Loan Assistance Up to 75% of Eligible Project Costs Minimum Loan Amount $5,000 Total eligible project costs > $6,667 Maximum Loan Amount $25 million Total eligible project costs > $33.4 million Details USDA guarantees a commercial loan; applicant must have a willing lender. Terms are negotiated between the lender and borrower. Fees, appraisals, equity & collateral requirements apply.

46 Combined Guaranteed Loan and Grant Minimum and Maximum grants apply Minimum and Maximum guaranteed loans apply Maximum assistance provided by REAP is limited to 75%

47 REAP Guaranteed Loan Terms GUARANTEE 85% for loans $600,000 or less. 80% for loans over $600,000 up to $5 Million 70% for loans over $5 Million up to $10 Million 60% for loans over $10 Million

48 REAP Guaranteed Loan Terms MAXIMUM TERM LIMITS Working Capital 7 Years Machinery & Equipment 15 Years (or useful life, whichever is less) Real Estate 30 Years OTHER FUNDS REQUIRED 25% of project costs INTEREST RATE Fixed or Variable; if variable can be adjusted quarterly Negotiated between lender and borrower

49 REAP Guaranteed Loan Terms FEES One-time guarantee fee of 1% ¼% annual renewal fee BENEFITS FOR THE BANK Mitigate Risk Guarantee is a loss guarantee Increase Capital and Improve Bank Liquidity Sale of Loan Note Guarantee on Secondary Market Increase Bank Returns Receive servicing fee from Secondary holder

50 REAP Guaranteed Loan Terms BENEFITS FOR THE BANK May help satisfy Community Reinvestment Act requirements Provides another tool to expand lender s portfolio in rural areas

51 REAP Guaranteed Loan Terms BENEFITS FOR BORROWERS Assists in providing stability and growth through energy efficient improvements and renewable energy utilization. Provides the ability to receive: Higher Loan Amounts Competitive Interest Rates Longer Repayment Terms

52 REAP Application Window Closing Deadlines Grants April 30, 2015 Grants June 30, 2015 Guaranteed Loans Set Aside Fund Competition-Grant Request $20,000 or less Grant Request > $20,000 Combination Guaranteed Loan/ Grant Request Grant Request $20,000 or less not competing for set aside Grant Request > $20,000 Combination Guaranteed Loan/ Grant Request Continuous Application Cycle Monthly Competitions for funds throughout the year Loan must score a minimum of 50 to compete monthly

53 Renewable Energy Scenic View Dairy Anaerobic digester $1.9 Million Total Cost $474,088 REAP Grant Powers an equivalent of 1000 homes/year

54 Renewable Energy Farm Power Tillamook 1 MW Anaerobic digester $4.15 Million Total Cost $100,000 REAP Grant $2.65 Million REAP Guarantee Powers an equivalent of 700 homes/year

55 How to Apply Contact the USDA Rural Development Energy Coordinator in your state for application materials and resources: Coordinators.pdf Submit applications any time of year. Applications compete for funding based on score throughout the year.

56 Potential REAP/EQIP Program Stacking Idea from VT to split the components of the anaerobic digester costs into manure handling components and renewable energy components Coordination between NRCS and RD enables agencies to provide better technical assistance for projects

57 Potential for Cluster Projects, Program Stacking DAIRY #1 $450,000 EQIP Manure handling components, including piping $50,000 Cash/Equity 10% Ownership DAIRY #2 $450,000 EQIP Manure handling components, including piping $50,000 Cash/Equity 10% Ownership Multiple Organic Streams, Tipping Fees: Food Processing, Institutional Food Waste, Crop Residues, FOG BIOGAS, LLC #1 $6.25M Total Project Cost $4M additional w/ $250,000 Cash/Equity $2.5M REAP Loan Guarantee $500,000 REAP Grant DAIRY #3 $450,000 EQIP Manure handling components including piping $50,000 Cash/Equity 10% Ownership DAIRY #5 $450,000 EQIP Manure handling components, including piping $50,000 Cash/Equity 10% Ownership DAIRY #4 $450,000 EQIP Manure handling components, including piping $50,000 Cash/Equity 10% Ownership *example for illustration only

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

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

60 Agenda 1. Financing Community s Perspective of Agriculture Mike Land, Baker Tilly 2. Development Strategies to Enhance Bankability Axel Hester, Natural Systems Utilities 3. Overview of Biogas Opportunities Roadmap Funding Programs Todd Campbell, USDA 4. Strategies to Attract Capital John May, Stern Brothers

61 June 2015 Reinventing Biogas Finance Series Part III: Strategies to Attract Capital to Ag Projects USDA Loan Guarantee and Bond Primer

62 Project Finance Fundamentals USDA Loan Guarantee Programs Basic Structure USDA Role of Lender of Record Typical Project Finance Structure Project Structure Mitigates Project Risk Project Capitalization Successful Financing Requires Systematic Approach At Financial Close 62

63 USDA Loan Guarantee Programs Business & Industry (B&I) Loan guarantees on up to $25 million of senior debt 60 to 80% guaranty (based on loan amount) For all rural development projects using commercialized technologies Advanced Biorefinery (9003) Biofuels and bio-chemicals from energy crops, crop waste, and MSW 60 to 90% guaranty (based on loan size & leversage) Long-term amortization (up to 20 years) Finance new biorefinery technology and encourage advanced biorefinery development Modeled on USDA B&I program Rural Energy for America (REAP) Installation of renewable energy and energy projects 60 to 85% guaranty (based on loan amount)

64 Basic Structure 1) Senior loan Guaranteed tranche senior secured Non-guaranteed tranche senior secured (pari passu with guaranteed tranche) Bond structure creates access to institutional capital (not commercial banks) to fund the transaction and distribute risk 2) Lender of Record USDA requires a Lender of Record to apply for the guaranty on the senior loan Holds a portion of the unguaranteed bonds 3) The blended coupon of the bonds will reflect: Guaranteed Bonds with (implied) AA+ rating (80%) and Unguaranteed Bonds (implied) non-investment grade rating (20%) Blended debt cost of < 10% for first commercial project 4) Capitalized Interest Capitalized Interest (interest during construction) is deposited with the LOR upon project finance close 5) Debt Service Reserve Fund DSRF = One year of principal + interest is deposited with the LOR upon project finance close, pays debt service if cash flow insufficient 64

65 USDA Role of Lender of Record Lender of Record Roles and Responsibilities 1) Files 9003 application for project With Stern, communicates with the USDA 2) Accounts bank / Disbursement agent / Loan servicing During construction Disburses construction progress payments During operation Pays principal and interest 3) Pursues remedies in the event of project default 4) Holds amortizing, unguaranteed bonds until maturity 65

66 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 66

67 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. 67

68 Project Capitalization Sources of Funds Equity Investors Sponsor(s) provide initial cash investment Receive net profits generated by the project Equity = 20 to 50% of project costs, depending on debt service coverage Senior Project Debt Providers Commercial Banks(??) / Institutional Investors (QIBs) Expect timely payment of interest and principal Other Sources Government Grants and/or Loans Uses of Funds Construction Fund Used to pay construction costs Capitalized Interest Used to pay interest during construction Debt Service Reserve Fund Used to pay debt service if project revenues are insufficient to pay interest and principal Other Reserves Maintenance, operating Project Soft Costs Used to pay for land, engineering, environmental studies, feedstock study, independent engineer s report, other development costs Legal and Financial Costs Working Capital Working capital line to fund operations In place or funded by sponsor at financial close 68

69 Successful Financing Requires Systematic Approach Ultimate objective of Sponsors is to maximize non-recourse debt while providing adequate equity to protect project debt investors Trade-off between time, cost and optimization of other Sponsor objectives Decisions reflected in economic terms of deal (interest rate, term, reserves, leverage, covenants, etc.) Role of Government Tax policies, guaranty, loans/grants, etc. Feedstock Supply Term, price and volume, hedging strategy (caps / collars) No diversion Adequate on-site storage Offtake Long-term quantity offtake agreement Long-term fixed price offtake agreement vs. Pricing formula (hedging strategy) Adequate storage and transportation infrastructure Technology Risks Commercialized technology reduces investor risk Independent engineer s report validating process 69

70 Successful Financing Requires Systematic Approach Construction Risks Fixed price, date certain, turnkey EPC contract with liquidated damages Completion guarantee by Sponsors Insurance/warranties on parts, availability and general failure relating to technology Operations Risks O&M contract with efficiency bonus provisions Adequate Operating and Maintenance Reserve Accounts Economic Performance Generates good debt service coverage under stress scenarios Stable project returns, with potential for additional upside Adequate Debt Service Reserve Account Sponsors & Management Ability of Sponsors to provide completion guarantees Adequate working capital Continuity of senior management Risk Management Policies Must assess competitive positioning Must assess market risk, commodity hedging strategies, currency risk 70

71 Technology Risk Mitigation Guaranty from a Credit-worthy Counterparty (some recourse) Parent Technology provider Credit Enhancement via Government Guaranty USDA 9003 for Advanced Bio-Refineries DOE program Insurance Insurance/warranties on parts, availability and general failure relating to technology Extended warranties for repeated failures and product defects Insuring the performance curve Availability 71

72 Credit Enhancements: Insuring Technology Risk Discussions with a major insurer of renewable technology (solar and wind) that has indicated an interest in developing a biofuels insurance product Major aspects of coverage Extended warranty Serial loss Repeated failure of same piece of equipment Product defect Failure of component to function properly Performance curve (efficacy) Failure of plant to produce the product design output at design specification for design input Availability Liquidated damages payment in the event that design performance cannot be achieved Insurers Information needs Independent engineer s report for the project Product off-take contract Equipment information (price, service and maintenance plan, warranty) Access to the EPC contractor 72

73 At Financial Close Financing in Place Project equity and debt funding in place Funds available to the project, working capital Completion guarantee by Sponsor(s) Adequate reserve accounts (debt service, maintenance, operating) Feedstock Agreements Origination contracts in place with credit-worthy counterparty Price/Volume Long-term, no diversion Off-take Agreements Long-term contracts in place with credit-worthy counterparty Price/Volume Fixed pricing / Pricing formula (hedging strategy) Project Cash Flows Long-term feedstock and offtake agreements reduce project cash flow volatility and provide operating cash flow margin that will enable the project to pay interest and principal EPC / Technology / Operating Agreements Contracts in place with experienced EPC contractor Guaranteed price and wrap Best type of contract Technology provider and EPC contractor are same company Experienced operator that can control costs, product quality and output volume 73

74 Project Finance Execution 1) Sources and Uses 2) Private Placement Memorandum 3) Independent Engineer Report 4) Timetable 5) Project Finance Waterfall 74

75 Sources and Uses of Funds Sources of Funds Senior debt Subordinated debt Equity Cash Contributed PPE NMTCs (after project finance close) Uses of Funds Project construction fund Capitalized interest (interest during construction) Debt service reserve fund (1-yr of principal + interest) Reserves operating, maintenance Project soft costs (third-party reports, engineering, etc.) Legal costs Developer counsel (TBD) Issuer counsel (PACE or SW bonds) Stern counsel (Krieg DeVault) Investment banking fee Stern Brothers (sole manager) Retainer / Structuring / Underwriting Fee 75

76 Private Placement Memorandum PPM Outline Introduction to the Project and the Bond Financing Description of the Project Sources and Uses of Funds Description of the Bonds Security and Sources of Payment for the Bonds Risk Factors Litigation Placement of the Bonds Annual Information Disclosure (Operating and Financial) Miscellaneous Appendices ** Dataroom Appendix A Description of the Project Appendix B Project Operating Model ** Appendix C Independent Engineer s Report ** Appendix D Feedstock Study ** Appendix E CNG/LNG Market Study ** Appendix F Document Summaries (Bonds, Feedstock, Off-take, EPC, O&M, etc.)** Appendix H Book-Entry Only / Form of Legal Opinions Appendix I Form of Investment Letter 76

77 IE Report Outline Independent Engineer s Report Summary and Background of the Project Detailed Project Description Licensing and Permitting Review Analysis of Project Costs and Schedule Review of Major Project Agreements (Feedstock, off-take, EPC, etc.) Technical Review of the Project Environmental Assessment Reports and Permits Review of the Project Financing Operating Model (ties management cash flow projections to cap ex, revenue assumptions [from feedstock and market studies] and cost assumptions) Conclusions 77

78 Documentation Timetable 8+ weeks Documents controlled by the team 8 to 10 weeks PPM, bond documents, etc. Documents NOT controlled by the team???? IE report / Feedstock study / Market study 4 to 8 weeks each Miscellaneous (Appraisal, Phase 1 Environmental, Insurance, Project survey, etc.) Marketing Selling Process 6 to 10 weeks Week 1 Information to investors 100+ investors Q&A conference call Week 2 Response from investors 20+ One-on-one calls Week 3 More information to investors 5+ Detailed discussions on price and terms Week 4 Response from investors 2-4 Finalize investor(s) Weeks 5-8 Negotiate 2+ Final price and terms Weeks 9-10 Document and Close 78

79 Project Finance Waterfall Cash Flow Waterfall Administered by the Trustee Cash flows into Revenue Account (cash transfer from Construction Account at COD + all project cash flow) 1) Cash transferred to the Operating Account (pays operating expenses) 2) Cash transferred to Trustee, Servicing Agent, Collateral Agent, Accounts Bank to pay servicing fees 3) Cash transferred to pay Debt Service (Interest and Principal) on Senior Debt 4) Cash transferred to fill Working Capital Reserve Account, if needed 5) Cash transferred to fill Debt Service Reserve Account, if needed 6) Cash transferred to pay Debt Service (Interest and Principal) on Subordinated Debt 7) Cash transferred to pay Permitted Tax Distributions 8) Cash held in Covenant Compliance Holding Account (If certain coverage ratios are not met) or distributed to project sponsors 79

80 John May, Managing Director John M. May, Managing Director, is Head of the firm s Renewable Energy Practice, which he founded in He is a seasoned project finance investment banker who has financed over $11 billion in loan and par values for over 100 clients in his 25-year banking career. In the past ten years, he has become one of the top renewable energy bankers in the country, having developed a national practice in renewable energy finance focusing on biofuels, biomass, biochemical and bio-products. He is credited with having pioneered the use of bonds as a form of project finance debt in the renewables market. He is financial advisor to numerous renewable companies and has placed senior and subordinated debt financing for new projects, expansions and acquisitions. He has also been placement agent to companies raising debt through the issuance of tax-exempt and taxable bonds. In 2003, he underwrote the country s first tax-exempt bond issue to fund a landfill gas-to-electricity project. In 2005, he was responsible for developing one of the first tax-exempt bond structures sold to major U.S. institutional investors to fund ethanol projects. He was the first banker to use a State guarantee of debt for a biofuel financing. In 2006, he secured a $15 million full faith and credit guarantee from the State of Illinois for a biodiesel project. Also in 2006, he introduced the use of bonds as a complement to syndicated bank debt in large biofuels financings. In 2008, he was placement agent for bonds used to finance the first U.S. ethanol plant with an off-take agreement from a major international oil company. In 2010, he created the bond finance structure adopted by the USDA in its Bio-Refinery Loan Guarantee Program; this resulted in the Agency s adoption of a new Interim Final Rule for the program in In 2012, John led the investment banking team that closed the first project financing for a biochemical company in U.S. history, for Myriant Corporation. The deal was awarded Deal of the Year by Biofuels Digest Magazine for He currently represents approximately 30 biofuels, biomass and biochemical and biorefinery technology, development and feedstock companies worldwide. John has been involved in financing renewable projects in ten states in the U.S., and is currently at work on financings for clients seeking to develop projects offshore in Canada, Latin America and the EU. He has developed Stern Brothers international practice into one of the most recognized brands in the financing of biofuels in the U.S. John May Managing Director Co-Head of Alternative Energy Finance Group 8000 Maryland Ave. Suite 800 St. Louis, Missouri Ph: Fax: jmay@sternbrothers.com John is a frequent speaker at national conferences and webinars in the industry for such sponsors as: ACORE, Infocast, Advanced Biofuels Association, BIO, Platts, Projects and Money CDFA, Midwest Energy, GreenPower, The National Governor s Association and the American Bar Association. He has provided counsel on financing options and the credit markets to such government and association industry stakeholders as the USDA, the Staff of the U.S. House Agriculture Committee, the U.S. Department of Energy/NREL, and the United States Congress Joint Committee on Taxation. He has been featured in recent articles on biofuels finance authored or sponsored by Biofuels Journal, Biofuels Digest, Biorefining Magazine, Renewable Energy from Waste Magazine, and Waste Advantage Magazine and published on Grainnet.com. In 2011, John was elected to the Advisory Board of the Rockefeller Brothers Fund s Climate Prosperity Partnership. In 2012, John was voted one of the Top 100 People in Bioenergy 2012 by the readers of Biofuels Digest. In November 2012, John was featured on the cover of Biomass Magazine in an article entitled Meet the Biobanker. Mr. May is also a member of the Board of Directors of the Donald Danforth Plant Science Center's BRDG Park. In early 2013, John was named the 50 th most influential person in the world in Bioenergy by Biofuels Digest. On March 17, 2013, John was was featured on the Platts Energy Week Sunday morning television broadcast which aired on selected PBS and CBS stations in major markets in the U.S. He was invited to speak as a global leader in the field of bioenergy and biochemical/product project financing. At the World Biofuels Markets conference held in Rotterdam in March, 2013, John's credit enhanced bond financing for Myriant Corp was shortlisted with two others for the World Biofuels Deal of the Year. John begun serving on the Power Generation & Infrastructure Advisory Committee of the American Council on Renewable Energy (ACORE) beginning in Prior to beginning his investment banking career, John practiced law at two national firms in Kansas City and Dallas. He received his J.D. and M.B.A. (with concentration in Finance) degrees from the University of Kansas, and his B.A. with Honors Cum Laude from Brown University. 80

81 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, June 19 th to all ABC Members and all attendees of the webinar.

82 Upcoming Events BioCycle REFOR15: Official Conference of the American Biogas Council Boston, MA October 19-22, 2015 For more information, visit or call (202)

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