Transcript Biomass Project Development and Finance

BIOMASS PROJECT
DEVELOPMENT , ACQUISITION
AND FINANCING
“FROM WOODS TO WATTS”
Presented by: Thomas Suffield,
Principal, Cedars Capital, LLC
Presented to: BioPower Generation USA
Chicago, Illinois
July 8 , 2009
Thomas Suffield, Principal: Cedars Capital LLC
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Education:
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Background:
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Cedars Capital, Houston, Texas based boutique Investment & Project
Advisory Firm
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Downstream Power Plant Development and Financing
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Development of gas, coal and renewable fired power projects
Equity and Debt Project Financing and Capital sourcing for Commercial Entities
Track Record: Renewable and traditional project financing/development
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Developed, Acquired or Financed over 2,500 MWs, valued at over $3.5Billion.
Currently sourcing capital and providing development and financing expertise
Contact Information: [email protected] (713) 554-3017
www.cedarscapital.com
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Biomass Power & Pellet Market Trends
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Biomass is the second largest renewable power source behind Hydro
Base-load Biomass Projects can be profitable and project financeable and PTCs
become additive to the plant economics
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Currently, biomass is the only proven renewable base-load electricity supply that
is scalable over large regions
Biggest Risk in Biomass Power Projects has historically been the inability to lock in
long term supply of biomass
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Market opportunities with a credit worthy off-taker
Capital shortage has dramatically increased the cost of capital (returns) available
through acquisitions and later stage development assets
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Has also increased the Bid/Ask spread for acquisition and development capital
Repowering Opportunities exist for shuttered biomass and older coal fired facilities
Biomass Pellet plants are in demand for supply to:
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Northern Retail/Residential Markets, some Industrial buyers-typically a spot
market
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European Utilities contracting for intermediate off take-up to 5 years
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Technology Issues/Venture Capital
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New forms of feedstock manufacturing, processing
 Adding heat and other processes to biomass chips through
torrefaction or pyrolysis: much like charcoal
 Torrified Biomass, Briquettes, Char
 Currently not commercial
New processes
 Liquid feed-stocks
 Solid fuel conversion: Gasification technology or
processing into liquids
Key components for financeable technology
 Established commercial size-not a test plant
 Operating history
 Serial number 3,4, 5, etc.
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Financing Sources: Development & Acquisition Capital
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Friends & Family Capital
Angel Investors
Venture Capital
 Incremental Capital-Priced as Equity, but takes a lien
 DOE Grants: not a great history of timely funding technologies/projects
Project Capital:
 Pre-Development and Development Capital
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Highest Risk, Highest Cost
 Construction Capital
 Equity (Private Equity, Hedge Funds) and Debt (Bank Debt) Tranches
 Won’t Take Construction Risk:
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Tax Equity:
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USDA Guarantees
Operating Capital: Working Capital, add on capital, etc.
Acquisition Capital: looking for cash flow
www.cedarscapital.com
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Project Development and Acquisition Structure
Equity
Other Funders
Debt financing
Contractor
Funding and
expertise
Dividends,
ownership stake
Construction
agreement
Fuel
Supply
Special Purpose
Vehicle (SPV)
Operator
Operation &
Maintenance
Power Purchase
Agreement (PPA)
Supply
agreement
Power Off taker
RECs
Permitting,
Approvals
Other Stakeholders
Carbon Credit/REC markets
www.cedarscapital.com
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Case Study: Project Description
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24 Megawatt biomass power plant built within
the Abitibi-Bowater recycled newsprint paper
mill in Snowflake, Arizona.
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2 year pre-construction development timeline
Financial Close and Construction Start,
September, 2006
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$55MM Project Financing led by CoBank,
represents the U.S. Farm Credit System
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Achieved Commercial Operations, 3rd Quarter,
2008
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Capture ½ of Eligible Production Tax Credits
Good mix with AZ’s wind and solar power
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Stakeholders, Players
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Project Owner
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www.renegy.com
Robert M Worsley: Entrepreneurial and Corporate Experience
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Owner’s Rep: Scott Higginson
Approval Authorities: Permitting, Tax Exempt Bond Financing
Financing Sources
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Thornton Farish
Owner’s Engineer: Evergreen
Lender’s Engineer: Stone & Webster
Technical Advisor: Carlson Small Power Consultants
Owner’s Counsel: Bracewell & Giuliani
Lender’s Counsel: Latham & Watkins
Operator: Abitibi Consolidated
Financing & Development Advisory Services: Cedars Capital, LLC
www.cedarscapital.com
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Power Purchase Agreements
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Request for Proposal from Salt River Project (SRP) for Electricity Offtake from Biomass Fueled Power sourced within Arizona
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Negotiation with Arizona Public Service (APS) for an additional 10-14
MWs of Biomass Fueled Power for a 15 year term
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Off take fluctuates as a function of the plant’s auxiliary load
Both regulated utilities with strong financials/credit worthy off takers
(SRP government owned)
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AZ has a renewable portfolio standard increasing to of 15% from renewable
generation by 2025
Successful Bid, Negotiation of Preliminary Commercial Terms and Power
Purchase Agreement (PPA), Sept, 2004
20 year term for 10MWs, with incremental 10 megawatts for years 16-20
Differ from a commodity reseller or ‘non finance-able/credit worthy entity’
Green Credits: From Wood Waste to Megawatts
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Both Utilities are purchasing Snowflake’s Renewable Energy Certificates
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Project Location
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Bidding Constraints
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Deliver to SRP interconnection points in Arizona
Close proximity to biomass fuel, existing infrastructure
Abitibi Paper Mill
Cost Effective Synergies
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Capital Cost Savings
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Operating Cost Savings
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Existing systems: Transmission Substation, Dedicated Transmission
Line, Control Room, Plant Security, Truck Weigh Station, Fuel Lay
down area, Fuel Processing, existing Natural Gas line
Plant will actually backfill the transmission line, producing additional
value
Fuel Sourcing: Previous Pulp operation and continuous Paper Sludge
being land filled
Redundant Systems
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Water Sourcing and Treatment, Black Start capability
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Equipment Procurement and Construction
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Engineering
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Plant has increased in size 3 fold since original
sizing, given higher elevations
Mix of New and Used Equipment
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Abitibi Plant in Sheldon, Texas
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Technology
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Conveyors, screw presses, etc.
Forged steel steam drum
New Babcock and Wilcox bubbling fluidized bed
boiler designed for this fuel application
Procurement
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Fuel Sourcing
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June 20, 2002 Rodeo-Chediski wildfire started that ultimately
burned almost 500,000 acres of National Forest land in Eastern
Arizona
Renergy (Wholly owned Subsidiary): Fuel Procurement,
Processing and Logistics of woody waste material from
surrounding area
 Business Plan: capture value from whole logs, aggregate fuel
sourcing (marketing/logistics)
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Largest forest logging operation in Arizona
Numerous US Forest Service contracts being let to remove
biomass
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Government (USFS, BLM, Native American Sovereignty) owned
forest lands typically pays for forest stewardship
Privately owned forest lands, typically is paid for forest stewardship
Green forest thinning activities,
Forest Rehabilitation
Waste material from the region’s existing saw mills
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Fuel Sourcing Continued
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Abitibi produces 250 bone dry tons/day of waste recycled paper
Sludge
 Will provide 25% of the fuel for the plant
Acquire a 3 year fuel supply prior to start up
Fuel will be chipped, typically has 7-10% moisture content from
the field
Disposal site for wood waste
Logistics: Rail and Trucking of biomass
 Fuel Costs, distance traveled
 Dis-aggregation of vendors: individual jobbers/truckers
Snowflake will consume:
 125,000 tons/year of forest thinnings @ 20% moisture
 168,000 tons/year of paper sludge @ 50% moisture
Competitive Uses:
 Fuel pellets for wood stoves, garden mulch
 Most is burned in place/side of the mountain
www.cedarscapital.com
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Project Financing
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Process of Identifying Financing Sources
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Equity: Sponsor Contributed approx. $20MM
Debt: Project Financed/avoidance of personal guarantee
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Sizing constraints:
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CoBank: Lead arranger and underwriter
JPMorgan/Chase: provided credit support to CoBank’s LCs
Thornton Farish
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Tax Exempt Bond Underwriter of Waste Projects
Financing Structure
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Debt/Equity Ratios
Debt Service Coverage Ratios
Bonds: Limited by statute on what assets they can fund
Project Debt: Construction and Term Loans
Industrial Development Bonds (Backstopped by Letters of Credit)
Production Tax Credit Availability
Developer Support
Creative Nuances
www.cedarscapital.com
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Approvals
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Permitting: Minimal given existing Abitibi footprint
 Air Quality Permit issued by AZ Dept of Environmental Quality,
without reopening the existing permit for the Abitibi Plant
 Construction permit issued by Navajo County for buildings
 Large Generator Interconnection Permit and Transmission
Agreement
Bond Approvals
 Western States typically don’t utilize all of their tax exempt bond
issuing capacity granted by U.S. Treasury/I.R.S.
 AZ Dept. of Commerce awarded Private Activity Bond allocation
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Bonds issued by the State
Show Low Industrial Development Authority was able to authorize up
to $39.25MM in bonds
Project qualified under IRS guidelines as a “Solid Waste Treatment
Facility”
Project was able to incorporate the authorized amount
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Risk/Reward Analysis
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Development Risk
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Construction Risk
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Bonds are swapped, eliminating interest rate risk
PPA escalation: fixed rate, inflation adjusted
Pricing Risk: Costs may still increase faster than revenues
Abitibi Viability/Operational Risk
Regulatory Risk
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Equipment, Fuel Sourcing, Payment Risk, Performance/Operator Risk (PPA
compliance)
Financial Risk
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Construction Guaranties/General Contractor Wrap
Developer Support
Operating Risk
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Developer Provided Consideration/Credit Support to Power Off-takers
Equipment/Development Risk
Permitting Risk
Financing/Interest Rate Risk
FERC, AZ utility regulation and environmental laws
Tax law
Investor Risk
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Bond Holders are only exposed to JPMorgan/Chase credit risk, not project risk
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Market forces and Lessons Learned
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Market Timing
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Early in latest wave of the Biomass Power Development life
cycle
Market Forces
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Price increases in capital cost components of source
material including
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Commodities: steel, cement, anything with a high fuel cost
component
Finished equipment and lead times: Lack of
Manufacturing/Infrastructure Capacity
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Boiler, generator, bag house, etc.
Market Strategy
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From Woods to megawatts to project Wonder
www.cedarscapital.com
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Social/Strategic Components
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Environmentally Beneficial
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Healthy Forest Initiative
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Forest Beautification
Abitibi: save landfill space, burn paper sludge
Economically Viable
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Forest Density (Crowding, Beatle Infestation, Drought)
Lack of fuel degradability at altitude/humidity
State and Utility diversification of fuel risk
Job creation
Renewable Energy
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CO2 Neutral
Secure supply of charred timber
www.cedarscapital.com
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Contact Information
Cedars Capital, LLC
1330 Post Oak Blvd, Suite 1375
Houston, TX 77057 USA
Voice: 1 (713) 554-3017
Fax: 1 (713) 513-7123
Thomas Suffield cell: 1 (713) 805-1296
[email protected]
www.cedarscapital.com
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