Financing for Biogas Projects - American Biogas...

Biogas Financing: Options, Steps, and Resources for Biogas Project Development • September 14, 2011

Financing for Biogas ProjectsFinancing for Biogas Projects

Biogas Financing: Options, Steps, and Resources for Biogas Project Development September 14, 2011


Hurdles for Financing BiogasHurdles for Financing Biogas

• High transaction costs – often small projects

• New technologies (in US), less experienced developers

• Capital intensive – sensitive to cost of capital

• Reliance on host or feedstock supplier

• Revenue from multiple sources, some short term (e.g. fiber and fertilizer sales)

• Projects are complex for lenders -- require project specific structures

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The Financeable Biogas ProjectThe Financeable Biogas Project

• Management experience

• Minimum investment/returns

• Feedstock supply risks

• EPC risks

• Offtake revenue risks

• (No) Technology risks

3


ItIt’’s not the lawyerss not the lawyers’’ fault . . .fault . . .

• Investors/lenders will require solid documentation

• Project finance is based on the project’s operating cash flows

• Lock down capex and all financing

• Comfort on revenues and expenses

• Risks eliminated or managed

4


Project DocumentsProject Documents

• Site control and permitting

• Feedstock supply

• Design, equipment, construction contract

• Interconnection/pipeline

• Power/gas/fiber/fertilizer/RECs offtake

• Operations & Maintenance

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Types of FinancingTypes of Financing

• Balance Sheet

• Debt (including bonds)

• Equity (incl tax equity)

• Grants and incentives

• Public-private partnerships

Need to determine best fit for project

6


Financing SourcesFinancing Sources

• Banks – construction and term loans

• Capital markets

• Vendor financing

• Sponsor equity – development capital

• Strategic equity – entry point into market

• Tax equity – need to monetize these benefits to make most projects work

7


Other Financing SourcesOther Financing Sources

• Taxable bonds using USDA loan gty

• Tax exempt bonds – Solid Waste Bonds

• Public-private financing

8


Tax Benefits Available OverviewTax Benefits Available Overview

• Production Tax Credit (“PTC”)

• Investment Tax Credit (“ITC”)

• Treasury Department Grant

• Accelerated Depreciation (“MACRS”)

• New Markets Tax Credit (“NMTC”)

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Production Tax CreditProduction Tax Credit

• Based on amount of electricity produced from qualified resource and sold to unrelated person during each year of credit period

– Credit rate adjusted for inflation each year

– Credit rate for 2010 was 2.2¢ per kilowatt hour

• Credit Period – 10-year period beginning with “placed-in-service” date

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Production Tax CreditProduction Tax Credit

• Electricity must be owned and produced by taxpayer seeking to claim the PTC

• Facility must be located in the U.S.

• Facility must be placed in service by 2013

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Investment Tax CreditInvestment Tax Credit

• Based on the cost of qualifying equipment

– Generally 30% of tax basis

– Credit is claimed entirely in the year in which property is placed in service

• To qualify, property must be “energy property”

• “Energy property” includes certain PTC-eligible property for which an election is made, such as biogas projects

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• Facility must be placed in service by taxpayer

• By 2013

• Property must be eligible for depreciation (not buildings or structural improvements) and must be an integral part of facility

• This creates issues for facilities producing and selling biogas, fertilizer and other co-products in addition to electricity

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• Nonrefundable but can be carried back one year and forward 20 years

• Basis of property reduced by 50% of ITC

• Recapture if disposed of within 5 years

• No cutback for subsidized financing

• More value (relatively) for more expensive, lower producing facilities

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Treasury Dept. GrantTreasury Dept. Grant

• Section 1603 - election to receive cash grant

• Eligibility requirements for the ITC apply

• Construction must begin before 2012 and project must be placed in service by 2013

• Application due no later than September 30, 2012

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Treasury Dept. GrantTreasury Dept. Grant

• Grant generally operates in the same manner as ITC

– 30% of tax basis of qualifying property (10% for certain projects)

– Subject to recapture if sold to disqualified person within 5 years

– Generally not included in recipient’s taxable income

– Basis reduced by 50% of grant amount

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DepreciationDepreciation

• Bonus Depreciation:

– For projects placed in service before January 1, 2012, 100% bonus depreciation in first year

– For projects placed in service in 2012, 50% bonus depreciation in first year

• 7-year MACRS

• Valuable losses for investor

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Tax Equity StructuresTax Equity Structures

• Partnership Flip

• Sale-leaseback

• Inverted lease

• Now being considered as a source of low cost capital for renewable facilities

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New Markets Tax CreditNew Markets Tax Credit

• In the law since 2000

• Previously used mostly for commercial real estate and manufacturing

• Now being considered as a source of low cost capital for renewable facilities

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Base Case ModelBase Case ModelNMTC

Investor

NMTC

Investor

AllocateeAllocateeCDECDE

QALIC-BQALIC-B

Tax Credits

$3.9M over 7

Years

$10M

QEI (Equity)

Investor

Member

99.99%

Managing Member

0.01% $10M

QLICI

(Debt or Equity)


Twinning NMTCs and 1603/ITC Twinning NMTCs and 1603/ITC

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Allocatee CDEAllocatee CDE Allocatee CDE 2

Allocatee CDE 2

$13.25M equity

NMTC - $7.8M1603/ITC – 5.6M

DeveloperDeveloper

$7.75MLeveraged Loan

CDE Fee 5%$500,000

CDE Fee 5%$500,000

0.01% Equity 0.01% Equity

Equity – 51%

NMTC InvestorNMTC Investor

Investment Fund$20.7M

Investment Fund$20.7M

LenderLender

SUB CDE 1SUB CDE 1 SUB CDE 2SUB CDE 2

QALIC-B49% Investor

51% Developer

QALIC-B49% Investor

51% Developer

U.S. Treasury1603/ITC

$5.6M

U.S. Treasury1603/ITC

$5.6M

Sub-Tenant DeveloperSub-Tenant Developer

Master TenantNMTC Investor

Master TenantNMTC Investor

Equity

(24.5%)

Subloan ASubloan

B


A Partnership FlipA Partnership Flip

• Investor receives cash grant/ITC plus depreciation

• Flip occurs after investor receives IRR but not within first five years

• Developer generally has purchase option after flip

• Capital account or outside basis issues

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Partnershipcash grant/ITC plus

depreciation

Developer Investor

99% pre-flip 5% post-flip

Power Sales

Power

Purchaser

1% pre-flip 95% post-flip


Traditional SaleTraditional Sale--LeasebackLeaseback

• Developer generally has option to acquire property at end of lease term

• Lease must qualify as true lease for tax purposes– Minimum investment – 20%

– No put right by lessor

– No lessee investment

– No lessee loans or guarantees

– Lessor profit

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Modified SaleModified Sale--LeasebackLeaseback

• No basis reduction as a result of ITC/cash grant

• Developer must take half the credit/cash grant into income over five year period

• Lease must qualify as true lease for tax purposes

• Lease must qualify for credit pass through election

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Inverted LeaseInverted Lease

• No basis reduction as a result of ITC/cash grant

• Investor must take half the credit/cash grant into income over five years

• Lease must qualify as true lease for tax purposes

• Lease must qualify for credit pass through election

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Inverted Lease Inverted Lease

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Inverted Lease with Sharing of Inverted Lease with Sharing of

Depreciation Depreciation

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Inverted Lease with BackleverInverted Lease with Backlever

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Thank YouThank You

David Benson

[email protected]

(206) 386-7584

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