Financing for Biogas Projects. Biogas Financing: Options, Steps, Steps, and and Resources Resources for Biogas for Biogas Project Development

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

2 Hurdles 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 2

3 The Financeable Biogas Project Management experience Minimum investment/returns Feedstock supply risks EPC risks Offtake revenue risks (No) Technology risks 3

4 It s s not the lawyers 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

5 Project Documents Site control and permitting Feedstock supply Design, equipment, construction contract Interconnection/pipeline Power/gas/fiber/fertilizer/RECs offtake Operations & Maintenance 5

6 Types 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

7 Financing 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

8 Other Financing Sources Taxable bonds using USDA loan gty Tax exempt bonds Solid Waste Bonds Public-private financing 8

9 Tax Benefits Available Overview Production Tax Credit ( PTC ) Investment Tax Credit ( ITC ) Treasury Department Grant Accelerated Depreciation ( MACRS ) New Markets Tax Credit ( NMTC ) 9

10 Production 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 10

11 Production 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

12 Investment 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 12

13 Investment Tax Credit 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 13

14 Investment Tax Credit 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 14

15 Treasury Dept. Grant Section 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,

16 Treasury 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 16

17 Depreciation 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 17

18 Tax Equity Structures Partnership Flip Sale-leaseback Inverted lease Now being considered as a source of low cost capital for renewable facilities 18

19 New 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 19

20 Base Case Model NMTC Investor Allocatee Tax Credits $3.9M over 7 Years CDE $10M QEI (Equity) Investor Member 99.99% Managing Member 0.01% $10M QLICI (Debt or Equity) QALIC-B 20

21 Twinning NMTCs and 1603/ITC NMTC Investor Allocatee CDE NMTC - $7.8M 1603/ITC 5.6M CDE Fee 5% $500,000 $13.25M equity Investment Fund $20.7M $7.75M Leveraged Loan SUB CDE 1 SUB CDE 2 CDE Fee 5% $500, % Equity 0.01% Equity B Lender Allocatee CDE 2 Subloan A Equity (24.5%) Subloan QALIC-B 49% Investor 51% Developer Equity 51% Developer U.S. Treasury 1603/ITC $5.6M Master Tenant NMTC Investor Sub-Tenant Developer 21

22 A Partnership Flip Developer Investor 1% pre-flip 95% post-flip Partnership cash grant/itc plus depreciation 99% pre-flip 5% post-flip Power Sales Power Purchaser 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 22

23 Traditional Sale-Leaseback 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 23

24 Modified Sale-Leaseback 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 24

25 Inverted 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 25

26 Inverted Lease 26

27 Inverted Lease with Sharing of Depreciation 27

28 Inverted Lease with Backlever 28

29 Thank You David Benson (206)