Promoting the Anaerobic Digestion and Biogas Industries Moving Biogas Projects Forward: A closer look at the tools used and steps taken to A closer look at the tools used and steps taken to complete a project Our Partner: February 26, 2013 www.americanbiogascouncil.org
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Promoting the Anaerobic Digestion and Biogas Industries
Moving Biogas Projects Forward:A closer look at the tools used and steps taken toA closer look at the tools used and steps taken to
complete a project
Our Partner:
February 26, 2013
www.americanbiogascouncil.org
Promoting the Anaerobic Digestion and Biogas Industries
Quick Notes• Two Audio Options: Streaming Audio and Dial‐
Joel LaubensteinManager - Energy and [email protected]@bakertilly.com
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Presentation Highlights
>Introduction
>Energy legislative updates
>Assess business case for project viability
>Selecting the project team & managing
construction/operating risks.g
>Example projects
>Conclusion>Conclusion
>Q&A
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Baker Tilly at a Glance
Baker Tilly is the 8th largest accounting network worldwide> Top 20 largest firms in the U S consisting of more than 1 400> Top 20 largest firms in the U.S. consisting of more than 1,400
professionals
> Established in 1931
> Offices throughout the Midwest and East Coast− Chicago
− Detroit
− Minneapolis
− New York
− Washington DC
− Wisconsin
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Diverse Clients Served
We serve our clients through our industry teamsUtilities > Nationwide energy practice: More than 40 years experience and over 300 energy and
utility clients nationwide - electric, water, waste water, storm water, and gas utilities
R bl ERenewable Energy> Dedicated Renewable Energy Group: Focused on development and financial
solutions to get projects to the finish line in a way that maximizes client value and minimizes risk. We work with more than 40 active projects representing 1,500 MW.minimizes risk. We work with more than 40 active projects representing 1,500 MW.
Manufacturers and Food & Beverage> Seventy-five years serving manufacturers: We serve more than 2,300 manufacturers
and wholesale/distributors with over 230 in the Food and Beverage industry.
State and Local Government> Work closely with municipalities and other non profits: Experience with
municipal/government leaders allows us to understand diverse perspectives. We work with more than 150 higher education and research institutions across the United States.
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Biogas Experience
Baker Tilly has been involved with over 15 biogas projects that are either operating or under construction involving more than 25 p g gfood processors and $200 million of funding.
> Accessing Federal Incentives (ITC PTC 1603 grants NMTC’s)> 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
> Financial Advisory and Funding Procurement
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Energy Legislative Updates
> Digesters typically fall under the “open loop biomass” or “trash” facilities definitiondefinition
– Production Tax Credit equal to $.011/kwh produced for 10 years» Indexed to inflation» 2 X more for “closed loop biomass” facilities» 2 X more for closed loop biomass facilities
– Investment Tax Credit (“ITC”) equal to 30% of eligible project costs
> American Taxpayer Relief Act of 2012> American Taxpayer Relief Act of 2012– Deleted 12/31/13 placed in service requirement– Added 12/31/13 begin construction deadline
Treasury says these changes do not apply to the 1603 grant program– Treasury says these changes do not apply to the 1603 grant program
> What is “Begin Construction”?
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Energy Legislative Updates
> New Markets Tax Credits– Designed to spur investment in economically disadvantaged areas (census tract driven)
– Can be paired with energy creditsCa be pa ed e e gy c ed s– Brings additional low cost capital to fund a project
– “Typical” NMTC deal ($10 million of allocation) provides approximately $2.0 million of benefit to the project
– Total allocation of $29.5 billion since program’s inception in 2000– American Taxpayer Relief Act of 2012 allocated $3.5 billion of allocation to each 2012 and
2013
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Assessing the Business Case for a Project’s Viability
Current Growth Constraints
Primary Issues
C t> Cost> Disposal of waste> Energy
> Environmental > Regulatory compliance> Community impact y p
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Assessing the Business Case for a Project’s Viability
Industry Growth Potential
Primar BenefitsPrimary Benefits
> Less risk regarding cost of disposal and energydisposal and energy– Long-term pricing
stabilization – Possible reduction ofPossible reduction of
current costs> Ability to expand on existing
footprintp> Ability to meet other
sustainability goals whether mandated internally or
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externally
Assessing the Business Case for a Project’s Viability
Case Study: WI State Energy Office -Biogas Energy Applications from AgriculturalBiogas Energy Applications from Agricultural and Cheese Manufacturing Feedstocks
Executive Summary > In October 2012, we provided an action plan for
development of biogas projects to the WI State Energy Office.
> This plan included an economic tool kit, a report assessing key project development considerations, and a mapping tool to help identify/site biogas
j l iproject locations.> Purpose of project is to aid a biogas project
developer in understanding if they have a solid base business case and should move a project forward into the construction and financing phases.
http://www bakertilly com/biogas energy digester
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http://www.bakertilly.com/biogas-energy-digester
Case Study: WI State Energy Office -Biogas Energy Applications from AgriculturalBiogas Energy Applications from Agricultural and Cheese Manufacturing Feedstocks
Economic Toolkit Basics> Purpose: To perform an initial assessment> Purpose: To perform an initial assessment
of the heat/power generation using various feedstocks
> Capabilities: The model is able to evaluate up to 10 farms and 10 processing facilities at the same time
> Within the model there are a number of “tabs” that are interrelated:
Case Study: WI State Energy Office -Biogas Energy Applications from AgriculturalBiogas Energy Applications from Agricultural and Cheese Manufacturing Feedstocks
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Assessing the Business Case for a Project’s Viability
> The primary question of a development is to evaluate “is the project feasible?”– “Feasible” means different things to different project stakeholders, or project “Sponsors”– A typical view of what is a feasible project, is the “developer” view - “Can the project stand on its
own as a viable business entity?” – To a waste producer, community and environmental impacts may be the primary driver why a
project is feasibleproject is feasible.
> The project developer needs to understand what “feasible” means to the “project owner” to advance development tasks and obtain required contracts.– Outside third parties (project finance model)Outside third parties (project finance model)– Waste producer (internally funded)
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Project Finance in Today’s Economy
Equity> Awareness to market funding options important
regardless of “internal capacity” to fund:> Added discipline to underwriting by understanding
Traditional financing
MezzanineAdded discipline to underwriting by understanding “project finance” standards and value of “de-risking” the investment
> Opportunity cost perspective
Other loan programs
Negotiated incentives
Tax credit programs
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Project Finance Perspective – “Non-recourse”
> Who is behind the project?> Financial strength of primary project owner/sponsorg p y p j p> If owner does not have experience, what outside parties has the owner aligned itself with that do?> How are outside parties (engineering/design, construction, operations and maintenance) aligned
with the project’s success?> Fixed cost agreements, performance guarantees, liquidated damages, etc.
> What fundamental needs does the project meet and why will the project’s value proposition remain relevant over the funding period?> Long term contracts with feedstock providers and off-takers (power and by-products) are typically
the best way to answer this question. > “Long Term” is defined relative to the term of the financing> Long Term is defined relative to the term of the financing.> Credit quality of counter parties has significant impact.
> The less cash flow coverage provided by long term contracts the greater owner/sponsor at-risk capital is required.capital is required.
Project Finance …
Potential Cost of Funding Options Funds Comments1603 Grant Funds* Nearly 0% Need to have met "start of construction" requirement prior to December 31, 2011NMTC P d N l 0% N t " titl t " t ll ti f CDENMTC Proceeds Nearly 0% Not an "entitlement program", must secure allocation from CDEUtility Rebates/Grants Nearly 0% Depends on project deliverables and timing for "yearly" program goals/fundingFederal Loan Guarantees/TIF/Other 4‐6% Specific to project location, availabilty and owner's overall profile of needTax Equity** 8‐15% Supply/demand driven and is a fluid marketTax Equity 8 15% Supply/demand driven and is a fluid marketSenior Debt 6‐9% Depends upon Sponsor's background and contractual "de‐risking" of the projectEquity 12‐20+% Depends upon technology's stage of development
* Requires a bridge investment (funds received post COD).** Cost of funds represents return provided by combination of tax benefits and cash flow.
$9 M Total Project Spend = All assets Non-Eligible
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$ j p g
Expansion with Investment Tax Credit and New Markets Tax CreditsNew Markets Tax Credits
Example MSW Project
------FactoryExpansion
On-site AnaerobicTreatment
$5 M Municipal T
Off-site-------
Expansion
$4 M
E i
$5 M Treatment
-----
Engine
$1 M
Now $10M spend has up to $6M eligible for 30% ITC & 20% from NMTC = $3.8MReduces project net costs from $10M down to approximately $6.2MB fit L t l li d di l t l l t i l d th l ti f th f t
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Benefit: Long-term levelized disposal cost, plus electrical and thermal generation for the factory with less long-term financial commitment by municipality, and project debt now possible
Closer look at Qualifying Equipment
Anaerobic Digester & Electrical Generation Process Flow Diagram
FactoryAnaerobic Digester
Solids Separation
1stStage
Remove
AerobicTreatment
GasFl
Clarifier
GasSkidDAF Flare
SludgePress
Building
Engine
Press
> What is integral to the production of electricity?f f
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> When and how do I qualify these project costs for the Investment Tax Credit?
Structures Used for Tax Investment
> Structures> Sale-leaseback> Flip Structure (Section 45, Revenue Procedure 2007-65)> Inverted Lease> Preferred membership class for tax investor
> Requirements in all cases> Must be investor at time qualifying equipment is placed in service (Sale-leaseback provides 3 q y g q p p ( p
month cushion)> Economic substance guidelines
Tax Investor will have similar underwriting perspective to senior lenders
Example Projects: What is Getting Done and Why
Private development of high strength liquid waste digester with 3 0+ MW from 5+ large food manufacturers’ feedstockswith 3.0+ 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> Able to procure power purchase agreement at adequate rate> Utilized proven technologies with performance guarantees acceptable
to debt community (non recourse debt)> Utili d bi ti f it i f d d fi i t t> Utilized combination of equity, mezzanine funds, vendor financing state
loans, NMTC funds and debt to finance (approx. $28.5 MM project)
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Example Projects: What is Getting Done and Why
Public expansion turned private development with 1.5+ MW of electrical power from 3 large food manufacturers’ feedstockselectrical power from 3 large food manufacturers’ feedstocks
> Primary Driver – Opportunity to expand core manufacturing and manage y pp y p g godors in community with overburdened POTW
> Formed joint venture to take advantage of economies of scale> Negotiated 20 year power sales with local utility at adequate rates> Negotiated 20 year power sales with local utility at adequate rates> Paired NMTC and 1603 grant to offset capital costs of project> $30 MM investment
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Example Projects: What is Getting Done and Why
High strength liquid waste digester with 250 kW from food processorfood processor
> AD to power solution identified as most optimal after performing cost benefit impact of anaerobic, aerobic, and open pond based technology
> Allowed manufacturer to grow core business and reduced regulatory risks
> Paired NMTC and Investment Tax Credit to offset capital costs of project
> Over $23 MM plant expansion including $7MM anaerobic waste treatment plant
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Example Projects: What is Getting Done and Why
Tax exempt entity owned high solids digester with 350 kw of electrical power350 kw of electrical power
> Campus sustainability initiatives, tie to research curriculum p y ,> University foundation investment diversification> Formation of a taxable corporation in order to become eligible
for the 1603 grant in lieu of tax creditfor the 1603 grant in lieu of tax credit.
Promoting the Anaerobic Digestion and Biogas Industries
Q&AAsk questions using the Questions Panel on the right side of your screenright side of your screen.
All questions and comments will be recorded and incorporated in the webinar summary reportincorporated in the webinar summary report.
Also, please take a few moments to answer the survey questionssurvey questions.
This Webinar will be available by Friday, March 1
www.americanbiogascouncil.org
Promoting the Anaerobic Digestion and Biogas Industries
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