Solving the financing puzzle

One of the biggest challenges the waste conversion industry faces is securing financing. While government programs can help provide the cash infusion necessary to accomplish a waste conversion project, understanding which ones a project qualifies for can be complicated.

During the Renewable Energy from Waste (REW) Virtual Conference held in early October, Mark Reidy, a partner at Washington-based Kilpatrick Townsend & Stockton LLP, shared his firm’s experience with a large waste conversion project his firm is working on that uses a variety of government programs for financing.

The dairy cattle waste-to-bioproducts project in New Mexico is primarily producing fuel. “We stayed with transportation fuel because the RINs (Renewable Identification Numbers) and the LCFS (Low Carbon Fuel Standard) made it very compelling and [offered] a strong rate of return,” Reidy explained.

The $210 million project has 60,000 head of dairy cattle and heifers and includes eight total anaerobic digesters. The digesters are divided into four modules of two digesters each. A fifth module is a wastewater treatment facility.

“We have up to five additional projects of this size that we are going to do,” he said.

The project creates biogas, biofertilizer, aqueous ammonium, biopellets and industrial-grade water. It reduces greenhouse gases and increases available energy by 30 percent, Reidy said. “The microgrid opportunity here is not the electricity, but multiple valuable products.”

He said the management team behind the overall project, Advanced European Technology Partners, has more than 25 years of experience and more than 30 facilities throughout the world.

WEIGHING THE OPTIONS

Each of the modular AD projects could qualify for funding as a first commercial plant under the U.S. Department of Agriculture (USDA) Section 9003, according to Reidy. They also could qualify for a Department of Energy (DOE) Section 1703 Loan Guarantee, among other federal programs.

The USDA and DOE programs take about 12 months to close, however, and the team was looking for a quicker way to get funding. However, he said, the advantage of USDA option is that no fee is due until closing. Both programs, Reidy added, have a two-part application process.

When it was still considering electricity as an output, the team also looked at the USDA Rural Utility Services (RUS) program. Reidy said the program provides a U.S. Treasury loan at 12.5 basis points over the Treasury rate with no cap on senior debt. The term of the loan can be as long as 35 years or the length of the power purchase agreement (PPA), whichever is shorter.

“When we pivoted out of the electricity side, we decided to look at a couple of other programs, which were commercial programs that can go much quicker,” Reidy said. The commercial programs can be closed in six months from the application date.

The team is using a combination of the USDA Section 9007 and Business & Industry (“B&I”) loans. “It makes it a bit more complicated,” Reidy said because the project is taking $25 million for each of four modules from the 9007 program and $10 million for each of four modules from the B&I program. The wastewater treatment plant is using $10 million from the B&I program.

“As long as you keep it below $10 million on the ask, you don’t get into a very difficult scoring process,” he said of the qualification process.

After interviewing lenders, it was determined that big banks were not going to be interested, Reidy said, so the team went with a regional bank that “had an appetite for multiple loans.”

The project was up to $150 million in senior debt with four of modules receiving $25 million and $10 million loans from the USDA Section 9007 and B&I programs, respectively, and the wastewater treatment plant receiving $10 million from the B&I program. The team had to cover the remaining $60 million.

Because the modules were not producing electricity, they did not qualify for investment tax credits (ITCs) or bonus depreciation, Reidy said. He noted that Congress is considering an ITC along with the Tax Reform Act that would give 30 percent for biogas projects and 30 percent for nutrient recovery systems.

New Market Tax Credits (NMTCs) are nondilutive over time and offer a seven-year period for the provider of the money to realize its incentives.

Employment-based- (EB-)5 funding is another mechanism that can be used. “EB-5 is something we are strongly using; in fact, we are raising about $92 million in EB-5 money across not just this project but the next ones,” Reidy said.

He added that this program is nondilutive because it is structured as a loan. “It is more difficult to structure it as equity.”

Funding is invested into a project to procure visas and green cards from the U.S. Office of Immigration and Department of Treasury based upon the injection of $500,000 for 10 direct, indirect and/or induced jobs per each visa, according to Reidy’s presentation.

State and federal grants and subordinated debt also were used on the New Mexico project, he added.

“The interesting thing with subordinated debt is USDA and their new Business and Industry rule can cover that with a loan guarantee, where they couldn’t in the past,” Reidy said.

He described some of the challenges of going through this process, including dealing with a rule that was being put into place. “The new rule actually opened it up to more lenders of record. Some of the nonregulated lenders, like private equity companies, could get in on being lenders.”

The B&I program initially had a 51 percent U.S. ownership requirement that challenged the use of foreign equity from the project’s European technology partners, Reidy said, adding that the new B&I rule removed this restriction.

The B&I has a 3 percent closing fee and the 9007 program’s is 1 percent. B&I also has an annual fee of 5.5 percent, while the annual fee for the 9007 program is 0.25 percent. The projects were required to be in an area of 50,000 persons or less, which they met. They also needed to have a National Environmental Policy Act (NEPA) permit, which Reidy said could take up to eight months to obtain.

The USDA programs were attractive to the dairy industry, according to Reidy, because they eliminated the U.S. Environmental Protection Agency (EPA) groundwater penalties for manure.

FINANCE STRUCTURE

A total of 13 loans were obtained. Four were for project construction and nine were permanent loans. With the 9007 program, money is taken out along with the permanent finance. With the B&I program, the construction funding is built into the permanent finance. Both programs have 15-year loan guarantees.

The package includes full construction wrap, insurance and offtake price floors and feedstock price collars.

The projects have what Reidy described as “10 strong revenue streams”: biogas for renewable compressed natural gas and renewable liquefied natural gas; RINs; California LCFS credits; New Mexico carbon credits; New Mexico RECs; pellets; aqueous ammonium; fertilizers; compost; and New Mexico Water Recycling Credits.

“For the next projects we are looking at, there is a possibility of using a 100 percent debt credit facility that we are developing,” he said. “We have several clients in front of this right now.”

This structure requires no equity, avoiding company ownership dilution, Reidy said, and is at the project level.

“It requires an investment-grade, credit-rated product offtaker or a performance guarantee provider,” Reidy said. “The product offtaker has to do a ‘hell or high water’ provision for a minimal percentage that would cover the debt service on an annual basis.”

Another financing option is a performance bond that goes beyond the construction and after the commercial operations date (COD), through the length of the term of the loan.

“Either of these mechanisms could make this work if we could get to the first closing,” Reidy said.

He said a lot of people get “challenged with the working capita.” He talked about a new loan fund that will lend up to $10 million in nondelutive funding for up to 10 years at a flat 10 percent. “It is going to be secured by cash flowing contracts at the bottom,” Reidy explained. “It comes in at the parent level, not the project level, so it can be used as working capital, and you can also push some of it down to the project level.”

The author is editor of Waste Today and can be reached at ksmith@gie.net.