Addressing Anaerobic Digestion financial issues

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Michael Dunn - Director, Iona Capital Michael is a Director with Iona Capital, a private equity company that manages retail and institutional funds targeting the energy from waste sector and specifically seeks to invest in anaerobic digestion projects that require external funding. Iona Capital has recently completed a 6m investment, with Biogen Ltd as the operating partner, in an SPV co-owned with Biogen Ltd. He has held senior level positions with Shanks Group , Veolia Group and Amey Group. He currently holds a variety of sector-related non executive director roles including sitting on London Waste Ltd's board. He has a Masters in Finance degree from the London Business School. This presentation was given on 27 September, 2012 at "Anaerobic Digestion: Accelerating the Rollout" event

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<ul><li> 1. Iona Capital LtdAddressing AD finance issues</li></ul> <p> 2. Agenda About Iona Capital Market Overview Principal Sources of Income Project Specific Issues Structures- a funders perspective Sources of Funding 3. About Iona Capital Ltd The UKs EnvironmentalRenewables Investment Fund Asset Managers withspecialist funds targeting boththe Local Authority andMerchant markets Particular focus on ADinfrastructure across UK 16m committed to threeLocal Government ADprojects Financing target: noncorrelated returns to investorsof 15-20% IRRs 4. UK total waste volumes 350Secondary, sewage andother 300Millions of tonnesHouseholds 250 200Commercial and 150industrial 100Mining and quarrying50 0Construction20042006 2008 DEFRA, waste data 5. Electricity generation fromBioenergy (GWh) 14,000 Plant Biomass 12,000Anaerobic digestion 10,000Animal Biomass8,000Co-firing with fossil fuels 6,000 Biodegradable municipal solid waste combustion 4,000 Sewage sludge digestion 2,000 Landfill gas-20072008 2009 20102011Data source: DECC. Renewables Statistics 6. Principal sources of Income I AD Gate Fees10080AD Gate Fees, 5760524543High4140LowMedian20 02008 20092010 2011 2012 WRAP Gate Fees Reports 2008-2012 7. Principal sources of Income IIGovernment incentives25.020.0Pence per kWh15.010.0 5.0 0.0 20072008 20092010 2011FITs (AD &gt;5kWh)9.99.9LEC0.4 0.50.50.50.5ROC (Nominal)x14.9 5.35.45.25.1Average consumer 5.4 6.87.36.56.9 8. Typical Project Assessment Plant objectives: process number of tonnes, produce methane andelectricity etc Technical specification: waste type, site specific (planning etc) Project considerations (timeframe, resources, skilled labour) Cost considerations (designs, controls required, documents andsafety training) Income generation: realistic pricing of supply and off take, strengthof counter party, contract durations and % secured of annualfeedstock assumptions Financial assumptions: capital, debt/equity split, (no) bank debt Project level return (IRR 15% with upside to 20%) 9. Deal structure Waste contractor Utility Project Power Purchase agreement AgreementInvestorDebtInvestor/OperatorSPVEquityConstructionOperatingcontractcontract ConstructionOperatingContractor Contractor 10. Key Investment Risks Engineering, Procurement,Technology SupplyOutputFinance Construction Site Proven process Waste Quality: Electricity Loan note: Planning Scalability composition &amp;contracts, FITs,repayment and Environmental Due Diligence chemical content ROCspriority rankingpermits PAS 110 Contamination Heat contracts, Equity: early Performancelevels RHI valuation Plant maintenanceGuarantees Continuity Digestate Interest rate Fixed Prices Contracts/Terms: Disposalprotection Local Authority vs Biomethane Security: C&amp;Iinjection to grid debenture, land, Rejects: %assetstonnage and Parentalhazardous waste Guarantees Emissions: odour, Indexation ofnoise, gases etcinflation rates 11. 1 MW AD plant Annual Operational Costs breakdownTotal Construction Costs breakdown 1%11%3%18%5%61%Facilities ManagementCivils13%14% 59%28%22%4% 11%16%10%11%Waste OverheadsPlanning &amp; Permitting CostsLife Cycle expenditureManagement &amp; StaffUtility Connections (incl. grid connections)Tank Bases, Underground Tank &amp; Bund AreaRates &amp; Utilities Equipment &amp; MaintenanceOther Site related costsAD related costsSite related costsBuildingPlant &amp; Machinery 12. Gate Fees depend on project costsLife cycle, 5%Tax,7% FM , 35% Assume 100 per tonneprocessing costs.Financing, 24%25,000 tpa facilityCapex, 16%Insurance, 6%Overheads, 5% 13. Economics of a typical Local Authority facilitySmall AD 14. Economics of a typical Local Authority facilityMid Range AD 15. Investment SensitivitiesValue change Base Case Electricity 20% RPI - 1% Increase in price increase inthird party decrease by FM waste gate 20%fee by 10 to40Project 14.29% 13.48%12.08%13.97% 14.71%post taxIRRBlended 13.90% 13.13%13.90%13.63% 14.32%returnInvestor12.68% 12.19%12.68%12.51% 12.97%blendedreturn 16. Pecking order TheoryGrants Local GovernmentEuropean organisationsCharities Special FundsWRAP (AD Loan fund, 10 m) GIB (3 billion)Internal FundingUniversities R&amp;DEstablished operator BanksProved operationalHSBC, Barclays,Access the risk levels track record ReturnsInvestec, Triodos Private Equity Iona, Albion, Novus Modus, Investec, Target IRRs!Debt/equity splitOctopus, Foresight, Equitix 17. Summary How to succeed withVCs Quality Business Plan addressing issuescontained in these slides Team External and Internal Financial Model but dont get hung up onfinance and tax target your audience Limited funding options in current market</p>