Iona Capital Ltd
Addressing AD finance issues
Agenda
• About Iona Capital
• Market Overview
• Principal Sources of Income
• Project Specific Issues Structures
- a funder’s perspective
• Sources of Funding
About Iona Capital Ltd
• The UK’s Environmental
Renewables Investment Fund
• Asset Managers with
specialist funds targeting both
the Local Authority and
Merchant markets
• Particular focus on AD
infrastructure across UK
• £16m committed to three
Local Government AD
projects
• Financing target: non
correlated returns to investors
of 15-20% IRR’s
UK total waste volumes
0
50
100
150
200
250
300
350
2004 2006 2008
Mill
ions o
f to
nnes
DEFRA, waste data
Secondary, sewage and
other
Households
Commercial and
industrial
Mining and quarrying
Construction
Electricity generation from
Bioenergy (GWh)
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
20072008
20092010
2011
Plant Biomass
Anaerobic digestion
Animal Biomass
Co-firing with fossil fuels
Biodegradable municipal solid
waste combustion
Sewage sludge digestion
Landfill gas
Data source: DECC. Renewables Statistics
Principal sources of Income I
45 52
57
43 41
0
20
40
60
80
100
2008 2009 2010 2011 2012
AD
Gate
Fees, £
WRAP Gate Fees Reports 2008-2012
AD Gate Fees
High
Low
Median
Principal sources of Income II
0.0
5.0
10.0
15.0
20.0
25.0
2007 2008 2009 2010 2011
FITs (AD >5kWh) 9.9 9.9
LEC 0.4 0.5 0.5 0.5 0.5
ROC (Nominal)x1 4.9 5.3 5.4 5.2 5.1
Average consumer 5.4 6.8 7.3 6.5 6.9
Pence p
er
kW
h
Government incentives
Typical Project Assessment
• Plant objectives: process number of tonnes, produce methane and
electricity etc
• Technical specification: waste type, site specific (planning etc)
• Project considerations (timeframe, resources, skilled labour)
• Cost considerations (designs, controls required, documents and
safety training)
• Income generation: realistic pricing of supply and off take, strength
of counter party, contract durations and % secured of annual
feedstock assumptions
• Financial assumptions: capital, debt/equity split, (no) bank debt
• Project level return (IRR 15% with upside to 20%)
Deal structure
SPV
Waste contractor Utility
Investor/Operator
Operating Contractor
Construction Contractor
Investor Debt Equity
Project
agreement
Construction
contract
Operating
contract
Power Purchase
Agreement
Key Investment Risks
Engineering, Procurement, Construction
• Site
• Planning
• Environmental permits
• Performance Guarantees
• Fixed Prices
Technology
• Proven process
• Scalability
• Due Diligence
• PAS 110
• Plant maintenance
Supply
• Waste Quality: composition & chemical content
• Contamination levels
• Continuity
• Contracts/Terms: Local Authority vs C&I
Output
• Electricity contracts, FITs, ROCs
• Heat contracts, RHI
• Digestate Disposal
• Biomethane injection to grid
• Rejects: % tonnage and hazardous waste
• Emissions: odour, noise, gases etc
Finance
• Loan note: repayment and priority ranking
• Equity: early valuation
• Interest rate protection
• Security: debenture, land, assets
• Parental Guarantees
• Indexation of inflation rates
1 MW AD plant
Annual Operational Costs breakdown
16%
14%
11% 18%
5%
22%
4%
10%
59%
Waste Overheads
Life Cycle expenditure Management & Staff
Rates & Utilities Equipment & Maintenance
AD related costs Site related costs
Facilities Management
Total Construction Costs breakdown
1%
3%
13%
11%
11%
61%
28%
Planning & Permitting Costs
Utility Connections (incl. grid connections)
Tank Bases, Underground Tank & Bund Area
Other Site related costs
Building
Plant & Machinery
Civils
Gate Fees depend on project costs
FM , 35%
Insurance, 6%
Overheads, 5%
Capex, 16%
Financing, 24%
Tax,
7%
Life cycle, 5%
Assume £100 per tonne
processing costs.
25,000 tpa facility
Small AD
Economics of a typical Local
Authority facility
Mid Range AD
Economics of a typical Local
Authority facility
Investment Sensitivities
Value change Base Case Electricity
price
decrease by
20%
20%
increase in
FM
RPI - 1%
Increase in
third party
waste gate
fee by £10 to
£40
Project
post tax
IRR
14.29%
13.48%
12.08%
13.97%
14.71%
Blended
return
13.90%
13.13%
13.90%
13.63%
14.32%
Investor
blended
return
12.68%
12.19%
12.68%
12.51%
12.97%
Pecking order Theory
Private Equity
Target IRRs! Debt/equity split Iona, Albion, Novus Modus, Investec,
Octopus, Foresight, Equitix
Banks
Access the risk levels Proved operational
track record Returns
HSBC, Barclays, Investec, Triodos
Internal Funding
Universities – R&D Established operator
Special Funds
WRAP (AD Loan fund, £10 m) GIB (£3 billion)
Grants Local Government European organisations Charities
Summary – How to succeed with
VC’s
• Quality Business Plan addressing issues
contained in these slides
• Team – External and Internal
• Financial Model but don’t get hung up on
finance and tax – target your audience
• Limited funding options in current market
