On Thursday, May 20, Companies for Net Zero (formerly Companies for Zero Waste) held a great, informative session on Financing RNG Projects. The event kicked off with a discussion on “Cutting Edge Funding and Contractual Structures for Successful RNG Project Financing” presented by Allison Larr, Vice President of Citi, Dave Livingstone, Managing Director of Citi, Mark Riedy, Partner and Chair – Energy Project, Finance Practice for Kilpatrick Townsend & Stockton, and Russell Macpherson, President and Founder of Becon Corporation. Allison Larr introduced the topic and said that the tax exempt market is available to finance most waste-to-value projects. She pointed out that the session would cover what tax exempt bonds are and why they may be worth considering. Oftentimes, tax exempt bond financing can be combined with other financing methods. They would talk about the ins and outs out tax exempts and how to get started.
Dave Livingstone asked the question: Why consider the tax exempt market? He said that it is exceptionally strong and offers access to a competitive alternative to traditional debt markets. The tax exempt market is primarily for U.S. state and local governments to finance their infrastructure. The private sector can access this market to a limited extent, including for many waste-to-value projects. Benefits include significantly lower interest rate than similarly related taxable corporate debt, market acceptance for LCFS and RINs revenue, market acceptance of non-traditional construction, feedstock and offtake arrangements, less stringent covenant package, longer maximum maturity, and market acceptance for credits down to the B-/B3 category and non-rated. He pointed out that although the market is set up by the federal government, there are still a few hurdles you have to cross – eligibility and mechanics.
Mark Reidy explained the commercial side and what is available as well as working tax exempt bonds into commercial loan transactions. He talked about the government Loan Program -Title XVII, Section 1703, which are uncapped federal finance bank/treasury department loans credit enhanced by DOE loan guarantees. Many new and unique renewable, clean fossil and nuclear technologies are able to be funded. Changes for Title XVII Loan Guarantees via Section 9010 of the Consolidated Appropriations Act of 2021 includes moving all borrower and DEP third party vendor fees to financial closing or later, $25 million is provided to reduce borrower fees in all three programs. $170 million is available to reduce credit subsidiary fees in the Renewable Energy Program only, attempts to cap the credit subsidy payment at 3%, reduced time to closing to potentially 6 months requiring DOE accountability, instead of the 12 – 24 months as previously needed. He also covered USDA – Section 9003 of Farm Bill – for first commercial projects, 60 – 80 percent senior debt with an 80% guarantee. There is more than 400 million available annually. For the Business and industry program – $25 million of senior debt with 80% guaranteed for up to 15 years. 90/10 for existing businesses. All federal loan guarantee, loan or grant programs require the borrower to obtain a National Environmental Policy Act prior to financing closing.
Reidy also covered Project and Company Level Working Capital Loans and stressed the need for insurance to mitigate the risk and protect revenue streams. A new technology protection is available up to 10 years with a reasonable upfront one-time premium of 5 – 15% of the loan amounts, depending on the risk level and the amount of loan protected and length of the policy. Underwriting can require up to 120 days.
Allison Larr spoke about how the market accepts loans maturities up to 30 years or longer and there is flexibility to structure with shorter mandatory tender featured. Bonds are sold at a fixed rate and don’t require credit enhancement. She covered the initial steps for tax-exempt insurance, which include:
- Engage underwriting
- Establishing project eligibility
- If eligible, move forward to determining conduit issuer and bond counsel – all tax-exempt bonds must be issued through a governmental entity, which is a pass through
- Bond counsel evaluation – confirm eligibility of the project for tax exempt status
- Inducement Resolution Adoption – defines the official point when costs are eligible for reimbursements with tax exempt bonds, low cost and not time intensive but tax exempt bonds cannot be issues without this step
- Applying for Volume cap – each state has a set amount of authority to issue tax exempt bonds for corporate entities
Finally, Russell Macpherson discussed qualifying for tax exempt financing. He said that what you want to think about is that there are two categories of qualification requirements: engineering process qualification and administrative timing rules and regulations. With engineering, he said they haven’t found waste material that they haven’t liked, focusing on solid waste and wastewater as source materials. A decade ago, it was restrictive but now you can quality if you are processing solid waste materials, such as food waste, crop or forest residual, landfill gas, dairy waste, swine waste, poultry litter, MSW and C&D waste and other biomass. If you are processing at 65% or greater of your weight of volume of your feedstock, you can get rewarded with 100 tax exempt eligibility for your project through to the end of the process to the point where the first end use product is created.
Streamlining the Financial Process
The next discussion in the session was presented by Lukasz Cianciara, Managing Director, Brean Capital, who talked about best practices on how to work with regulators, engineers and investors to streamline the financing process. He kicked off his part of the session by giving a market overview for RNG. He said it is a favorable backdrop for the demand of RNG. The market potential significantly outstrips current production; the current focus is on transportation and a growing interest in dispensing stations for CNG/LNG and EV Charging with an expansion to electric power generation and heating. There are multiple supply channels to address growing demand such as landfill gas, wastewater, pre-processed food waste, dairy/swine/poultry manure.
Supportive federal and state incentives promote RNG growth, such as at the Federal level: Renewable fuel standard – D3 RINS generation Statutory Volumes set to expire at the end of 2022, and at the State level: California LCFS (2006), Oregon clean fuels program, Regional greenhouse gas initiative (CT, DE, MA, MD, MN, NH, NJ, NY, PA, RI, VA, VT).
Cianciara also covered the development timeline for pre NTP RNG projects: developers need to engage with their EPC and environmental consultants early in the development lifecycle, upon site selection, permitting and interconnect studies will need to be initiated as soon as possible, independent engineering reports are a gating item with many institutional investors; better to select a recognized regional/national group to avoid costly duplication by potential investors, quality EPC contractors have growing backlogs, CI score validation relies on multiple inputs along with advanced engineering work, selecting a reputable third party attestation group is key.
With regards to financing best practices, consider what form of financing is required, status of projects (early stage developments, late stage developments, construction ready, operational), what are the capital requirements and available resources (self-funded, joint venture funding, third party funding) and what are the desired ownership requirements of the developer (platform development vs. individual project sale). Key elements to a financeable project are site control, term contract, term offtake, proven technology, established EPC contractor and O&M provider, natural gas interconnect agreement, independent CI score verification, all permits and licenses in place or in process, realistic development timeline and budget. Available financing sources include: Early stage developers – self funding/private equity firms/development equity firms; late stage development – strategic investors/infrastructure funds/impact funds (number of European funds coming into the US; construction financing – commercial banks/infrastructure funds/USDA REAP loan program; and Take out financing – strategic investors/infrastructure funds/social impact funds/insurance companies. He said to expect additional financing options under the new Biden administration.
He concluded by discussing recent trends that includes a more diverse group of investors entering the space, more investors willing to consider market price exposure with the development of new hedge products, bank financing can combine construction and take-out financing under mini-perm structures, however projects are subject to stringent convents.
The Future of the Green Bond Market
The last speaker of the session, George Sullivan, Senior Principal and CEO, Net Zero Analysis, gave an overview of RNG and its sources including fossil fuels, landfills and waste, livestock, biomass, biofuels and rice agriculture. He said that the biggest push right now is technology – pyrolysis of plastic, tires, roofing, waste, etc.; Aerobic Digestion – wastewater treatment, composting facilities, cellulosic ethanol, etc.; and Anaerobic Digestion – landfill gas, cellulosic carbon black, etc. All RNG project types offer multiple end-product streams. Binding letters of intent will finance these projects. What they are currently all missing is the Carbon Offset Future Income from their operations and product streams. Use the following methodologies: how to maximize plant generation and offtake products, electric material handling and/or EVs and charging stations generate an additional carbon offset project.
He pointed out that carbon offset composition has 3 prongs: environmental (MT of CO2e not released to the environment or sequestered from the atmosphere), social (improved local state/province, national economy and environmental health), and governance (demonstrates proactive pursuit of new revenue opportunities, risk mitigation and future proofing to stakeholders). States fall into two categories when it comes to utilities – regulated and deregulated. Why is it easier to go carbon neutral in a deregulated state? – renewable electric energy availability, RNG availability, and client carbon footprint reductions. In regulated states, he said to ask if the client wants to include the following – onsite renewable energy generation, offer a carbon footprint estimate of the facility within that state, offset the facility carbon footprint with carbon offsets. For deregulated states, the RNG Product Purchase Agreements (RNGPPA) are the big ones they are starting to see especially in the pipeline for natural gas.
Client Purchases RNG from a new or existing RNG project require a 20 – 30 year contract and siting projects are flexible in length. Client portfolios using 350,000,000 Therms of RNG do two things – reduce the portfolios carbon footprint and generate a carbon offset project. Net Zero Emissions Targets occur from sources owned or controlled by other entities in the value chain.
After all the speakers were finished, the session opened up to Q&A and a lively discussion of key questions and clarifications the attendees had about the discussions they had heard and they were addressed by the various presenters.
Finally, Scott Donachie, CEO of Companies for Net Zero talked about the company’s plans for the rest of 2021 and announced the next virtual meetings: Sustainable Construction and Tracking Raw Materials on June 17 and Supply Chain Problem Solving Workshop on July 22. In addition, he said that Companies for Zero Waste has rebranded as Companies for Net Zero and will continue to bring informative sessions to those in the industry looking to invest, learn more strategies, and network with peers in the same space. We look forward to these exciting changes and the future presentations!