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