biomass supply chain risk-- abfc conference june 9-10 2015 v.1
TRANSCRIPT
ABFC ConferenceNew Orleans, LAJune 9-10, 2015
Jordan SolomonManaging Director & CEOEcostrat Inc.
Biomass Supply Chain RiskUnderstanding, Measuring and Mitigating
Ecostrat Supply Chain Risk Methodology for Biomass Ecostrat Supply Chain Risk Methodology for Biomass
Supplier ExposureCompetitor ExposureResource Availability Exposure
Replacement SuppliersInventoriesLiquidated damages
Supply CurvesGrowth to Drain AnalysisResource Demand EvaluationRoad Network AnalysisMarginal Cost of replacing lost supply
Supply Chain Risk Exposures
Impact Analysis of Risk Events
RiskMitigation Strategies
Risk Minimization
ASSURANCEOF DEBT
COVERAGEEconomic PerformanceGenerates good debt service coverage under stress scenarios.Stable Project returns, with potential for additionalupside.Adequate Debt Service Reserve Account.
SponsorsExperienced & financially strong strategic investors with demonstrated track record of investing & operating similar projects.Ability to provide financial support to Project.
ManagementStrong managerial, financial, operational, & technical capabilities with demonstrated track record of implementing similar projects.Continuity of senior management.
Technology Risks / FeasibilityPerpetual technology licenses & performance warranties.Technology reviewed by an independentengineer.
Construction RisksFixed price, date certain, turnkey EPC contract with.liquidated damages.Completion guarantee by Sponsors.
Operations RisksO&M contract with experienced contractor.Adequate Maintenance Reserve Account.
Feedstock SupplyAdequacy of available feedstock.Long-term quantity supply agreement.Long-term fixed price supply agreement (or at least a price ceiling).Independent feedstock assessment.
OfftakeLong-term quantity offtake agreement.Long-term fixed price offtake agreement (or at least a price floor).Adequate storage & transportation infrastructure.
Proper Project Financing StructureProper Project Financing Structure
Lack of credit depth of most suppliers. Rapidly-evolving woodsheds:
• Increasing demand on fixed fiber supply puts fiber suppliers in a power position.
• Many competitors leads to instability of supply.• Spot fiber prices have increased by 30% in certain
woodsheds over the past two years.• Long-term fiber supply contracts are increasingly
difficult to obtain. Many, small fragmented sources of supply.
• Strong incentive to breach, especially for small – medium sized suppliers.
Project sponsors will demand mitigation of feedstock supply risk.
Sources of Supply RiskSources of Supply Risk
Source: Fitch Renewable Energy Forum 6/23/11Note: Includes Public, Private Ratings and Credit Assessments
Non-Investment Grade Investment Grade
Financings Depend on Project RiskFinancings Depend on Project Risk
> 100 basis points> 100 basis points
Balance Sheet Suppliers: most are not investment grade Multiple suppliers: Dilute Risk of Breach/Insolvency Long term contracts: rare, especially in the southeast Contracts: Use an experienced professional Small woodshed (65 mile max; sensitivity to diesel, to
shorthaul) Wood Fiber Studies/ Feedstock / Supply Assessments. What
makes a good study? Minimize capital provider’s perception of feedstock risk
Actual Supplier vs Competitor focus? Important Macros: Growth to drain, historical stumpage Sensitivity Analysis: Stumpage, Distance, Demand, Diesel, Weather “Real” Supply Curves Optionality, Optionality, Optionality
Traditional Feedstock Risk Mitigation Traditional Feedstock Risk Mitigation ToolsTools
Maintain Optionality: Carry a large BAMBAM can partially mitigate risk of supplier breach and insolvencyReal Risk versus Perceived Risk: Evidencing BAM is important for risk perception of capital providers.
The Biofuel Supply Network®® and MarketWatch®®
Traditional Feedstock Risk Mitigation Traditional Feedstock Risk Mitigation ToolsTools
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Biofuel Supply Network® - St. Louis, MO Woodshed
Long-term contracts are rare and are only as good as the covenant behind them.
A BAM helps assure availability of quantity -- it doesn’t mitigate the risk of price increases in the overall woodshed.
The consequence: Long-term perceived risk of fuel supply is high. Difficult to finance new projects. Project ratings tend to be low, and capital costs
high.
Problems with the Traditional Model: Problems with the Traditional Model: Insufficient Risk MitigationInsufficient Risk Mitigation
Biomass Supply InsuranceBiomass Supply Insurance®®
A Solution to Manage Supply Risk A Solution to Manage Supply Risk Insurance policy designed for biomass projects. Backed by A rated insurance syndicate:
investment grade credit. Download feedstock risk to one investment-
grade entity Bankable guarantee of both fuel cost and
biomass quantity. Decreases project risk rating. Impact on capital cost: ~100 basis points less
expensive.
Upstream Coverage: Covers differentials in supply cost due to supplier breach or insolvency. Quantity Quality
Downstream Coverage: Covers loss resulting from a total or partial Reduction in Supply which leads to a reduction in Output. Penalties due to loss of production, missed shipments.
Insured is responsible for 10% of loss
CoveragesCoverages
Two year automatic rolling terms Not at underwriter’s discretion.
Catastrophic coverage Not useful for small claims: project must be able to absorb
“normal” feedstock “bumps”. Policy’s function is to bump projects into bond ratings. For
that to happen, it does not need to take care of “fender benders”.
Liability Caps: How high? When do they kick in? Deductibles. Caps should cover debt servicing, not more.
Term and Liability CapsTerm and Liability Caps
Initial Placement Fee Annual Premium:
project specific Indicative range: $0.75 - $1.75 per ton
Payable in advance with reconciliation at year-end.
PremiumsPremiums
Underwriters look for info that enables them to clearly understand and quantify feedstock risk
Supply Study is the “due diligence”: Actual Supplier vs Competitor focus? Macro vs Granular focus? Important Macros: Growth to drain, historical stumpage, “Real” Supply Curves. Weather impacts.
Importance of Feedstock Supply Importance of Feedstock Supply StudiesStudies
No contracts – no coverage Input during the LOI – Contract negotiation
stage Professional input can be beneficial
It does not do anything the supply contracts do not already do. It simply makes the contracts covenants and warranties stronger.
Importance of Supply ContractsImportance of Supply Contracts
Professional grade Feedstock Studies. Specific deliverables for underwriters must be addressed.
Supply Contracts with established companies. In certain cases, supplier must provide financial
information (basic to balance sheet).
Qualifying Projects Must Have:Qualifying Projects Must Have:
Many projects can only contract on the spot/shorter term
In certain cases, the Policy can function as price cap When spot feedstock prices increase past projects ability to
service debt.
Feedstock Price Caps: The ExceptionFeedstock Price Caps: The Exception
Prequalification assessments discussion
Submission Packages 30 – 40 hours
Timeline for approval: 1-3 months for approval
Do I Qualify?Do I Qualify?
Biomass Supply Studies | Fiber Supply
Jordan Solomon President and [email protected]: 416-968-8884 x222
www.ecostrat.com
Biomass MarketWatch: a simple tool to provide developers with a quick and easy way to make an initial high level determination of fiber cost.
Biomass MarketWatch: consolidates actual sell prices of suppliers within the
project woodshed, calculates transportation costs to the project site, aggregates data into an estimate of delivered fiber cost. is free
Real-time, area-specific determinations of FOB purchase price for major categories of woody biomass in North America
www.biomassmagazine.com: click Fiber Price Analysis
Biomass MarketWatchBiomass MarketWatch®®