Biomass Feasibility Project Final Report - Xcel Energy

from local, regional or state venture funds. (Professional venture capital firms are not interested
in project financing.)
First-position commercial lenders often limit their loans to 50% of the assets financed. If equity
investment doesn’t provide the balance of project cost, the developer may resort to a number
of government “gap” financing programs that take a subordinate position to the commercial
loan Chapter VII). In larger projects, a bundle of those gap loans from various agencies may be
needed to rise to the necessary level. From a collateral standpoint, commercial lenders regard
subordinated debt as virtual equity because in a default the first position lender has a lien on all
of the assets financed. But from a cash-flow standpoint the first-position lender will be
concerned if it sees payments on subordinated debt biting too deeply into cash.
Government first-position loan programs are tax-exempt, but they don’t work for power projects.
Industrial Development Bonds (IDBs) are capped by federal law at 80% of a maximum total
project cost of $20 million, too low for most power projects. And in any case they are restricted
to manufacturers. In rare cases, municipalities have issued general obligation bonds for facilities
that can provide some public benefit – a recycled paper mill once was financed as a municipal
waste treatment plant – but that can be contentious.
A developer contemplating a bio-power project is well advised to discuss financing options early
with a reputable investment bank. As the development moves forward, project financing will
condition many of its decisions
Biomass Project Finance Steps
The typical financing of a bio-power project occurs in four phases that covering a period of ten
to twelve weeks: Planning, Documentation, Issuance and a Post Sale phase.
Planning Phase. The Planning Phase entails a number of meetings for finance team members.
They will prepare a detailed analysis of options for the structure of the financing. At the end of
the Planning Phase a plan will be decided upon, and a preliminary schedule of events will be
drafted.
Documentation Phase. During the Documentation Phase, staff and legal counsel will develop
resolutions, indentures, loan agreements and any required notices. All necessary economic
data will be assembled for inclusion in the offering documents. Presentation packages will be
developed for rating agencies and bond insurers. Finally, legal counsel will draft the preliminary
offering documents, as well as any supplementary amendments to the loan agreement or
indenture.
Issuance Phase. During the Issuance Phase, the materials prepared for rating agencies and
bond insurers will be distributed. Potential investors will receive a prospectus and indicate their
level of interest during a survey. A pricing plan will be developed and the interest rate
environment will be assessed. The loan or bond syndicate will need to be organized and
managed, and the distribution of bonds planned. Briefing materials need to be prepared to
educate interested investors in the key features of the loan or bonds. The final step during the
issuance phase is the actual purchase of the loan or bonds by investors.
Post-sale Phase. The Post-sale Phase involves the transfer of all funds and the management of
the bond or loan proceeds. All final documents must be prepared, and an official statement
released summarizing the results of the issuance. Finally a post-sale analysis will be prepared for
the finance team.
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Identifying Effective Biomass Strategies:
Quantifying Minnesota’s Resources and Evaluating Future Opportunities