First of Kind: Financing Advanced Biorefineries, Part II

February 24, 2011 |

Part 2-On Quantifying Risks

By Biofuels Digest special correspondent Tim Sklar

In Part I of this three part article titled “On Identifying Risks”, discussions were included that focused upon the high risk nature of advanced bio-refinery  projects, why financing is hard to obtain what can be done to improve the odds.

In Part 2 titled “On Quantifying Risks” a summary of due diligence inquiries that project developers can expect to be subjected to is presented along with a a list of typical concerns potential financial backers have with respect to perceived risks. In addition, a set of  bio-refinery specific “what if” questions are included, because many of them will be asked. It was hoped that the material included in Part 2 will ultimately be used as a useful guide in assembling information and in conducting analyses that will be needed when preparing loan requests, applications for loan guarantees, investment memoranda and prospectuses.

What Due Diligence Requirements Are Being Asked


In this section, a summary is provided of an “Application and Submission Information” that the US DOE is requiring when Biorefinery Project Sponsors apply for Loan Guarantees. Similar information is required by USDA and by the Institutional lenders who are being asked to participate as issuers of guaranteed loans. The submission is part of the Due Diligence process applicants are subjected to and is a good example of what Biorefinery Project Sponsors should be prepared to provide. However this information requirement  had to be reduced to summary form for this article, as it is 25 pages in length. This summary contains a few illustrative examples of the level of detail that may be required. The purpose of providing this summary is to illustrate the fact  that in financing bio-refinery projects, project sponsors are being asked to submit thorough and complete applications or risk being turned down. The subsequent sub-section of Part 2 address specific what-if questions that may be asked and how the answers given could impact the project. Another sub-section describes the type of models that are needed to perform the analyses. These topics should be considered as part of the due diligence effort that is needed to obtain bio-refinery project financing.

A Summary of the Due Diligence Information That Must Be Submitted

Applicants must submit a “Project Execution Plan (PEP) that shows how the project will be implemented. Being required are ”Work Breakdown Structures” (WBS) and “Resource Loaded Schedules” describing all the tasks and sub-tasks, key milestones along the critical path to completion, and demonstrations that support the case that the project can be completed on-time and on budget, even if certain milestones are not met as originally planned.

Applicants must provide supporting information to “demonstrate the feasibility of the technology and its reliability when in operation”. Applicants must also provide a “justification” for adequacy of the proposed testing that will be undertaken.

Data must be submitted documenting pilot-scale operations using the proposed feedstock.

Other materials to be submitted will include a detailed project description and salient features of the process to be used, how it will be integrated, and how it will perform in comparison to competing technologies.

Also to be submitted are data from “bench-tests process flow diagrams” and supporting data, engineering evaluations, process chemistry, energy balance calculations. The submission should address such issues as solids handling, construction materials to be used, waste management, and issues related to “product  isolation, product characterization and product purification”.

This submission should also include a discussion of the factors related to scalability of individual processes as well as process steps for scale-up and how scale-up is to be achieved.

A series of questions must be answered that address the competitive advantages the project offers, factors that are critical to success and barriers that must be overcome.

Justification needs to be provided for the “technical and financial aspects the plan” and include “detailed economic breakdown(s) with…descriptions(s) and cost estimates of reasonable alternatives”.

The submission should address “siteing considerations and (environmental and safety regulatory) compliance (issues)”.

Information should be submitted describing “financial assurances” that are in place to ensure the project will be funded through completion. Full disclosure of parties participating in the financing should be made along with letters of commitment and the respective roles of each of the funding providers.

Information must be provided to demonstrate that major materials to be used are available and economic, and that the methods used for estimating equipment costs, construction costs and operating costs were sound and thorough.

Descriptions of plans for collection, transport, storage and processing of feedstock are to be provided, taking into account all costs associated with feedstock management that should be incorporated into business plans being submitted.

Information must be provided that accounts for the sale or use of the bio-fuels and other products that are to be produced, the customers that are prepared to accept these products, documentation of their interest in doing so, and copies of off-take agreements they have signed or other evidence of their commitment.

Similar information will be needed on supporting organizations and on key personnel, specifically with respect to managing project development, operations and commercialization of projects similar in scope.

The Business and Commercialization Plan is to be submitted with supporting documentation. The required contents should include descriptions of resources, business management, and the financial, legal, technical factors that are relevant to the proposed project.

The Business Plan should include assessments of technological and market conditions, feedstock availability and costs, and market forecasts.

Financial projections should reflect strategic plans  and business strategies that have been provided. They should also reflect reasonable sets of assumptions, with respect to the staged development of the project. Financial viability assessments should be based on the financial projections using projected earnings, cash flows and projected balance sheet values. In additions assessments of business risk assessments are required. Implied is the use of financial modeling that can run sensitivity tests of the impact of using more pessimistic sets of assumptions.

Finally, the submission should be complete enough to facilitate due diligence reviews that will be conducted independently and on behalf of the agencies and institutions that are being asked to provide project financing.

Biorefinery Project Risks And

Potential Financial Backers’ Concerns

Sponsors and developers can anticipate the concerns that potential financial backers have when considering participation in advanced bio-refinery projects. These concerns can be attributed to risks commonly associated with all bio-refinery development projects. They typically include:

  • Possible delays in start-up and ramp-up;
  • Possible capital cost over-runs;
  • Possible higher than expected operating costs;
  • Possible inadequacy of yields and operational throughputs;
  • The potential adverse impact conventional fuels prices may have on bio-fuels prices;
  • Less than optimal changes in the slate of products produced;
  • Possible higher than planned feedstock costs;
  • Uncertainty as to feedstock availability;
  • Unforeseen increases in other process related costs;
  • Curtailment of Government grants, subsidies and incentives; and,
  • Further declines in sources of equity for bio-fuels projects

Based on the information that US DOE and USDA requires of project sponsors seeking loan guarantees it is apparent that these Government agencies have the same concerns as other  potential financial backers, such as investment bankers, institutional lenders, VC firms and affinity investors.

The purpose of presenting a detailed list of “what if” questions  as part of this article is to stimulate bio-refinery project sponsors and developers in providing answers that will better satisfy these potential financial backers’ concerns and give them insights as to the risks they are being asked to assume.

Project sponsors and developers should also anticipate that in preparing investment memoranda, loan requests and applications for loan guarantees, plausible answers will need to  be incorporated as part of each such submission. If the answers imply that the project has some weaknesses and the risks associated with these “known-unknowns” could undermine to the project’s financially viability, an attempt should be made to quantify the impact adverse outcomes.

Presented with the realities, potential financial backers would then have the information they need in order to decide on the amount of risk they wish to assume. Without such information, potential financial backers may just decide not to participate at all.

Typical Biorefinery Project “What-if “Questions

Re: Start-up and Ramp-up delays

What if proving process technology takes longer than expected?

What if delays are incurred in receiving and installing equipment?

What if sub-contractors do not meet timetables?

What if obtaining of construction financing is delayed?

What if problems are encountered in staffing?

What if problems are encountered in ramp- up to operating levels?

Re: Cost over-runs

What if added cost is incurred in procurement, construction, testing and fast-tracking?

What if alternative technology has to be found and additional licenses obtained?

Re: Yields and Throughputs

What if gallons of bio-fuels produced per ton of biomaterial are less than expected?

What if biomaterial feedstock that is actually used requires more pretreatment than expected?

What if the amount of biomaterial needed to support  continuous bio-fuels production cannot be assured?

What if unanticipated  supply interruptions occur with greater frequency than planned? Will added inventories of material have to be maintained and if so, at what cost?

What if the process being used is unable to attain expected  throughput capacities?

What if additional bi-products or contaminants have to be dealt with by making process improvements not initially installed?

Re: Biofuels Prices vs. Conventional Fuels Prices

What if crude oil and petroleum product prices are significantly higher than forecast and how would these higher prices impact bio-fuels pricing?

What if prices of 1st generation bio-fuels  and advanced bio-fuels are more highly correlated than predicted? And if so are  these correlations expected to remain valid if crude oil prices significantly increase?

What impact will higher than expected prices have on the financial viability of the bio-refinery project assuming no changes in direct costs or in subsidies?

Re: Types of Biofuels Produced

What if a bio-refiner decides to produce a drop-in bio-fuel-

  • Will added “discounts” in price be needed to cover added distribution cost?
  • Will such discounts undermine a bio-refiner’s prospects for financial viability?
  • Will changes in distribution infrastructure, such as adding additional tanks and pumps,  impede growth in demand and require additional price discounting?

What if a bio-refiner decides to produce a blend stock

  • Will demand for and price of biofuels used in blending increase if the maximum percentage of biofuel blended increases?

What if a bio-refiner can only produce an  intermediate product

  • Will the cost of further refining this unfinished bio-oil into a finished fuel limit its marketability?
  • Will there be a need to offer higher price discounts?
  • Will the bio-refiner making intermediate bio-oils be able to be financially viable?

What if Changes Occur in Government Subsidy Programs-

Will possible  changes in subsidy programs impact a bio-refiner’s financial viability:

  • If the blenders Federal Excise Tax credit on bio-ethanol and bio-diesel are phased out or significantly reduced; and/or
  • If the Renewable Fuels Standards for advanced bio-fuels (RFS2) go un-enforced, or are phased out  or are otherwise significantly reduced  and the market for RIN credits disappears;

What if Changes Occur in Government Incentives Programs-

  • Will possible  changes in the RIN credit program impact a bio-refiner’s financial viability if RIN prices remain high or if they fall?
  • Will RIN credits cause a significant shift in demand away from conventional fuels and toward renewable fuels?
  • Will these possible changes  impact a particular bio-refiner’s bottom line and overall financial viability?
Re: Feedstock Costs and Competing Users

What if the cellulosic content of  feedstock to be used are expected to increase in the future how will it impact the biofuel production levels and the per gallon cost?

What if added demand for cellulosic feedstock by bio-refiners create competition from existing users?

  • Will it be enough to drive up feedstock prices significantly?
  • Will it create shortages or supply disruption?
  • Could it undermine the financial viability of the bio-refinery?

Re: Costs of Additional Materials used in the Process, Direct Labor, Utilities and Fixed Operating Costs

What if any of  these costs increase significantly and if so, to what extent and how will these cost increases impact the bio-refiner’s bottom line and overall financial viability?

Re: Availability of Grant, Tax Incentives, Low Cost Loans and Government Loan Guarantees

What if these various incentives are no longer available and what impact would it have on the project’s financial viability?

For example-

  • Are DoE and USDA R&D grants to advanced bio-refinery  project  developers  expected to continue in the future? If not, what impact could their curtailment have on the viability of the  specific bio-refinery project being evaluated?
  • Are there specific tax incentives at the Federal and State level that if discontinued, could undermine this project’s financial viability? What is the likelihood that this could occur?
  • Will it become easier for sponsors of advanced bio-refinery projects to obtain low-cost longer term loans subject to loan guarantees granted by USDA and US DoE? If not, what impact would less desirable financing have on the project’s financial viability?
Re: Private Sector Equity

What if potential investors’ perceived high risk bias toward investment in bio-refining projects remain, are the prospects are good for finding  “Affinity Investors” among potential parties-in-interest (such as biofuels blenders resellers, petroleum products refiners, biofuels end users, technology providers and feedstock suppliers)?

What if terms and conditions are modified to attract such investors, what impact would it have on the financial viability of the project and return on Project Sponsor’s equity?

What if VC participation is offered? Should it even be considered, based on having to cross the “Valley of Death”?

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