Ensus: Fuel for thought

Described by financial adviser Societe Generale (SG CIB) as being in the 'hard as it gets' category of deal, the £155.5 million (at the time $306.5 million) debt package supporting the truly seminal Ensus Ethanol Project is the first UK bioethanol project financing and funds the largest bioethanol plant in Europe to date.

The deal started with an idea, a small but respected project team, a founding shareholding, a site and little more – except for a large appetite for both debt and equity in a financial market becoming more wary of nascent industries and with no UK bioethanol project finance precedent.

The project was the idea of Ensus founder, deputy chairman and director of business development, Michael Fox. A UK-based entrepreneur with whom SG CIB had a longstanding relationship, Fox put together a small project team headed by Alwyn Hughes (now Ensus CEO) who has held a number of senior roles at ICI. Subsequently, a board of directors was appointed led by chairman Sir Rob Margetts, who is also non-executive chairman of Legal & General, senior independent director of Anglo American and was formerly chairman of BOC and vice-chairman of ICI.

The financing strategy assumed from the start that equity would be raised via an IPO – Ensus planned to solely develop the plant itself with proceeds from an AIM listing. And following receipt of debt commitments in November 2006, Ensus approached the equity market.

But given the faltering liquidity for flotations at the end of 2006 and the flagging patience of the equity markets with the lack of delivery in the biofuels sector, the IPO was shelved and the strategy switched to focus on private equity.
After sifting a range of proposals and a further period of further bank negotiation, The Carlyle Group (a global private equity firm) and Riverstone Holdings (a global energy focused private equity firm) bought into the project and the whole deal went to financial close on 15 March 2007.

The announcement of financial close was well-timed: On 9 March 2007, the EU Council of Ministers endorsed a 10% binding minimum target to be achieved by all Member States for the share of biofuels in overall EU transport fuels by 2020.

The UK Government has also announced that from April 2008 it will be introducing the Renewable Transport Fuels Obligation (RTFO). The RTFO should ensure a significant and stable market for biofuels in the UK, setting a mandatory target of 5% of transport fuels to be made up of biofuels by 2010. A big positive for bioethanol is that it can be easily blended with petrol; a mix of 5% bioethanol and 95% petrol can be used in all cars today without the need for modification to the engine.

Ensus will provide substantial underpinning to the UK meeting these targets and, at full capacity, will be capable of supplying approximately 35% of the bioethanol required to achieve the targeted 5% substitution of the UK petrol market.

The 400 million litre per year bioethanol facility will be at the Wilton International site in Teesside, an integrated petrochemical complex in North-East England. Construction started in Q2 2007 and full production is expected to begin in early 2009. The plant will use an established dry milling process technology licensed from Katzen. The manufacturing facility is being built by Simon Carves, Sembcorp, which will be providing the utilities at Wilton, and Vopak, which will be providing the specialised bioethanol storage and handling facilities.

The debt package supporting the project was designed to appeal to both renewables and oil & gas lenders and to reflect variable input costs and output revenues. Consequently the £155.5 million debt has an eight-year tenor – relatively short by European standards – accompanied by cash sweeps aimed at addressing the fluctuations in project cashflow. The package also incorporates a cost overrun facility and a substantial working capital tranche to ensure liquidity during the ramp-up phase.

Lenders are taking some commodity risk on the procurement of grain and the sale of ethanol and dry-distilled grain. However these risks are reflected by a generous margin of around 170bp over Libor.

The sponsors have the flexibility to roll over repayments in a base case scenario and leave up to a 30% bullet at the end of the tenor. But under the target case scenario the loan will evenly amortize across the tenor.

The project benefits from a 10-year offtake agreement with Shell for all of the ethanol and with Glencore for the dry-distilled grain. Drymill ethanol production uses only the starch portion of the feedstock which is about 70% of the kernel, the residual material is concentrated into distillers grain, and is usually used as feed for dairy and beef cattle.

Glencore is also providing the grain feedstock. Because the grain feedstock and the dry-distilled grain offtake are linked products with linked prices, the price risk from fluctuations in feedstock is mitigated.

The deal benefits from a number of intrinsic features – not least its heavyweight investors and the strength of the offtakers. The plant will use simple, tested technology and has excellent road and port access for both the supply of feedstock and the transportation of finished product. The plant also has large capex benefits through its proximity to steam and electricity provided by Sembcorp.

Ensus is already hoping to replicate some of these conditions for a second plant on mainland Europe and the success of this first deal should pave the way for further significant biofuel financings in the UK and Europe.

Ensus Ltd
Status: Financial close 15 March 2007
Description: £155 million 8-year facility for Europe's first world scale project financed bioethanol plant
Sponsors: Ensus Group, The Carlyle Group, Riverstone Holdings
Lead arrangers: Calyon, RBS, SG
Financial adviser: SG
Legal counsel to sponsors: Clifford Chance, Halliwells (Ensus)
Legal counsel to lenders: Norton Rose
Financial and tax adviser to Carlyle and Riverstone: Ernst & Young
EPC: Simon Carves