?Biomass? is a very neutral name for a fuel that covers a multitude of sources, some of them more appetising than others. Straw, wood chips, cellulose, paper, plants and industrial waste are all good examples, but the king of biomass fuels is manure. Fibrowatt USA and Homeland Renewable Energy's $202 million FibroMinn financing is best understood as a creative solution to the poultry industry's litter problem than a way around burning $6 gas.

Fibrowatt is a UK-based biomass developer, now part of EPR, and owns the 12.7MW Eye, 38.5MW Thetford, and 13.5MW Glanford plants, all of which run on chicken litter, although Glanford was also used to burn flesh and bone meal during the UK's foot-and-mouth crisis. The three plants are the only commercial scale poultry-litter fired plants in the world, and were all project financed.

FibroMinn is much larger ? a 55MW plant that will be located in Benson, Minnesota. This size reflects the larger scale on which the US poultry operates. And the fact that the since the US turkey growers' operations are more concentrated, their litter problem is much more acute. The growers approached Fibrowatt when it became uneconomic to transport litter to ever more distant locations for use as fertiliser.

FibroMinn's owners are Homeland Renewable Energy (70%), which was formed by private investors that include the founders of Fibrowatt UK, and Fibrowatt USA (30%), which is in turn 70% owned by EPR. But the developers' first task was to find a buyer for the litter-fuelled power.

Minnesota passed a mandate in 1994 that committed local utilities to buying 125MW of biomass power, and Northern States Power, part of Xcel Energy, signed contracts with producers up to this level. But the mandate only covers contracts to buy power, and several suppliers were unable to fulfil their obligations. Moreover, Turkey litter was not even covered in the biomass obligation.

So Fibrowatt lobbied for an extension to the mandate to include Biomass, a process that it achieved in 2000, and it then signed a 20-year power purchase agreement for 50MW of capacity with Xcel. The terms of the contract state that it must buy all the power produced by the project, up to 50MW, but does not have to make any capacity payments. Fibrowatt had hoped to secure financing as soon as possible, and for the plant to be operational in 2002, but permitting issues created a series of delays, and the deadline was extended. Providing Xcel had a contract in place, it was fulfilling the mandate.

With a power purchase agreement in place, Fibrowatt could now approach the growers to put in place supply agreements. There are around thirty of these, including two with Jennie-O Turkeystore, a subsidiary of Hormel, the largest grower in the US. And the operator will have to collect the litter from several hundred barns in the vicinity of the plant.

The suppliers, while unrated, are a relatively diverse group, and the plant will only take care of roughly a third of their output, Should any one grower not be able to meet their obligations, there is likely to be sufficient fuel available in the open market, providing Fibrowatt can offer a small premium to the price that litter would fetch as fertilizer.

But the developer's biggest challenge was signing an engineering, procurement and construction contract for a plant using tested but still fairly unusual technology. FibroMinn licences the technology from Fibrowatt UK, but neither has the resources to guarantee the construction of a $235 million project. They thus had to convince a creditworthy EPC contractor ? in this case SNC Lavalin ? to undertake the work and provide a completion guarantee. This process appears to be almost as time-consuming as that for procuring the necessary permits.

The sponsors now engaged two advisory firms ? McDonald Investments, part of Key Bank, HH Media, with a background in film, gaming and real estate finance, and Baldwin & Clarke, to put together a long-dated deal. Those close to the financing say that there was limited enthusiasm from the deal from project finance banks, although this response might be down to the desire on the part of the arrangers to achieve a deal with a maturity as close to the length of the power purchase agreement as possible.

This would likely require a pitch to the institutional market, which would in turn require a rating. Given the strength of the offtaker, Xcel, which has been the credit behind numerous wind projects, and the contractor, it was just possible to gain an investment grade rating. Fitch rated the senior debt, sized to match the cashflows from the PPA, BBB-, which a smaller subordinated tranche received a BB rating.

The lead institutions on the financing were Prudential and John Hancock, but the lender group included Met Life, Nationwide Life, Ohio National Life, Ohio National Assurance, Beneficial Life Insurance Company and Manufacturers Life. Sources close to the transaction indicate that the tenor is close to the length of the PPA and say that the pricing is within market.

The final layer of complication came from the inclusion of a sale-leaseback structure, by which PowerMinn 9090, owned by private investor Norton Herrick, leases the plant to FibroMinn. The time and expense of structuring the lease almost outweighed the tax benefits of the deal, which derive purely from its asset value, rather than any renewables incentives. The plant may be eligible for section 45 production tax credits should that regime be in force when the plant comes online (likely in 2007), but these will be passed through to the offtaker.

The section 45 issue highlights one difficulty in financing biomass projects ? their lead time and high capital cost make a secure regulatory and financial environment critical, and a supportive offtaker is a must. While the sponsors are looking eagerly at the livestock and poultry producing areas of the south east, they will encounter much less receptive local utilities.

FibroMinn LLC
Status: Closed 10 December 2004
Size: $234 million
Location: Minnesota
Description: 55MW turkey litter-fired power plant
Sponsor: Fibrowatt USA, Homeland Renewable Energy
Equity: $35.5 million
Debt: $202 million
Arrangers: McDonald Investments, HH Media
Financial advisers: HH Media, Baldwin & Clarke
Borrower legal counsel: Hogan & Hartson
Lender legal counsel: Bingham McCutchen