After a year in which solar tariffs endured savage cuts before the industry could get off the ground, and the country’s offshore wind market effectively ceded leadership to Germany, biomass was probably the brightest spot in UK renewables. The financing for the 7.2MW £60.5 million ($95.8 million) Helius Energy-led CoRDe biomass plant was not the largest biomass deal to close in the UK, but it had the most interesting contractual set-up.

CoRDe can quite comfortably be proclaimed the first project financing for a draff-fired power plant, draff being the by-product of the process by which whisky is distilled. Draff, a solid residue, together with waste wood, will produce power, heat and reduce pot ale, another whisky by-product, to pot ale syrup, which can be used as animal feed. The project is designed to provide a more sustainable and simple processing solution for nearby distillers’ by-products.

CoRD, or Combination of Rothes Distillers, is a group of distillers comprising the Ben Riach distillery, Pernod Ricard’s Chivas Brothers, the Edrington Group, Campari’s Glen Grant distillery, ThaiBev’s Inverhouse Distillers, Diageo, and Bacardi’s John Dewar & Son. Between them they account for 33% of the Scotch whisky industry, and given the number of distilleries with multinational parentage, represent a very manageable credit risk.

The distilleries currently use gas to evaporate liquids from the pot ale before mixing it with draff to make animal feed pellets, an expensive and carbon-intensive process. They pay Helius a gate fee, essentially a tipping fee, to take their by-procusts under a 15-year contract, the proceeds of which partly cover wood supply costs. The bulk of the plant’s revenues come from a 15- year contract with RWE for the project’s power and renewable obligation certificates. Steam from the project is used to make pot ale syrup.

The suppliers also own a minority stake in the project of 6.9%, to Helius’ 51%, and Rabo Project Equity 42.1%. The deal dates back to discussions between the distillers and Helius management, with the plant winning planning permission in 2008. The developer mandated Lloyds and Royal Bank of Scotland as joint lead arrangers in late 2010, and signed the financing on 13 April 2011. In funding its share of the project equity, the developer had at its disposal the £20 million profit on the sale of its 65MW Stallingborough project to RWE, which closed in 2008.

The initial discussions with the sponsor, which did not use an external financial adviser, provided a clearer idea of the project’s probable equity requirement, and the developer decided to solicit an outside equity investment. Rabo joined as equity provider in January 2011, after the sponsor issued an equity information memorandum on 24 December 2010. The plant’s integration with the animal feed market sat well with Rabo’s specialisation with agriculture.

The project’s proximity to its suppliers makes for increased lender security, though the wood supply is under a variety of long-term contracts with two third-party suppliers. But the biggest challenge for lenders was coping with a group of seven draff suppliers, two wood suppliers, three construction contractors, and one offtaker.

Despite the project’s small size, its involvement at so many levels of its own supply chain makes it technically complex and creates some interface risks for lenders to understand. Despite the lack of a single turnkey engineering, procurement and construction contract (Fichtner is essentially owner’s engineer), is proceeding two weeks ahead of schedule and within budget The plant uses an unorthodox fuel source, but proven technology, and has a power offtaker that is will known in the project finance market.

Lloyds and RBS provided a £42.4 million project loan split equally between them, with a 14-year tenor (2 years’ construction plus 12 years’ operations). One unusual feature of the financing was the banks’ provision of a swap linked to the retail price index, which allowed the sponsor to capture some of the escalation for inflation in the renewable obligation certificate buy-out regime. The benefits to the sponsor are primarily in the shape of slightly higher gearing, but CoRDe is the first biomass project to use the product.

The plant was closing financing as the incoming UK government contemplated changes to the incentives regime for renewables producers. The changes did not take shape until October 2011, and biomass producers have urged the government to provide greater support for biomass, though they are broadly satisfied that current ROC banding proposals keep support at roughly the same level. But given that the Rothes plant is set for commissioning in the third quarter of this year, and full commercial operations in the first half of 2013, it will operate under the current incentives regime.

The CoRDe project accounts for about 25% of the waste that is produced by industry within an 80km radius, leaving ample scope for further projects nearby or close to other distillery clusters. As Alan Lyons, Helus Energy’s chief financial officer notes, malt whisky production grew by more than 20% in 2011, indicating that there is room for additional projects, even if sponsors want to retain some excess waste supply.

Helius is currently in the market with a financing for its 100MW Avonmouth project, to be located on the Bristol channel, which runs primarily on wood. Another application of the CoRDe template would be finding a larger and more concentrated source of this kind of high-calorie fuel. The UK’s brewing industry, particularly those producing the larger commercial beers, would have obvious candidates.

Helius CoRDe
STATUS: Closed 13 April 2011
SIZE: £60.52 million
DEBT: £42.4 million
DESCRIPTION
7.2MW biomass-fired combined heat and power plant, located in Rotes, Scotland
SPONSORS: Helius Energy (51%), Rabo Project Equity (42.1%), Combination of Rothes Distillers (6.9%)
EQUITY: £18.12 million
LEAD ARRANGERS: Lloyds Bank, Royal Bank of Scotland
SPONSOR LEGAL COUNSEL: Burgess Salmon
LENDER LEGAL COUNSEL: Norton Rose
INDEPENDENT ENGINEER: Shaw Consultants
LENDERS’ INSURANCE ADVISER:JLT
MODEL AUDITOR: PKF
CONSTRUCTION CONTRACTORS: Fichtner (owners engineer); Aalborg Energie Technik (Boiler); Wellman Thermal (Evaporator); Robertson Construction (Civils)