The 100MW Gainesville biomass project is one of the largest ever in North America, and its $500 million financing is certainly the largest project financing ever for a biomass project. Earlier deals for biomass plants have been smaller, often for unusual fuels, or using unusual equipment, and many of them have struggled to close financing.

Perhaps the most important feature of the $394 million Gainesville facility is that it is almost conventional enough to be readily repeatable. The deal attracted a broad base of bank support, based on familiar technology and a well-rated offtaker. But it had to contend with several challenges, including accommodating an uncertain outlook for US renewables incentives.

The developer of the Gainesville plant is American Renewables, a joint venture of Baycorp Holdings, Energy Management and Tyr Energy. Gainesville is its second venture, after it sold its first, Nacogdoches, to Southern Company in 2009.

The developer had brought in Fagen as engineering, procurement and construction contractor on Nacogdoches, and prevailed upon Southern to assume the contract when it was sold, even though Fagen was best known as a builder of ethanol plants and Southern has traditionally been averse to working with outside contractors.

Fagen is also the EPC contractor on Gainesville, and despite the privately-held contractor’s reputation, its obligations benefit from a performance bond. To create additional lender comfort Fagen is taking a 25% equity stake in the project, with the three shareholders in American Renewables each investing their equity directly in the project company, Gainesville Renewable Energy Centre.

The plant had an eight-year procurement history – the Florida city originally planned to build a new coal plant, but as public opinion

grew increasingly conscious of coal’s emissions it opted for biomass. The city, through municipal utility Gainesville Regional Utilities, issued a request for proposals in late 2007, awarded the project to American Renewables in mid-2008, and executed a power purchase agreement in May 2009.

The plant will account for roughly a fifth of Gainesville’s power requirement, and should produce power at a marginal cost inside that of an existing inefficient 280MW unit, with which it will share a site. The utility is rated AA, based in part on the city’s hosting the growing University of Florida. The state has limited capacity to import gas, meaning that bountiful shale gas has yet to meaningfully affect power market fundamentals.

The state’s landfill law, on the other hand, is a huge boost to biomass generators. Sawmills, forestry operations, and other sources of wood waste cannot use landfills, and are prepared to pay a biomass generator a tipping fee to take their residues, though the plant’s economics are not dependent on the law being in force. The project can take in wood waste from within a 200km radius, encompassing not only northern Florida’s forestry operations, but those in parts of Georgia and Alabama.

The execution of the PPA with GRU marked the start of an 18-month permitting process. The sponsors also had to wait for the US Environmental Protection Agency to issue new rules for permitted emissions from biomass plants. The rules, when they came out, were much stricter than the sponsors expected, and required that the project’s emissions control equipment be reordered to produce hotter flue gas.

The sponsor was sufficiently clear of the permitting process by late 2010 to be able to mandate bank lenders on the deal. It picked Bank of Tokyo-Mitsubishi UFJ, Natixis, Rabobank, ING, Societe Generale and Credit Agricole as lead arrangers, and closed the financing in June 2011, a little over three months after starting construction. The financing brought in commitments from CIT and DZ Bank.

Banks had to deal with outstanding litigation against the project but benefitted from familiarity with American Renewables and the project’s underlying contracts from their time spent working on the abortive financing for Nacogdoches. The suppliers for the plant include Metso for its boiler island, Siemens for its steam turbine, and Wolf for its fuel handling system, but the boiler island is the most significant component and lenders have a look-through to the manufacturer’s guarantee of its technology.

Sponsors and lenders, not to mention the offtaker, had to deal with the risk that the project might not be complete by the end of 2013, in time to receive its investment tax credit, and also had to decide what to do with the proceeds of the tax grant if it did receive it. The power purchase agreement, which includes a capacity component, power payment and all renewable attributes, had an adjustment to cope with the loss of the ITC. The debt financing is sized against the lower boundaries of the coverages under this agreement, though the adjustment does not completely compensate for the loss of the ITC.

In the event that the ITC is forthcoming, the proceeds are shared with lenders in such a fashion that the project sticks to the metrics laid down in its model – a minimum debt service coverage ratio of 1.45x, and an average DSCR of 1.55x. The pricing on the debt starts at 275bp over Libor, rising to 350bp over the life of the loan.

The developer, according to its financial adviser, Christopher Smith, always planned to use commercial banks to finance the project. Its reasoning is that a seven-year mini-perm will be relatively easy to refinance in the bond market once the project comes online. Nevertheless, the sponsors had to put in place a mechanism in case one of the lead banks – which are providing interest rate swaps pro rata – withdrew from the financing.

Gainesville Renewable Energy Center, LLC
STATUS: Closed June 2011
SIZE: $500 million
DESCRIPTION: 100MW biomass plant located in Gainesville, Florida
SPONSORS: Baycorp; Energy Management; Fagen Power; Tyr
DEBT: $393.6 million
MANDATED LEAD ARRANGERS: MUFJ; Natixis; Rabobank; ING;
Societe Generale; Credit Agricole
OFFTAKER: Gainesville Regional Utilities
O&M CONTRACTOR: NAES
EPC CONTRACTOR: Fagen
SPONSOR LEGAL COUNSEL: Cadwalader Wickersham & Taft (transaction); Chadbourne & Parke (tax)
LENDER LEGAL COUNSEL: Milbank
INDEPENDENT ENGINEER: Black & Veatch
LENDER INSURANCE ADVISER: Moore-McNeil