Creditworthiness Key to Biomass Project Success

By John Eustermann
Most biomass projects require the developer to raise large amounts of finance well in advance of breaking ground, let alone commercial operation. Although the debt markets are expected to rebound and the implementation of multiple state and federal financial incentives and capital sources have some saying they already see things opening up, arranging finance for a renewable energy project is not easy, and the route adopted to raise finance has a major bearing on how the project will be developed. It is therefore important that, at an early stage, consideration is given to the available financing options.

The push for renewable energy and the green economy combined with the multiple grants, guarantees, bonds and other stimulus programs and facilities have resulted in many options for biomass facility developers to consider when layering up their financial model. Though the applications and requirements differ from option to option, they share one threshold requirement: creditworthiness.

Creditworthiness is a creditor's measure of the project company's ability to meet its debt obligations. The financial markets must get comfortable with their ability to rely on the project to generate a predictable stream of cash flow necessary to ensure repayment of their loans. Investment grade rated projects are projects that have contractually sound cash flows. Such cash flows are the result of well negotiated through-put and development agreements that form the basis of the lender's security structure, credit analysis; hence underpinning the projects ability to get financed. For biomass projects, the contracts and high level considerations for purposes of credit analysis are as follows:

Fuel Supply Agreement: Financiers will generally require the term of a fuel supply contract to exceed the term of the debt by a reasonable margin (ideally two or three years) or have the term align with or be no less than the tenor of the power purchase agreement (PPA). The contract will specify the price, amount and characteristics of fuel to be delivered on a daily, monthly and annual basis. Further, appropriate escalators will be negotiated and the developer should be cognizant of and seek to control how such price adjusters are triggered and the effect they will have on cash flows over the term of the agreement. Finally, the counterparties (the fuel/waste suppliers) will be expected to be creditworthy entities with access to assured sources of fuel/waste over the term of the contract. As a part of this upstream component of project development, the developer is wise to engage the services of an expert in feedstock supply analysis and modeling.

Engineering, Procurement and Construction Agreement: Often a creditworthy contractor will undertake to carry out design, engineering, procurement and construction on a fixed-price, turnkey basis. The desire is to have the contractor assume "single point" responsibility for the overall construction of the project. The contract will contain completion tests and liquidated damages, which will be payable if the tests are not met by the specified date. The debt markets will likewise require bonding or external guarantees to support the obligations of the turnkey contractor (eg: to ensure ability to perform and pay liquidated damages). If more than one contractor assumes the EPC responsibilities, the development of the project in this regard becomes more complex. In such instances, lenders will require that the responsibility for each separate point is clearly delineated. Furthermore, risk allocation, insurance, and warranties will be more complex.

Operating Agreement: The operation of the plant is another key consideration of the lending community and will be required to be carried out by a company or entity with an appropriate track record of successful operation of similar facilities deploying the same technology. This is, of course, more important to technologies where operation is more complex. Typically, operating agreements will provide for reimbursement of costs plus an incentive-related performance fee. Lenders and the developer will want the ability to terminate such an arrangement in case of poor performance.

Power Purchase Agreement:
The PPA is the cornerstone of the biomass project. The power purchaser, more than other project counterparties, must be creditworthy. Lenders will want the contract term to extend beyond the term of the loan. The contract will be assessed by the lenders for its economics and conditions that might cause early terminations-lenders will want the ability to cure any defaults rather than face termination.

Rigorous conceptual analysis and planning must go into the structuring of the contractual arrangements of any biomass project and the underlying consideration in all instances for the developer should be the creditworthiness of the project. The wise developer should view all material contracts, terms and decisions through the eyes of a potential creditor.

John Eustermann is a partner with Stoel Rives LLP. Reach him at or (208) 387-4218.