Spring 2006 saw the Viridis Clean Energy Group - an Australian investment fund - secure ownership of a portfolio of power plants fueled with landfill gas in England, Scotland and Wales. By the end of the summer, Viridis had tied up project financing for the assets in a deal that was among the first of its type

The precedent set by the transaction promises similar deals for the future - but the presence of several factors unique to the resource means that landfill gas is likely to remain something of a niche market for project finance, dominated by a select group of potential MLAs with the required expertise.

Background

One reason for the attractiveness of Viridis to bankers is the fund's pedigree in the landfill gas sector. The Australian investor made its project finance breakthrough in 2005 with the acquisition of six US plants from Reliant Energy, based in Houston, Texas.

Viridis snapped up 31MW of generating capacity and the accompanying Renewable Energy Certificates for US$28 million, securing a 5 year PPA to sell power from four plants back to Reliant and the remaining output to local grid operators.

The Texas deal, in which Viridis took ownership of proven assets operational since 2003, established the fund in the landfill gas market and formed a basis for the larger portfolio acquisition in the UK the following year.

Viridis' first foray into UK landfill gas was one of several recent investments that have seen the fund accumulate a range of European assets including a 38MW wind portfolio in the German state of Lower Saxony.

Purchase of the UK landfill assets, acquired by the Australian investor for £90m (US$157m) from UK waste-to-energy specialist ENER-G, brings Viridis assets to 49 projects in the US, Germany and the UK, with a total capacity of 194MW.

In the UK acquisition deal, ENER-G was advised by RBC Capital Markets (Financial) and Stevens & Bolton (Legal). Viridis Energy was advised by Watson, Farley & Williams.

Financing

Viridis closed financing for the UK portfolio on 21 August 2006.

The portfolio includes 35 landfill power plants, for which the investment fund paid £99.6 million (US$188.2m). Viridis has now secured two thirds of this sum in project financing.

Bayerische Hypo- und Vereinsbank (HVB) and National Australia Bank (NAB) jointly arranged a £65.25 million (123.2m) senior debt facility.

And despite the unusual nature of the deal, HVB had few  problems attraction interest from other banks.

'We had a 100 per cent hit rate with the banks we approached,' HVB's director of project and structured finance loan syndications Stuart Wimbury told IJ.

'The banks took a fair time to look at the transaction before coming back to us - their main concern was getting comfortable with the new gas resource'

The debt facility included a £61 million term loan facility with a tenor of 10 years and a £4.25 million (US$8m) annually renewable revolver. Pricing is around 120bp over LIBOR.

The two MLAs shared slightly more than half of the lending equally between them, with two other arrangers - Fortis and LloydsTSB - taking up the remainder. HVB was bookrunner and facility agent.

Linklaters advised the banks on the transaction. Watson Farley & Williams was counsel to the borrower. Engineering advice was provided by Black & Veatch, with Enviros Consulting responsible for gas due diligence.

The landfill gas plants are eligible for ROCs, with power to be sold under NFFO contacts with a merchant tail.

Details of the sites are as follows:

Of the 35 landfill sites, 16 are active and 19 are closed. Of the generating plants, six were commissioned in 1999 or earlier, 29 since 2000.

The deal is a typical SPV-type structure, the most salient feature of which is a merchant tail.  Contracted revenues fall away gradually - unless Viridis chooses to sign up to any new or extended off-take contracts in due course. 

 'At the outset banks are looking at a merchant tail and that was something we needed to consider during the structuring phase,' said Wimbury. 'The base case was relatively conservative with strong cover ratios and showed resilience to downside sensitivity analysis, both in terms of pricing and volume. 

'In addition, some innovative structural elements give the banks further protection against the merchant tail risk.'

Important to the arrangers was the size and the diversity of the portfolio, which helped to distribute the risk.

Landfill gas deals are unusual in that because the gas resource is derived from decomposing waste - rather than, for example, a steady supply stream from an underground reserve - various factors can influence the rate of production.

This made exhaustive due diligence hugely important in predicting likely fluctuation in gas supply - studies took into account a broad range of factors, including:

• climatic conditions
• waste composition
• management of the landfill site
• water ingress.

That the technology had been proven by Viridis experience in Texas was vital in securing financing, as was the limited completion risk - the majority of the plants are already operational.

Outlook

Wimbury sees the deal as representative of a wider trend in UK energy project financing, which is showing an readiness to expose itself to the market:

'Merchant risk in the wider UK power market has made a return, as shown by deals with CCGT and coal-fired power generation plant over the past year,' he says.

As far as landfill gas is concerned, Wimbury sees the additional complexities of landfill power generation continuing to ensure that such projects will most likely appeal to a smaller audience of project finance banks with a particular focus on renewables.

This limited appeal is not expected to result in a shortage of liquidity, however.

Given the relatively modest size of these transactions (this portfolio is only 60MW in total, small in comparison with a typical coal-fired power station transaction), landfill gas financing should not be too hard to get hold of on reasonable terms.

The project at a glance