Energy & resources insight 11 May 2020 Newhurst continues UK merchant EfW trend

It is the first project financed EfW project to reach financial close in the UK since the Rookery EfW project in March 2019 and the latest in a series of merchant UK EfW facilities not procured by any governmental authority or supported by any long term municipal waste contracts.

The Newhurst EfW facility is owned by Covanta, a sustainable waste management company headquartered in the US and the world's largest owner & operator of EfW facilities; Biffa, one of the UK's largest waste management companies; and Macquarie's Green Investment Group (GIG), a specialist developer and investor in green infrastructure.

Development of the facility commenced several years ago and was initially led by Biffa, who secured planning permission for an EfW facility on the site in 2012. This will be the first large-scale project financed EfW facility developed by Biffa.  The project development activities started in earnest in 2017 when Biffa formed a joint venture with Covanta to develop the project. Following financial close, Biffa now holds a 50% stake in the project and the remaining 50% is held by an incorporated joint venture between Covanta and GIG.  The ownership of the project is set out in Figure 1.  

Newhurst is the third EfW facility developed by GIG and Covanta to reach financial close in the last 18 months, the first being the Earls Gate EfW CHP facility located at Grangemouth, Scotland (being constructed by Covanta, GIG and Brockwell Energy, a UK renewable energy developer), which reached financial close in December 2018. The second is the Rookery EfW located at Bedfordshire, England (being constructed by Covanta, GIG and Veolia, an international waste management company), which reached financial close in March 2019.  

As indicated below, the Newhurst project is notable for adopting a very robust and bankable structure, underpinned by some of the most experienced and bankable contractors and stakeholders in the international EfW market. This contractual structure enabled the sponsors to focus on innovation and efficiency in the financing structure for the project, driving maximum value for the shareholders.

Figure 1 - Newhurst Shareholders

Construction and operation

The state of the art, single line EfW facility will be procured by the project company under a fixed price, turnkey engineering, procurement and construction (EPC) contract with Hitachi Zosen Inova, a Swiss company and one of the leading construction contractors globally for EfW facilities.  The project is targeting commissioning in late 2022 and completion of construction by May 2023.

Once constructed, the facility will be operated and maintained by Covanta Energy Limited, a UK-based Covanta subsidiary (and current operation and maintenance (O&M) contractor for the Rookery EfW facility) under a 20-year O&M contract. 

Biffa Waste Services Limited, a member of the Biffa group, will supply fuel (municipal solid waste, household waste and commercial and industrial waste) comprising 70% of the thermal capacity of the facility under a fixed price 20-year fuel supply contract, which provides a secure baseload revenue stream for the project, backed by a robust security package. It is anticipated that further fuel supply contracts for the remaining capacity of the facility will be entered into closer to the commencement of operations.

The electricity generated by the facility will be sold by the project company to SmartestEnergy Limited (a subsidiary of Marubeni, one of the largest Japanese trading houses) under a 15-year power purchase agreement (PPA).  As a "route-to-market" PPA, the price paid to the project company for power is generally linked to market prices, subject to any fixed price the project company and SmartestEnergy agree for certain periods from time to time.

Accordingly, the facility will have two primary sources of revenue: firstly, the "gate fees" payable by Biffa Waste Services Limited and other fuel suppliers to the project company for accepting waste under fuel supply agreements; and secondly, the fees payable by SmartestEnergy to the project company for power and other benefits sold under the PPA.

Financing process

The financing process for the Newhurst project started in early 2018 with the development of a debt term sheet between the sponsors and their advisors. Ashurst was the sponsors’ legal advisor and Macquarie Capital was the financial advisor. Having recently also acted as financial advisor on the Earls Gate and Rookery EfW projects, Macquarie Capital was able to leverage its experience to develop a robust and competitive financing structure and drive value for the sponsors. Following the completion of this initial process, a group of lenders was selected in early 2019.

Finance documents were substantially agreed by late 2019 and lenders obtained their credit approvals in early 2020.  Project and finance documents were signed and financial close was achieved with full condition precedent satisfaction on 11 February 2020.

Financing participants and advisers

As mentioned above, the sponsors comprise Biffa, Covanta and GIG.  Sponsors were advised by Macquarie Capital as financial advisor and Ashurst as sponsors' counsel.

The lenders comprise NatWest, ABN AMRO, AIB and Natixis.  NatWest acts as facility agent, security agent and account bank.  Lenders were advised by Linklaters as lenders' counsel, Fichtner as technical advisor, Tolvik Consulting as waste market adviser, Baringa as power market adviser, Mazars as model auditor, Marsh as insurance adviser and KPMG as tax and accounting adviser.

Key financing terms

The senior debt was made available through a term loan facility of approximately £250m. Interest is LIBOR-linked and the project company has hedging in place to manage its exposure to fluctuations in the interest rate, as well as its exposure to foreign currency fluctuations in respect of the EPC contract, which contemplates payments in euros, Swiss francs and pound sterling.

USPs

As with any merchant EfW project, there are a number of unique and innovative elements to the Newhurst EfW Project which ensured its bankability and resulted in a highly efficient financing structure.

On this project, these noteworthy aspects included:

• the nature and extent of the hedging proposed by the sponsors, including with respect to flexibility around electricity hedging;
• the financing structure set a new benchmark for UK greenfield EfW projects, with advances in debt sizing, tenor and debt service reserve;
• establishment by the sponsors of a clear and coherent waste strategy, which balances shareholder flexibility to manage third party fuel supplies with lenders’ desire for information and controls; and
• the nature of the long term waste supply arrangements with Biffa, which de-risk the project from its exposure to the waste market.

Current state of the UK waste to energy market

Although the involvement of project finance banks in the UK EfW market commenced with a decade of local authority–backed waste PFI and PPP projects, the days of government support for these projects has now passed.

In place of the previous "integrated" waste PPP schemes (which often involve landfill, recycling, composting and transfer station facilities in addition to MBT or EfW plants), the UK market has now seen the emergence of more challenging but innovative merchant EfW schemes which have managed to achieve bankability, despite the absence of any direct subsidies or public sector support. For that small group of banks prepared to take greenfield development risk in this sector and to spend time in understanding the economic drivers behind it, the pipeline of EfW transactions has been strong.

Whilst the technical characteristics of these merchant schemes (typically involving well-proven moving grate technology) is relatively simple compared to the multi-site integrated PPP projects of yesteryear, the innovation in this new wave of merchant EfW projects is found in the financial and commercial structures being adopted.

These merchant schemes instead rely on commercial waste supply arrangements (typically contributing 65 to 70% of all project revenues) as well as a route to market PPA (contributing 30 to 35% of the project revenues).

The returns on these merchant projects can further be enhanced by including in the structure a private wire power offtake agreement (i.e. supplying power at a significant discount to the retail power price but well in excess of wholesale tarfiffs which would otherwise be available) or developing the project as a combined heat and power plant, providing heat as well as power to one or more local businesses or municipal facilities.

Looking forward, the future for the greenfield EfW market will continue to be driven by a number of key factors, including:

• the rapidly narrowing "capacity gap" between the volume of municipal, commercial and industrial waste arising in the UK and the available capacity to treat the residual waste for disposal;
• the impact of BREXIT, which is likely to reduce the UK's ability to export refuse derived fuel (RDF), requiring greater UK self-sufficiency in waste disposal;
• the desire for developers, driven by offtaker demand and subsidies, to invest in more innovative technology and to increase the value which can be extracted from a finite UK waste resource – this includes the development of waste to biofuel, biogas and jet fuel projects (several of which are already in early development); and
• the premiums which industrial and commercial customers are prepared to pay for long-term heat offtake arrangements and private wire PPAs, thereby enhancing the returns to be extracted from the UK's waste resource.

Similar to the development of other industry sectors, what originally started out as fairly straightforward projects has developed into a sophisticated and innovative sector and is now driven by a smaller number of experienced and creative developers, contractors and advisors supported by an increasingly active secondary market of renewable energy.