Future Capital Partners on their latest investment opportunity in the UK renewable energy sector: Future Fuels
What is Future Fuels?
Future Fuels is a unique investment opportunity in the UK renewable energy sector, offering attractive returns and considerable downside risk protection. Through a UK Limited Liability Partnership, retail equity investors will be entitled to dividends and a share of sale proceeds derived from a 40% stake in the operating company, Vireol Ltd. The total LLP equity fund raise is £40m which together with limited recourse debt from senior debt providers will finance the construction of a Bioethanol facility in Grimsby over a two year period.
The LLP will have a property investment business and as such retail equity investors will be entitled to excess capital allowances proportionate, but not limited to their initial capital contribution, over the course of the investment term. In this way, LLP investors can mitigate their capital risk exposure on the investment. The investment is suitable for UK tax resident individuals and corporate investors with a minimum investment of €50,000 (or the sterling equivalent). An investment in Renewable Energy offers the opportunity to have a diversified and balanced investment portfolio using uncorrelated financial products.
Target IRR for the LLP is >30% pa over a 5-7 year investment period. Exit is anticipated to be either by way of a trade sale or IPO listing. The LLP is targeting a 30th September financial close, with various different investment options. For further details please contact Piers Denne (Head of Sales and Marketing) at Future Capital Partners on 200 7009 6680.
What will investors find particularly attractive about this opportunity?
Based on independent commodity price forecasts, the project has the potential to make attractive commercial returns for equity investors. It is expected that EU mandated blending requirements will create a structurally short ethanol market from 2013 onwards and once built the 200m litre facility will represent c.20% of the UK's renewable transport fuel requirement.
The project has now secured all key commercial agreements and with a 10 year offtake agreement with a global investment bank (worth c.£1bn over 10 years), the anticipated value of the project at exit is c.£500m. As a 40% stake holder in Vireol Limited, LLP investors can therefore expect a x5 return on their initial capital contribution. Furthermore, the ability for LLP members to utilise excess capital allowances arising from the construction of the facility, means that there is considerable downside risk protection.
For every £100,000 invested into the LLP, it is expected that there will be an equal and matching amount of capital allowance relief (assuming 50% HRT status for the duration of the project). Future Fuels LLP offers retail equity investors the opportunity to invest in a sustainable renewable energy project with proven technology and proven carbon emission reducing credentials. This project will make a meaningful contribution to UK carbon emission targets using surplus UK feedstock wheat and creating UK employment in the process. The freehold site (with planning permission) is owned by the project and investors will benefit from a management/non-exec team with considerable oil and gas and agri-business experience.
Why should investors be looking at biofuels?
The EU Renewable Energy Directive (RED) and the UK Renewable Transport Fuel Obligation (RTFO) now provide a clear regulatory framework for long term investment in renewable transport fuels. Currently, all fuel retailers are mandated to blend liquid transport fuels with a minimum of 2.5% fuel from a renewable source. From April 2010, failure to comply results in a £0.30/litre ‘buy-out' penalty levied on the fuel retailer. This penalty, together with the reputational damage of non-compliance has resulted in an effective blending rate of 3.25% (by volume) in 2009/10, with several oil majors now strategically committing themselves to renewable transport fuels.
Furthermore, both EU and UK legislation now have a statuary blending requirement of 5% by 2013 and 13% (by volume) by 2020. This equates to an installed biofuel capacity in the EU of 23bn litres by 2020. Currently there are 2.4bn litres of installed capacity, representing a 10 fold increase in just 10 years. It is worth noting that it took global industry leaders, Brazil over 30 years to install >20bn litres of biofuel capacity. The ethanol market is therefore anticipated to be structurally short post 2013 and whilst many of the project's competitors have not been able to weather the financial downturn (‘plan to plant' is approximately 4 years), Future Fuels finds itself with an early mover advantage in a Government supported market.
The project's proposed facility will be strategically located near the wheat growing fields of North Lincolnshire, the deep water port of the Humber estuary and has close proximity to the existing petro-chem infrastructure. The process engineering of the plant is also fully compatible with second generation (advanced biofuels) as and when they become commercially viable.
How will Future Fuels benefit the environment?
When appraising renewable transport fuels, it is important to differentiate between those biofuel technologies which are sustainable and those which are not. The Gallagher review (2008) highlighted the need for biofuel technologies to demonstrate their carbon emission reducing credentials and the RTFO has now been modified to include stringent sustainability criteria for all renewable transport fuels wishing to contribute towards the mandated blending requirements.
Future Fuels has been independently accredited with a 52% carbon emission reducing standard (when compared to fossil fuel equivalents) which easily complies with the 35% current minimum requirement and more importantly a 50% requirement by 2017. Renewable Transport Fuels are based on the ‘closed carbon cycle' principle, ameliorating carbon emission pollution from fossil fuel use in road transportation. Operation of the project's bioethanol facility is the equivalent of saving 185,000 tonnes of carbon per annum or removing 60,000 cars from UK roads.
Every aspect of the facility's engineering has been designed with the RTFO sustainability criteria in mind. All necessary environmental surveys will be carried out on the site and even the CO2 emissions from the plant are being liquefied and sold to the food and beverage industry. Perhaps most importantly, however, is a biorefining process which does not utilise any of the protein content of the feedstock wheat, resulting in a refined and pellitised high protein animal feed co-product (DDGS) which is used in livestock husbandry.
DDGS typically trades at a 20-30% premium to feedstock wheat, providing a natural hedge to input commodity price exposure and contributing as much as 20% of revenues. This co-product is not associated with many other biofuels and benefits the environment by contributing to the food chain, rather than taking away from it. Future Fuels will use 500k tonnes of a 3m tonne feedstock wheat surplus in the UK (currently exported), converting the starch to ethanol to meet UK renewable transport fuel targets and negating the need to import much of our protein (e.g. Soya) from other ecologically sensitive parts of the world.
