Media Coverage

US Renewables Closes Initial $80M

The Deal

Clifford Carlsen

October 7, 2005

US Renewables Group LLC raised $80 million to support a 2-year-old business plan to provide equity funding for renewable energy projects, and it expects the recent explosion in fuel costs will help entice investors to put in another $170 million.

The Los Angeles-based company landed $6 million from Rustic Canyon Partners of Santa Monica, Calif., with the rest of the money coming from individual investors, but the company expects to close the investment at $250 million largely from institutional investors. (Rustic Canyon Partners is an investor in The Deal LLC.)

USRG founder and CEO Jim McDermott said the company is in discussions with fund-of-funds, insurance companies and other potential investors and hopes to close fundraising in the next six months. USRG is not working with an outside financial adviser in raising funds. Craig Jacoby of Cooley Godward LLP in San Francisco is counsel.

The investment company was formed in 2003 to acquire, develop and operate renewable energy and clean fuel projects, and it decided in 2004 to raise a dedicated fund to invest in about 30 projects over the next three years. USRG is structured with no terminal value, but it will return income from its projects to investors throughout operations. It is likely the company will eventually cash out investors' positions in a public offering, trade sale or refinancing.

USRG targets stationary power generation, including landfill methane, waste-to-gas, biomass and geothermal projects, as well as the production of clean fuels such as biodiesel, ethanol and coal-to-liquid conversion. The company already has acquired controlling positions in two landfill methane generating facilities in Texas and one in California, and is about to close on an additional methane project. McDermott said the company will invest $5 million to $25 million in each project to acquire control, adding that the company will raise additional debt financing to complete projects with a total cost of $50 million to $100 million.

McDermott said the company offers a way for investors to make equity investments in renewable energy technologies unsuited to traditional venture capital investment.

"If you really want to be involved in renewables, you have to act like it's the energy business, not technology, and that means project finance," McDermott said. "A typical renewable energy project will be 50 to 75 megawatts, and the cost is basically $1 million a megawatt, and that can be highly leveraged. But the typical large-project finance people want to do 500 megawatt projects."

McDermott said the company has experience in project finance, and it has hired people with energy operations experience to oversee projects, though each investment will operate independently. Lee Bailey, who first got involved in USRG as a general partner with Rustic Canyon, has joined the company as chief operating officer.

Bailey said Rustic Canyon has one energy investment from its venture capital arm - energy management software maker Encorp Inc. of Windsor, Colo. - but that the firm found energy a difficult field for venture investing. He said USRG's structure will enable the company to take advantage of converging market factors and new technology.

"With energy technology, it takes a long time to sell to customers who are often utilities, and there are not a lot of opportunities for venture returns," Bailey said. "There are a lot of large funds interested in putting debt on these [renewable] projects, and there's no shortage of money on that side. But on the equity side, investors are targeted at larger projects."

Private equity funds, including Riverstone Fund of Washington-based Carlyle Group and ArcLight Capital Partners LLC of Boston, compete for equity investment in deals for projects of more than 100 megawatts, but so far there have been few funds organized to target smaller deals.

USRG will compete with Hanover, N.H.-based New Energy Capital, which raised $30 million in June 2005 from VantagePoint Venture Partners of San Bruno, Calif., and the California State Teachers' Retirement System. But John Quealy, a resource optimization analyst with Adams Harkness Inc. in Boston, said institutional investors have been historically slow to get into clean energy investment.

"There was a lot of interest with alterative production in the 1980s that in many cases left a bad taste because the technology was not ready. But now the technology is proven, and the costs have become viable," Quealy said. "The interest from investors is much higher with energy costs so high now, but what I think needs to happen is for the energy industry to come closer to a consensus on what long-term prices will be."

McDermott and most alternative-power supporters believe that ship has already sailed, and that alternative power projects that were cost competitive when conceived a few years ago have only gotten more attractive with the recent run-up in fuel prices.

"This is not a cyclical thing with fuel prices; this is a step change," McDermott said. "These things are flat-out cost competitive now, and what this comes down to is getting the projects built."

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ZENO Group
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