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NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007

NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007. Overview. Farm Credit System – Ethanol Background Sources of Debt Capital Underwriting Considerations. AgriBank Overview.

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NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007

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  1. NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007

  2. Overview • Farm Credit System – Ethanol Background • Sources of Debt Capital • Underwriting Considerations

  3. AgriBank Overview • Comprised of 18 Farm Credit Associations that provide financial products to agricultural producers and agricultural related business within 15 states (See map) • $49.6 billion in assets • Wells Fargo $415.8 billion • US Bank $205.9 billion • Farm Credit System (inc. AgriBank) $130.0 billion

  4. Ethanol Industry(Data as of 7/31/07) • Industry Capacity • 114 plants • 6.5 bgy capacity • AgriBank District helped finance 58 projects (52% of capacity) • Under Construction or Development • 87 new construction / 11 Expansion Projects • 7.4 bgy of capacity • AgriBank District has commitments to 57 plants (58% of capacity)

  5. Farm Credit System Ethanol Portfolio(as of June 30, 2007) AgriBank District: $1.7 billion Other Farm Credit System Lenders: $1.8 billion* Total System Ethanol Commitments: $3.5 billion * Includes Farmer Mac commitments and guarantees

  6. Current Sources of Debt • Farm Credit System (since 1992) • Provided approximately 2/3’s of debt capital prior to 2005 • Commercial Banks: First National Bank of Omaha, Home Federal Savings & Loan, Community Banks • Insurance Companies • Foreign Banks: West LB, Society Generale

  7. Future Sources of Debt • Issues • Farm Credit is Full: little remaining loan capacity to finance additional ethanol projects unless existing volume is paid down rapidly. (Hold Limits) • Blender Wall: Rate of growth exceeding blender capacity results in: • Ethanol priced at variable cost of production. • Idling of ethanol plants. • Portfolio stress and slow rate of debt pay down. • Reduced industry enthusiasm and capital investment.

  8. Since MTBE has been replaced Ethanol demand has been relatively flat. Why the concern about Blender Wall?

  9. Source: Houston BioFuels Consultants

  10. If Supply out paces demand… • Price of ethanol will drop to incent more blending capacity and/or less capacity utilization until equilibrium is satisfied • Contribution Margin = net revenues less variable costs (corn, utilities, chemicals) • Contribution Margin is the signal to producers on whether to vary production rate or stop production • In oversupplied commoditized markets, pricing typically reverts to a variable cost-plus basis. A value-added basis (gasoline related) only arises when negotiating leverage is more balanced between buyers and sellers. • Variable Costs = cash costs incurred to produce an incremental amount of product.

  11. Underwriting Guidelines Historical – Dry Mill Plant • Equity: 50% for start up/ 40% existing • Mitigators: • Experienced Management/ Construction • Cash Sweeps/ Retention of Earnings • Debt per gallon (less than $0.90) • Working Capital: 5% of sales or $0.15 /gallon • Repayment Capacity: 115% (Net income + Interest + Depreciation divided by Principal + Interest + Capital Expenditure + Dividends) • Limitations on Dividends • Loan Term: 7 to 10 years (May include cash sweeps to reduce debt faster) • Feasibility Study: Corn procurement, marketing, permitting, rail access, infrastructure, technology, etc.

  12. Underwriting Guidelines Cellulosic Ethanol: No current guidelines but… • Similar to Dry Mill Ethanol Plant with following • Equity: 50% • Working Capital: 10% to 15% of sales • Repayment Capacity: 115% • Dividend Limitations • Cash Sweep Provisions • Loan term 7 to 10 years

  13. Underwriting Guidelines • Other Considerations • Scale of project: Larger or smaller than today’s ethanol plants • Experienced Contractor • Reliable Technology – low cost operation • Feedstock Availability/Procurement • Federal Subsidies/Mandates and term of programs. • Loan Guaranty – to mitigate technology and start up risks • Purchase Agreements (Tolling)

  14. Federal IncentivesLenders Perspective • Federal Incentives (CCC production credit, Production credit) are typically not relied upon in the underwriting process. • Federal Subsidies and Mandates: Important but ultimately industry must be financially viable without Federal support to attract lenders. Large Commercial Banks have avoided the industry due to political risk. • Loan Guarantees: Best credit enhancement • Issue: size of guaranty relative to cellulosic projects • Typically do not guaranty lender during construction phase

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