BIOMASS PROJECT DEVELOPMENT , ACQUISITION AND FINANCING

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BIOMASS PROJECT DEVELOPMENT , ACQUISITION AND
FINANCINGFROM WOODS TO WATTS

• Presented by Thomas Suffield, Principal, Cedars
  Capital, LLC
• Presented to BioPower Generation USA
• Chicago, Illinois
• July 8 , 2009

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Thomas Suffield, Principal Cedars Capital LLC

• Education
• Background
• Cedars Capital, Houston, Texas based boutique
  Investment Project Advisory Firm
• Downstream Power Plant Development and Financing
• Development of gas, coal and renewable fired
  power projects
• Equity and Debt Project Financing and Capital
  sourcing for Commercial Entities
• Track Record Renewable and traditional project
  financing/development
• Developed, Acquired or Financed over 2,500 MWs,
  valued at over 3.5Billion.
• Currently sourcing capital and providing
  development and financing expertise
• Contact Information tsuffield_at_cedarscapital.com
  [phone]

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Biomass Power Pellet Market Trends

• Biomass is the second largest renewable power
  source behind Hydro
• Base-load Biomass Projects can be profitable and
  project financeable and PTCs become additive to
  the plant economics
• Currently, biomass is the only proven renewable
  base-load electricity supply that is scalable
  over large regions
• Biggest Risk in Biomass Power Projects has
  historically been the inability to lock in long
  term supply of biomass
• Market opportunities with a credit worthy
  off-taker
• Capital shortage has dramatically increased the
  cost of capital (returns) available through
  acquisitions and later stage development assets
• Has also increased the Bid/Ask spread for
  acquisition and development capital
• Repowering Opportunities exist for shuttered
  biomass and older coal fired facilities
• Biomass Pellet plants are in demand for supply
  to
• Northern Retail/Residential Markets, some
  Industrial buyers-typically a spot market
• European Utilities contracting for intermediate
  off take-up to 5 years

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Technology Issues/Venture Capital

• New forms of feedstock manufacturing, processing
• Adding heat and other processes to biomass chips
  through torrefaction or pyrolysis much like
  charcoal
• Torrified Biomass, Briquettes, Char
• Currently not commercial
• New processes
• Liquid feed-stocks
• Solid fuel conversion Gasification technology
  or processing into liquids
• Key components for financeable technology
• Established commercial size-not a test plant
• Operating history
• Serial number 3,4, 5, etc.

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Financing Sources Development Acquisition
Capital

• Friends Family Capital
• Angel Investors
• Venture Capital
• Incremental Capital-Priced as Equity, but takes a
  lien
• DOE Grants not a great history of timely
  funding technologies/projects
• Project Capital
• Pre-Development and Development Capital
• Highest Risk, Highest Cost
• Construction Capital
• Equity (Private Equity, Hedge Funds) and Debt
  (Bank Debt) Tranches
• Wont Take Construction Risk
• Tax Equity
• USDA Guarantees
• Operating Capital Working Capital, add on
  capital, etc.
• Acquisition Capital looking for cash flow

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Project Development and Acquisition Structure
Equity
Other Funders
Debt financing
Contractor
Funding and expertise
Dividends, ownership stake
Construction agreement
Operator
Special Purpose Vehicle (SPV)
Operation Maintenance
Fuel Supply
Power Purchase Agreement (PPA)
Supply agreement
Power Off taker
RECs
Permitting, Approvals
Other Stakeholders
Carbon Credit/REC markets
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Case Study Project Description

• 24 Megawatt biomass power plant built within the
  Abitibi-Bowater recycled newsprint paper mill in
  Snowflake, Arizona.
• 2 year pre-construction development timeline
• Financial Close and Construction Start,
  September, 2006
• 55MM Project Financing led by CoBank, represents
  the U.S. Farm Credit System
• Achieved Commercial Operations, 3rd Quarter, 2008
• Capture ½ of Eligible Production Tax Credits
• Good mix with AZs wind and solar power

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Stakeholders, Players

• Project Owner
• www.renegy.com
• Robert M Worsley Entrepreneurial and Corporate
  Experience
• Owners Rep Scott Higginson
• Approval Authorities Permitting, Tax Exempt Bond
  Financing
• Financing Sources
• Thornton Farish
• Owners Engineer Evergreen
• Lenders Engineer Stone Webster
• Technical Advisor Carlson Small Power
  Consultants
• Owners Counsel Bracewell Giuliani
• Lenders Counsel Latham Watkins
• Operator Abitibi Consolidated

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Power Purchase Agreements

• Request for Proposal from Salt River Project
  (SRP) for Electricity Off-take from Biomass
  Fueled Power sourced within Arizona
• AZ has a renewable portfolio standard increasing
  to of 15 from renewable generation by 2025
• Successful Bid, Negotiation of Preliminary
  Commercial Terms and Power Purchase Agreement
  (PPA), Sept, 2004
• 20 year term for 10MWs, with incremental 10
  megawatts for years 16-20
• Negotiation with Arizona Public Service (APS) for
  an additional 10-14 MWs of Biomass Fueled Power
  for a 15 year term
• Off take fluctuates as a function of the plants
  auxiliary load
• Both regulated utilities with strong
  financials/credit worthy off takers (SRP
  government owned)
• Differ from a commodity reseller or non
  finance-able/credit worthy entity
• Green Credits From Wood Waste to Megawatts
• Both Utilities are purchasing Snowflakes
  Renewable Energy Certificates

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Project Location

• Bidding Constraints
• Deliver to SRP interconnection points in Arizona
• Close proximity to biomass fuel, existing
  infrastructure
• Abitibi Paper Mill
• Cost Effective Synergies
• Capital Cost Savings
• Existing systems Transmission Substation,
  Dedicated Transmission Line, Control Room, Plant
  Security, Truck Weigh Station, Fuel Lay down
  area, Fuel Processing, existing Natural Gas line
• Plant will actually backfill the transmission
  line, producing additional value
• Operating Cost Savings
• Fuel Sourcing Previous Pulp operation and
  continuous Paper Sludge being land filled
• Redundant Systems
• Water Sourcing and Treatment, Black Start
  capability

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Equipment Procurement and Construction

• Engineering
• Plant has increased in size 3 fold since original
  sizing, given higher elevations
• Mix of New and Used Equipment
• Abitibi Plant in Sheldon, Texas
• Conveyors, screw presses, etc.
• Forged steel steam drum
• Technology
• New Babcock and Wilcox bubbling fluidized bed
  boiler designed for this fuel application
• Procurement

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Fuel Sourcing

• June 20, 2002 Rodeo-Chediski wildfire started
  that ultimately burned almost 500,000 acres of
  National Forest land in Eastern Arizona
• Renergy (Wholly owned Subsidiary) Fuel
  Procurement, Processing and Logistics of woody
  waste material from surrounding area
• Business Plan capture value from whole logs,
  aggregate fuel sourcing (marketing/logistics)
• Government (USFS, BLM, Native American
  Sovereignty) owned forest lands typically pays
  for forest stewardship
• Privately owned forest lands, typically is paid
  for forest stewardship
• Largest forest logging operation in Arizona
• Numerous US Forest Service contracts being let to
  remove biomass
• Green forest thinning activities,
• Forest Rehabilitation
• Waste material from the regions existing saw
  mills

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Fuel Sourcing Continued

• Abitibi produces 250 bone dry tons/day of waste
  recycled paper Sludge
• Will provide 25 of the fuel for the plant
• Acquire a 3 year fuel supply prior to start up
• Fuel will be chipped, typically has 7-10
  moisture content from the field
• Disposal site for wood waste
• Logistics Rail and Trucking of biomass
• Fuel Costs, distance traveled
• Dis-aggregation of vendors individual
  jobbers/truckers
• Snowflake will consume
• 125,000 tons/year of forest thinnings _at_ 20
  moisture
• 168,000 tons/year of paper sludge _at_ 50 moisture
• Competitive Uses
• Fuel pellets for wood stoves, garden mulch
• Most is burned in place/side of the mountain

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Project Financing

• Process of Identifying Financing Sources
• Equity Sponsor Contributed approx. 20MM
• Debt Project Financed/avoidance of personal
  guarantee
• Sizing constraints
• Debt/Equity Ratios
• Debt Service Coverage Ratios
• Bonds Limited by statute on what assets they
  can fund
• CoBank Lead arranger and underwriter
• JPMorgan/Chase provided credit support to
  CoBanks LCs
• Thornton Farish
• Tax Exempt Bond Underwriter of Waste Projects
• Financing Structure
• Project Debt Construction and Term Loans
• Industrial Development Bonds (Backstopped by
  Letters of Credit)
• Production Tax Credit Availability
• Developer Support
• Creative Nuances

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Approvals

• Permitting Minimal given existing Abitibi
  footprint
• Air Quality Permit issued by AZ Dept of
  Environmental Quality, without reopening the
  existing permit for the Abitibi Plant
• Construction permit issued by Navajo County for
  buildings
• Large Generator Interconnection Permit and
  Transmission Agreement
• Bond Approvals
• Western States typically dont utilize all of
  their tax exempt bond issuing capacity granted by
  U.S. Treasury/I.R.S.
• AZ Dept. of Commerce awarded Private Activity
  Bond allocation
• Bonds issued by the State
• Show Low Industrial Development Authority was
  able to authorize up to 39.25MM in bonds
• Project qualified under IRS guidelines as a
  Solid Waste Treatment Facility
• Project was able to incorporate the authorized
  amount

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Risk/Reward Analysis

• Development Risk
• Developer Provided Consideration/Credit Support
  to Power Off-takers
• Equipment/Development Risk
• Permitting Risk
• Financing/Interest Rate Risk
• Construction Risk
• Construction Guaranties/General Contractor Wrap
• Developer Support
• Operating Risk
• Equipment, Fuel Sourcing, Payment Risk,
  Performance/Operator Risk (PPA compliance)
• Financial Risk
• Bonds are swapped, eliminating interest rate risk
• PPA escalation fixed rate, inflation adjusted
• Pricing Risk Costs may still increase faster
  than revenues
• Abitibi Viability/Operational Risk
• Regulatory Risk
• FERC, AZ utility regulation and environmental
  laws
• Tax law
• Investor Risk

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Market forces and Lessons Learned

• Market Timing
• Early in latest wave of the Biomass Power
  Development life cycle
• Market Forces
• Price increases in capital cost components of
  source material including
• Commodities steel, cement, anything with a high
  fuel cost component
• Finished equipment and lead times Lack of
  Manufacturing/Infrastructure Capacity
• Boiler, generator, bag house, etc.
• Market Strategy
• From Woods to megawatts to project Wonder

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Social/Strategic Components

• Environmentally Beneficial
• Healthy Forest Initiative
• Forest Density (Crowding, Beatle Infestation,
  Drought)
• Lack of fuel degradability at altitude/humidity
• Forest Beautification
• Abitibi save landfill space, burn paper sludge
• Economically Viable
• State and Utility diversification of fuel risk
• Job creation
• Renewable Energy
• CO2 Neutral
• Secure supply of charred timber

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Contact Information

• Cedars Capital, LLC
• 1330 Post Oak Blvd, Suite 1375
• Houston, TX 77057 USA
• Voice 1 [phone]
• Fax [phone]
• Thomas Suffield cell 1 [phone]
• tsuffield_at_cedarscapital.com