OPPORTUNITIES AND CHALLENGES PRESENTED BY FEEDSTOCK IN THE FINANCING OF BIOREFINERY, BIOCHEMICAL AND

BIOBASED PRODUCT MANUFACTURING PROJECTS

John KirkwoodPartnerKrieg DeVault LLP 12800 N. Meridian StreetSuite 300 Carmel, IN 46032Office) 317.238.6238 (Cell) 317.625.4258 e-mail: jkirkwood@kdlegal.com

Thinking BeyondTraditional Solutions

Advanced Bioeconomy Feedstocks ConferenceJune 9-10, 2015New Orleans, LA

OPPORTUNITIES AND CHALLENGES PRESENTED BY FEEDSTOCK IN THE FINANCING OF BIOREFINERY, BIOCHEMICAL AND BIOBASED

PRODUCT MANUFACTURING PROJECTS

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As demand for project finance continues to grow, the tools available to developers to mitigate traditional project finance risk have also grown. These tools consist of: • USDA 9003 Program, renamed by the 2014 Farm Bill as the

“Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance" Program. 2014 Farm Bill expanded eligibility for the 9003 Program to include qualified renewable chemical projects and biobased product manufacturing projects.

• USDA Business & Industry Guaranteed Loan Program which can be utilized to finance first commercial projects for innovative energy and renewable chemical projects.

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SECTION 1703 OF TITLE XVII OF THE ENERGY POLICY ACT OF 2005—EXISTING AND FORTHCOMING SOLICITATIONS.

• DOE solicitation for Advanced Fossil Energy Projects seeks applications for up to $8 billion in loan guarantees in connection with projects that employ new or significantly improved fossil energy technology, covering all fossil fuels, including coal, natural gas, oil, shell gas, oil gas, coal-bed methane, methane hydrates and others.

• DOE solicitation for Renewable Energy Projects seeks applications for up to $2.5 billion in loan guarantees for renewable energy projects focused on advanced grid integration and storage, drop-in biofuels, waste-to-energy and innovative technology upgrades at existing facilities.

• Tax-Exempt Solid Waste Disposal Facility Bonds.

• New financial products which provide for risk mitigation in technology and feedstock.

RATIONALE FOR USING PROJECT FINANCE STRUCTURE:

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• 100% equity financed projects are the exception—not the rule

• Economically and legally independent project entity

• Highly leveraged project entity with concentrated equity ownership

• Allows for project sponsors to develop outside of their respective balance sheets

• No recourse to owners of project entity; recourse is only to project assets

The risk profile of a particular project, when properly structured, may allow for an attractive net cost of financing

Structure matters

DRAWBACKS OF USING PROJECT FINANCE STRUCTURE:

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• Takes longer to structure and execute than equivalent size corporate balance sheet financing

• Higher transaction costs due to creation of an independent entity and complex contractual structure

• Non-recourse project debt is more expensive due to greater risk and high leverage

• High leverage and extensive contracting restricts managerial flexibility

• Project finance requires greater disclosure of proprietary information to lenders

Still, the combination of organizational, financial, and contractual features may offer an opportunity to reduce net cost of financing and improve performance

Structure matters

Project Company (Borrower)

Offtake AgreementsFeedstock Agreements

O&M AgreementEPC ContractTechnology License Agreements

Sponsor Project Level Equity Investors Debt Providers

Equity Investors

PROJECT FINANCE SCHEMATIC

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SOUND PROJECT

ECONOMICSEconomic PerformanceGenerates good debt service coverage under stress scenarios.Stable Project returns, with potential for additionalupside.Adequate Debt Service Reserve Account.

SponsorsExperienced & financially strong strategic investors with demonstrated track record of investing & operating similar projects.Ability to provide financial support to Project.

ManagementStrong managerial, financial, operational, & technical capabilities with demonstrated track record of implementing similar projects.Continuity of senior management.

Technology Risks / FeasibilityPerpetual technology licenses & performance warranties.Technology reviewed by an independentengineer. Technology Performance Insurance.

Construction RisksFixed price, date certain, turnkey EPC contract withliquidated damages secured by Letter of Credit.Payment and Performance Bond.

Operations RisksO&M contract with experienced contractor.Adequate Working Capitol Reserve Account.Adequate Maintenance Reserve Account.

Feedstock SupplyAdequacy of available feedstock.Long-term quantity supply agreement.Long-term fixed price supply agreement (or at least a price ceiling).Independent feedstock assessment.Feedstock Supply Insurance.

OfftakeLong-term quantity offtake agreement.Long-term fixed price offtake agreement (or at least a price floor).Adequate storage & transportation infrastructure.

STRATEGIES IN READYING RENEWABLE PROJECTS FOR FINANCING

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BIOMASS SUPPLY INSURANCE:A SOLUTION TO MANAGE SUPPLY RISK

Current problem in the industry: • Long-term supply contracts are rare and are only as good as

the credit quality of the feedstock provider.

• Many small fragmented sources of feedstock supply.

• Investment grade feedstock providers generally charge a higher price.

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BIOMASS SUPPLY INSURANCE:A SOLUTION TO MANAGE SUPPLY RISK (CONT’D)

The consequences:

• Long-term perceived risk of feedstock supply is high.

• Difficult to finance new projects.

• Project ratings tend to be low, and capital costs high.

The solution:

• Insurance policy designed for biomass projects.

• Backed by A to AA rated insurance syndicate: investment grade credit.

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TECHNOLOGY PERFORMANCE INSURANCE:A SOLUTION TO MANAGE TECHNOLOGY

PERFORMANCE RISKS

Current problem in the industry:

• Large number of new and emerging technologies seeking to finance first commercial project.

• EPC Contractors unwilling, at any cost, to assume technology performance risks.

• Institutional Investors either will not accept technology performance risks or will charge equity-like returns in exchange for assumption of risks.

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TECHNOLOGY PERFORMANCE INSURANCE:A SOLUTION TO MANAGE TECHNOLOGY

PERFORMANCE RISKS (Cont’d)

The consquences:

• Without a USDA or DOE Loan Guarantee, if available, developers have no access to the debt capital markets.

• Perceived risks of performance technology is high.

• Project ratings tend to be low, and capital costs high.

The solution:

• Insurance policy designed for projects having technology performance risks.

• Backed by A to AA rated insurance syndicate: investment grade credit.

SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC APPROACH ON KEY ISSUES

Ultimate objective of Sponsors is to maximize non-recourse debt while providing adequate equity to protect project debt investors• Trade-off between time, cost & optimization of other Sponsor objectives.• Decisions reflected in economic terms of deal (interest rate, term, reserves,

leverage, etc.).

Feedstock Supply• Long-term quantity supply agreement.• Long-term fixed price supply agreement (or at least a price ceiling).• Credit quality (or lack thereof) of feedstock supplier(s).

Offtake• Long-term quantity offtake agreement.• Long-term fixed price offtake agreement (or at least a price floor).• Adequate storage & transportation infrastructure.• Credit quality of off-take counter-party.

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SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC APPROACH ON KEY ISSUES (CONT’D)

Third-Party Reports• Independent engineering verification of technology / construction.• Feedstock availability / logistics assessment by feedstock consultant.

Technology / Construction Risks• Fixed price, date certain, turnkey EPC contract with liquidated damages.• May require completion guarantee by Sponsors.• Insurance/warranties on parts, availability, & general failure relating to proprietary

technology.

Operations Risks• Experience / credit quality of O&M contractor.• Adequate Maintenance Reserve Account.

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SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC APPROACH ON KEY ISSUES (CONT’D)

Debt Structure• Maturity, coupon.• Amortization, waterfall, covenants, cash trap, etc.• Debt Service Reserve Fund.

Economic Performance• Efficient use of cash flows.• Generates good debt service coverage under stress scenarios.• Stable Project returns, with potential upside for equity.

Sponsors / Partners / Management• Ability of Sponsors to provide completion guarantees.• Quality of partners (feedstock, EPC, technology, off-take).• Experience and continuity of Senior Management.• Political / Regulatory risks.

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RATING AGENT CRITERIA FOR PROJECT FINANCE

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Standard & Poor’s – www.standardandpoors.com

Moodys Investors Service – www.moodys.com

Fitch Ratings – www.fitchratings.com