Stuttgart Ethanol, LLC Ethanol Plant Feasibility Study

Report Prepared for:

Stuttgart Ethanol, LLC 2018 Main Street Stuttgart, AR 72160

July 2006 This report is the property of Stuttgart Ethanol, LLC and cannot be disclosed or reproduced in whole or in part without the written permission of Stuttgart Ethanol, LLC.

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

NOTICE This report was prepared as an account of work sponsored by Stuttgart Ethanol, LLC. Neither BBI International, nor any of their employees, makes any warranty, expressed or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, produce, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not constitute or imply its endorsement, recommendation, or favoring by BBI International.

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Table of Contents I. EXECUTIVE SUMMARY .......................................................................................... 1-1 Introduction........................................................................................................................... 1-1 Site Evaluation and Recommendation.................................................................................. 1-1 Feedstock Supply.................................................................................................................. 1-2 Ethanol Market ..................................................................................................................... 1-3 Coproducts............................................................................................................................ 1-4 Financial Forecast................................................................................................................. 1-4 Recommendations................................................................................................................. 1-6 Next Steps............................................................................................................................. 1-6 II. PROJECT OVERVIEW ............................................................................................ 2-1 Purpose of Study................................................................................................................... 2-1 Scope of Work ...................................................................................................................... 2-2 III. SITE ASSESSMENT............................................................................................... 3-1 Study Area ............................................................................................................................ 3-1 Port of Pine Bluff Industrial Harbor District Site................................................................. 3-1 Stuttgart Industrial Park Site................................................................................................. 3-3 Port of Phillips County Site, Helena..................................................................................... 3-5 Site Evaluation Criteria......................................................................................................... 3-8 Site Evaluation Results ....................................................................................................... 3-12 Required State and Federal Permits.................................................................................... 3-13 Site Issues and Recommendations...................................................................................... 3-14 IV. FEEDSTOCK AVAILABILITY AND PRICE ........................................................... 4-1 Feed Grain Supply and Demand Overview .......................................................................... 4-1 Local Grain Availability ....................................................................................................... 4-1 National Grain Production.................................................................................................... 4-4 Disappearance....................................................................................................................... 4-5 Local Feed Use ..................................................................................................................... 4-6 Local Industrial Use.............................................................................................................. 4-7 Historical and Seasonal Pricing Patterns .............................................................................. 4-8 Spatial Equilibrium Model and Analysis Approach........................................................... 4-15 Sourcing Corn by Rail ........................................................................................................ 4-15 Sourcing Corn by Barge ..................................................................................................... 4-17 Sourcing by Truck .............................................................................................................. 4-19 Conclusions Regarding Feedstock...................................................................................... 4-21 V. REVIEW OF FUEL ETHANOL MARKETS ............................................................. 5-1 World Fuel Ethanol Industry ................................................................................................ 5-1 International Markets............................................................................................................ 5-1 U.S. National Ethanol Market .............................................................................................. 5-2 Regional Ethanol Market...................................................................................................... 5-7 Local Ethanol Market ........................................................................................................... 5-8 State Producer Payment........................................................................................................ 5-9 Ethanol Pricing ..................................................................................................................... 5-9 Ethanol Shipping Costs....................................................................................................... 5-12 Ethanol Market Summary................................................................................................... 5-13

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VI. REVIEW OF CO-PRODUCTS ................................................................................ 6-1 Distillers Grains .................................................................................................................... 6-1 Local Market for Distillers Grain ......................................................................................... 6-2 Regional Markets for DDGS ................................................................................................ 6-2 Distillers Grain Pricing ......................................................................................................... 6-3 Distillers Wet Grain.............................................................................................................. 6-5 CO2 Markets ......................................................................................................................... 6-5 Conclusion for Co-Products ................................................................................................. 6-6 VII. OVERVIEW OF ETHANOL TECHNOLOGIES...................................................... 7-1 Technology Supply and Construction Services.................................................................... 7-3 VIII. PROJECT STATISTICS ....................................................................................... 8-1 Ethanol Plant Statistics ......................................................................................................... 8-1 Personnel Requirements ....................................................................................................... 8-2 IX. FINANCIAL ANALYSIS ......................................................................................... 9-1 Assumptions Used in the Financial Forecast........................................................................ 9-1 Economic Modeling Results................................................................................................. 9-4 State Incentives..................................................................................................................... 9-7 Sensitivity and Breakeven Analysis ..................................................................................... 9-7 Capital Cost Sensitivity ........................................................................................................ 9-8 X. PROJECT FINANCING ......................................................................................... 10-1 Commodity Credit Corporation Program ........................................................................... 10-1 Comments on Profitability and Economic Forecasts.......................................................... 10-1 Risk Factors ........................................................................................................................ 10-2 XI. CONCLUSIONS AND RECOMMENDATIONS .................................................... 11-1 APPENDIX A: Site Evaluation Matrices ................................................................... A-1 APPENDIX B: Financial Forecast – 100 MMGY Plant in Stuttgart ......................... B-1

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List of Tables Table 1-1 – Financial Modeling Results...................................................................................... 1-5 Table 3-1 – Ethanol rail shipment analysis.................................................................................. 3-8 Table 3-2 – DDGS rail shipment analysis ................................................................................... 3-9 Table 3-3 – Summary of Site Analysis Scores .......................................................................... 3-12 Table 4-1 – Composition and Yields for Corn............................................................................. 4-1 Table 4-2 – Grain Requirements Versu Ethanol Plant Capacity ................................................. 4-1 Table 4-3 – Annual Corn Price Variation: Pine Bluff, AR.......................................................... 4-8 Table 4-4 – Annual Corn Price Variation: Stuttgart, AR............................................................. 4-8 Table 4-5 – Annual Corn Price Variation: Helena, AR ............................................................... 4-9 Table 4-6 – Best Markets for Rail Delivery to Pine Bluff, AR ................................................. 4-17 Table 4-7 – Best Markets for Rail Delivery to Stuttgart, AR .................................................... 4-17 Table 4-8 – Best Markets for Rail Delivery to Helena, AR....................................................... 4-17 Table 4-9 – Best Markets for Barge Delivery to Pine Bluff and Helena, AR ........................... 4-18 Table 4-10 – Net Corn Supplies Within Driving Miles of PineBluff, AR ................................ 4-19 Table 5-1 – Ethanol and Gasoline Use in Arkansas and Neighboring States.............................. 5-9 Table 5-2 – Missouri and Tennessee Ethanol Plants ................................................................... 5-9 Table 5-3 – Basis for Ethanol Pricing 100 mmgy Plant ............................................................ 5-10 Table 5-4 – Ethanol Shipping Costs from Stuttgart................................................................... 5-12 Table 6-1 – Typical Corn DDGS Composition ........................................................................... 6-1 Table 8-1 – Ethanol Plant Statistics ............................................................................................. 8-1 Table 8-2 – Personnel Requirements for Dry Mill Gallon Plant ................................................. 8-2 Table 9-1 – Assumptions Used In the Financial Forecast ........................................................... 9-3 Table 9-2– Stuttgart Ethanol, LLC Project Capital Cost Estimate .............................................. 9-4 Table 9-3 – Financial Modeling Results...................................................................................... 9-5 Table 9-4– Income Statement for Year 2..................................................................................... 9-6 Table 9-5 – Sensitivity and Breakeven Analysis for the Stuttgart Ethanol Project .................... 9-9

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List of Figures Figure 1-1 – Project Structure Diagram....................................................................................... 1-7 Figure 3-1 – Study Area............................................................................................................... 3-1 Figure 3-2 – Location of the Site in the Port of Pine Bluff.......................................................... 3-2 Figure 3-3 – Proposed Site in the Port of Pine Bluff Harbor Industrial District ......................... 3-2 Figure 3-4 – Panoramic Photo of the Pine Bluff Site (View of Tyson's Mill to the NEast)........ 3-3 Figure 3-5 – Panoramic Photo of the “Front 20” of the Pine Bluff Site (View to the West) ...... 3-3 Figure 3-6 – Panoramic Photo of the “Back 20” at the Pine Bluff Site (View to the SWest) ..... 3-3 Figure 3-7 – Proposed Site in Stuttgart Industrial Park ............................................................... 3-4 Figure 3-8 – Location of Proposed Stuttgart Site ........................................................................ 3-4 Figure 3-9 – Panoramic Photo of the Stuttgart Site (Looking Southeast) ................................... 3-5 Figure 3-10 – Panoramic Photograph of the Stuttgart Site (Looking Southwest) ....................... 3-5 Figure 3-11 – Photo of Eastern 1100-Acres in Helena Harbor Ind. Park .................................... 3-6 Figure 3-12 – Photo of Eastern 1100-Acres in Helena Harbor Industrial Park Rail Line ........... 3-6 Figure 3-13 – Photo of Potential Site near Bridge Crane under Construction............................. 3-6 Figure 3-14 – Photo of Potential Site near Rail Looking Southwest........................................... 3-7 Figure 3-15 – Photo of Gas Main and Rail Line in Background ................................................. 3-7 Figure 3-16 – Electrical Transmission Lines near Rt. 20 ............................................................ 3-7 Figure 4-1 – Total Corn Supplies for Stuttgart-Pine Bluff-Helena, AR Region ......................... 4-2 Figure 4-2 – Corn Net Supplies for Stuttgart-Pine Bluff-Helena, AR Region ............................ 4-3 Figure 4-3 – Local Production – Pine Bluff................................................................................. 4-3 Figure 4-4 – Local Production – Stuttgart .................................................................................. 4-4 Figure 4-5 – Local Production – Helena...................................................................................... 4-4 Figure 4-6 – U.S. Corn Production .............................................................................................. 4-5 Figure 4-7 – U.S. Corn Utilization............................................................................................... 4-6 Figure 4-8 – Proximity of Existing Ethanol Plants to the Stuttgart Site...................................... 4-7 Figure 4-9 – 10-Year Average Seasonal Corn Price in Pine Bluff, AR ...................................... 4-9 Figure 4-10 – 10-Year Average Seasonal Corn Price in Stuttgart, AR ..................................... 4-10 Figure 4-11 – 10-Year Average Seasonal Corn Price in Helena, AR........................................ 4-10 Figure 4-12 – 10-Year Average Corn Price............................................................................... 4-11 Figure 4-13 – 10-Year Average October Corn Price ................................................................. 4-12 Figure 4-14 – 10-Year Average October Corn Basis................................................................. 4-12 Figure 4-15 – 10-Year Average February Corn Price ............................................................... 4-13 Figure 4-16 – 10-Year Average February Corn Basis ............................................................... 4-13 Figure 4-17 – 10-Year Average June Corn Price....................................................................... 4-14 Figure 4-18 – 10-Year Average June Corn Basis ...................................................................... 4-14 Figure 4-19 – Price Spread between Pine Bluff, AR and Fall Creek, WI ................................. 4-16 Figure 4-20 – Grain Terminals on the Mid and Upper Mississippi........................................... 4-18 Figure 4-21 – Corn Sourcing by County-Pine Bluff, AR .......................................................... 4-20 Figure 4-22 – Corn Sourcing by County-Stuttgart, AR............................................................. 4-20 Figure 4-23 – Corn Sourcing by County-Helena, AR ............................................................... 4-21 Figure 5-1 – Worldwide Ethanol Production (000 Liters)........................................................... 5-1 Figure 5-2 – Worldwide Ethanol Production by Continent ......................................................... 5-2 Figure 5-3 – U.S. Ethanol Production and Use............................................................................ 5-4 Figure 5-4 – Fuel Ethanol Plants and Projects in the U.S............................................................ 5-4

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Figure 5-5 – Projected Renewable Fuels Growth in the U.S....................................................... 5-5 Figure 5-6– States that have banned MTBE ................................................................................ 5-5 Figure 5-7– Mandates and Potential Mandates for Ethanol......................................................... 5-6 Figure 5-8– States with Production Incentives ............................................................................ 5-6 Figure 5-9 – Regional Ethanol Markets and Ethanol Plants........................................................ 5-8 Figure 5-10 – Historic Relationship between Prices of Oil, Gas, and Ethanol.......................... 5-11 Figure 5-11 – Rack Ethanol Prices Omaha, NE ........................................................................ 5-11 Figure 5-12 – Average Annual Price for Regular Unleaded Gasoline in PADD III ................. 5-12 Figure 6-1 – Cattle within 70 miles of Stuttgart, AR................................................................... 6-3 Figure 6-2 – Historical Pricing of DDGS and Corn .................................................................... 6-4 Figure 6-3 – Historical DDGS pricing for Select National Markets ........................................... 6-4 Figure 7-1 – Flow Diagram for Dry Mill Ethanol Plant .............................................................. 7-2 Figure 9-1 – Industrial Natural Gas Prices in Arkansas .............................................................. 9-3 Figure 9-2 – Effect of Corn Price on ROI.................................................................................. 9-10 Figure 9-3 – Effect of Ethanol Price on ROI ............................................................................. 9-10 Figure 9-4 – Effect of DDGS Price on ROI............................................................................... 9-11 Figure 9-5 – Effect of Natural Gas Price on ROI ...................................................................... 9-11 Figure 9-6 – Effect of Electricity Price on ROI......................................................................... 9-12 Figure 9-7 – Effect of % of Distillers Grains sold Wet on ROI ................................................ 9-12 Figure 9-8 – Effect of Project Capital Cost on ROI................................................................... 9-13

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I. EXECUTIVE SUMMARY Introduction Stuttgart Ethanol, LLC (SELLC) has retained BBI International (BBI) to conduct a study to determine the feasibility of an ethanol plant located in either Helena, Pine Bluff, or Stuttgart, AR. The ethanol plant would be a dry-mill production facility that would produce ethanol, distillers grains and carbon dioxide from local corn. BBI is an independent consulting firm with no vested interest in the proposed project. The information detailed in this report reflects to the best of our ability, a true and accurate evaluation of the current ethanol industry, applicable markets and the feasibility of the project. Several possible sites for the plant were evaluated by BBI with regard to the infrastructure and attributes needed for a modern ethanol plant. Key site evaluation considerations include: • • • • • • •

Grain availability Road, rail and barge access and transportation infrastructure at the site Utilities including electricity, natural gas, water and wastewater disposal Ethanol and co-product market proximity Labor availability Community services such as welding, electrical shop, plumbing, schools, fire protection, hospital and airport Location relative to communities and homes

Historical local corn production and “net exportable” corn were determined for the project; the estimated average price of corn delivered to the site was also determined. BBI also evaluated the local, regional and national ethanol markets and the possible impacts of various market issues on the project. Local and regional markets for distillers grain and carbon dioxide were also evaluated. The feasibility study considered a dry mill ethanol plant with a capacity of 100 million gallons per year (mmgy). The cost and performance of the plant is based on a state-of-the-art plant built by one of the leading U.S. design/build firms. Site Evaluation and Recommendation The site evaluation indicates that all three sites are excellent sites with the necessary attributes for an ethanol plant. However, the Pine Bluff site is too small to support a 100 mmgy plant with the necessary rail sidings. In the site evaluation, the Helena/Phillips County Port Authority site scored slightly higher than the Stuttgart Industrial Park site, mainly due to the advantage of barge shipments at the Helena site. Currently, another group is working to secure the Helena site, and thus, this site may not be available. The Stuttgart site is therefore the primary focus of this analysis, although Stuttgart Ethanol, LLC should work to secure the Helena site should the other group fail to secure the site in the Phillips County Port Authority. The site development costs for

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the two locations may be slightly different – a rail spur would have to be added in Stuttgart, while a dock and barge loading/unloading equipment would need to be installed at Helena. Therefore, BBI recommends that SELLC pursue both the Stuttgart Industrial Park site and the Phillips County Port Authority site in parallel, focusing on the Stuttgart site, until one site or the other distinguishes itself in price, availability, or proximity to the natural gas and electrical transmission lines, as well as the water and sewer infrastructure. If the competing project fails to secure the Phillips County Port Authority site, SELLC should move to acquire it. BBI also makes the following recommendations regarding siting of the project: • • •

Ascertain the level of acceptance of the project by the city and community. Investigate the exact nature, availability and amount of local, state and federal tax incentives that may be available to the project. Have the three sites evaluated by an ethanol process design company from an engineering and construction perspective. There should be no cost for this “second” opinion.

Feedstock Supply This region of Arkansas has insufficient grain to support a 100 MMGY plant at any of the three proposed sites. A 100 MMGY plant would require 39 million bushels of corn annually, while the farms in a 50 mile radius surrounding the three sites could only supply 2.6 to 9.2 million bushels of corn, after accounting for feed uses. The plants would consequently need to rely on rail or barge shipments to secure sufficient corn. Plants in Pine Bluff and Stuttgart would only obtain 16 to 20% of their corn locally, with the balance brought in by rail. A plant in Helena would obtain 10% of its corn locally, and 90% would be brought in by barge. The ten-year average price for corn has ranged from $2.31/bu in the region surrounding Stuttgart, to $2.32/bu and $2.35/bu in the regions surrounding Pine Bluff and Helena, respectively. A 100 mmgy plant in Stuttgart or Pine Bluff would create a basis impact of $0.29/bu, while a plant in Helena would create a $0.17/bu basis impact. If all of the plant’s corn were sourced by truck, the basis impact could be even greater, reaching $0.64/bu. The resulting price for corn will thus range from $2.52/bu to $2.61/bu, taking into account the ten year average cash corn price in the local area and the $0.17/bu or $0.29/bu basis impact. A price of $2.52 per bushel was used for the financial analysis for the Helena site, and a price of $2.60/bu was used to evaluate the Stuttgart site. A sensitivity analysis was performed to establish the impact of corn price on the financial returns for the plant. The significant seasonal variations in corn price also imply that it may be valuable to install additional on-site grain storage, allowing more grain to be purchased in the fall, when prices are low.

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Ethanol Market The national demand for ethanol is growing at a very rapid rate and the market is expected to nearly double in size in the next few years. The strong market growth is being driven by the phase out of the oxygenate MTBE and the price of ethanol relative to gasoline. Historically, only limited quantities of ethanol have been consumed in Arkansas. In the surrounding regional market, which includes Missouri, Texas, Illinois, and Indiana, ethanol consumption has grown steadily, averaging 575 million gallons per year from 2000 to 2004, while reaching 735 million gallons in 2004. The regional market potential based on an E10 blend is nearly 4 billion gallons, with Arkansas contributing 150 million gallons to this total. There are currently four ethanol plants in Missouri and Tennessee with a combined annual production capacity of 162 million gallons. Plants in the regional market, including Illinois and Kansas, have total production capacities nearing 1 billion gallons per year. The proposed ethanol plant is well-positioned to serve the local Arkansas and northwestern Mississippi markets, as well as ethanol markets in Tennessee, Missouri, Texas and on the gulf coast. Ethanol use in Louisiana is about 50 million gallons per year, and there are significant opportunities for growth in Alabama, Louisiana, Mississippi, Texas, and Tennessee. The ability to divide product effectively between local, regional and national markets is extremely important - so much so that it is imperative that either an experienced marketer is hired, or the ethanol marketing be contracted to a broker or a cooperative marketing group. The best scenario for the Stuttgart Ethanol, LLC plant would be to supply ethanol locally within Arkansas, while developing local and regional markets, particularly to the south, where there is little competition. Memphis would be within the local market for the plant; developing the market to serve Memphis and other major municipalities in Tennessee would be advantageous. For a 100 mmgy plant, BBI estimates that 20 to 30% of the plant’s ethanol could be sold to local markets, 40% would be sold regionally, and the balance would be sold to East Coast markets. The average shipping cost for this scenario is estimated to be $0.08 per gallon of ethanol, falling to $0.060 per gallon if barge transportation is used for national markets. Ethanol prices are normally equal to the rack or wholesale price of unleaded gasoline, plus the 51¢ per gallon Federal Excise Tax Exemption for ethanol blends. The resulting price may be higher or lower to account for ethanol supply and demand in local and regional markets. The 5-year average spot ethanol prices in the local, regional and East Coast markets were used to establish a weighted average price for ethanol sold by the plant. For a 100 mmgy plant, the weighted average price is $1.468 per gallon. Based on historical pricing trends in the projected target markets, the price of ethanol used in the financial analysis is $1.46 per gallon, with a weighted transportation cost of $0.06 to $0.08 per gallon. A marketing fee of 1¢/gallon will also be deducted from the ethanol price in the financial analysis.

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Coproducts Coproducts produced by a dry mill ethanol plant with corn as the feedstock include distillers grains and carbon dioxide. The distillers grain will be sold to local cattle either wet or dry and to more distant cattle, poultry and swine markets as dry DDGS. The primary uses of carbon dioxide include the carbonation of beverages and food processing. Total cattle production in Arkansas averaged 1.8 million head of cattle from 2001 to 2006, with approximately 944 thousand head of beef cows and 35,000 dairy cows. In the 70-mile radius around Stuttgart, there are 234,000 head of cattle (6 year average). For the proposed ethanol project, there are sufficient numbers of livestock in the local market to support selling some DWG, but the market would have to be developed. Therefore, the financial analysis for the plant is based on initially selling all of the distillers grain dry. Although the potential local market is substantial, regional markets for DDGS are significant and should be developed with the aid of a DDGS marketing company. For the financial projections, the DDGS price was set equal to the price of corn on a dry weight basis and the DWG price was set at 96% of the corn price on a dry weight basis. With corn at $2.60 per bushel, the resulting DDGS price is $98.32 per ton and the DWG price is $36.32 per ton. Revenue from CO2 sales typically has only a minor impact on an ethanol plant’s revenue (2 or 3%). CO2 manufacturing and marketing companies could be pursued in the project development stage to gauge their interest, but CO2 sales will not be included in the feasibility study financial forecast. Financial Forecast Various scenarios were evaluated using the financial model, comparing the Stuttgart and Helena sites for a 100 mmgy ethanol plant. Financial forecasts were based on historical average prices for ethanol and corn, which, correspond to $1.46/gallon, and, including a basis adjustment and shipping, $2.52/bu for the Helena site, and $2.60/bu for the Stuttgart site, respectively. Financial analyses do not include any state incentives. Pre-tax average annual Return on Investment (ROI) and Internal Rate of Return (IRR) were used to measure the projected profitability of the Stuttgart Ethanol, LLC project. The results are summarized in Table 1-1. The ROI is the average of the return for the 11 years of the financial forecast including the construction year. More detailed results are shown in the financial analysis section and the complete 10-year economic forecasts for the project are included in Appendix B. The corresponding IRRs are also shown in Table 1-1. The IRR is based on the cash flows consisting of the equity investment at the start of construction followed by the net increase in cash at the end of years 1 through 11. In year 11, we have assumed that the plant is sold for 4 times the previous year’s EBITDA. The equity investment is assumed to be 40% of the total project cost. The cash flows are shown in the Proforma Statements of Cash Flows in Appendix B.

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Table 1-1 – Financial Modeling Results Stuttgart Ethanol Project 11-year Average Annual ROI Internal Rate of Return Average Annual Income Installed Capital Cost ($/gal) Plant Capital Cost Owner's Costs Total Project Investment 40% Equity

100 mmgy Stuttgart 32.4% 33.2% $17,877,000 $1.15 $114,950,000 $23,005,000 $137,955,000 $55,182,000

100 mmgy Helena 35.9% 35.8% $19,829,000 $1.15 $114,950,000 $23,005,000 $137,955,000 $55,182,000

Another method BBI uses to measure projected profitability is the average annual pre-tax Return on Investment (ROI) for the 11-year financial forecast. In general, BBI use a hurdle rate of 25% average annual pre-tax ROI for ethanol project go/no go recommendations. BBI uses the following guidelines for determining the feasibility of a project and as a guideline for determining if a project will be able to compete in today’s competitive ethanol industry. Average Annual ROI (40% equity) Less than 20% 20% to 24% 25% to 29% 30% and higher

Competitive Status of the Project project is typically not worth pursuing less than average project – needs improvement a good project – should be able to compete an excellent project

The above scale is based on BBI’s methods and history of evaluating over 75 ethanol projects. This scale should not be used for financial projections done by others. Also as projects progress, the assumptions used in the financial analysis may change and the resulting projected returns may change significantly. The financial analysis established that a 100 mmgy facility at either Stuttgart or Helena would be viable, based on a corn purchase price of $2.52 – 2.60/bu, and an ethanol selling price of $1.46/gallon. The Stuttgart plant has an ROI of 32%, and is considered an “excellent” project based on the criteria listed above. The Helena plant has a slightly higher ROI – 35% - due to the lower feedstock cost resulting from grain shipments by barge. Sensitivity analyses also demonstrated that the plant would be cash-flow positive if ethanol prices dropped as low as $1.28/gallon with corn at $2.60/bu, and corn prices as high as $3.05/bu with ethanol at $1.46/gallon. The relatively narrow window for positive cash-flow is due to the comparatively higher feedstock prices in the region. The total project investment for a 100 mmgy plant is $138 MM, requiring an equity investment of $55 MM.

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Recommendations Given the expected growth and vitality of the ethanol industry and the strength of the financial projections, the Stuttgart Ethanol, LLC project is a viable opportunity to add value to agriculture and the economy in Arkansas. Although the region does not produce a significant quantity of corn, it is still relatively economical to bring in corn by rail and by barge. Furthermore, the plant would have ready access to a growing ethanol market in the southern U.S, and thus, the ROI is sufficient to classify the project as an excellent one. If the decision is made to proceed with further development of the project, Stuttgart Ethanol, LLC and its partners should focus their efforts on (1) developing a corn supply and procurement plan for the project, (2) developing the required marketing relationships for ethanol and distillers grain, and (3) developing a risk management strategy for the operation of the plant. Special emphasis should be placed on the issues that have the greatest impact on the project profitability: maximizing revenue from ethanol and distillers grain, reducing grain shipping and handling costs, and obtaining or natural gas, water and electricity at favorable long-term rates. Next Steps The major activities and issues for the project that must be addressed as the project moves forward after the feasibility study include the following: • • • • • • • • • • • • • •

Project Leadership and establishment of an ownership group Project Management Team and Advisors Debt and Equity Plans and Contingency Plans Utility Supply Negotiations Site Purchase Agreement Design-Build Contract Permits Corn Procurement Plan Ethanol Marketing and Market Development Plan Distillers Grain Marketing and Market Development Plan Utility Contracts Risk Management Plan Equity Capitalization Senior Lender

The recommended project structure is shown in the following figure. This diagram shows all of the key contracts and relationships that must be developed prior to financial close.

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Figure 1-1 – Project Structure Diagram

Project Structure Ethanol Marketer DDGS Marketer

EPC Contractor Grain Procurement

CO2 Contract Legal Counsel Utility Contracts

Stuttgart Ethanol, LLC

Permitting

Rail Contract

Plant Management

Energy Management Risk Management

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II. PROJECT OVERVIEW Purpose of Study Stuttgart Ethanol has retained BBI International (BBI) to conduct a study to determine the feasibility of an ethanol plant located in the area of Pine Bluff, Stuttgart and Helena, Arkansas. The purpose of the feasibility study is to examine the site specific criteria relating to the siting and financial performance of the proposed plant, and to generate a financial model that will estimate the economic robustness of the potential business. Based on the results of the report, Stuttgart Ethanol will then be able to decide whether or not to proceed with the development of the project. BBI is an independent consulting firm with no vested interest in the proposed project. The information detailed in this report reflects to the best of our ability, a true and accurate evaluation of the current ethanol industry, applicable markets and the feasibility of the project. Scope of Work The ethanol facility is envisioned to be a state-of-the-art dry-mill ethanol plant with a nameplate capacity of 100 million gallon per year (mmgy). The plant would produce fuel ethanol, distillers grains and carbon dioxide from corn feedstock. Thermal energy for the production of steam and drying distillers grain would be provided by either natural gas. This full feasibility study makes an evaluation of the following areas: • Review and assess the project site including o Transportation o Utilities o Water o Land Cost o Roads o Wastewater disposal o Site location relative to communities o Numerical ranking of site attributes o Required State and Federal permits o Site recommendation • Appraisal of feedstock availability and price • Review of fuel ethanol markets including o Local o Regional o National • Review of the co-products, their markets, and feasibility of servicing those markets including o Dried Distillers Grain and Solubles (DDGS) o Distillers Wet Grain (DWG) o Carbon Dioxide (CO2) • Overview of the dry mill ethanol technology

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Description of project statistics including o Plant inputs o Plant outputs o Transportation o Energy demands o Personnel requirements Develop a Financial Model, including a construction budget, interim funding schedule and a ten-year operating forecast Sensitivity analyses Executive summary and recommendations

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III. SITE ASSESSMENT Study Area The proposed project area is eastern Arkansas and there are three sites under consideration, one in each of the three towns of Pine Bluff, AR, Stuttgart, AR and Helena-West Helena, AR (Figure 3-1). Figure 3-1 – Study Area

The three sites under consideration for the proposed Stuttgart Ethanol LLC (SELLC) ethanol plant are shown in Figures 3-2 to 3-6 on the following pages. Site 1: The Port of Pine Bluff Industrial Harbor District Site The first site BBI visited was in the Port of Pine Bluff Harbor Industrial District. The site is a 39acre parcel within the harbor industrial park. The site is flat and already graded. The site is bordered on the south by a working siding off the mainline UP; UP has a very large maintenance and switching yard located within 1 mile of the site, and a reciprocal switching agreement with the BNSF. The site is bordered on the north by the slackwater bay that is part of Lake Langhofer, providing direct access to the Mississippi River via the extensive barge system that runs through Arkansas. The site is bordered on the west by an industrial facility operated by Allied Tube and Conduit; on the east the site is bordered by The Strong Company, Inc. a distributor of vermiculite and other aggregate products. BBI INTERNATIONAL

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Figure 3-2 – Location of the Site in the Port of Pine Bluff

Figure 3-3 – Proposed Site in the Port of Pine Bluff Harbor Industrial District

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The Strong Co. has indicated an interest in sharing the cost of installing a barge facility with SELLC, should the Pine Bluff site be selected for the ethanol plant. There is a Tyson feed mill located two parcels away. A 4”, low pressure gas main is available, however a 100 mmgy fuel ethanol plant will require additional capacity via a larger or high pressure main. An on-site substation provides access to a 13.8kV electrical transmission line. A 12” water main is available, as are 15” and 18” municipal sewer mains. Figure 3-4 – Panoramic Photo of the Pine Bluff Site (View of Tyson's Mill to the NEast)

Figure 3-5 – Panoramic Photo of the “Front 20” of the Pine Bluff Site (View to the West)

Figure 3-6 – Panoramic Photo of the “Back 20” at the Pine Bluff Site (View to the Southwest)

Site 2: Stuttgart Industrial Park Site The second site BBI visited was in Stuttgart, AR, in an industrial park owned by the Stuttgart Industrial Development Corporation (Figure 3-7). There are 227 acres available at the proposed site that is currently being used to grow rice. Immediately north of the site is a soybean solvent BBI INTERNATIONAL

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extraction plant operated by the soy division of Riceland Foods. The site has access to the UP mainline rail, and Class A roads; a source of municipal water, sewer lines, natural gas and electricity are all located within 100-600 feet of the site and will require minor extensions to service the proposed site. A higher capacity natural gas line will be required. Pictures of the site are shown in Figures 3-8 to 3-10. Figure 3-7 – Proposed Site in Stuttgart Industrial Park

Figure 3-8 – Location of Proposed Stuttgart Site

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Figure 3-9 – Panoramic Photo of the Stuttgart Site (Looking Southeast)

Figure 3-10 – Panoramic Photograph of the Stuttgart Site (Looking Southwest)

Site 3: The Port of Phillips County Site, Helena-West Helena, AR The third site BBI visited was in the Phillips County Port Authority near Helena-West Helena, AR. Pictures of the site are shown in Figures 3-11 to 3-14. The Phillips County Port Authority has developed a 2.3 mile long slackwater harbor and industrial park complex. The adjoining Helena Harbor Industrial Park has rail service, natural gas, electrical power and water utilities. Approximately 4000 acres of publicly owned, flood protected land are available for industrial development. Currently there is just one commercial operation in the industrial park. The site is protected by a series of levees that are graded 1-ft above the 100-year floodplain. The site is serviced by a shortline rail spur owned by the port and operated under contract by the local shortline rail. In addition to road and rail access, the port has a slackwater harbor channel with a 9-ft draft that connects directly to the Mississippi River; the port is currently installing a 60-ton bridge crane capable of unloading river barges. In addition to being served by three alternate modes of transportation, the site has all utilities available at the site. There is a 10” high pressure natural gas main available that provides access to four natural gas suppliers (Figure 3-15). The site also has access to 13.8 kVa electrical service (Figure 3-16), a source of municipal water as well as the potential to drill new wells, and the port has indicated a willingness to install wastewater service as required for the plant. Land application and discharge to surface waters may also be possible with the appropriate permits. BBI INTERNATIONAL

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Figure 3-11 – Photo of Eastern 1100-Acres in Helena Harbor Ind. Park (Looking Southeast toward Levee)

Figure 3-12 – Photo of Eastern 1100-Acres in Helena Harbor Industrial Park Rail Line from Levee (Looking West)

Figure 3-13 – Photo of Potential Site near Bridge Crane under Construction (Looking Southwest toward Mississippi)

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Figure 3-14 – Photo of Potential Site near Rail Looking Southwest

Figure 3-15 – Photo of Gas Main and Rail Line in Background

Figure 3-16 –Electrical Transmission Lines near Rt. 20 at Northern Boundary of Industrial Park

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Site Evaluation Criteria Below is a discussion of each of the key items that determine the suitability of an ethanol plant site. A more detailed review of the availability of feedstock and the ethanol and co-product markets occurs in following sections of this report. Each of the key site attributes received a score and the site evaluation scores follow the discussion below. The plant inputs and outputs discussed are typical for a 100-mmgy dry-mill fuel ethanol plant. Each site’s score is presented at the end of this section rather than during the discussion of each criterion. Feedstock Proximity The proximity of feedstock is an important component of the site evaluation as well as the overall feasibility of an ethanol plant. Reviewed briefly here, an in-depth discussion and analysis of the availability of feedstock is in the Feedstock section of this report. Feedstock proximity takes into account the plant’s feedstock requirement and the feedstock production within various distances. The feedstock requirement for a 100-mmgy plant is approximately 36 million bushels of corn per year. The surrounding area needs to have at least twice as much production as the plant’s requirement in order for the plant to be able to source all of its corn locally. Production numbers are county 10-year production averages from USDA NASS. 10 points are possible in this section. Transportation Access to Class A roads is an important requirement for an ethanol plant. Feedstock is typically delivered by truck; the product or co-products may be shipped to market by truck. Access to rail provides an important and possibly primary mode of transportation for receiving feedstock and shipping product to more distant markets. Rail access can be a distinct advantage over other plant sites, and while a site on a mainline rail line is generally better than a location on a short line rail line, there can be advantages to a short line. Access to two mainlines is a great advantage when it comes to negotiating transportation rates. Access to barge provides yet another alternative model of transportation for feedstocks and products. The site evaluation matrix factors in these considerations and reflects them in the scoring for the site. 8 points are possible in this section. Rail Access and Siding BBI evaluated the adequacy of the proposed sites with respect to rail access and the amount of rail siding required for receiving feedstock and shipping the plant’s ethanol and DDGS to market. An analysis of the ethanol rail shipments for a 100-mmgy plant is in Table 3-1. To determine the amount of rail siding required, BBI assumes that all of the ethanol ships by rail and that five days of loaded ethanol rail car storage is needed at the plant. At 100-mmgy, the ethanol plant will produce about 284,000 gallons of denatured ethanol daily. An ethanol rail car holds about 30,000 gallons, filling an average of 9.4 rail cars each day. Therefore, five days of storage requires 48 rail cars. Recommended loaded ethanol rail car storage is 50 cars. Empty ethanol rail car storage capacity should be twice loaded storage or 100 cars. BBI INTERNATIONAL

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Table 3-1 – Ethanol Rail Shipment Analysis (100-mmgy plant) ETHANOL RAIL SHIPMENTS Annual ethanol production, gal Production days per year Daily ethanol production, gal Rail car capacity, gal Rail cars per day Days rail car storage needed # loaded rail car storage needed Loaded ethanol rail car storage recommended Empty ethanol rail car storage recommended

100,000,000 353 283,286 30,000 9.4 5 47 50 100

An analysis of the rail shipping of distillers dried grain and solubles (DDGS) for a 100-mmgy plant is in Table 3-2. To determine the required rail siding for DDGS, BBI assumes that all of the DDGS ship by rail (at least initially) and that four days of loaded DDGS rail car storage is at the plant. BBI also assumes that the plant produces 18 pounds of DDGS from each bushel of corn processed. At 100-mmgy, the ethanol plant will produce about 322,000 tons of DDGS annually or nearly 910 tons each day. A DDGS rail car will hold 100 tons, filling 9.2 rail cars on average each day. Four days of storage requires 37 rail cars. The recommended number of loaded rail car storage is 40 cars. Recommended empty DDGS rail car storage capacity is 40 cars. Table 3-2 – DDGS Rail Shipment Analysis (100-mmgy plant) DDGS RAIL SHIPMENTS Annual DDGS production, tons Production days per year Daily DDGS production, tons Rail car capacity, tons Rail cars per day Days rail car storage needed # loaded rail car storage needed Loaded DDGS rail car storage recommended Empty DDGS rail car storage recommended

321,428 353 910 100 9.1 4 37 40 40

The longest siding would be for the 100 empty ethanol cars. Each car is approximately 65 feet long, and so this siding would be 6,500 feet, with 100 feet added to each end to clear the switch. The actual rail siding layout is usually the responsibility of the ethanol design firm, the railroad, and the rail-yard design company. 25 points are possible in this section.

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Electrical Service Based on a typical electrical energy input requirement of 0.75 kWh per gallon of anhydrous ethanol produced, a 100-mmgy plant will require approximately 8.8 MW of power, or 76,000,000 kWh per year (assuming 90% capacity factor). A site with an existing electrical supply (substation with adequate capacity), or one adjacent to a transmission or distribution line, has an advantage over a Greenfield site located miles from a power line. 8 points are possible in this section. Natural Gas Most ethanol plants use natural gas to generate process steam and to fire the direct-fired distillers grain dryers. Natural gas use is typically about 34,000 BTUs for each gallon of 200-proof ethanol produced with drying the distillers grains. A 100-mmgy ethanol plant requires about 400,000 cubic feet of natural gas per hour. The plant operates 24 hours a day, about 350 days per year. Natural gas typically comes from a large gas transmission line with the ethanol plant installing a new line to the gas source, or from an existing gas distribution line with distribution costs paid to the local gas company. Either way, the natural gas is purchased on the open market with transmission fees paid to the transmission pipeline company and then distribution costs paid to the local gas company if local distribution lines are utilized. The transmission and distribution costs are usually negotiable. 17 points are possible in this section, accounting for service availability and proximity. Water There are three basic sources of water used for ethanol plants: well water, municipal or district water, and surface or river water. Most plants use well water due to their rural location. Over the long term, well water is often less expensive. Cost of drilling, quality of well water, and longterm supply are important considerations when considering a water supply. The second option as a water source is city water or a rural water district, which may provide a more reliable source of water, but usually at a higher cost. The third option is surface or river water if a reliable source is available nearby. Water quality and long-term supply are important considerations just as they are with well water. The factors driving the choice of water supply are reliability, water quality, and price. With municipal or city water supply, special water conditioning systems are usually not required; reducing capital cost. Water requirements for a 100-mmgy ethanol plant are about 840 gallons per minute (1,200,000 gallons per day) depending on the design of the plant and the quality of the makeup water. 7 points are possible in this section. Wastewater Today’s ethanol plants typically do not discharge process water; they recover and recycle it in the dry-mill process. Most plants do have utility blow-downs where water periodically discharges from the cooling tower and steam boiler to prevent scale buildup in the equipment. There may also be wastewater discharged from makeup water treatment equipment, such as a BBI INTERNATIONAL

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reverse osmosis system. The blowdown water is typically very similar to the makeup water, but with an increase in the hardness. Cooling tower and boiler blowdown typically meet the discharge requirements for release to a local sewer, to surface water with appropriate permits, or to an evaporation pond. The wastewater can also be used for irrigation of crops or landscaping. 7 points are possible in this section. Ethanol Market Proximity A large local ethanol market provides a distinct advantage for an ethanol plant through lower shipping costs. Local, regional, and national markets for ethanol are differentiated by distance and transportation cost. Local markets are within 150 miles and are usually serviced by truck. Regional markets are generally considered to be within 450 miles and are serviced by truck and rail. National markets are more than 450 miles away and utilize rail. 10 points are possible in this section. Co-product Market Proximity A large local market for the plant’s co-products can provide a distinct advantage for an ethanol plant through lower transportation costs. Approximately 18 pounds of DDGS are produced from each bushel of grain processed. If the plant is located near a significant number of feedlots, livestock operations, or dairies, the plant may be able to reduce or eliminate the drying step and sell its distillers grains as distillers wet grains (DWG). While this reduces the plant’s natural gas consumption by up to one-third, it results in a perishable product that needs to be sold immediately (within one week). 10 points are possible in this section. Labor Availability The exact number of employees varies depending on the plant design and operating plan. It is usually preferable for the plant to obtain the majority of its workforce locally. However, the specialty positions such as the plant manager and microbiologist may require recruiting from greater distances. 7 points are possible in this section. Community Services Community services within 20 miles of the processing plant site are important to provide quick response to the needs of the plant and to attract and retain top employees. Desirable community services include electrical maintenance, machine shop, welding, plumbing, hospital, airport, good schools, and fire protection. 35 points are possible in this section. Proximity to Communities Ethanol plants bring numerous benefits to communities including job creation, adding value to local crops with diversified products, increased local tax revenues, and significant economic development across the community. There are, however, potential negative impacts associated with such facilities as well, such as increased traffic volume, visual impacts, and noise. While noise and odors from modern processing facilities are dealt with using engineering controls and BBI INTERNATIONAL

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operating procedures, issues such as traffic and visual impacts on the community must be considered during site selection. In the context of site evaluation, a site in close proximity to a community or residential area will receive a lower score than a site located in a more isolated or industrial area or with a “buffer” of undeveloped land between it and its neighbors. 6 points are possible in this section. Site Evaluation Results BBI examined each of the candidate sites and rated them using the BBI Site Evaluation Matrices, included in Appendix A. A summary for each category is shown in Table 3-3, below. A score of 105 to 130+ is excellent, 90 to 104 points indicates a good site, and less than 90 indicates a marginal site. The site evaluation score is an indication of the suitability of a site; it is not a measure of the overall economic feasibility of the proposed project. Table 3-3 – Summary of Site Analysis Scores Site Characteristic Feedstock Proximity Proximity of Communities Rail & Barge Existing Rail Siding Roads/Highways Electricity Natural Gas Water Wastewater Discharge Co-product Market Proximity Labor Availability Ethanol Market Proximity Community Services Within 20 Miles TOTAL:

Pine Bluff 2 6 18 7 8 8 14 7 7 1 7 2 35 122

Stuttgart 2 6 10 0 6 8 14 7 7 1 7 2 35 105

Helena Harbor 2 6 18 0 6 8 17 7 5 1 7 2 35 114

RATING 105 to 130+ – Excellent 90 to 104 – Good Less than 90 – Marginal to Poor Based on these results, any of the three sites would be an excellent location for a fuel ethanol plant.

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Required State and Federal Permits The following is a list of permits normally required for an ethanol project. However, the size and design of the ethanol plant, the method of steam and power generation, and local permitting requirements ultimately affect the actual permits required. Federal Permits Clean Air Act • Prevention of Significant Deterioration (PSD) and Construction Permits • Applicable Federal New Source Performance Standards (NSPS) • Applicable National Emission Standards for Hazardous Air Pollutants (NESHAPS) • Title V Operating Permit of the Clean Air Act Amendments of 1990 • Risk Management Plan Clean Water Act • National Pollutant Discharge Elimination System (NPDES) • Oil Spill Prevention and Control Countermeasures Comprehensive Environmental Response Compensation and Liability Act & Community Right to Know Act (CERCLA/EPCRA) • Tier II Forms – listing of potentially hazardous chemicals stored on-site • EPCRA Section 313 and 304 and CERCLA Section 103 track use and release of regulated substances above threshold and/or designated quantities annually. Bureau of Alcohol, Tobacco, and Firearms (BATF) • Alcohol Fuel Permit (AFP) State Permits • • • • • • • • •

Air Quality Permits Storage Tank Permits Water Quality Permits State Liquor License State Department of Motor Fuels State Department of Transportation o Highway Access Permit o Possible Easement rights State Department of Health State Department of Public Service o Boiler License State Department of Natural Resources o Water appropriation permits

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o Other waters and wetland consideration

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Site Issues and Recommendations Based on the results of the site evaluation and the BBI Site Evaluation Matrix scores, any of the three proposed sites would be suitable for a commercial fuel ethanol plant. Based on the following discussion, BBI recommends the Stuttgart Industrial Park and the Phillips County Port Authority sites for further consideration. The site in the Harbor Industrial District at the Port of Pine Bluff scored the highest site evaluation due to access to transportation by barge and the presence of an existing rail siding. It also has the advantages of immediate local access to the interstate highway system via I-530, as well as municipal water and wastewater service. Unfortunately, the acreage available at the site in the Port of Pine Bluff (39 acres) is too constricted (i.e., too small) to accommodate the unit trains that would be necessary to service a 100 mmgy fuel ethanol plant, so the site is not recommended. The site in the Phillips County Port Authority Industrial Park near Helena-West Helena is the next-highest rated site, again due primarily to the availability of barge access, plus this site has the space required to accommodate a unit train for delivery of feedstock and shipment of products. Were it not for the previously-announced intention of a competing project to site on the same acreage, the site in the Phillips County Port Authority Industrial Park would be highly recommended as an excellent site for the SELLC ethanol project. The site in the Stuttgart Industrial Park is another excellent site for consideration by SELLC. The Stuttgart site has all the requirements for a 100 mmgy fuel ethanol plant; the reasons the Stuttgart site scored lower than the other two sites is the lack of barge access and the lack of an existing rail siding. Were these two attributes present, the Stuttgart site would be essentially equivalent to the Phillips County site, and superior to the Pine Bluff site. Using the matrix’s results, BBI recommends the Pine Bluff, Stuttgart, and Phillip County Port Authority sites. The Pine Bluff site is only large enough to accommodate a 50-mmgy plant. Therefore, BBI recommends the Stuttgart Industrial Park site and the Phillips County Port Authority site as the best options for the siting the proposed plant. Advantages of the sites include access to natural gas transmission lines, rail system, road networks, community support services, and a skilled local labor pool. The Phillips County Port Authority site has the added advantages of the slackwater harbor and the existing rail spur. Unfortunately, another group is already working to secure the site, and the site cannot accommodate two large, competing fuel ethanol plants. Therefore, the Stuttgart Industrial Park site is the best option, assuming the Phillips County Port Authority site is unavailable. And, if it weren’t for the lack of barge access, this would be the superior site for a corn ethanol plant. The lack of barge access is not a fatal flaw, and in fact nearly all operating ethanol plants rely solely on unit trains for BBI INTERNATIONAL

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feedstock delivery and product shipment. Even without barge access, the Stuttgart is an excellent site for a fuel ethanol plant. It is also sufficiently distant from Helena-West Helena (50-miles) to support a second 100 mmgy fuel ethanol plant within the same region. Therefore, BBI recommends that SELLC pursue both the Stuttgart Industrial Park site and the Phillips County Port Authority site in parallel, focusing on the Stuttgart site, until one site or the other distinguishes itself in price, availability, or proximity to the natural gas and electrical transmission lines, as well as the water and sewer infrastructure. If the competing project fails to secure the Phillips County Port Authority site, SELLC should move to acquire it. BBI also makes the following recommendations regarding siting of the project: • • •

Ascertain the level of acceptance of the project by the city and community. Investigate the exact nature, availability and amount of local, state and federal tax incentives that may be available to the project. Have the three sites evaluated by an ethanol process design company from an engineering and construction perspective. There should be no cost for this “second” opinion.

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IV. FEEDSTOCK AVAILABILITY AND PRICE Stuttgart Ethanol, LLC has retained BBI International to conduct a feasibility study to determine the viability of an ethanol plant located near Stuttgart, AR. The present study evaluates the feasibility of a dry-mill fuel ethanol production facility that produces ethanol and distillers grains from local and if necessary, railed-in or barged-in corn. The feedstock analysis takes into account the amount of grain necessary to operate various size ethanol plants, local grain availability and the delivered cost of grain. The recommended site for the project is the Stuttgart Industrial Park or the Phillips County Port Authority. The local feedstock study data presented below are based on a 70-mile radius surrounding the plant sites. Feedstock Requirements The grain analyss evaluates the corn requirements for ethanol plant capacities from 50 mmgy to 100 mmgy. Most design build companies guarantee their plant to produce 2.8 gallons of denatured ethanol per 56 pound bushel of #2 grade yellow dent corn, based on a starch content of 71% by weight (Table 4-1). The production requirements are therefore based on an assumed yield of 2.8 gallons of denatured ethanol per bushel of corn. The resulting corn requirements are shown in table 4-2, below. Table 4-1 – Composition and Yields for Corn Starch (dry basis) 71%

Corn

Protein (dry basis) 9%

Ethanol Yield (gal/bushel) 2.8

DDGS Yield (lb/bushel) 18.0

Corn bushel = 56 lbs, 14% moisture. Ethanol and DDGS yields based on information from ethanol process design companies. Ethanol yield is denatured. DDGS at 10% moisture.

Table 4-2 – Grain requirements versus ethanol plant capacity Ethanol Plant Capacity (mmgy) 50 100

Annual Corn Requirements (millions of bushels) 19.7 39.4

FEED GRAIN SUPPLY AND DEMAND OVERVIEW Local Grain Availability Local grain availability is determined by three factors: production, disappearance, and carryover. Production is simply the amount of feedstock produced each year. These data are readily available from USDA on a county-level basis. Disappearance is based on current uses of the grain. For most grains, there are three major categories for disappearance; animal feed (both on farm and off farm) industrial/commercial, and export. The local grain not used as feed for local livestock or used as feedstock in local industrial and commercial applications is known as “net exportable” corn. Net exportable corn is generally considered what is available for new uses in the local area. The net exportable corn should be at least twice what is required for the ethanol plant to meet the feedstock supply requirements of some lenders. BBI INTERNATIONAL

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Limited quantities of corn are grown near the proposed plants. However, feed use is also relatively low so most of the corn that is grown locally can be used at the proposed ethanol plants, provided the plant can outbid grain outlets along the River. Figure 4-1 below shows the total corn supplies in the area, while Figure 4-2 illustrates the net supply conditions. Net supply, in this case, is total corn production, less the quantity of corn that is being used for feed. Figure 4-1. Total Corn Supplies for Stuttgart-Pine Bluff-Helena, AR Region

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Figure 4-2. Corn Net Supplies for Stuttgart-Pine Bluff-Helena, AR Region

There has been significant variability in local production from year to year largely driven by weather. Production has been relatively high for the past three to four years as favorable weather patterns resulted in above average yields. Local production is the lowest around Pine Bluff, with zero production accounted for in some years (Figure 4-3). Production is higher around the proposed Stuttgart plant (Figure 4-4), and it is highest near the Helena plant, where 18 million bushels were produced in 2003 (Figure 4-5). Low production years, such as 1995 and 1999, can lead to substantially higher local grain prices. Figure 4-3. Local Production – Pine Bluff Annual Corn Production for the Nine County Region Around Pine Bluff, AR

Millions of Bushels

6 5 4 3 2 1 0 1995

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1997

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1999

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Figure 4-4. Local Production – Stuttgart Annual Corn Production for the Eight County Region Around Stuttgart, AR 14

Millions of Bushels

12 10 8 6 4 2 0 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Figure 4-5. Local Production – Helena Annual Corn Production for the Nine County Region Around Helena, AR 20

Millions of Bushels

18 16 14 12 10 8 6 4 2 0 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Nationally As shown in Figure 4-6, U.S. corn production has grown steadily, thanks to innovations in corn production practices and improved genetics. Although U.S. farmers have kept their corn acreage fairly stable over the past 20 years, U.S. corn yield per acre has increased at an average annual rate of 1.5 percent. While the trend over time is for higher yields, significant yield variations occur due to weather and growing conditions. As a result, U.S. corn production can change quite readily from one year to the next.

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Figure 4-6. U.S. Corn Production

Disappearance Long-term growth in corn production has been mostly matched by demand-side growth in animal feed, industrial uses, (ethanol and sweeteners), and export (Figure 4-7). Corn used for feed is by far the largest component of corn demand, and it has grown from 4 billion bushels in the mid-1980s to more than 6 billion bushels by 2004. However, changes in livestock feeding profitability, as well as relative prices of alternative feed stocks, can have an important impact on how much corn is fed each year. Exports also exhibit significant year-to-year variation, although this variability has diminished in recent years. Industrial use of corn, which includes corn utilized in the production of ethanol and high fructose corn syrup, has been a growing segment of the U.S. corn market. In 1984, industrial use of corn accounted for only 15 percent of the total corn market, but by 2005 its share will reach 28 percent. With continued expansion in ethanol manufacturing for the coming years, industrial use of corn will continue to expand. The USDA predicts an additional 500 million bushels of corn with be used in ethanol production in 2006. The Renewable Fuels Associations numbers suggest a 750 million bushel increase in corn use. In either case, this growth in corn utilization is significant and the trend of higher corn use should continue uninterrupted for the next 3 to 5 years. If future gains in corn production continue to match this demand growth, then prices should hold relatively consistent with recent history. However, the current economic climate of higher farm input prices and relatively low corn prices could cause some production cutbacks in the near future, which would push corn prices higher.

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Figure 4-7. U.S. Corn Utilization

Local Feed Use Beef and dairy cattle, swine, and poultry all feed on the local grain. In the Stuttgart area, poultry are the largest consumers of corn followed by cattle and finally, swine. The local area within 70 miles of the plant sites supports approximately 4,200 to 12,000 hogs/pigs, depending upon the site (USDA County Data). Similarly, there are ~190,000 cattle within 70 miles of Helena, increasing to 237,000 head surrounding Pine Bluff (USDA County Data); less than 3,000 of these are dairy cows. Poultry are most numerous, with ~28 million broilers and layers within 70 miles of Helena, and nearly 54 million and 88 million within 70 miles of Pine Bluff and Stuttgart, respectively. There are also approximately 24 million turkeys in Missouri. The amount of grain used for feed depends on the type of cattle and feeding operations. According to Kansas Dairy Farmers, the average dairy cow needs 162 bushels a year. Beef cattle feeding in a feed lot require 88 bushels per year and beef cattle grazing require 12 bushels of corn annually to supplement their diets (Iowa Beef Center). Both the corn numbers for dairy and feed lot cattle grain consumption include feeding distillers grains back to the cattle. If the cattle are not fed distillers grain, an additional 62 bushels of grain for a dairy cow and an additional 34 bushels for a feed lot cow are necessary on a per annual basis to obtain the same protein nutrition (38% increase). For this analysis, it is assumed that ten bushels of corn are consumed per hog/pig (Iowa State University generalized feed recommendations). It is also assumed that 67% of the rations fed to poultry consist of corn (USDA recommendations); thus, chickens consume approximately 8 lbs

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of corn per animal per year, and turkeys consume approximately 53 lbs of corn per animal per year. The total corn requirement as feed for local swine, cattle, and poultry in the study area is therefore 6.4 to 14.6 million bushels, depending upon the site. Local Industrial Uses Existing wet mills and ethanol plants should have a negligible impact on local corn use. Although there are several plants in Missouri, Kentucky, and points further north, all of these plants are a significant distance from the proposed plant sites (Figure 4-8). The most significant competitor could be the alternate plant proposed for the Phillips County Port Authority Industrial Site. At a capacity of 100 mmgy, the proposed ethanol plant will require 39.4 million bushels of corn each year. Several other plants have been proposed in Missouri, Kentucky, and Kansas, but these have not yet secured full financing or reached construction stage. Nonetheless, this region of Arkansas has insufficient supplies of grain to support a 100 MGY plant at any of the 3 locations. There are only 4.7 million bushels of grain with 50 driving miles of the proposed plants. These results thus indicate that is inadequate corn in the study area for the proposed ethanol plant. Pine Bluff and Stuttgart will thus need to rely on rail to source the majority of their corn supplies, while Helena will have to source corn by barge to meet feed stock requirements. Figure 4-8 – Proximity of Existing Ethanol Plants to the Stuttgart Site

The Stuttgart site is shown in light blue; existing plants are represented by green triangles. Circles show a 70 mile local feedstock zone surrounding each plant; a feedstock zone is not shown around the Louisville plant, because it uses beverage waste

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HISTORICAL AND SEASONAL PRICING PATTERNS In the past 10 years, corn prices have shown extreme variability, plummeting from a record high of more than $4.75 per bushel in the summer of 1996 to a low of $1.65 in 2000 and 2005 (Tables 4-3 to 4-5). This variability means that grain prices may be dramatically different from one year to the next. Over the past decade, the average price at Pine Bluff was $2.32. Stuttgart’s average price was $2.31 and Helena had an average price of $2.35. Prices tend to be lowest in November at harvest and reach a peak in May (Figures 4-9 to 4-11). Table 4-3: Annual Corn Price Variation: Pine Bluff, AR 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Average 352 260 221 202 202 192 221 232 242 203

Max 472 292 263 213 230 204 258 244 299 231

Min 260 236 186 184 169 173 189 215 191 170

(Price in cents/bushel) Table 4-4: Annual Corn Price Variation: Stuttgart, AR 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Average 355 262 225 198 198 192 220 230 236 195

Max 468 292 262 213 226 206 253 246 297 226

(Price in cents/bushel)

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Min 257 234 180 178 165 174 190 209 180 165

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Table 4-5: Annual Corn Price Variation: Helena, AR 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Average 358 262 228 204 204 196 218 232 248 205

Max 475 295 267 216 234 211 251 249 307 234

Min 261 239 186 183 169 173 189 217 198 173

(Price in cents/bushel) Figure 4-9. 10-Year Average Seasonal Corn Price in Pine Bluff, AR 260

Price (Cents/Bu.)

250

240

230

220

210

200 Jan

Feb

Mar

Apr

May

Jun

Jul

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Figure 4-10. 10-Year Average Seasonal Corn Price in Stuttgart, AR 260

Price (Cents/Bu.)

250

240

230

220

210

200 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Month

Figure 4-11. 10-Year Average Seasonal Corn Price in Helena, AR 270

260

Price (Cents/Bu.)

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200 Jan

Feb

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Prices tend to be slightly higher moving north of the plants. Prices are also higher at terminal markets along the Arkansas and Mississippi River. Helena, with its location along the Mississippi River, has been the highest priced market. Pine Bluff is the second highest price due to its access to the Arkansas River. Figures 4-12 to 4-18 illustrate average price and basis patterns found around the three proposed plant locations through out the season. Historically there has been as much as a 45 cent difference between spring and harvest prices near some of the proposed plants. Figure 4-12. 10-Year Average Corn Price

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Figure 4-13. 10-Year Average October Corn Price

Figure 4-14. 10-Year Average October Corn Basis

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Figure 4-15. 10-Year Average February Corn Price

Figure 4-16. 10-Year Average February Corn Basis

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Figure 4-17. 10-Year Average June Corn Price

Figure 4-18. 10-Year Average June Corn Basis

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SPATIAL EQUILIBRIUM MODEL AND ANALYSIS APPROACH Cash Grain Bids Inc. collects daily grain bid prices from elevators, feedlots, terminals, ethanol plants, and other key buyers. The data encompasses more than 2,700 markets and 17 commodities, dating back to 1996. These markets include country elevators, feed mills, ethanol plants, and terminal markets along major export routes. Along with data dissemination, spatial arbitrage models are deployed that help cash grain traders pinpoint regional buying and selling opportunities. These models take into account price differences across markets, and also rail, barge, and truck shipping network systems and rates. A spatial arbitrage model is employed along with grain trade to conduct the analyses. This model provides a framework for assessing the impacts of localized structural changes on cash grain markets. From regionalized production shortfalls to disruptions in grain transportation flows and the introduction of new sources of demand, the models allow us to ascertain the extent of price impacts and also to see how these impacts diffuse spatially across the market landscape. For this study, we began by identifying key markets within a 200-mile radius of Pine Bluff, Stuttgart, and Helena, AR. Daily price data on these markets was collected from January 1, 1996 through December 30, 2005. From these daily values, an average price for each location is computed. This dataset serves as the basis for the analysis. The following analysis examines the price impacts of a 100 MGY plant at each of the three site locations. To assess the impact of a new ethanol plant, we begin by having the spatial equilibrium model adjust the plant’s corn price higher until it draws the necessary grain supplies needed to run the plant at full capacity. Supplies come from nearby elevators that have set prices and certain supplies based on corn density in their area. The relative price of corn at each elevator, adjusted for trucking costs, will dictate which markets ultimately deliver corn to the new ethanol plant. The plant must ultimately raise prices enough to reach its capacity level. The output of this procedure is a final assessment of the plant price for corn, and a full accounting of the market share of corn the plant receives from various sources. SOURCING CORN BY RAIL The Union Pacific rail line connects key markets in the north to the of the proposed Arkansas plants. Utilizing rail service allows the plants to search for low-cost markets, which may vary seasonally or from one year to the next. Key locations along the Union Pacific rail line were identified in Iowa, Missouri, Wisconsin and Minnesota. These areas tend to have lower corn prices and more abundant supplies than Arkansas, making them good candidates as sourcing points for the plants. Over seventy (70) rail markets were identified in these regions and delivery rates were collected from each origin facility to either Pine Bluff, Stuttgart, or Helena, AR. Rates ranged from a low of $0.39 per bushel for corn originated from Dudley, MO to a high of $0.66 per bushel from Burt, IA. In addition to rail rates, we also collected bid prices from the corresponding elevators.

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Bid prices paid to farmers by each elevator where adjusted higher by 10 cents a bushel to reflect the normal cost of buying grain from a country elevator. Combining buying prices at each elevator and the cost of rail delivery from each elevator, we estimated a final delivery price to the Arkansas plants. At different points in time the spread between Arkansas prices and Midwest prices will vary. Time periods where the spread becomes especially large will create buying opportunities for the plant. Figure 4-19 shows the spread between Pine Bluff, AR and Fall Creek, WI. The Fall Creek price is typically 40 to 50 cents below the Pine Bluff price. Figure 4-19. Price Spread between Pine Bluff, AR and Fall Creek, WI Price Spread Between Pine Bluff, AR and Fall Creek, WI 10 Cents Per Bush

0 -10 -20 -30 -40 -50 -60 6/2/06

5/2/06

4/2/06

3/2/06

2/2/06

1/2/06

12/2/05

11/2/05

10/2/05

9/2/05

8/2/05

7/2/05

6/2/05

5/2/05

-70

Tables 4-6 to 4-8 show the estimated least cost combinations of delivered price and rail costs from potential source markets to the Arkansas plants. The cheapest points for sourcing grain are mostly in Wisconsin and Iowa where dramatically lower prices outweigh higher freight costs. However, some corn may also be acquired from Missouri where rail rates are lower. Helena rail rates have been adjusted higher than the Pine Bluff and Stuttgart markets to account for the potential higher costs of connecting with Arkansas Midland Railway Company (AKMD) for the 12 mile stretch of track between Lexa, AR and Helena, AR. Currently AKMD does not have the capacity for shuttle trains, and so multiple trains would have to be sent to Helena, increasing rail costs.

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Table 4-6. Best Markets for Rail Delivery to Pine Bluff, AR State City Rail Cost Delivered Price WI WI WI IA MO IA IA IA MO

62 60 46 63 40 58 58 61 41

Fall Creek Adams Janesville Burt Dudley Beaver Scranton Algona Dudley

253 258 259 260 260 261 262 262 262

Table 4-7. Best Markets for Rail Delivery to Stuttgart, AR State City Rail Cost Delivered Price WI WI WI IA MO IA IA IA MO

61 59 45 62 39 57 56 55 54

Fall Creek Adams Janesville Burt Dudley Beaver Scranton Algona Dudley

252 257 258 259 258 260 261 261 261

Table 4-8. Best Markets for Rail Delivery to Helena, AR State City Rail Cost Delivered Price WI WI WI IA MO IA IA IA MO

65 63 49 66 43 61 61 64 44

Fall Creek Adams Janesville Burt Dudley Beaver Scranton Algona Dudley

256 260 262 263 263 264 265 265 265

SOURCING CORN BY BARGE If the Helena or Pine Bluff sites are chosen, there is the potential to bring in corn by barge from terminals on the Upper Mississippi river. As shown in Figure 4-20, there are a number of grain terminals on the Upper Mississippi. BBI has evaluated the feasibility of such an approach, including barge transportation costs and establishing corn prices at representative elevators on the inland waterway system. Owing to the fact that portions of the Upper Mississippi are closed during the winter months, corn can only be brought in by barge from approximately April 1 to Nov 30 each year. Barge rates fluctuate by season, peaking in Q4, and lowest in Q2. The plant may not have sufficient volume to justify a contract with a barge transportation company. Thus, the historical spot market was used as the basis for transportation costs. Furthermore, some barge

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operators are reticent to take shipments that terminate partway down the Mississippi, and will only take shipments that terminate at the Gulf. This adversely impacts shipping costs. Barge rates are significantly lower than rail rates. However, these cost savings can be overshadowed by the nature of the markets available on barge routes. River markets are typically high priced, as the large amount of corn traffic headed to the Gulf for export, bids up basis along the river. Table 4-9 lists potential markets for sourcing corn by barge, and the delivered prices to Pine Bluff along the Arkansas River, and Helena, along the Mississippi. Due to Helena’s location on the Mississippi river, it has greater access to low priced corn by barge. Pine Bluff faces higher barge rates as grain that comes down the Mississippi must be diverted up stream along the Arkansas River to reach Pine Bluff. Figure 4-20: Grain Terminals on the Mid and Upper Mississippi

Table 4-9. Best Markets for Barge Delivery to Pine Bluff and Helena, AR State KS AR TN MO AR NE

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City White Cloud Blytheville Heloise Glasgow Armorel Brownville

Basis -49 -12 -13 -35 -12 -47

4-18

Pine Bluff Barge Delivered Cost Price 54 262 20 264 21 265 43 265 20 265 43 265

Helena Barge Delivered Cost Price 41 248 7 251 8 252 30 252 7 252 30 252

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SOURCING BY TRUCK Looking at road distance and available corn supplies, it is apparent that a 100 million gallon plant will not be able to meet its full supply needs solely by purchasing corn locally. Table 4-10 shows the approximate net corn supplies - after feed use- based on the 4-year average production for corn in the region. Within a 50-mile driving distance of Pine Bluff, there are only 2.6 million bushels of corn available after feed. There are slightly higher supplies, of 8.4 and 9.2 million bushels within 50 miles of Stuttgart and Helena. As mileage from the plants increases, grain availability increases. Table 4-10. Net Corn Supplies Within Driving Miles of PineBluff, AR (Millions of Bushels)

Miles 25 50 75 100

Pine Bluff

Net Supply Stuttgart

Helena

2.1 2.6 7.2 12.2

3.3 8.4 12.0 15.9

2.1 9.2 17.8 28.4

While available supplies are an important indicator of sourcing grain in a local area, it is not necessarily true that all grain within a narrow region will find its way to the plant. This is because competing uses and alternative market outlets (with potentially more advantageous prices) will keep some of the available corn from moving to the plant. With limited corn supplies in the area the basis impact from building a 100 MGY plant at Pine Bluff would be 64 cents if all corn were sourced by truck. Stuttgart would see a basis impact at the plant of 62 cents leading to predicted price of $2.93. Helena, with access to larger supplies, would be faced with a basis impact of 49 cents and a final predicted corn price of $2.84. Sourcing all of the corn by truck is obviously not a viable option. A combination of truck rail, and barge must be used instead. Pine Bluff would be able to source 100% of its corn by offering a bid price of $2.61. At a price of $2.61 Pine Bluff would receive 16% of its corn supplies from the local market with the remaining 84% being sourced by rail. Figure 4-21 illustrates the likely source of Pine Bluff’s corn supplies. Stuttgart would need to set a bid price of $2.60 to meet its full supply needs. At this price the plant would be able to pull 20% of its corn supplies from the local market and the remaining 80% would be sourced by rail from the markets listed above. Figure 4-22 details where Stuttgart would likely originate its grain.

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Figure 4-21. Corn Sourcing by County-Pine Bluff, AR

Figure 4-22. Corn Sourcing by County-Stuttgart, AR

Helena’s access to low priced corn via barge allows it to access grain at a lower price than the other two locations. Helena can meet its full supply needs by setting a bid price of $2.52. At this price the plant would be able to pull 10% of its grain supplies from the local market, with the

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remaining 90% sourced by barge. Figure 4-23 highlights where the plant would likely source corn. Figure 4-23. Corn Sourcing by County-Helena, AR

For the feasibility study, we will use the Stuttgart bid price of $2.60/bu, which includes transportation costs and is based on the assumption that 80% of the plant’s corn with be delivered by rail from Northern Markets. A sensitivity analysis will be performed to show the impact of corn pricing on financial returns, which will also capture the impact of the lower projected corn price at the Helena site. Conclusions Regarding Feedstock This region of Arkansas has insufficient supplies of grain to support a 100 MMGY Plant at any of the 3 locations. After feed use, there are only 2.6 million bushels of grain within 50 driving miles of Pine Bluff. There are 8.4 and 9.2 million bushels of corn within 50 miles of Stuttgart and Helena respectively. These values are much less than the 39 million bushels per year required for a 100 MMGY plant. Pine Bluff and Stuttgart will need to rely on rail to source the majority of their corn supplies, while Helena will source corn by barge to meet feed stock requirements. Key findings are as follows: •

The ten-year average grain price is $2.32 at Pine Bluff, $2.31 at Stuttgart and $2.35 at Helena. Over the past ten years prices have been as high as $4.75 at Helena in 1996 and as low as $1.65 at Stuttgart in 2000 and 2005.

•

The basis impact of building a 100 MG ethanol facility would be 29 cents for both Pine Bluff and Stuttgart indicating a ten-year average corn price of $2.61 for Pine Bluff and $2.60 for Stuttgart. The price impact at Helena would be 17 cents resulting in a predicted ten-year average price of $2.52

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At a price of $2.61 Pine Bluff would source 16% of its corn locally with the remainder being sourced by rail. Stuttgart, at a price of $2.60 would obtain 20% locally and the remainder by rail. Helena can source 10% locally and 90% by barge at a price of $2.52.

The basis impact from locating a 100 MG plant at Pine Bluff would be as high as 64 cents if all corn were sourced by truck. Helena, with slightly more access to local corn, would see a basis impact of 49 cents. However, high corn costs can be mitigated by sourcing by rail or barge. Over the past ten years, on average, for Pine Bluff and Stuttgart sufficient corn could be purchased at a price of $2.61 and $2.60 respectively. Therefore, this results in an actual basis impact of only 29 cents at both Pine Bluff and Stuttgart. Helena can make use of its location along the Mississippi river to source corn by barge. Sufficient corn supplies can be sourced at a 10 year average price of $2.52, resulting in a basis impact of only 17 cents. In future years the basis impact may be muted by a supply side response. A 17 to 29 cent basis impact in the short run will encourage producers to plant more corn acres. This increase in corn acreage is likely to dampen the basis impact in the long run. However, given the limited corn supplies in the area currently, it would be surprising if the basis impact were to decrease substantially. Sourcing corn by rail and barge from low cost markets will continue to be a key driver of these plants success. Prices vary significantly over the season, with the lowest prices occurring at harvest and the highest prices occurring in the spring. Storage strategies that allow for more grain to be purchased at harvest and less during the spring can help to reduce total grain costs.

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V. REVIEW OF FUEL ETHANOL MARKETS World Fuel Ethanol Industry World ethanol markets are comprised of three distinct segments: fuel, industrial and beverage (in order of production and use). At present, world economics as well as environmental and oil dependency concerns are providing enormous opportunities for world fuel ethanol growth while population growth will offer modest growth opportunities for the much smaller industrial and beverage segments. Worldwide ethanol production reached approximately 12 billion gallons (~45 billion liters) in 2004 (see Figure 5-1), compared to 9.25 billion gallons (~35 billion liters) in 2002. Figure 5-1 – Worldwide Ethanol Production (000 Liters)

(Source: F.O. Licht)

Of the world’s total ethanol production, approximately 75% is now fuel ethanol, which reached an all-time high of over 9 billion gallons in 2004. Even though the bulk of the world’s fuel ethanol production still comes from Brazil and the U.S., there are significant developments in other countries as well. Some of these could result in new production centers being established beside the traditional ones in the western hemisphere. International Markets Brazil has long been the world's number one fuel alcohol producer, with three to five billion gallons of anhydrous alcohol produced each year. The United States recently surpassed production in Brazil due to the continuing bipartisan support for the alcohol fuel industry and the phase out of MTBE as a fuel oxygenate. Figure 5-2 shows fuel ethanol production by continent.

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Figure 5-2 – Worldwide Ethanol Production by Continent

North and South America continue to be the world’s leading ethanol production regions, with no indication of change in the foreseeable future. Total production in the Americas in 2003 reached nearly 8 billion gallons, about 65% of the world ethanol output. Historically, the world leader for the past 30 years has been Brazil, with approximately 5 billion gallons produced in 2003. At the peak of ethanol production, Brazil had 40 to 60% of its vehicles fueled by ethanol (1984 to 2002). Total U.S. ethanol production in 2005 was 3.9 billion gallons. Even though the majority of production still comes from Brazil and the U.S., there are significant developments in other countries as well. Some of these could result in new production centers being established in addition to the traditional ones in the western hemisphere. Europe now has a major distillery built by the Ecocarburentes Group in Spain, with another distillery planned. The European community is also putting its weight behind the programs. There are indications that the EU is working on provisions for a Renewable Fuels Standard, securing a rising market share for biofuels. Sizeable new production centers are emerging in Thailand, where the government plans to produce up to 170 million gallons of fuel ethanol in 2003, as well as China, where recently announced projects could raise fuel ethanol production capacity to 500 million gallons a year. In India, 5% ethanol blends are now required in some regions of the country, and the entire country will soon require ethanol blends. In Latin America, new ethanol production initiatives are in place in many countries. In Brazil, where the original fuel ethanol distilleries use molasses and sugar cane as the raw material, expansions are also underway. U.S. National Ethanol Market In the U.S., ethanol’s primary purpose is to serve as an octane extender for gasoline, a clean air additive in the form of an oxygenate, and as an aid in the reduction of America’s dependence on imported oil, thereby reducing our balance of trade. In order to accomplish these tasks in the face of resistance from the oil industry, Congress established an incentive in the form of a tax credit BBI INTERNATIONAL

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during the mid-1970’s designed to encourage the oil industry to blend ethanol. The tax incentive continues today and was recently extended in the 2005 Energy Policy Act (EPACT). New restrictions on automobile emissions, reductions in carbon monoxide, smog mitigation programs in major cities, and a general trend toward the reduction of greenhouse gas emissions, continue to drive the demand for ethanol. Discoveries of ground water contamination by methyl tertiary butyl ether (MTBE), ethanol’s primary competitor, have spurred even greater interest in ethanol blends. Until recently, MTBE had the majority of the oxygenate market in the United States. Since incidences of ground water contamination have occurred in thousands of wells in California and in the Northeast, where MTBE was the predominant oxygenate, there have been demands for the discontinuation of its use. In March 2000, the EPA issued an Advance Notice of Proposed Rulemaking that could result in a total ban of the use of MTBE. Ethanol, a fully biodegradable product, stands ready to fill the void left in California and other parts of the country where the use of MTBE is banned. The EPACT removed oxygenate requirements for fuel, but also specifically excluded a liability waiver for MTBE; which has led to the nearcomplete phase-out of MTBE as of May, 2006. The petroleum refining capacity in the United States continues to decline while gasoline consumption continues to increase. The slightest upset in refining capacity (fire, shutdown, closure) sends gasoline prices soaring. U.S. refining capacity is not keeping pace with increasing demand. Ethanol plays a key role in helping refiners extend their product by as much as 10%. Fuel ethanol produced from corn continues to be the mainstay of the domestic fuel ethanol industry; fuel ethanol production capacity in the United States exceeded 4.5 billion gallons/yr as of March, 2006, and capacity under construction is exceeds 2.1 billion gallons/yr. Approximately 95% of U.S. fuel ethanol is manufactured from corn and it follows that the majority of production capacity and subsequent use of fuel ethanol is in the Midwest Corn Belt. Ethanol is used in nearly every state in the country including Alaska (see Figure 5-3). While corn has been the primary feedstock for fuel ethanol in the U.S., other feedstocks including wheat, sorghum and various waste starch and sugar streams are also used. Grain-based ethanol will likely continue to be the major contributor to ethanol production in the years ahead. Currently there over 100 commercial fermentation ethanol production facilities in operation in the U.S. (as of June, 2006), with 36 new plants under construction and another 5 undergoing significant expansion (see Figure 5-4). Ethanol demand is expected to increase at a very aggressive pace with current market, environmental and political forces all driving demand for renewable fuels, higher ( Figure 5-5). Current demand is driven by the phase-out of MTBE; future demand will be driven by the mandate in EPACT, along with ethanol’s economic and environmental benefits. Today’s 4.5 billion gallon per year production capacity is thus expected to grow to at least seven billion gallons over the next few years; indeed, current production capacity plus the capacity under construction total nearly 6.6 billion gallons per year.

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Figure 5-3 – U.S. Ethanol Production and Use

Figure 5-4 – Fuel Ethanol Plants and Projects in the U.S. z Plants in operation z under construction z plant expansion Data as of March, 2006

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Figure 5-5 – Projected Renewable Fuels Growth in the U.S.

Growth of the U.S. Ethanol Industry 8.0 Annual Production billions of gallons

7.0 Actual

6.0

Projected

5.0 4.0

11% Average Annual Growth

3.0 2.0 1.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0.0

The recent bans on MTBE and the have greatly expanded the market demand for ethanol, creating a major stimulus for new ethanol production. Nineteen states have banned or have MTBE bans pending (Figure 5-6). However, the lack of a liability waiver has also led to the phase-out of MTBE in regions that did not have an MTBE ban in place, and the use of ethanol as a replacement oxygenate and octane enhancer. Figure 5-6 – States that have banned MTBE

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Various states have also enacted mandates for use of renewable fuels, or are considering their implementation (Figure 5-7). This will further increase demand, both nationally and regionally. To encourage local production, various states have also implemented production incentives, as shown in Figure 5-8. Figure 5-7: Mandates and Potential Mandates for Ethanol

Figure 5-8: States with Production Incentives

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At the same time, the continued implementation of new technological and input improvements (i.e., lower cost enzymes and advanced yeast strains) continue to decrease ethanol production costs. Gasoline prices also continue to increase due to a decrease in supply, allowing ethanol to play a more significant role in the U.S. fuel consumption arena. Recent accomplishments of the ethanol industry include: • • • •

Annual production record of 3.9 billion gallons produced in 2005 Monthly record of 375 million gallons (288,000 bbl/d) produced in January, 2006 Currently, 102 ethanol plants are online with an annual production capacity of 4.5 billion gallons Ethanol use prevented nearly 3 million tons of carbon monoxide, 300,000 tons of ozone equivalent VOCs, and 5.7 million tons of CO2-equivalent greenhouse gas emissions.

For new ethanol projects, one of the most important strategic marketing decisions to be made will be the allocation of production to the various markets: ethanol markets should be divided up into three categories: local, regional and national. If too much product is sold locally, the local price will be depressed. If too much is sold regionally or nationally, transportation costs will be increased and opportunities to service a less expensive local market will be forgone. A good balance between local, regional and national markets are required to achieve a maximum revenue return to the plant. On the issue of markets, both for ethanol and the co-products produced from the plant, there are critical considerations that should be addressed up-front. As new production comes on-line it is incumbent on the new producer to ensure that there is an active market development initiative undertaken in the state. Developing new production with no regard to developing new markets, does not serve the interest of the producer, or the industry at large. Regional Ethanol Market Typically, a regional market is one that is outside of the immediate local market, but within the same state and possibly neighboring states. This market will likely be serviced by truck or rail, and is within a 450-mile radius of the plant (see Figure 5-9). Regional pricing tends to follow national pricing less the freight difference. As with national markets, the use of a group-marketing program or a broker is advantageous, especially in the first one to three years of operation. Occasionally there are opportunities to obtain backhaul rates from local trucking companies. These are rates that are reduced since the truck is loaded both ways. Normally the trucks drive to the refined fuels terminals empty and load gasoline product for delivery. A backhaul is the opportunity to load the truck with ethanol to drive to the terminal.

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Figure 5-9 – Regional Ethanol Markets and Ethanol Plants

Note: S operational ethanol plant. S under construction. Circle represents the 450 mile regional market surrounding the Stuttgart site

The regional markets for an ethanol plant in the Stuttgart area would include Arkansas, Alabama, Louisiana, Mississippi, Missouri, Tennessee, along with most of Illinois, Kentucky, Oklahoma, and parts of Georgia, Indiana, Kansas, and Texas. In general, markets to the north of the project would not be preferred due to the volume of ethanol production in Illinois and Iowa. The advantage of the current project with respect to the ethanol market is its location relative to Louisiana, Mississippi, Texas, and other growing Southern markets. Data on gasoline and ethanol usage in Arkansas and surrounding states were obtained from the Energy Information Agency of the U.S. DOE. Ethanol use in these states is shown in Table 5-1. As recently as 2004, there was no ethanol use in Arkansas. In the regional market, ethanol use has increased from about 473 million gallons in 2001 to an estimated annual usage of 735 million gallons in 2004 – an increase of about 55% over four years. Nonetheless, this still only represents about 1.4% of total gasoline consumption in the regional market, indicating that there is significant room for future growth.

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Table 5-1 – Ethanol and Gasoline Use in Arkansas and Neighboring States

State Arkansas Alabama Georgia Illinois Indiana Kansas Kentucky Louisiana Mississippi Oklahoma Tennessee Texas Total

Ethanol 2000 – 04 Avg MMGY

Ethanol 2004 MMGY

Avg annual growth

Gasoline Consumption Ethanol as 1999-2004 Avg Percent of MMGY Gasoline

Market at 10% RFS MMGY

13.6 31.4 23% 1466 0.9% 147 3.9 5.5 24% 2534 0.2% 253 0.0 0.0 n/a 5039 0.0% 504 328.8 421.3 10% 5241 6.3% 524 118.6 140.2 6% 3255 3.6% 325 15.4 4.3 13% 1366 1.1% 137 28.3 53.1 84% 2213 1.3% 221 26.4 50.1 188% 2374 1.1% 237 0.0 0.0 n/a 1644 0.0% 164 0.0 0.0 n/a 1848 0.0% 185 0.0 0.0 n/a 3055 0.0% 306 39.5 28.7 -13% 11136 0.4% 1114 574.6 734.7 41169.9 1.4% 4117 Source: U.S. Department of Transportation Highway Statistics Historically, ethanol has not been used in Tennessee, Georgia, Mississippi, or Oklahoma

The Stuttgart area ethanol plant is very well-positioned to serve the regional ethanol markets in Arkansas, Oklahoma, Missouri, and Kentucky, along with developing markets south, west and east of the project. Local Ethanol Market The local ethanol market includes municipalities within a 150 mile radius of the plant. The local market includes most of Arkansas, plus northwestern Mississippi and small parts of Tennessee and Louisiana. Major cities within the local market include Memphis and Little Rock; Jackson and Shreveport are just outside the local market area. Thus far, very limited amounts of ethanol have been sold into these local markets, and thus, these markets would have to be developed. There are currently no other plants within the local market area, although the competing project considering the site in Helena would also serve this area. However, there are currently four ethanol plants in Missouri and Tennessee with a combined production capacity of 162 million gallons of ethanol annually (Table 5-2). There are another six plants in north-central Illinois, with about 800 million gallons of capacity, and a further 7 plants in Kansas with about 174 million gallons of capacity. The current plant would thus be within the extended regional market for many of these existing plants in Missouri, Kentucky, Tennessee, Illinois, Kansas and Iowa. Table 5-2 – Missouri and Tennessee Ethanol Plants Capacity (mmgy)

Company

City

State

Golden Triangle Energy Coop Mid-Missouri Energy Northeast Missouri Grain AE Staley TOTAL CAPACITY

Craig

MO

20

Malta Bend

MO

40

Macon

MO

42

Louden

TN

60

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State Producer Payment There is currently no state producer payment in Arkansas. Ethanol Pricing Over the past 10 years the spot prices of fuel ethanol, crude oil and gasoline have had a definite upward trend (see Figure 5-10 below). It is obvious that the price of crude oil has a significant effect on the price of gasoline since gasoline is produced from crude oil. A correlation coefficient of 0.996 for the average annual spot market prices of crude oil and gasoline supports this conclusion. There is a correlation of 0.79 between the price of ethanol and crude oil, and a 0.80 correlation between the price of ethanol and gasoline. These high correlations are not surprising. As mentioned in the discussion on fuel ethanol pricing, the price of fuel ethanol is often based on the local rack price of unleaded gasoline plus the value of the federal excise tax exemption. So, most of the price changes in ethanol are explained by price changes in crude oil and gasoline and not by the price of corn, distillers grain or the cost of ethanol production. The rack price for ethanol (FOB Omaha) is shown in Figure 5-11. Over the 10 year period from 1996 to 2005, prices have ranged from a low of $0.90/USG in 1999 to $2.74/USG in September, 2005. Recent 2006 rack/spot prices have been even higher, exceeding $3.50/USG as the demand for ethanol has rapidly increased. However, prices are expected to moderate as more plants come on line. Furthermore, much of the ethanol is sold on contract at prices nearer to historical averages, rather than on the spot market. The ten year average ethanol price for the central and south/eastern region of the United States is $1.33/USG, while the price has averaged $1.46/USG over the period from January 2001 to December, 2005. As noted above, this is consistent with the historical price for gasoline (Figure 5-12), adjusted for the value of the federal excise tax exemption. Over the period from 2001 to 2005, retail prices for regular unleaded in the regional market area averaged $1.64/USG. The delivered price for ethanol will be less than this value, after accounting for retail margins and taxes, to be competitive with the price for regular unleaded gasoline. Typical delivery costs range from 4 cents/gallon for local deliveries by truck, to ~10 cents/gallon for national shipments by rail. Barge shipments can be much cheaper, as little as 2 cents/gallon, depending upon the season and destination. The projected sales price of ethanol based on historical trends in the target markets is shown in Table 5-3. An ethanol selling price of $1.468 per gallon will thus be used in the financial analysis for the 100 MMGY plant. Table 5-3 – Basis for Ethanol Pricing – 100 mmgy plant Ethanol Price $/gal Local (truck) Regional New York Barge/ Rail to Other Markets Average Ethanol Price

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1.46 1.46 1.48 1.48

5-10

MMGY

% of production

Ethanol Price $/gal

20 40 10 30 100

20% 40% 10% 30% 100%

0.292 0.584 0.148 0.444 1.468

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Figure 5-10 – Historic Relationship between Prices of Oil, Gas, and Ethanol Historical Ethanol Gasoline and Crude Oil Prices

Ethanol ($/gal)

Gasoline ($/gal)

Crude Oil ($/bbl)

2004

2003

2002

2001

2000

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1998

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$45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 1994

Etoh & Gasoline ($/gal)

$1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00

Crude Oil ($/bbl)

Figure 5-11: Rack Ethanol Prices Omaha, NE Rack Ethanol

U.S. Dollars per gallon, FOB Omaha

$2.50

$2.00

$1.50

$1.00

$0.50

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Figure 5-12: Average Annual Price for Regular Unleaded Gasoline in PADD III Annual Average Price for Regular Unleaded - PADD III

Cents per gallon, including taxes

300

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200

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20 06

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Ethanol Shipping Costs The Stuttgart Ethanol plant would likely ship ethanol via truck to local and regional markets and by rail or barge to more distant markets, e.g., on the East Coast or to New Orleans. The split between local, regional and national markets is not likely to be known until marketing agreements and contracts are negotiated in the subsequent business development phase of the project. Assuming ethanol is marketed 40% locally, 40% regionally, and 20% to the National/International markets, BBI estimates the average ethanol shipping cost for a 100 mmgy plant to be about 8.0¢ per gallon, as shown in Table 5-4, below. These values are based on shipments by truck and by rail. However, if shipping to “other national markets” occurs by barge, the weighted average shipping cost drops to ~6.0¢ per gallon. Transportation costs will thus reduce the net ethanol sales price, i.e., FOB plant, to about $1.38 to $1.40/USG. Table 5-4 – Ethanol Shipping Costs from Stuttgart

Local (truck) Regional New York Other National Markets Average Shipping Cost

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$/gal 0.04 0.08 0.10 0.10

5-12

MMGY 20 40 10 30 100

% of production 20% 40% 10% 30% 100%

$/gal 0.008 0.032 0.01 0.03 0.080

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Ethanol Market Summary Historically, there has been very little ethanol consumption in Arkansas. However, in the regional market, which includes Missouri, Indiana, Illinois, and Texas, among others, historical ethanol consumption has averaged 575 million gallons annually from 2000 to 2004, reaching 735 million gallons in 2004. The market potential based on an E10 blend is nearly 4 billion gallons per year in the states comprising the regional market. There are currently four ethanol plants in Missouri and Tennessee with a combined annual production capacity of 162 million gallons; several other plants in the extended regional market, including Illinois and Kansas, have production capacities totaling nearly 1 billion gallons annually, with additional plants under construction or in the planning stages. The proposed ethanol plant is well-positioned to serve the local Arkansas, and northwestern Mississippi markets, as well as ethanol markets in Tennessee, Missouri, Texas and on the gulf coast. Ethanol use in Louisiana is about 50 million gallons per year, and there are significant opportunities for growth in Alabama, Louisiana, Mississippi, Texas, and Tennessee. The ability to divide product effectively between local, regional and national markets is extremely important. So much so, that it is imperative that either an experienced marketer is hired, or the ethanol marketing be contracted to a broker or a cooperative marketing group. The best scenario for the Stuttgart Ethanol plant would be to supply ethanol locally within Arkansas and to develop nearby local and regional markets. The Tennessee market, which includes Memphis and Nashville, needs to be developed, but has significant potential. For a 100 mmgy plant, BBI estimates that 20% of the plant’s ethanol could be sold to local markets, 40% regionally, and the balance to national and East Coast markets. The average shipping cost for this scenario is estimated to be $0.08 per gallon of ethanol, dropping to $0.06 per gallon if shipping by barge. Ethanol prices are normally equal to the rack or wholesale price of unleaded gasoline, plus the 51¢ per gallon Federal Excise Tax Exemption for ethanol blends. The resulting price may be higher or lower to account for ethanol supply and demand in local and regional markets. The 5year average spot ethanol prices in the local, regional and national/East Coast markets were used to establish a weighted average price for ethanol sold by the plant, based on the anticipated distribution of ethanol into these markets. For a 100 mmgy plant, the weighted average price is $1.468 per gallon. Based on historical pricing trends in the projected target markets, the price of ethanol used in the financial analysis is $1.468 per gallon with a weighted transportation cost of $0.06 to $0.08 per gallon. A marketing fee of 1¢/gallon will also be deducted from the ethanol price in the financial analysis.

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VI. REVIEW OF CO-PRODUCTS This section of the feasibility study reviews the anticipated co-products of the proposed Stuttgart ethanol project. The primary co-products of alcohol production from a dry mill ethanol plant are distillers grains and carbon dioxide. Distillers Grains Distillers grains are the residues that remain after high quality cereal grains have been fermented by yeast. In the fermentation process, nearly all of the starch in the grain is converted to ethanol and carbon dioxide, while the remaining nutrients (proteins, fats, minerals and vitamins) undergo a three-fold concentration in the beer, which after distillation and centrifugation of the still bottoms, yields distillers wet grains (DWG) and “thin stillage”. The thin stillage is subsequently concentrated via evaporation and the “heavy syrup” is added back to the DWG. This material is then dried to 10% moisture, producing distillers dried grains with solubles (DDGS). The addition of the soluble fraction increases the protein and vitamin potency of the final product and also removes the logistical problems associated with marketing wet feed. It also provides a solid baseline byproduct that can be marketed while allowing development of both the wet feed and special blend feed markets. DDGS is the most common and highest volume form of feed product derived from a dry mill facility. Typical composition of DDGS from corn is presented in the following table. Table 6-1 – Typical Corn DDGS Composition Component Moisture Protein Carbohydrates Fat Fiber Ash

Weight % 9 to 10% 27 to 30% 52 to 56% 7.5 to 9% 8 to 9% 4.5 to 5%

DDGS derived from corn contain nutrients that have been demonstrated by numerous experiments to have important growth promoting properties for dairy and beef cattle, poultry and swine. For dairy cattle the high digestibility and net energy content of DDGS and DWG, compared to other feed ingredients (soybean meal, canola meal, brewers spent grains as examples), as well as the high fat content, results in feeds that yield greater milk production. For beef cattle the improved rumen health, energy effect of the fiber, and palatability has been shown in feedlot studies to result in faster and more efficient gains. For poultry, feeding tests have demonstrated that DDGS favorably effects fertility and hatchability. DDGS is an excellent ingredient for supplying protein to broilers where the diet has been adjusted to limit certain amino acids. For hogs, research has shown that DDGS can

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effectively furnish portions of the energy, protein and other key nutrients during all phases of production. More than six million tons of DDGS are produced in North America each year and incorporated into animal feeds or exported. Several ethanol producers market a portion of their byproducts in a wet form (65% moisture) where nearby markets make it economical to deliver the product and avoid drying costs. Some maintain that DWG has a higher nutritive value than DDGS due to the loss of volatile compounds during drying of the distillers grain. Local Market for Distillers Grain Approximately 18 pounds of DDGS (at 10% moisture) or 46.3 pounds of DWG (at 65% moisture) are produced from each bushel of grain processed. A 100 mmgy ethanol plant will produce about 321,000 tons of DDGS or 825,000 tons of DWG each year. One feeder cow will consume up to about one ton of DDGS per year; therefore, a minimum of 321,000 head of cattle on feed are required for the entire distillers grain output of a 100 mmgy dry mill ethanol plant. Total cattle inventory in Arkansas averaged 1.83 million head from 2001 to 2006 with approximately 944,000 head of beef cows and 35,000 head in the dairy industry (USDA NASS). In the 70-mile radius around Stuttgart (Figure 6-1), there were 235,000 head of cattle, but no dairy cattle. Over the past six years, the area surrounding Helena supported only ~2,300 head of dairy cows, and 191,000 head of cattle overall, while the area around Pine Bluff supported ~237,000 head of cattle, but no dairy cows. Both dairy and beef cattle consume distillers grains in both wet and dry form, however, dairy and feedlot beef cattle usually receive distillers grains in the wet form (if there is an ethanol plant within about 100 miles) and beef on farm receive distillers grains in the dry form. Based on the cattle data, there may be a potential local cattle market for wet distillers grains, but much of the grains will have to be dried and sold outside the local market. For the financial analysis, BBI has thus assumed that all of the distillers grain will be dried, but, for comparison, the impact of selling wet distillers grains will also be evaluated. Regional Markets for DDGS Regional markets for the project’s DDGS include Arkansas, Missouri, Kansas, Kentucky, Tennessee, Illinois, and Indiana, and markets further to the east and south from Arkansas, including Alabama, Mississippi, Louisiana and Texas. The Illinois and Iowa markets are already effectively covered by ethanol production in those regions. For the current project, the primary target markets include poultry, swine and dairy cattle. The number of broilers within 70 miles of Stuttgart was 87 million in 2002, and approximately 6 billion within 500 miles, encompassing Alabama, Kentucky, Mississippi, Missouri, Tennessee, and Texas. Over the past 6 years, approximately 30 million cattle and 975,000 dairy cattle were supported within 500 miles of the project; and approximately 10 million hogs and pigs were in the project’s regional market. These markets are currently using local corn and DDGS from Midwest ethanol plants. Because the current plant would have a lower shipping cost to these markets, it is expected that the Stuttgart plant will compete favorably with the Midwest DDGS.

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Figure 6-1 – Cattle within 70 miles of Stuttgart, AR „ Stuttgart Plant Site

Distillers Grain Pricing In the U.S., the base market value for distillers grains historically has been set by producers of distilled spirits and more recently by the large corn dry-millers that operate fuel ethanol plants. As shown in the following figure, corn and DDGS prices do not track exactly, but they do generally follow each other (Figure 6-2). Distillers grain market price is determined through a number of factors that include the market value of local feed grain, the market value of soybean meal and other competitive protein ingredients, the performance or value of distillers grain in a particular feed formulation, the supply and demand within the market, and, most importantly, acceptance by animal producers. Historical DDGS pricing for product delivered to select national markets as reported by Feedstuffs Magazine is shown in Figure 6-3. The data in Figure 6-3 show the relationship between DDGS prices and point of origin. Prices for DDGS are least in the Minneapolis market, reflecting the low cost of corn in the state. As DDGS is shipped to more distant markets, the price increases to reflect the additional transportation costs, and the higher cost of corn which sets the standard for the DDGS market. This is reflected in the higher price for DDGS in Chicago, and the highest price per ton in Pacific Northwest markets like Portland.

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Figure 6-2 – Historical Pricing of DDGS and Corn Price Per Ton Comparison of DDGS and Corn 150

$ per Ton

125 100 75 50 25 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

DDGS

CORN

Figure 6-3 – Historical DDGS pricing for Select National Markets

160.00 DDGS Price ($/ton)

140.00 120.00 100.00

Minneapolis Chicago Portland

80.00 60.00 40.00

3/22/03

12/22/02

9/22/02

6/22/02

3/22/02

9/22/01

12/22/01

6/22/01

3/22/01

9/22/00

12/22/00

6/22/00

3/22/00

12/22/99

9/22/99

6/22/99

0.00

3/22/99

20.00

Date Source: Feedstuffs Magazine

For the proposed Stuttgart ethanol project, BBI used a conservative approach to establish pricing for the plant’s distillers grains (either wet or dry). The price of the plant’s DDGS was set equal to the price of local corn on a dry weight basis and the DWG price was set at 96% of the corn price on a dry weight basis. With corn at $2.61 per bushel, the resulting DDGS price is $98.70 per ton and the DWG price is $36.85 per ton. This approach assumes that the plant receives no credit for the higher protein and nutritional value of the distillers grain compared to corn. As the local market for distillers grain is developed after the ethanol plant starts up, a higher price should be received for the distillers grain as local feeders become familiar with the distillers grain feed and its benefits.

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BBI recommends that the plant take advantage of the expertise of a DDGS marketing company in the marketing of the project’s distillers grains. The advantages of using such a marketing firm are numerous. It allows the plant personnel to stay focused on plant operations, it eliminates the need for a marketer as well as clerical billing functions, and it improves cash flow since the plant receives a check when the scale ticket is submitted. While there is a fee for these services, the benefits would seem to outweigh the costs. The marketing firm may also be able to obtain better rail rates due to their volume of rail shipments. Distillers Wet Grain Distillers Wet Grain (DWG) is the wet cake that comes directly from the centrifuge. It has approximately 65% moisture. The syrup that is centrifuged out is evaporated and returned back into the wet cake. This product remains at about 65% moisture after the evaporated syrup is returned to the cake. The primary market for DWG is local cattle. Cattle perceive DWG as sweet and readily eat it without any added sweeteners. Dairy cattle perform well on DWG. Beef cattle gain weight on DDGS similar to grain, but without the problems caused by the high starch content of grain. Although wet distillers grain is nutritionally superior compared to dry distillers grain (drying reduces digestibility), least cost ration formulations may dictate the use of the dry form as the distance between the ethanol plant and the livestock operation increases. This is because transportation costs on a dry matter basis are generally less for dry product. Thus, inclusion of wet or dry distillers grain in cattle diets must be evaluated on an individual operation basis. Selling DWG usually reduces ethanol plant operating costs by reducing natural gas use. However, in the wet form, the distiller grain has a shelf life of about a week, so it needs to be distributed quickly. The plant must insure that it maximizes the price of its byproducts and should not sell DWG for less than the equivalent price at which it can sell DDGS plus drying costs. For the proposed ethanol project, there are sufficient numbers of livestock in the local market to support selling some DWG, but this market would have to be developed. Therefore, the financial analysis for the plant is based on selling all of the distillers grain dry. CO2 Markets Dry ice and liquid carbon dioxide are principally used as expendable refrigerants in the food industry. Carbon dioxide, whether solid, liquid, or gaseous, is recognized as safe for use in foods. Food applications include: • • • •

Beef, pork, and poultry slaughter operations Frozen food storage and transportation Supplemental cooling for refrigerated products Meat, sausage and bakery processing

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• • •

DRAFT REPORT JULY, 2006

Airline catering Gift food packaging Carbonation of beverages

Non-food applications include: • • • • •

Various chemical processes Oil extraction via CO2 injection Pharmaceutical manufacturing Shrink fitting pH control

Currently in the U.S., about 25% of fermentation carbon dioxide (CO2) produced from ethanol plants is captured, and balance is vented to the atmosphere. The carbon dioxide captured is in most cases from very large ethanol plants. Capture of CO2 from medium sized and smaller plants is usually not justified unless special market conditions are present. If justified, the ethanol plant can easily capture raw carbon dioxide. However, it must be processed further if it is to be used for commercial purposes. At most, the revenue potential from the sale of CO2 is on the order of 3% of total plant revenues. A CO2 processing company would prefer to use high pressure CO2 rather than liquid CO2 since it reduces the capital costs for equipment and processing costs. Typically, a CO2 processing company will construct a processing facility next to the ethanol plant. The raw CO2 is then piped to the processing facility for finishing. In order for the processing facility to be economically viable, there must be a close market for the finished CO2. Packing plants, soft drink bottlers, food processors, are just a few of the numerous users of fermentation CO2. CO2 manufacturing and marketing companies occasionally acquire a plant’s CO2; this is usually pursued in the project development stage of the project. For the purpose of the feasibility study, CO2 sales will not be included in the financial analysis. Should an opportunity develop that could utilize the plant’s CO2, the plant could make a small incremental improvement in the bottom line by considering the capture and marketing of the CO2 at the appropriate time. Conclusion for Co-Products Total cattle inventory in Arkansas averaged 1.8 million head of cattle in from 2001 to 2006, with approximately 944,000 head of beef cows and 35,000 head in the dairy industry. In the 70-mile radius around Stuttgart, there are 234,000 head of cattle (6 year average). For the proposed ethanol project, some of the distiller’s grains could be sold wet to local livestock, but the market would have to be developed. Furthermore, the majority of the distiller’s grains would have to be dried and sold as DDGSs. Therefore, the financial analysis for the plant is based on selling all of the distillers grain dry. Although the potential local market is substantial, regional markets for DDGS are significant and should be developed with the aid of a DDGS marketing company.

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For the financial projections, the DDGS price was set equal to the price of corn on a dry weight basis and the DWG price was set at 96% of the corn price on a dry weight basis. With corn at $2.61 per bushel, the resulting DDGS price is $98.70 per ton and the DWG price is $36.85 per ton. Revenue from CO2 sales typically has only a minor impact on an ethanol plant’s revenue (2 or 3%). Although CO2 sales can be pursued in the project development stage, it will not be included in the feasibility study financial forecast.

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VII. OVERVIEW OF ETHANOL TECHNOLOGIES The production of ethanol or ethyl alcohol from starch or sugar-based feedstocks has been practiced for thousands of years. While the basic process steps remain the same, the process has been considerably refined in recent years, leading to a highly efficient process that now yields more energy in the ethanol and coproducts than is required to make the products. In the dry milling process, corn, wheat or other high-starch grains are first ground into meal and then slurried with water to form a mash. Enzymes are added to the mash to convert the starch to the simple sugar, dextrose. Ammonia is also added for pH control and as a nutrient to the yeast. The mash is processed through a high temperature cook step, which reduces bacteria levels prior to fermentation. The mash is cooled and transferred to the fermenters where yeast is added and the conversion of sugar to ethanol and carbon dioxide (CO2) begins. After fermentation, the resulting "beer" is transferred to distillation where the ethanol is separated from the residual "stillage”. The ethanol is concentrated to 190 proof using conventional distillation and then is dehydrated to approximately 200 proof in a molecular sieve system. The resulting anhydrous ethanol is blended with about 5% denaturant (usually gasoline) and is then ready for shipment to markets throughout the country. The stillage is separated into a coarse grain fraction and a "soluble" fraction by centrifugation. The soluble fraction is concentrated to about 30% solids by evaporation. This intermediate is called Condensed Distillers Solubles (CDS) or "syrup." The coarse grain and syrup fractions are then mixed and dried to produce distillers dried grain and solubles (DDGS), a high protein animal feed product. A simplified block diagram of a typical dry milling ethanol plant follows in Figure 7-1.

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Figure 7-1 – Flow Diagram for Dry Mill Ethanol Plant

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Technology Supply and Construction Services The project sponsor should ensure that reputable design and construction firms are engaged throughout the development, design, and construction of the project. The construction firm should guarantee the completion of the project within a fixed budget and time schedule and must warrant all workmanship for a period of not less than a year following startup. The firm should be capable of posting performance, materials, and labor bonds and should be willing and financially able to accept liquidated damages provisions in their contract, if it is required by the sources of debt financing for the project. The supplier of the ethanol process technology and the designer of the process should be experienced and well regarded, to guarantee the performance of the plant so long as the construction firm builds it to the designer’s specifications. This guarantee should include a minimum yield requirement, and specific quality requirements of products. The guarantee should also include quality and quantity requirements of feedstock (usually a bushel of #2 yellow corn). Requirements for energy and utility consumption for the use of chemicals and enzymes, and for the process water, with respect to consumption, should be stated in the process guarantee. The volume and characteristics of wastewater should also be addressed in this guarantee, and all requirements should be presented on a per bushel basis. The guarantee is normally considered satisfied if a successful performances test of several days duration is completed after plant startup. In some cases, the same firm may be both the designer and the constructor. In such cases, the General Constructor (GC) will provide the performance guarantees and the process designer will act as a subcontractor to the GC. In cases where separate contracts are held for both the designer and the construction contractor, the process and construction guarantees would be in separate documents. BBI recommends that there be a single “turnkey” contract providing the strongest possible financial resources to back the design and construction scope of work. What follows is a list and short description of firms that BBI knows to be successful and reliable in the ethanol industry. Other firms are also entering this increasingly competitive industry. Fagen, Inc. (Granite Falls, MN) Fagen Inc. has been the design-build contractor, E.P.C. contractor, general contractor, or subcontractor for at least 48 ethanol plant projects, both new construction and expansion jobs, and claims more ethanol industry experience than any other U.S. firm during the past decade. With the addition of Fagen Engineering LLC and Fagen Management LLC, Fagen now performs the civil, structural, mechanical, and electrical engineering aspects for ethanol projects and provides management services after construction and startup. They typically utilize the ethanol process design of ICM, Inc. Fagen, Inc. is located at 501 West Highway 212, Granite Falls, MN 56241 Telephone (320) 564-3324. Web address: http://www.fageninc.com/

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Delta-T Corporation (Williamsburg, VA) Headquartered in Williamsburg, VA, Delta-T is a design-build firm that provides alcohol plants, systems and services to the fuel, beverage, industrial and pharmaceutical markets. Delta-T is known for pioneering many of the innovations currently in use by the newest generation of ethanol plants, including the commercialization of molecular sieve dehydration, zero discharge of process wastewater, and more efficient refining and purification systems to produce high quality alcohols. Delta-T has provided alcohol production, dehydration and purification solutions to more than 60 clients worldwide, including projects in Russia, India, Western and Eastern Europe, Africa, the Caribbean and South America. Delta-T Corporation is located at 323 Alexander Lee Parkway, Williamsburg, VA 23185 Telephone (757) 220-2955. Web address: http://www.deltatcorp.com/. ICM, Inc. (Colwich, KS) ICM, Inc. of Colwich, KS, serves the agricultural industry by developing and implementing innovative and practical processing solutions. ICM, Inc. employs about 100 people in all aspects of ethanol project development and operation including cash and commodity trading of corn, marketing of ethanol and distillers grain, process consulting, engineering, equipment fabrication, field installation, and plant start-up. The former technology leader of High Plains Corporation formed ICM. High Plains operates plants in Nebraska, Kansas, and New Mexico. ICM does own and operate a facility in Russell, Kansas, which acts as both a training and research facility for their technology. Six of the latest ethanol plants in the United States have utilized ICM technology. ICM Inc. is located at 310 N. First Street, Colwich, KS 67030 Telephone (316) 796-0900. Web address: http://www.icminc.com/. Katzen International, Inc. (Cincinnati, OH) Katzen is one of the most experienced ethanol plant process designers and technology suppliers in the world, having operated worldwide for over forty years. Katzen International, Inc. was formed in 1955 by Dr. Raphael Katzen. Katzen International provides innovative and advanced design concepts in a wide variety of industries, such as agriculture, chemicals, sugar, cryogenic and pulp and paper. Although based in the United States, Katzen has completed projects in over 25 countries. Katzen International Inc. is located at 2300 Wall Street, Suite K, Cincinnati, Ohio 45212 Telephone (513) 351-7500. Web address: http://www.katzen.com/ Lurgi/PSI, Inc. (Memphis, TN) This firm was created approximately three years ago with the purchase of Process Systems, Inc. (“PSI”) of Memphis by Lurgi AG of Germany. The company is part of the GEA Group, the largest food technology company in the world. PSI is best known as a process engineer and as a

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turnkey contractor in the corn wet milling and the sugar beet processing industries. The company’s ethanol work in the United States has been in association with its wet milling activities and in the expansion of large dry milling facilities with respect to corn as a feedstock. Lurgi PSI Inc. is located at 1790 Kirby Parkway, Suite 300, Memphis, TN 38138 Telephone (901) 756-8250. Web address: http://www.lurgipsi.com/ Vogelbusch USA, Inc. (Houston, TX) Vogelbusch USA, Inc. is a subsidiary of Vogelbusch GMBH, a large process engineering company, headquartered in Vienna, Austria. The worldwide company claims to have more ethanol capacity in place, utilizing its technology, than any other designer. Vogelbusch provides technologies for fermentation, separation, distillation and evaporation with a focus on contracting of tailor-made plants based on Vogelbusch proprietary technology or client technology for the sugar, starch, pharmaceutical, chemical and food industries. The U.S. operation offers its license and design services in tandem with other firms and does not undertake any construction activity. Vogelbusch USA, Inc. is located at 10810 Old Katy Road, #107, Houston, Texas 77043 Telephone (713) 461-7374. Web Address: http://www.vogelbusch.com/

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VIII. PROJECT STATISTICS Ethanol Plant Statistics The project statistics for a 100 mmgy dry mill ethanol plant are shown in the following table. The project statistics shown in the table are general guidelines only and may change with the specific plant design and other project variables. Table 8-1 – Ethanol Plant Statistics Per Million Gallons of Ethanol

100 mmgy plant

356,697

35,669,700

Water (1,000 Gal/yr)

4,320

432,000

Electricity (kWh/yr)

750,000

75,000,000

Thermal Energy (MMBTU/yr)

34,000

3,400,000

1,000,000

100,000,000

DDGS (Tons/yr)

3,210

321,000

CO2 (Tons/yr)

3,143

314,300

846

84,600

396 102 6.8

39,200 10,200 680

125 33 2.2

12,700 3,300 220

128 32 2.14

12,350 3,210 215

Plant Inputs Corn (Bu/yr)

Plant Outputs Denatured Ethanol (GPY)

Wastewater (Gal/yr) Transportation Statistics Incoming Grain (Truckloads) or (Railcars, 3500 bu/car) or (Barges, 52,500 bu/barge) Outgoing Ethanol (Truckloads) or (Railcars) or (Barges; 453,600 gal/barge) DDGS (Truckloads) or (Railcars) or (Barges; 1500 tons/barge)

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Personnel Requirements The personnel requirements used in the feasibility study are listed in Table 8-2. The positions and salaries shown are typical of the industry. Table 8-2 – Personnel Requirements for Dry Mill Ethanol Plant Position Administration/Management General Manager

100 mmgy Ethanol Plant Number Employed 1

Annual Salary

128,700

Plant Manager

1

94,100

Environmental & Safety Mgr.

1

59,400

Controller

1

79,200

Commodity Manager

1

54,500

Administrative Assistant

3

29,700

Microbiologist

1

44,600

Lab Technician

3

29,700

Shift Team Leader

4

43,600

Shift Operator

12

36,600

Yard/Commodities Labor

10

26,700

Maintenance Manager

1

54,500

Boiler Operator

0

49,500

Maintenance Worker

4

36,600

Welder

2

41,600

Electrician

2

39,600

Instrument Technician

3

39,600

Production Labor

Maintenance

Total Number of Employees

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50

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IX. FINANCIAL ANALYSIS BBI’s financial model for dry mill ethanol production was used to project the financial performance of the proposed ethanol plant in the Stuttgart and Helena areas of Arkansas. Dry mill ethanol plants with a nameplate capacity of 100 mmgy were evaluated, with natural gas as the main heating source. The key model inputs include product and co-product yields, product and raw material pricing, shipping costs, labor costs, energy consumption and pricing, capital costs including engineering, procurement and construction of the ethanol plant and all supporting facilities and systems, project development costs, financing costs, start-up costs, working capital and inventory costs. The BBI model produces a ten-year operating forecast for the project including a balance sheet, income statement and cash flow statement. The complete 10-year proforma for the 100 mmgy dry mill ethanol plants are included at the end of this report. The impact of critical project variables will be determined and the viability of the project with regard to each will be evaluated. Assumptions Used in the Financial Forecast The major variables for the financial analysis are ethanol price, feedstock price, distillers grain drying and price, and energy costs. In addition to these issues, various financial model input sensitivities were analyzed and are described below. The assumptions used in the financial forecasts that have the greatest impact on the project risk and return are: •

Ethanol Price. The net ethanol price used in the financial forecast is $1.37 per gallon of denatured ethanol. The net price includes denatured ethanol product sold at a price of $1.46 per gallon less 8.0¢ per gallon shipping and 1.0¢ per gallon sales commission. Spot market ethanol prices in the projected target markets have ranged from $1.46 to $1.48 per gallon over the past 5 years. The impacts of higher and lower ethanol prices will be determined.

•

Ethanol Yield. The ethanol yield is an important variable for profitable ethanol production. Reputable ethanol process design companies will guarantee a yield of 2.8 gallon of denatured ethanol for each 56 pound bushel of #2 yellow corn (at 15% moisture or less) processed. We have used a yield of 2.8 gallons of denatured ethanol per 56 pound bushel of corn in the financial analysis.

•

Feedstock Price. The feedstock price for corn used in the analysis will be $2.52 per bushel for the Helena site, and $2.60 per bushel for the Stuttgart site. This is based on the historical average cash price for corn in the local feedstock area, supplemented by corn brought in by rail or barge, plus an anticipated increase in the local basis of 17 to 29¢ per bushel.

•

Distillers Grain Price. BBI has used a price of $98.70 per ton for DDGS in the financial projections, which is based on DDGS priced at 100% of the price of corn on a dry weight basis.

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•

Distillers Grain Yield. A state-of-the-art dry mill ethanol plant should yield about 18 pounds of high quality DDGS at 10% moisture per bushel of corn processed. The equivalent yield of wet distillers grain at 65% moisture is 46 pounds per bushel.

•

Wet Distillers Grain. The local market for wet distillers grain appears to be substantial, but this market would have to be developed. We have therefore assumed that all of the distillers grains will be dried. In the sensitivity analysis for DWG, we assumed a DWG price of $36.85 per ton, which is based on DWG priced at 96% of the price of corn on a dry weight basis.

•

Incentive Payments. The financial forecast does not include any state incentives or tax credits. State ethanol incentives can be reduced or eliminated at any time, with Minnesota’s reduction in payments to ethanol producers a few years ago as an example.

•

Financing. 40% equity has been assumed for financing the project. 60% debt at 8.0% interest amortized over 10 years provides the balance of project funding. Actual financing may be different than this.

•

Electricity Price. The estimated electric rate for the project is $0.0844 per kWh based on rate information from Entergy Arkansas.

•

Water Price. Makeup water is assumed to be purchased from the local utility at a rate of $1.23 per 1,000 gallons. The estimated makeup water rate is 12 gallons per bushel of corn processed or about 400 gallons per minute. Natural Gas Price. Natural gas pricing for industrial users in Arkansas from 2001 through 2006 is shown in Figure 9-1, below (source: U.S. DOE Energy Information Administration). The average industrial natural gas price in Arkansas for the period from 2001-2006 was $7.43 per MCF. Recent prices have been much higher than this, so the financial analysis will carefully explore the sensitivity of the plant’s profitability to the price of natural gas.

The key project assumptions discussed above plus additional assumptions used in the financial projections are presented in Table 9-1. A breakdown of the ethanol plant capital costs and the owner’s costs is presented in Table 9-2. The sale of the plant’s carbon dioxide is not included in the financial projections.

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Figure 9-1 – Industrial Natural Gas Prices in Arkansas Source: http://www.eia.doe.gov Average Annual Natural Gas Prices 12.00

10.00

$/MMBTU

8.00

6.00

4.00

2.00

0.00 2001

2002

2003

2004

2005

2006

Table 9-1 – Assumptions Used In the Financial Forecast Stuttgart Ethanol Project Nameplate Ethanol Production (gal/year) Anhydrous Ethanol Production (gal/year) Product Values Conversion Rate (anhydrous gal/bushel) Grain ($/Bu) Grain Elevator Fee ($/bu) Ethanol ($/gal) Ethanol Sales Commission (%) Ethanol Shipping Cost ($/gal) DDGS (% of corn price, dry weight basis) DDGS Commission DWG (% of corn price, dry weight basis) DWG Commission ($/ton) % DWG Sold in Year 1 % DWG Sold in Year 2 % DWG Sold in Years 3 through 10 Denaturant ($/gal) Natural Gas ($/MMBTU) Electricity ($/kWh) Makeup Water ($/1000 gal) Wastewater ($/1000 gal)

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100mmgy Stuttgart 100,000,000 95,238,095

100mmgy Helena 100,000,000 95,238,095

2.67 2.60 0.03 1.46 0.685% 0.080 100% 2% 95% 4% 10% 20% 30% 1.20 7.43 0.0844 2.95 1.23

2.67 2.52 0.03 1.46 0.685% 0.080 100% 2% 95% 4% 10% 20% 30% 1.20 7.43 0.0844 2.95 1.23

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Table 9-2 – Stuttgart Ethanol, LLC Project Capital Cost Estimate 100 mmgy Stuttgart 100,000,000

100 mmgy Helena 100,000,000

95,238,095

95,238,095

Project Engineering & Construction Costs EPC Contract Site Development Rail Additional Grain Storage Total NG Engineering and Construction Cost

$105,000,000 $5,100,000 $2,850,000 $0 $114,950,000

$105,000,000 $5,100,000 $2,850,000 $0 $114,950,000

Owners Costs Inventory - Feedstock Inventory - Chemicals/Yeast/Denaturant Inventory - Spare Parts Startup Costs Land Fire Protection & Potable Water Administration Building & Office Equipment Insurance & Performance Bond Rolling Stock and Shop Equipment Organizational Costs and Permits Capitalized Interest & Financing Costs Working Capital/Risk Management Total Owners Costs

$2,100,000 $490,000 $600,000 $3,500,000 $1,600,000 $2,050,000 $500,000 $925,000 $675,000 $915,000 $3,650,000 $6,000,000 $23,005,000

$2,100,000 $490,000 $600,000 $3,500,000 $1,600,000 $2,050,000 $500,000 $925,000 $675,000 $915,000 $3,650,000 $6,000,000 $23,005,000

Total Project Capital Cost

$137,955,000

$137,955,000

Stuttgart Ethanol Project Nameplate Ethanol Production (gal/year) Anhydrous Ethanol Production (gal/year)

As noted in Section IV – Feedstock – there is significant seasonal variability in grain prices, particularly for grain brought in by rail or barge. Although additional grain storage has not been included in the project financials, this option should be seriously evaluated during the Project Development stage, and/or when sustained positive cash flow is generated from operations. An additional investment of $1.5 to $2.0 million for grain bins would permit storage of an additional 1 million bushels of corn. Economic Modeling Results Pre-tax average annual Return on Investment (ROI) and Internal Rate of Return (IRR) were used to measure the projected profitability of the Stuttgart Ethanol, LLC ethanol project. The results are summarized in Table 9-3. The ROI is the average of the return for the 11 years of the

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financial forecast including the construction year. More detailed results are shown on the following pages and the complete 10-year economic forecasts for the project are included in Appendix B. The projected average annual ROIs for the plant in Stuttgart is 32.4%, increasing to 35.9% for the Helena site, primarily due to lower feedstock costs. The corresponding IRRs are also shown in Table 9-3. Table 9-3 – Financial Modeling Results Stuttgart Ethanol Project 11-year Average Annual ROI Internal Rate of Return Average Annual Income Installed Capital Cost ($/gal) Plant Capital Cost Owner's Costs Total Project Investment 40% Equity

100 mmgy Stuttgart 32.4% 33.2% $17,877,000 $1.15 $114,950,000 $23,005,000 $137,955,000 $55,182,000

100 mmgy Helena 35.9% 35.8% $19,829,000 $1.15 $114,950,000 $23,005,000 $137,955,000 $55,182,000

The IRR is based on the cash flows consisting of the equity investment at the start of construction followed by the net increase in cash at the end of years 1 through 11. In year 11, we have assumed that the plant is sold for 4 times the previous year’s EBITDA. The equity investment is assumed to be 40% of the total project cost. The cash flows are shown on the Proforma Statements of Cash Flows in Appendix B. Another method BBI uses to measure projected profitability is the average annual pre-tax Return on Investment (ROI) for the 11-year financial forecast. In general, BBI use a hurdle rate of 25% average annual pre-tax ROI for ethanol project go/no go recommendations. BBI uses the following guidelines for determining the feasibility of a project and as a guideline for determining if a project will be able to compete in today’s competitive ethanol industry. Average Annual ROI (40% equity) Less than 20% 20% to 24% 25% to 29% 30% and higher

Competitive Status of the Project project is typically not worth pursuing less than average project – needs improvement a good project – should be able to compete an excellent project

The above scale is based on BBI’s methods and history of evaluating over 75 ethanol projects. This scale should not be used for financial projections done by others. Also, as projects progress, the assumptions used in the financial analysis may change and the resulting projected returns may change significantly. Based on the results in Table 9-3, a 100 mmgy ethanol plant located in either Stuttgart or Helena would be viable; each is ranked as an “excellent” project. The proforma income statement for year two of operations for each site is shown in Table 9-4.

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Table 9-4 – Income Statement for Year 2 Proforma Income Statement

100mmgy Stuttgart $/Year

100mmgy Helena $/Year

$/gal

$/gal

Revenue Ethanol DDGS DWG Carbon Dioxide State Producer Payment Federal Small Producer Tax Credit USDA CCC Bioenergy Program Total Revenue

$ $ $ $ $ $ $ $

146,727,000 26,247,946 6,107,950 179,082,897

$ $ $ $ $ $ $ $

1.47 0.26 0.06 1.79

$ 146,727,000 $ 25,440,317 $ 5,920,013 $ $ $ $ $ 178,087,330

$ $ $ $ $ $ $ $

1.47 0.25 0.06 1.78

Production & Operating Expenses Feedstocks Chemicals, Enzymes & Yeast Coal Natural Gas Electricity Denaturants Makeup Water Wastewater Disposal Direct Labor & Benefits Total Production Costs

$ $ $ $ $ $ $ $ $ $

99,475,655 7,070,000 25,251,895 6,456,600 6,120,000 1,339,101 111,667 1,403,538 147,228,457

$ $ $ $ $ $ $ $ $ $

0.99 0.07 0.25 0.06 0.06 0.01 0.00 0.01 1.47

$ 96,449,438 $ 7,070,000 $ $ 25,251,895 $ 6,456,600 $ 6,120,000 $ 1,339,101 $ 111,667 $ 1,403,538 $ 144,202,240

$ $ $ $ $ $ $ $ $ $

0.96 0.07 0.25 0.06 0.06 0.01 0.00 0.01 1.44

Gross Profit

$

31,854,440

$

0.32

$

33,885,091

$

0.34

Administrative & Operating Expenses Maintenance Materials & Services $ Repairs & Maintenance - Wages & B $ Consulting, Management and Bank $ Property Taxes & Insurance $ Admin. Salaries, Wages & Benefits $ Legal & Accounting/Community Affa $ Office/Lab Supplies & Expenses $ Travel, Training & Miscellaneous $ Total Administrative & Operating Expe $

1,294,125 382,053 153,000 1,325,534 730,620 97,920 122,400 51,000 4,156,653

$ $ $ $ $ $ $ $ $

0.01 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.04

$ $ $ $ $ $ $ $ $

1,294,125 382,053 153,000 1,325,534 730,620 97,920 122,400 51,000 4,156,653

$ $ $ $ $ $ $ $ $

0.01 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.04

EBITDA Less: Interest - Operating Line of Credit Interest - Senior Debt Interest - Working Capital Depreciation & Amortization

$

25,120,332

$

0.25

$

27,150,983

$

0.27

$ $ $ $

6,380,021 8,030,436

$ $ $ $

0.06 0.08

$ $ $ $

6,380,021 8,030,436

$ $ $ $

0.06 0.08

Pre-Tax Income Current Income Taxes

$ $

10,709,875 -

$ $

0.11 -

$ $

12,740,526 -

$ $

0.13 -

Net Earnings (Loss) for the Year

$

10,709,875

$

0.11

$

12,740,526

$

0.13

Pre-Tax Internal Rate of Return 11-Year Average Annual Pre-Tax ROI

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32.4% 33.2%

9-6

35.9% 35.8%

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State Incentives There are currently no state producer incentives in Arkansas. It is BBI’s view that a project should be viable without state incentives, in case the payment program is reduced or suspended, which recently occurred in Minnesota. Sensitivity and Breakeven Analysis The variables that have the greatest impact on the project’s profitability are the delivered price for corn and the ethanol selling price. This is the case for all fuel ethanol plants, not just the proposed Stuttgart Ethanol, LLC ethanol project. A sensitivity analysis was run to determine the “breakeven” prices for corn and ethanol. Breakeven here is defined as the point where the year two Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA) is zero. The breakeven sensitivity analysis for the 100 mmgy plant in Stuttgart is shown in Table 9-5. The breakeven analysis shows that the project would continue to be cash-flow positive over a range of corn and ethanol prices. The breakeven price for corn is about $3.05 per bushel with ethanol at $1.46 per gallon. For ethanol, the breakeven price is $1.30 per gallon with corn at $2.60 per bushel. For comparison, the breakeven analysis for the Helena plant gives a slightly wider operating range where the operation is cash-flow positive: the breakeven price for corn is about $3.07 per bushel with ethanol at $1.46 per gallon, and for ethanol, the breakeven price is $1.29 per gallon with corn at $2.52 per bushel. Thus, comparing the two sites, it is apparent that the Helena site would have a slight advantage, but is not materially different from the Stuttgart site in terms of sensitivity to feedstock and product price fluctuations. A series of sensitivity analyses were run to examine the effect of critical parameters on the 11year average ROI. The parameters analyzed include: • Corn price • Ethanol selling price • DDGS selling price • Natural gas price • Electricity price • Percent of Distillers Grain sold wet • Capital cost of the project The results of these parameter studies are shown in the graphs that follow. As expected, the projected profitability as measured by the ROI is very sensitive to the corn and ethanol price; moderately sensitive to the DDGS and natural gas price and relatively insensitive to the electricity price, and % distillers grain sold wet. The sensitivity to corn price shows that for both plants, the ROI remains positive for corn prices up to ~ $3.05/bu, an increase of 32% over the historical average price in the area. Similarly, the plants have a positive ROI with ethanol prices as low as ~$1.28/gal, which is only 14% lower than the historical price. The high baseline feedstock costs imply that the Stuttgart project is much more sensitive to the ethanol selling price than other projects with a large local supply of ethanol.

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The price of DDGSs has a low to moderate effect on the profitability of the facility (Figure 9-4). As mentioned previously, the price obtained for DDGSs is generally correlated to the cost of corn, the feed it would nominally replace. However, as the market is developed, and the unique benefits of DDGSs are realized in the marketplace, it is possible to sell DDGSs at a slight premium relative to the price of corn. On the other side of the equation, as more biofuels plants come on line, there will be a significant increase in the quantity of protein meal in the marketplace, which could drive down prices. The sensitivity profile thus helps to illustrate the impact of such a price premium, and the possibility of a price reduction. A 10% premium, to $$107/ton, would increase the ROI by about 3 to 4%, while a 10% price reduction would reduce the plant’s ROI by 3 to 4%. The sensitivity to natural gas price is shown in Figure 9-5. Compared to the baseline historical average of $7.43/MMBTU, an increase in natural gas price to $11.00/MMBTU would reduce the ROI significantly, to about 11 to 15%, but the plant would still be cash-flow positive if all other parameters (ethanol price, corn price, etc.) remained the same. Although recent natural gas futures approached (and even exceeded) this threshold, longer-term futures are much closer to the historical average. Nonetheless, the price of natural gas is quite volatile, and a dramatic increase in natural gas costs will have a significant adverse effect on the overall profitability of the facility. The ROI is comparatively tolerant to increases in the cost of electricity (Figure 9-6); doubling the cost of electricity is projected to reduce the ROI from ~33% to ~22%. Although the current plan is to market distillers grains dry, developing the market for wet grains is especially advantageous for a natural-gas fired plant. One of the key benefits of selling wet grains is the energy savings accrued in the drying process. If all of the distiller’s grains are sold dry, the ROI would range from 29 to 32% (Figure 9-7), while selling 40% of the distillers grains wet can increase the ROI by about 5%, based on natural gas at $7.43/MMBTU. The impact on ROI increases at higher natural gas prices. Capital Cost Sensitivity A sensitivity analysis was conducted to account for uncertainties in capital cost (Figure 9-8). The baseline capital cost is estimated at $105MM, excluding site development, land, and other owner’s costs. Increasing the capital cost by $45MM would reduce the ROI from ~ 17 to 20%, but the plant would still clearly be profitable. Furthermore, as previously discussed, adding more grain storage should seriously be considered. Again, increasing the capital cost by $5 million (enough to add ~ 2 to 2.5 million bushels of grain storage) would reduce the ROI by only 2% (assuming no change in corn purchase price). However, such an option is very likely to reduced the net price for corn, and as shown in Figure 9-2, every 5 cent/bu reduction in corn price increases the ROI by about 3%. Given that the seasonal variation in corn price is on the order of 30 cents per bushel, additional investment in grain storage could be highly profitable, and provide the plant with an additional hedge against an increase in corn prices or a drop in ethanol prices.

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Table 9-5 – Sensitivity and Breakeven Analysis for the Stuttgart Ethanol, LLC Ethanol Project Feedstock and Ethanol Price Sensitivity 10-Year Average Annual Return on Investment Stuttgart Ethanol Project - 100mmgy Stuttgart 100 MMGPY Plant

Feedstock ($/bushel)

Ethanol ($/gallon) 0.96

1.06

1.16

1.26

1.36

1.46

1.80

-17.1%

8.4%

27.7%

46.9%

66.1%

85.3%

104.5%

123.7%

142.9%

162.1%

181.3%

1.90

-26.5%

0.5%

21.1%

40.3%

59.5%

78.7%

97.9%

117.0%

136.2%

155.4%

174.6%

2.00

-36.1%

-8.8%

14.5%

33.7%

52.9%

72.1%

91.3%

110.5%

129.6%

148.8%

168.0%

2.10

-45.4%

-18.2%

7.7%

27.1%

46.3%

65.4%

84.6%

103.8%

123.0%

142.1%

161.3%

2.20

-54.8%

-27.8%

-0.6%

20.5%

39.6%

58.8%

78.0%

97.1%

116.3%

135.4%

154.6%

2.30

-64.1%

-37.1%

-9.9%

13.9%

33.0%

52.2%

71.3%

90.5%

109.6%

128.8%

147.9%

2.40

-73.4%

-46.4%

-19.3%

6.9%

26.4%

45.6%

64.7%

83.8%

103.0%

122.1%

141.2%

2.50

-82.7%

-55.8%

-28.8%

-1.7%

19.9%

39.0%

58.1%

77.3%

96.4%

115.5%

134.7%

2.60

-92.0%

-65.1%

-38.2%

-11.0%

13.2%

32.4%

51.5%

70.6%

89.8%

108.9%

128.0%

2.70 -101.3%

-74.4%

-47.5%

-20.4%

6.1%

25.8%

44.9%

64.0%

83.1%

102.2%

121.3%

2.80 -110.6%

-83.7%

-56.8%

-29.9%

-2.8%

19.2%

38.3%

57.4%

76.5%

95.6%

114.7%

2.90 -119.8%

-92.9%

-66.1%

-39.2%

-12.1%

12.5%

31.7%

50.8%

69.9%

89.0%

108.1%

3.00 -129.1% -102.3%

-75.4%

-48.5%

-21.4%

5.2%

25.2%

44.3%

63.3%

82.4%

101.5%

3.10 -138.4% -111.5%

-84.7%

-57.8%

-30.9%

-3.9%

18.6%

37.7%

56.7%

75.8%

94.9%

3.20 -147.6% -120.7%

-93.9%

-67.1%

-40.2%

-13.2%

11.8%

31.1%

50.2%

69.2%

88.3%

3.30 -156.8% -130.0% -103.1%

-76.3%

-49.5%

-22.5%

4.2%

24.5%

43.6%

62.6%

81.7%

3.40 -166.0% -139.2% -112.4%

-85.6%

-58.8%

-32.0%

-5.0%

17.9%

37.0%

56.0%

75.1%

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9-9

1.56

1.66

1.76

1.86

1.96

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Figure 9-2 – Effect of Corn Price on ROI Feedstock Price Sensitivity Average Annunal ROI

50% 40% 30% 20% 10% 0% -10% -20% 2.25 2.35 2.45 2.55 2.65 2.75 2.85 2.95 3.05 3.15 3.25 Feedstock Price ($/bu) 100mmgy Stuttgart

100mmgy Helena

Figure 9-3 – Effect of Ethanol Price on ROI Ethanol Price Sensitivity Average Annunal ROI

80% 60% 40% 20% 0% -20% -40% -60% 1.05

1.15

1.25 1.35 1.45 1.55 Ethanol Price ($/gal)

100mmgy Stuttgart

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9-10

100mmgy Helena

1.65

1.75

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Figure 9-4 – Effect of DDGS Price on ROI

Average Annunal ROI

DDGS Price Sensitivity 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 50

60

70

80 90 100 DDGS Price ($/ton)

100mmgy Stuttgart

110

120

100mmgy Helena

Figure 9-5 – Effect of Natural Gas Price on ROI

Average Annunal ROI

Natural Gas Price Sensitivity 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 5.00

6.00

7.00 8.00 9.00 10.00 Natural Gas Price ($/MMBTU)

100mmgy Stuttgart

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100mmgy Helena

9-11

11.00

12.00

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Figure 9-6 – Effect of Electricity Price on ROI Electricity Price Sensitivity Average Annunal ROI

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0.040

0.060

0.080 0.100 0.120 0.140 Electricity Price ($/kWh)

100mmgy Stuttgart

0.160

0.180

100mmgy Helena

Figure 9-7 – Effect of % of Distillers Grains sold Wet on ROI

Average Annunal ROI

%DWG Sold Sensitivity 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0%

20%

40% 60% % DWG Sold

100mmgy Stuttgart

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9-12

80%

100mmgy Helena

100%

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Figure 9-8 – Effect of Ethanol Plant Capital Cost on ROI Capital Sensitivity Average Annunal ROI

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 90

100

110

120

130 140 Capital ($)

100mmgy Stuttgart

BBI INTERNATIONAL

9-13

150

100mmgy Helena

160

170

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X. PROJECT FINANCING Project financing for ethanol plants has always been difficult in the absence of a corporate credit or government loan guarantee program because of a lack of a pricing relationship between the feedstock and the ethanol product. Many facilities have been built with the support of grain producers who have agreed to adjust the pricing of feedstock in the event that conditions warrant it to support a project’s cash flow. Project lenders in most cases will require a “turnkey” contract from a creditable contractor utilizing proven ethanol process technology. The contract should include guarantees as to schedule, cost and process performance as well as surety bonding and substantial (25% to 30%) liquidated damages provisions. Lenders typically require 40% minimum equity as well as a solid feedstock supply plan and product purchase or marketing agreements; again from creditable parties. Most project lenders try to maintain a 7 to 10 year amortization schedule with cash “sweeps” requiring mandatory prepayments of up to 50% of annual “excess” cash flow. It should be noted that the 40% “equity” may include subordinated debt and some lenders will lend more then 60% of the project cost (up to 70% in some cases). Commodity Credit Corporation Program Since 2003, the USDA Commodity Credit Corporation (CCC) Bioenergy Program has made incentive cash payments to bioenergy producers who increase their purchases of agricultural commodities over the previous fiscal year’s (FY) purchases and convert that commodity into increased ethanol production over previous FY ethanol production. The Program is set to expire September 30, 2006, and BBI does not expect the Program to be extended beyond this date. The feasibility study, therefore, does not include any CCC Program payments. Comments on Profitability and Economic Forecasts The word profitability is a general term for the measure of the amount of profit that can be obtained from a given situation. Total profit alone cannot be used as the deciding factor in determining if an investment should be made, however. Many factors must be considered when deciding if a return is acceptable, and it is not possible to give one figure that will apply for all investment situations. There are many methods for measuring or estimating profitability: return on investment, internal rate of return, net present value and payback period are just a few. In this report we have used return on investment, ROI, as the primary measure of the estimated project profitability. Return on investment does not take into account the time value of money. The “time value of money” is the concept that a dollar today is worth more than a dollar a year from now due to inflation. When dealing with common industrial operations, profits cannot be predicted with absolute accuracy. Risk factors must be given careful consideration and the degree of uncertainty in estimated returns on investments plays an important role in determining what returns are acceptable (higher risk should equal higher returns). Because of the inherent risk, a 15% return before income taxes is usually the minimum acceptable return for any type of business

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proposition, even if the economics appear to be completely sound and reliable. Some companies required a 25% pretax return before they will consider investing capital in a project. A 20% rate of return is considered the minimal acceptable return for an ethanol project by many investors. The economic forecasts and projected profitability presented in the remainder of this report are estimates only. When dealing with commodities such as grain and gasoline (the two main divers in the project’s profitability), one can only make an educated guess as to what the future may hold. Additional project risk factors are discussed in the Summary and Recommendations section of this report. That said, BBI has used its experience and expertise to provide our best estimate as to the project’s future profitability. The sensitivity study provided later in this report shows the possible wide swings in the project’s profitability when the economic forecast model input assumptions change. The impact of changes in grain, gasoline, energy costs and other project variables should be well understood by the project sponsor and investors. Risk Factors The project and its investors will be subject to a number of risks to start-up ventures in general and to the major risks involved in the development and operation of the project and ethanol production facilities specifically. The failure to prevent or mitigate any of the following risks could jeopardize the project and/or the financial returns projected. New Venture The project sponsor may be a start-up company created specifically for the purpose of developing and operating the project. The sponsor likely will not have, nor contemplate having, significant financial resources other than its ownership of the project. Completion Risk The financial success of the project is dependent upon the timely completion of the plant construction within budget. This risk should be mitigated by extensive preliminary engineering and equipment selection activities prior to the start of construction together with the financial resources and outstanding record of success of the contractor, backed by payment and performance bonding. It is recommended that each of the firms involved in the project should have a proven record of success in similar undertakings. Performance Risk A major success factor of the project is dependent upon the process design parameters regarding feedstock throughput and product yields and quality being matched or exceeded during commercial operations. A record of successes in this area is the principal reason for choosing a specific process engineer.

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Political Risk The fuel ethanol industry is dependent upon tax policies and environmental regulations which favor the use of the product in motor fuel blends in North America. The repeal or substantial modification of the U.S. Federal Excise Tax exemption on ethanol blends or other federal or state tax programs encouraging the use of ethanol could have a detrimental effect on the industry and the project. Changes in gasoline specification or the development of other cost-effective additives competitive with ethanol could adversely affect the product. BBI believes that the ethanol industry and the product will continue to enjoy favorable support from national politicians and environmental regulators. Market Risk The major risk associated with the ongoing operation of an ethanol plant relates to the fact that grain feedstocks comprising the major portion of operating expenses do not have any price relationship to fuel ethanol. In a conventional corn dry milling plant serving only fuel grade markets, falling gasoline prices coupled with a rise in corn cost can result in severe constraints on cash flow which could jeopardize the project and/or the projected financial returns. Technological Risk There is the risk that alternative products to ethanol could be developed for use as a fuel additive or in industrial applications or that improved ethanol production processes could be introduced. BBI believes that the prospect of an occurrence of either of these developments is unlikely. Ethanol does compete with several other products in the gasoline marketplace, all of which are based on the use of hydrocarbons as raw materials. Industrial demand often is based on the product’s unique properties in specific applications where there is no currently viable alternative. There is no substitute in the manufacture of certain beverages. Most process improvements in the near term are expected to be in the areas of development of new feedstocks and improved yields for existing major feedstocks, any of which probably could be introduced into the project without considerable cost to the owner while maintaining the project’s competitive advantages. Risk Summary Finally, the risks for this project are no worse than those any other plant, planned or operating, faces today. With the new energy policy in place, the shortage of refining capacity, and the need for ethanol as an oxygenate, the demand for ethanol will remain well into the future. The risk of utility costs rising can be managed through good energy management and forward contracting programs particularly with natural gas.

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XI. CONCLUSIONS AND RECOMMENDATIONS Project Site Based on the results of the site evaluation and the BBI Site Evaluation Matrix scores, any of the three proposed sites would be suitable for a commercial fuel ethanol plant. Based on the following discussion, BBI recommends the Stuttgart Industrial Park and the Phillips County Port Authority sites for further consideration. The site in the Harbor Industrial District at the Port of Pine Bluff scored the highest site evaluation. Unfortunately, the acreage available at the site in the Port of Pine Bluff (39 acres) is too small to accommodate the unit trains that would be necessary to service a 100 mmgy fuel ethanol plant, so the site is not recommended. The site in the Phillips County Port Authority Industrial Park near Helena-West Helena is the next-highest rated site, again due primarily to the availability of barge access, plus this site has the space required to accommodate a unit train for delivery of feedstock and shipment of products. Were it not for the previously-announced intention of a competing project to site on the same acreage, the site in the Phillips County Port Authority Industrial Park would be highly recommended as an excellent site for the SELLC ethanol project. The site in the Stuttgart Industrial Park is another excellent site for consideration by SELLC. The Stuttgart site has all the requirements for a 100 mmgy fuel ethanol plant; the reasons the Stuttgart site scored lower than the other two sites is the lack of barge access and the lack of an existing rail siding. Were these two attributes present, the Stuttgart site would be essentially equivalent to the Phillips County site, and superior to the Pine Bluff site. Using the matrix’s results, BBI recommends the Pine Bluff, Stuttgart, and Phillip County Port Authority sites. The Pine Bluff site is only large enough to accommodate a 50-mmgy plant. Therefore, BBI recommends the Stuttgart Industrial Park site and the Phillips County Port Authority site as the best options for the siting the proposed plant. Advantages of the sites include access to natural gas transmission lines, rail system, road networks, community support services, and a skilled local labor pool. The Phillips County Port Authority site has the added advantages of the slackwater harbor and the existing rail spur. Therefore, the Stuttgart Industrial Park site is the best option, assuming the Phillips County Port Authority site is unavailable. Nearly all operating ethanol plants rely solely on unit trains for feedstock delivery and product shipment, and thus, even without barge access, the Stuttgart is an excellent site for a fuel ethanol plant. It is also sufficiently distant from Helena-West Helena (50miles) to support a second 100 mmgy fuel ethanol plant within the same region. Therefore, BBI recommends that SELLC pursue both the Stuttgart Industrial Park site and the Phillips County Port Authority site in parallel, focusing on the Stuttgart site, until one site or the other distinguishes itself in price, availability, or proximity to the natural gas and electrical transmission lines, as well as the water and sewer infrastructure. If the competing project fails to secure the Phillips County Port Authority site, SELLC should move to acquire it.

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The distinguishing criteria for site selection should therefore take other factors into account, such as: 1) 2) 3) 4)

Negotiated natural gas fees Community and local government acceptance and support Rail rates and markets served Incentive packages (property tax abatement, tax increment financing, etc.).

Feedstock Supply This region of Arkansas has insufficient supplies of grain to support a 100 MMGY Plant at any of the 3 locations. After feed use, 2.6 to 9.2 million bushels of grain within 50 driving miles of the three sites, much less than the 39 million bushels per year required for a 100 MMGY plant. Pine Bluff and Stuttgart will need to rely on rail to source the majority of their corn supplies, while Helena will source corn by barge to meet feed stock requirements. Key findings are as follows: • •

•

The ten-year average grain price is $2.32 at Pine Bluff, $2.31 at Stuttgart and $2.35 at Helena. The basis impact of building a 100 MG ethanol facility would be 29 cents for both Pine Bluff and Stuttgart indicating a ten-year average corn price of $2.61 for Pine Bluff and $2.60 for Stuttgart. The price impact at Helena would be 17 cents resulting in a predicted ten-year average price of $2.52. At a price of $2.61 Pine Bluff would source 16% of its corn locally with the remainder being sourced by rail. Stuttgart, at a price of $2.60 would obtain 20% locally and the remainder by rail. Helena can source 10% locally and 90% by barge at a price of $2.52.

In future years the basis impact may be muted by a supply side response. A 17 to 29 cent basis impact in the short run will encourage producers to plant more corn acres. This increase in corn acreage is likely to dampen the basis impact in the long run. However, given the limited corn supplies in the area currently, it would be surprising if the basis impact were to decrease substantially. Sourcing corn by rail and barge from low cost markets will continue to be a key driver of these plants success. Prices vary significantly over the season, with the lowest prices occurring at harvest and the highest prices occurring in the spring. Storage strategies that allow for more grain to be purchased at harvest and less during the spring can help to reduce total grain costs.

Ethanol Market Historically, there has been very little ethanol consumption in Arkansas. However, in the regional market, which includes Missouri, Indiana, Illinois, and Texas, among others, historical ethanol consumption has averaged 575 million gallons annually from 2000 to 2004, reaching 735 million gallons in 2004. The market potential based on an E10 blend is nearly 4 billion gallons per year in the states comprising the regional market. BBI INTERNATIONAL

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There are currently four ethanol plants in Missouri and Tennessee with a combined annual production capacity of 162 million gallons; several other plants in the extended regional market, including Illinois and Kansas, have production capacities totaling nearly 1 billion gallons annually, with additional plants under construction or in the planning stages. The proposed ethanol plant is well-positioned to serve the local Arkansas, and northwestern Mississippi markets, as well as ethanol markets in Tennessee, Missouri, Texas and on the gulf coast. Ethanol use in Louisiana is about 50 million gallons per year, and there are significant opportunities for growth in Alabama, Louisiana, Mississippi, Texas, and Tennessee. The best scenario for the Stuttgart Ethanol plant would be to supply ethanol locally within Arkansas and to develop nearby local and regional markets. The Tennessee market, which includes Memphis and Nashville, needs to be developed, but has significant potential. For a 100 mmgy plant, BBI estimates that 20 to 30% of the plant’s ethanol could be sold to local markets, 40% regionally, and the balance to national and East Coast markets. The average shipping cost for this scenario is estimated to be $0.08 per gallon of ethanol, dropping to $0.06 per gallon if shipping by barge. Ethanol prices are normally equal to the rack or wholesale price of unleaded gasoline, plus the 51¢ per gallon Federal Excise Tax Exemption for ethanol blends. The 5-year average spot ethanol prices in the local, regional and national/East Coast markets were used to establish a weighted average price for ethanol sold by the plant, based on the anticipated distribution of ethanol into these markets. For a 100 mmgy plant, the weighted average price is $1.468 per gallon. Based on historical pricing trends in the projected target markets, the price of ethanol used in the financial analysis is $1.468 per gallon with a weighted transportation cost of $0.06 to $0.08 per gallon and a marketing fee of 1¢/gallon.

Co-Products Total cattle inventory in Arkansas averaged 1.8 million head of cattle in from 2001 to 2006, with approximately 944,000 head of beef cows and 35,000 head in the dairy industry. In the 70-mile radius around Stuttgart, there are 234,000 head of cattle (6 year average). For the proposed ethanol project, some of the distiller’s grains could be sold wet to local livestock, but the market would have to be developed. Furthermore, the majority of the distiller’s grains would have to be dried and sold as DDGSs. Therefore, the financial analysis for the plant is based on selling all of the distillers grain dry. For the financial projections, the DDGS price was set equal to the price of corn on a dry weight basis and the DWG price was set at 96% of the corn price on a dry weight basis. With corn at $2.61 per bushel, the resulting DDGS price is $98.70 per ton and the DWG price is $36.85 per ton. Revenue from CO2 sales typically has only a minor impact on an ethanol plant’s revenue (2 or 3%). Although CO2 sales can be pursued in the project development stage, CO2 sales have not been included in the feasibility study financial forecast.

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Financial Forecast Various scenarios were evaluated using the financial model, comparing the Stuttgart and Helena sites for a 100 mmgy ethanol plant. Financial forecasts were based on historical average prices for ethanol and corn, which, correspond to $1.46/gallon, and, including a basis adjustment and shipping, $2.52/bu for the Helena site, and $2.60/bu for the Stuttgart site, respectively. Financial analyses do not include any state incentives. Pre-tax average annual Return on Investment (ROI) and Internal Rate of Return (IRR) were used to measure the projected profitability of the Stuttgart Ethanol, LLC project. The ROI and IRR for a 100 mmgy plant at both the Stuttgart and Helena locations exceeds 30%, and each can thus be classified as an excellent project. Returns are slightly higher at the Helana site, due to the slightly lower projected feedstock cost at this site ($2.52/bu vs. %2.60/bu). The equity investment, $55.2 million, is based on 40% of the total project investment cost, including capital costs, sitedevelopment costs, and owner’s costs incurred during start-up. Sensitivity analyses also demonstrated that the plant would be cash-flow positive if ethanol prices dropped as low as $1.28/gallon with corn at $2.60/bu, and corn prices as high as $3.05/bu with ethanol at $1.46/gallon. The relatively narrow window for positive cash-flow is due to the comparatively higher feedstock prices in the region.

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Appendix A – Site Evaluation Matrices

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BBI SITE EVALUATION MATRIX SITE #1: The Port of Pine Bluff Industrial Harbor District Site, Pine Bluff, AR Plant Criteria Feedstock Proximity Proximity of Communities Rail Existing Rail Siding Mainline Rail Short line Rail Access to two Railroads or Barge Roads/Highways Class A Road Access Class B Road Access Electricity Non-Interruptible Service Interruptible Service Natural Gas On site Within 2 miles of the site 2-4 miles from the site Non-Interruptible Service Interruptible Service Water City Water Well Water Waste Water Treatment To POTW (city treatment system) To Surface Waters Ability to land apply Coproduct Market Proximity Labor Availability Ethanol Market Proximity Community Services Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Fire Protection

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Available Yes/No ----6

7 10 6 8

20 Miles 10 ----0.25 mile ----9 5 -----

40 Miles 8 ----0.50 mile ----8 4 -----

60 Miles 5 ----0.75 mile ----7 3 -----

80 Miles 3 ----1.0 mile ----6 2 -----

100 Miles 2 ----More than 1 mile ----5 1 -----

8 6

---------

---------

---------

---------

---------

8 0

8 4

---------

---------

---------

---------

---------

8 0

9 6 3 8 4

---------------------

---------------------

---------------------

---------------------

---------------------

0 6 0 8 0

7 5

---------

---------

---------

---------

---------

7 0

7 5 3 -------------

------------8 5 3 Within 20 Miles 1 1 1 2 1 1 2

------------3 3 2

------------2 2 2

------------1 0 2

7 0 0 1 7 2

5 5 5 6 4 4 6

------------10 7 4 Within 15 Miles 3 3 3 4 2 2 4

-----------------------------

-----------------------------

5 5 5 6 4 4 6

-----

-----

-----

-----

-----

----------------------------Total Points

On Site

Within 10 Miles

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Potential Plant Site 2 6

7 10 0 8

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BBI SITE EVALUATION MATRIX SITE #2: Stuttgart Industrial Park Site, Stuttgart, AR Plant Criteria Feedstock Proximity Proximity of Communities Rail Existing Rail Siding Mainline Rail Short line Rail Access to two Railroads or Barge Roads/Highways Class A Road Access Class B Road Access Electricity Non-Interruptible Service Interruptible Service Natural Gas On site Within 2 miles of the site 2-4 miles from the site Non-Interruptible Service Interruptible Service Water City Water Well Water Waste Water Treatment To POTW (city treatment system) To Surface Waters Ability to land apply Coproduct Market Proximity Labor Availability Ethanol Market Proximity Community Services Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Fire Protection

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Available Yes/No ----6

7 10 6 8

20 Miles 10 ----0.25 mile ----9 5 -----

40 Miles 8 ----0.50 mile ----8 4 -----

60 Miles 5 ----0.75 mile ----7 3 -----

80 Miles 3 ----1.0 mile ----6 2 -----

100 Miles 2 ----More than 1 mile ----5 1 -----

8 6

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---------

---------

---------

---------

0 6

8 4

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---------

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---------

---------

8 0

9 6 3 8 4

---------------------

---------------------

---------------------

---------------------

---------------------

0 6 0 8 0

7 5

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---------

---------

---------

---------

7 0

7 5 3 -------------

------------8 5 3 Within 20 Miles 1 1 1 2 1 1 2

------------3 3 2

------------2 2 2

------------1 0 2

7 0 0 1 7 2

5 5 5 6 4 4 6

------------10 7 4 Within 15 Miles 3 3 3 4 2 2 4

-----------------------------

-----------------------------

5 5 5 6 4 4 6

-----

-----

-----

-----

-----

----------------------------Total Points

On Site

Within 10 Miles

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Potential Plant Site 2 6

0 10 0 0

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BBI SITE EVALUATION MATRIX SITE #3: Phillips County Port Authority Industrial Park, Helena-West Helena, AR Plant Criteria Feedstock Proximity Proximity of Communities

Available Yes/No ----6

7 10 6 8

20 Miles 10 ----0.25 mile ----9 5 -----

40 Miles 8 ----0.50 mile ----8 4 -----

60 Miles 5 ----0.75 mile ----7 3 -----

80 Miles 3 ----1.0 mile ----6 2 -----

100 Miles 2 ----More than 1 mile ----5 1 -----

8 6

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---------

---------

---------

0 6

8 4

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---------

8 0

9 6 3 8 4

---------------------

---------------------

---------------------

---------------------

---------------------

9 0 0 8 0

7 5

---------

---------

---------

---------

---------

7 0

7 5 3 -------------

------------8 5 3 Within 20 Miles 1 1 1 2 1 1 2

------------3 3 2

------------2 2 2

------------1 0 2

0 5 0 1 7 2

5 5 5 6 4 4 6

------------10 7 4 Within 15 Miles 3 3 3 4 2 2 4

-----------------------------

-----------------------------

5 5 5 6 4 4 6

-----

-----

-----

-----

-----

----------------------------Total Points

On Site

Rail Existing Rail Siding Mainline Rail Short line Rail Access to two Railroads or Barge Roads/Highways Class A Road Access Class B Road Access Electricity Non-Interruptible Service Interruptible Service Natural Gas On site Within 2 miles of the site 2-4 miles from the site Non-Interruptible Service Interruptible Service Water City Water Well Water Waste Water Treatment To POTW (city treatment system) To Surface Waters Ability to land apply Coproduct Market Proximity Labor Availability Ethanol Market Proximity Community Services Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Fire Protection

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Within 10 Miles

A-4

Potential Plant Site 2 6

0 10 0 8

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APPENDIX B: Financial Forecast: 100 MMGY Gas-Fired Ethanol Plant in Stuttgart, AR

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Stuttgart Ethanol Project - 100mmgy Stuttgart Production Assumptions Nameplate Denatured Fuel Ethanol (gal/year) Anhydrous Ethanol Production (gal/year) Operating Days Per Year

Product Yields & Energy Consumption

100,000,000 95,238,095 350 1st Year Operations

11-Year Average Annual Pre-Tax ROI

2nd Year Operations

3rd Year Operations

4th Year Operations

32.4%

5th Year Operations

6th Year Operations

7th Year Operations

8th Year Operations

9th Year Operations

10th Year Operations

Annual Escalation

Ethanol Production Increase Over Previous Year Anhydrous Ethanol Yield (gal/bushel) Denatured Ethanol Sold (gal/year) Ethanol Price ($/gal) Ethanol Sales Commission (% of Ethanol Price) Ethanol Transportation ($/gal)

0% 2.6700 76,880,952 $1.4600 0.685% $0.0800

5% 2.6700 105,000,000 $1.4892 0.685% $0.0816

5% 2.6700 110,250,000 $1.5190 0.685% $0.0832

0% 2.6700 110,250,000 $1.5494 0.685% $0.0849

0% 2.6700 110,250,000 $1.5804 0.685% $0.0866

0% 2.6700 110,250,000 $1.6120 0.685% $0.0883

0% 2.6700 110,250,000 $1.6442 0.685% $0.0901

0% 2.6700 110,250,000 $1.6771 0.685% $0.0919

0% 2.6700 110,250,000 $1.7106 0.685% $0.0937

0% 2.6700 110,250,000 $1.7448 0.685% $0.0956

Delivered Feedstock Price ($/bu) Feedstock Procurement Fees ($/bu) Feedstock Usage (bu/year) Grain Test Weight (lb/bu)

$2.6000 $0.0300 28,238,511 56.000

$2.6260 $0.0300 37,453,184 56.000

$2.6523 $0.0300 39,325,843 56.000

$2.6788 $0.0300 39,325,843 56.000

$2.7056 $0.0300 39,325,843 56.000

$2.7326 $0.0300 39,325,843 56.000

$2.7600 $0.0300 39,325,843 56.000

$2.7876 $0.0300 39,325,843 56.000

$2.8154 $0.0300 39,325,843 56.000

$2.8436 $0.0300 39,325,843 56.000

DDGS Yield (lb/bu) DDGS Sold (ton/year) DDGS Price, FOB ($/ton) DDGS Transportation ($/ton) DDGS Sales Commission ($/ton)

18.000 217,840 $98.319 $0.000 $1.966

18.000 269,663 $99.303 $0.000 $1.966

18.000 247,753 $100.296 $0.000 $1.966

18.000 247,753 $101.299 $0.000 $1.966

18.000 247,753 $102.311 $0.000 $1.966

18.000 247,753 $103.335 $0.000 $1.966

18.000 247,753 $104.368 $0.000 $1.966

18.000 247,753 $105.412 $0.000 $1.966

18.000 247,753 $106.466 $0.000 $1.966

18.000 247,753 $107.530 $0.000 $1.966

1.00% 1.00% 0.00%

% DWG Sold DWG Yield (lb/bu) DWG Sold (ton/year) DWG Price, FOB ($/ton) DWG Transportation ($/ton) DWG Sales Commission ($/ton)

10% 46.286 65,352 $36.324 $0.000 $1.453

20% 46.286 173,355 $36.687 $0.000 $1.453

30% 46.286 273,034 $37.054 $0.000 $1.453

30% 46.286 273,034 $37.424 $0.000 $1.453

30% 46.286 273,034 $37.798 $0.000 $1.453

30% 46.286 273,034 $38.176 $0.000 $1.453

30% 46.286 273,034 $38.558 $0.000 $1.453

30% 46.286 273,034 $38.944 $0.000 $1.453

30% 46.286 273,034 $39.333 $0.000 $1.453

30% 46.286 273,034 $39.727 $0.000 $1.453

1.00% 1.00% 0.00%

6.600 0% 0 $8.000

6.600 0% 0 $8.080

6.600 0% 0 $8.161

6.600 0% 0 $8.242

6.600 0% 0 $8.325

6.600 0% 0 $8.408

6.600 0% 0 $8.492

6.600 0% 0 $8.577

6.600 0% 0 $8.663

6.600 0% 0 $8.749

1.00%

Electricity Use (kWh/bu) Annual Electricity Use (million kWh/year) Electricity Price ($/kWh)

2.003 56.548 $0.0844

2.003 75.000 $0.0861

2.003 78.750 $0.0878

2.003 78.750 $0.0896

2.003 78.750 $0.0914

2.003 78.750 $0.0932

2.003 78.750 $0.0950

2.003 78.750 $0.0969

2.003 78.750 $0.0989

2.003 78.750 $0.1009

2.00%

Waste Heat Fuel Use (% of total energy use) Waste Heat BTU per Pound (BTU/lb) Waste Heat Use (BTU/gal) Annual Waste Heat Use (MMBTU/year) Delivered Waste Heat Price ($/MMBTU) Delivered Waste Heat Price ($/MMBTU)

0% 0 0 0 $3.0000 $3.0000

0% 0 0 0 $3.0600 $3.0600

0% 0 0 0 $3.1212 $3.1212

0% 0 0 0 $3.1836 $3.1836

0% 0 0 0 $3.2473 $3.2473

0% 0 0 0 $3.3122 $3.3122

0% 0 0 0 $3.3785 $3.3785

0% 0 0 0 $3.4461 $3.4461

0% 0 0 0 $3.5150 $3.5150

0% 0 0 0 $3.5853 $3.5853

32,867 2,526,821 $7.4300

31,733 3,332,000 $7.5786

30,600 3,373,650 $7.7302

30,600 3,373,650 $7.8848

30,600 3,373,650 $8.0425

30,600 3,373,650 $8.2033

30,600 3,373,650 $8.3674

30,600 3,373,650 $8.5347

30,600 3,373,650 $8.7054

30,600 3,373,650 $8.8795

2.00%

0.012 338,862 $2.9500

0.012 449,438 $2.9795

0.012 471,910 $3.0093

0.012 471,910 $3.0394

0.012 471,910 $3.0698

0.012 471,910 $3.1005

0.012 471,910 $3.1315

0.012 471,910 $3.1628

0.012 471,910 $3.1944

0.012 471,910 $3.2264

1.00%

CO2 Yield (lb/gal) Percernt of CO2 Produced that is Sold CO2 Sold (ton/year) CO2 Price ($/ton)

Natural Gas Use (BTU/gal) Annual Natural Gas Use (MMBTU/year) Natural Gas Price ($/MMBTU) Fresh Water Use (1000 gal/bu) Annual Fresh Water Use (1000 gal/year) Fresh Water Price ($/1000 gal)

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2.00% 0.00% 2.00% 1.00% 0.00%

2.00%

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DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Production Assumptions, continued

Effluent Water Disposal (1000 gal/bu) Annual Effluent Water Disposal (1000 gal/year) Effluent Water Disposal Price ($/1000 gal) Denaturant Use (% of ethanol sold) Annual Denaturant Use (gal/year) Denaturant Price ($/gal) Chemicals & Enzymes Cost ($/gal ethanol) Number of Employees Average Salary Including Benefits Maintenance Materials & Services (% of Capital Equ Property Tax & Insurance (% of Depreciated Proper Inflation for all other Administrative Expense Categories Financial Assumptions USE OF FUNDS: Project Engineering & Construction Costs EPC Contract Site Development Rail Grain Receiving and Storage Waste Heat Steam Generator Construction Contingency Total Engineering and Construction Cost Development and Startup Costs Inventory - Feedstock Inventory - Chemicals/Yeast/Denaturant Inventory - Spare Parts Startup Costs Land Fire Protection & Potable Water Administration Building & Office Equipment Insurance & Performance Bond Rolling Stock and Shop Equipment Organizational Costs and Permits Capitalized Interest & Financing Costs Working Capital/Risk Management Total Development Costs TOTAL USES Accounts Payable, Receivable & Inventories Fuel Ethanol Distillers Grain Denaturants Chemicals & Enzymes Feedstock Utilities

BBI INTERNATIONAL

1st Year Operations 0.002 67,772 $1.2300

2nd Year Operations 0.002 89,888 $1.2423

3rd Year Operations 0.002 94,382 $1.2547

4th Year Operations 0.002 94,382 $1.2673

5th Year Operations 0.002 94,382 $1.2799

6th Year Operations 0.002 94,382 $1.2927

7th Year Operations 0.002 94,382 $1.3057

8th Year Operations 0.002 94,382 $1.3187

9th Year Operations 0.002 94,382 $1.3319

10th Year Operations 0.002 94,382 $1.3452

5.000% 3,769,841 $1.2000

5.000% 5,000,000 $1.2240

5.000% 5,250,000 $1.2485

5.000% 5,250,000 $1.2734

5.000% 5,250,000 $1.2989

5.000% 5,250,000 $1.3249

5.000% 5,250,000 $1.3514

5.000% 5,250,000 $1.3784

5.000% 5,250,000 $1.4060

5.000% 5,250,000 $1.4341

2.00%

$0.0700

$0.0707

$0.0714

$0.0721

$0.0728

$0.0736

$0.0743

$0.0750

$0.0758

$0.0766

1.00%

50 $54,038

50 $55,389

50 $56,773

50 $58,193

50 $59,648

50 $61,139

50 $62,667

50 $64,234

50 $65,840

50 $67,486

2.50%

2.500% 2.000%

2.538% 2.060%

2.576% 2.060%

2.614% 2.060%

2.653% 2.060%

2.693% 2.060%

2.734% 2.060%

2.775% 2.060%

2.816% 2.060%

2.858% 2.060%

SOURCE OF FUNDS: Senior Debt Principal Interest Rate Lender and Misc. Fees Placement Fees Amortization Period Cash Sweep

$105,000,000 $5,100,000 $2,850,000 $0 $0 $2,000,000 $114,950,000

Subordinate Debt Principal Interest Rate Lender Fees Placement Fees Amortization Period

$2,100,000 $490,000 $600,000 $3,500,000 $1,600,000 $2,050,000 $500,000 $925,000 $675,000 $915,000 $3,650,000 $6,000,000 $23,005,000

Equity Investment Total Equity Amount Placement Fees Common Equity Preferred Equity Grants Amount

$137,955,000 Receivable (# Days) 14 14

TOTAL SOURCES Payable (# Days)

10 15 10 15

$82,773,000 8.50% $827,730 $0 10 0.000%

60.00% fixed 1.000% 0.000% years

$0 8.00% $0 $0 10

0.00% interest only 0.000% 1.500% years

$55,182,000 $0 $55,182,000 $0

40.00% 0.000% 100.000% 0.000%

$0

0.00%

$137,955,000

Inventories (# Days) 8 8 15 20 10

B-3

Investment Activities Income Tax Rate Investment Interest Operating Line Interest

0.00% 3.00% 8.00%

State Producer Payment Producer payment, $/gal Estimated annual payment Incentive duration, years

$0.000 $0 5

Other Incentive Payments Small Producer Tax Credit % of CCC Payment

no 0%

Plant Operating Rate Month 13 14 15 16 17 18 19 20 21 22 23 24

% of Nameplate 0.0% 0.0% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Annual Escalation

1.00%

1.50% 3.00% 2.00%

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Proforma Balance Sheet Construction (Year 0) ASSETS Current Assets: Cash & Cash Equivalents Accounts Receivable - Trade Inventories Feedstock Chemicals, Enzymes & Yeast Denaturant Finished Product Inventory Spare Parts Total Inventories Prepaid Expenses Other Current Assets Total Current Assets

1st Year Operations

2nd Year Operations

3rd Year Operations

4th Year Operations

5th Year Operations

6th Year Operations

7th Year Operations

8th Year Operations

9th Year Operations

10th Year Operations

0 0

4,744,135 6,522,339

14,944,051 7,163,316

30,495,145 7,649,045

48,087,674 7,788,747

67,303,141 7,931,103

88,177,264 8,076,165

110,750,220 8,223,985

135,056,531 8,374,618

161,135,513 8,528,118

189,027,480 8,684,541

0 0 0 0 0 0 0 0 0

2,121,922 250,000 244,898 2,507,558 600,000 5,724,378 0 0 16,990,852

2,842,162 384,762 249,796 3,365,222 600,000 7,441,941 0 0 29,549,308

3,013,775 388,610 254,792 3,554,411 600,000 7,811,587 0 0 45,955,778

3,043,576 392,496 259,888 3,599,218 600,000 7,895,177 0 0 63,771,599

3,073,675 396,421 265,085 3,644,667 600,000 7,979,847 0 0 83,214,091

3,104,074 400,385 270,387 3,690,767 600,000 8,065,613 0 0 104,319,042

3,134,778 404,389 275,795 3,737,529 600,000 8,152,490 0 0 127,126,696

3,165,789 408,433 281,311 3,784,964 600,000 8,240,496 0 0 151,671,644

3,197,109 412,517 286,937 3,833,082 600,000 8,329,645 0 0 177,993,277

3,228,743 416,642 292,676 3,881,895 600,000 8,419,957 0 0 206,131,978

Land Property, Plant & Equipment Property, Plant & Equipment, at cost Less Accumulated Depreciation & Amortization Net Property, Plant & Equipment Capitalized Fees & Interest Total Assets

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

1,600,000

104,150,000 0 104,150,000 1,954,418 107,704,418

117,175,000 8,119,024 109,055,976 3,964,495 131,611,323

117,675,000 15,753,011 101,921,989 3,568,045 136,639,342

118,175,000 23,232,149 94,942,851 3,171,596 145,670,224

118,675,000 30,600,746 88,074,254 2,775,146 156,220,999

119,175,000 37,888,208 81,286,792 2,378,697 168,479,580

119,675,000 45,271,013 74,403,987 1,982,247 182,305,276

120,175,000 52,433,993 67,741,007 1,585,798 198,053,501

120,675,000 59,568,492 61,106,508 1,189,348 215,567,501

121,175,000 66,680,360 54,494,640 792,899 234,880,815

121,675,000 73,775,000 47,900,000 396,449 256,028,427

LIABILITIES & EQUITIES Current Liabilities: Accounts Payable Notes Payable Current Maturities of Senior Debt (incl. sweeps) Current Maturities of Working Capital Total Current Liabilities

0 0 0 0 0

3,350,568 0 5,990,193 0 9,340,761

3,658,906 0 6,515,820 0 10,174,726

3,884,674 0 7,087,570 0 10,972,244

3,928,020 0 7,709,490 0 11,637,510

3,971,896 0 8,385,982 0 12,357,878

4,016,310 0 9,121,835 0 13,138,144

4,061,268 0 9,922,257 0 13,983,525

4,106,779 0 10,792,915 0 14,899,694

4,152,849 0 11,739,971 0 15,892,820

4,199,487 0 0 0 4,199,487

Senior Debt (excluding current maturities) Working Capital (excluding current maturities) Deferred Income Taxes Total Liabilities

54,675,348 0 0 54,675,348

71,275,839 0 0 80,616,601

64,760,019 0 0 74,934,745

57,672,449 0 0 68,644,694

49,962,960 0 0 61,600,470

41,576,978 0 0 53,934,856

32,455,143 0 0 45,593,288

22,532,886 0 0 36,516,411

11,739,971 0 0 26,639,665

0 0 0 15,892,820

0 0 0 4,199,487

Capital Units & Equities Common Equity Preferred Equity Grants (capital improvements) Distribution to Shareholders Retained Earnings Total Capital Shares & Equities

55,182,000 0 0 0 (2,152,930) 53,029,070

55,182,000 0 0 0 (4,187,278) 50,994,722

55,182,000 0 0 0 6,522,597 61,704,597

55,182,000 0 0 0 21,843,531 77,025,531

55,182,000 0 0 0 39,438,529 94,620,529

55,182,000 0 0 0 59,362,724 114,544,724

55,182,000 0 0 0 81,529,989 136,711,989

55,182,000 0 0 0 106,355,089 161,537,089

55,182,000 0 0 0 133,745,837 188,927,837

55,182,000 0 0 0 163,805,995 218,987,995

55,182,000 0 0 0 196,646,940 251,828,940

136,639,342

145,670,224

156,220,999

168,479,580

182,305,276

198,053,501

215,567,501

234,880,815

256,028,427

Total Liabilities & Equities

BBI INTERNATIONAL

107,704,418

131,611,323

B-4

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Proforma Income Statement Construction (Year 0)

1st Year Operations

2nd Year Operations

3rd Year Operations

0 0 0 0 0 0 0 0

105,326,905 20,989,519 2,278,862 0 0 0 0 128,595,286

146,727,000 26,247,946 6,107,950 0 0 0 0 179,082,897

157,144,617 24,361,326 9,720,189 0 0 0 0 191,226,131

0 0 0 0 0 0 0 0 228,218 228,218

74,267,285 5,277,778 0 18,411,854 4,772,619 4,523,810 999,643 83,360 1,369,305 109,705,654

99,475,655 7,070,000 0 25,251,895 6,456,600 6,120,000 1,339,101 111,667 1,403,538 147,228,457

(228,218)

18,889,632

0 108,473 0 423,000 354,240 755,000 84,000 200,000 1,924,713

EBITDA Less: Interest - Operating Line of Credit Interest - Senior Debt Interest - Working Capital Depreciation & Amortization

(2,152,930)

Pre-Tax Income Current Income Taxes Net Earnings (Loss) for the Year

Revenue Ethanol DDGS DWG Carbon Dioxide State Producer Payment Federal Small Producer Tax Credit USDA CCC Bioenergy Program Total Revenue Production & Operating Expenses Feedstocks Chemicals, Enzymes & Yeast Waste Heat Natural Gas Electricity Denaturants Makeup Water Wastewater Disposal Direct Labor & Benefits Total Production Costs Gross Profit Administrative & Operating Expenses Maintenance Materials & Services Repairs & Maintenance - Wages & Benefits Consulting, Management and Bank Fees Property Taxes & Insurance Admin. Salaries, Wages & Benefits Legal & Accounting/Community Affairs Office/Lab Supplies & Expenses Travel, Training & Miscellaneous Total Administrative & Operating Expenses

Pre-Tax Return on Investment 11-Year Average Annual Pre-Tax ROI

BBI INTERNATIONAL

5th Year Operations

6th Year Operations

7th Year Operations

8th Year Operations

9th Year Operations

10th Year Operations

160,287,509 24,609,811 9,821,358 0 0 0 0 194,718,678

163,493,260 24,860,780 9,923,538 0 0 0 0 198,277,578

166,763,125 25,114,260 10,026,741 0 0 0 0 201,904,125

170,098,387 25,370,274 10,130,975 0 0 0 0 205,599,637

173,500,355 25,628,849 10,236,252 0 0 0 0 209,365,456

176,970,362 25,890,009 10,342,581 0 0 0 0 213,202,953

180,509,769 26,153,781 10,449,974 0 0 0 0 217,113,525

105,482,135 7,497,735 0 26,078,895 6,915,019 6,554,520 1,420,117 118,423 1,438,626 155,505,469

106,525,158 7,572,712 0 26,600,473 7,053,319 6,685,610 1,434,318 119,608 1,474,592 157,465,790

107,578,612 7,648,439 0 27,132,482 7,194,385 6,819,323 1,448,661 120,804 1,511,457 159,454,163

108,642,601 7,724,924 0 27,675,132 7,338,273 6,955,709 1,463,148 122,012 1,549,243 161,471,041

109,717,229 7,802,173 0 28,228,634 7,485,039 7,094,823 1,477,779 123,232 1,587,974 163,516,883

110,802,603 7,880,195 0 28,793,207 7,634,739 7,236,720 1,492,557 124,464 1,627,673 165,592,159

111,898,832 7,958,997 0 29,369,071 7,787,434 7,381,454 1,507,483 125,709 1,668,365 167,697,344

113,006,022 8,038,587 0 29,956,453 7,943,183 7,529,083 1,522,557 126,966 1,710,074 169,832,925

31,854,440

35,720,662

37,252,888

38,823,415

40,433,085

42,082,754

43,773,297

45,505,608

47,280,599

2,078,125 650,835 150,000 2,115,000 681,750 96,000 120,000 50,000 5,941,710

2,664,375 667,106 153,000 2,279,513 698,794 97,920 122,400 51,000 6,734,108

2,704,341 683,784 156,060 2,132,553 716,264 99,878 124,848 52,020 6,669,747

2,744,906 700,878 159,181 1,988,783 734,170 101,876 127,345 53,060 6,610,199

2,786,079 718,400 162,365 1,847,290 752,524 103,913 129,892 54,122 6,554,585

2,827,871 736,360 165,612 1,707,468 771,338 105,992 132,490 55,204 6,502,334

2,870,289 754,769 168,924 1,565,682 790,621 108,112 135,139 56,308 6,449,844

2,913,343 773,638 172,303 1,428,425 810,387 110,274 137,842 57,434 6,403,646

2,957,043 792,979 175,749 1,291,754 830,646 112,479 140,599 58,583 6,359,833

3,001,399 812,804 179,264 1,155,550 851,412 114,729 143,411 59,755 6,318,323

12,947,922

25,120,332

29,050,915

30,642,688

32,268,830

33,930,751

35,632,909

37,369,651

39,145,775

40,962,277

0 6,863,246 0 8,119,024

0 6,380,021 0 8,030,436

0 5,854,393 0 7,875,588

0 5,282,644 0 7,765,046

0 4,660,724 0 7,683,912

0 3,984,232 0 7,779,255

0 3,248,379 0 7,559,429

0 2,447,956 0 7,530,948

0 1,577,299 0 7,508,318

0 630,242 0 7,491,089

(2,152,930) 0

(2,034,348) 0

10,709,875 0

15,320,934 0

17,594,999 0

19,924,195 0

22,167,264 0

24,825,101 0

27,390,747 0

30,060,158 0

32,840,945 0

(2,152,930)

(2,034,348)

10,709,875

15,320,934

17,594,999

19,924,195

22,167,264

24,825,101

27,390,747

30,060,158

32,840,945

-3.9% 32.4%

-3.7%

0 0 0 0

19.4%

27.8%

B-5

4th Year Operations

31.9%

36.1%

40.2%

45.0%

49.6%

54.5%

59.5%

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Proforma Statements of Cash Flows Construction (Year 0) Cash provided by (used in) Operating Activities Net Earnings (loss) Non cash charges to operations Depreciation & Amortization

Changes in non-cash working capital balances Accounts Receivable Inventories Prepaid Expenses Accounts Payable

Investing Activities Land Purchase Fixed Asset Purchases Capitalized Fees & Interest

Financing Activities Senior Debt Advances Repayment of Senior Debt Working Capital Advances Repayment of Subordinate Debt Equity Investment Grants Cash Sweep for Debt Service Distributions to Shareholders Net Increase (Decrease) in Cash Cash (Indebtedness), Beginning of Year Cash (Bank Indebtedness), End of Year IRR

BBI INTERNATIONAL

1st Year Operations

2nd Year Operations

3rd Year Operations

4th Year Operations

5th Year Operations

6th Year Operations

7th Year Operations

8th Year Operations

9th Year Operations

10th Year Operations

(2,152,930)

(2,034,348)

10,709,875

15,320,934

17,594,999

19,924,195

22,167,264

24,825,101

27,390,747

30,060,158

32,840,945

0 (2,152,930)

8,119,024 6,084,676

8,030,436 18,740,311

7,875,588 23,196,521

7,765,046 25,360,045

7,683,912 27,608,106

7,779,255 29,946,519

7,559,429 32,384,530

7,530,948 34,921,695

7,508,318 37,568,477

7,491,089 40,332,034

0 0 0 0 0

6,522,339 5,724,378 0 (3,350,568) 8,896,149

640,977 1,717,563 0 (308,338) 2,050,202

485,729 369,646 0 (225,768) 629,607

139,702 83,590 0 (43,346) 179,946

142,356 84,670 0 (43,876) 183,150

145,062 85,766 0 (44,414) 186,414

147,820 86,877 0 (44,958) 189,739

150,633 88,005 0 (45,511) 193,128

153,500 89,150 0 (46,070) 196,579

156,423 90,311 0 (46,638) 200,096

1,600,000 104,150,000 1,954,418 107,704,418

0 13,025,000 2,010,076 15,035,076

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

0 500,000 0 500,000

54,675,348 0 0 0 55,182,000 0 0 0

28,097,652 (5,506,968) 0 0 0 0 0 0

0 (5,990,193) 0 0 0 0 0 0

0 (6,515,820) 0 0 0 0 0 0

0 (7,087,570) 0 0 0 0 0 0

0 (7,709,490) 0 0 0 0 0 0

0 (8,385,982) 0 0 0 0 0 0

0 (9,121,835) 0 0 0 0 0 0

4,744,135 0

10,199,916 4,744,135

15,551,094 14,944,051

17,592,529 30,495,145

19,215,467 48,087,674

20,874,124 67,303,141

22,572,956 88,177,264

4,744,135

14,944,051

30,495,145

48,087,674

67,303,141

88,177,264

110,750,220

0 0 0 33.2%

B-6

0 (9,922,257) 0 0 0 0 0 0

0 (10,792,915) 0 0 0 0 0 0

0 (11,739,971) 0 0 0 0 0 0

24,306,310 110,750,220

26,078,983 135,056,531

27,891,967 161,135,513

135,056,531

161,135,513

189,027,480

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Debt Coverage Ratio

EBITDA Taxes Paid Distributions to Shareholders Changes in non-cash working capital balances Investing Activities (Capital Expenditures) Senior Debt Advances Working Capital Advances Cash Available for Debt Service Senior Debt P&I Payment Suboridinate Debt P&I Payment Debt Coverage Ratio (senior + subdebt) 10-year Average Debt Coverage Ratio

1st Year Operations 12,947,922 0 0 (8,896,149) (15,035,076) 28,097,652 0 17,114,348

2nd Year Operations 25,120,332 0 0 (2,050,202) (500,000) 0 0 22,570,130

3rd Year Operations 29,050,915 0 0 (629,607) (500,000) 0 0 27,921,308

12,370,214 0

12,370,214 0

12,370,214 0

1.38

1.82

2.26

4th Year Operations 30,642,688 0 0 (179,946) (500,000) 0 0 29,962,742

5th Year Operations 32,268,830 0 0 (183,150) (500,000) 0 0 31,585,680

6th Year Operations 33,930,751 0 0 (186,414) (500,000) 0 0 33,244,337

7th Year Operations 35,632,909 0 0 (189,739) (500,000) 0 0 34,943,170

8th Year Operations 37,369,651 0 0 (193,128) (500,000) 0 0 36,676,524

9th Year Operations 39,145,775 0 0 (196,579) (500,000) 0 0 38,449,196

10th Year Operations 40,962,277 0 0 (200,096) (500,000) 0 0 40,262,180

12,370,214 0

12,370,214 0

12,370,214 0

12,370,214 0

12,370,214 0

12,370,214 0

12,370,214 0

2.42

2.55

2.69

2.82

2.96

3.11

3.25

4th Year Operations 5,100,170 1,125,038 1,091,218 58,320 13,551 21,600 255,150 100,000 7,765,046

5th Year Operations 5,100,170 1,125,038 1,018,470 34,992 12,647 12,960 229,635 150,000 7,683,912

6th Year Operations 5,100,170 1,125,038 950,572 135,000 11,804 50,000 206,672 200,000 7,779,255

7th Year Operations 5,100,170 1,125,038 887,200 0 11,017 0 186,004 250,000 7,559,429

8th Year Operations 5,100,170 1,125,038 828,054 0 10,283 0 167,404 300,000 7,530,948

9th Year Operations 5,100,170 1,125,038 772,850 0 9,597 0 150,664 350,000 7,508,318

10th Year Operations 5,100,170 1,125,038 721,327 0 8,957 0 135,597 400,000 7,491,089

2.53

Note: the '1st Year Operations' consists of 0 months of construction and startup, plus 12 months of commercial operation

Depreciation Schedules

Major process equipment Minor process equipment Process buildings Vehicles Office building Office equipment Start-up cost Annual capital expenditures Total Depreciation

Depreciation Method (note1) 15 year SLN 15 year SLN 30 year DDB 5 year DDB 30 year DDB 5 year DDB 20 year DDB 10 year SLN

1st Year Operations 5,100,170 1,125,038 1,342,150 135,000 16,667 50,000 350,000 0 8,119,024

2nd Year Operations 5,100,170 1,125,038 1,252,673 162,000 15,556 60,000 315,000 0 8,030,436

3rd Year Operations 5,100,170 1,125,038 1,169,162 97,200 14,519 36,000 283,500 50,000 7,875,588

Note 1: Depreciation Method = DDB (Double Declining Balance) or SLN (Straight Line) Note 2: Only 50% of the "1st Year Operations" depreciation shown in the above table is claimed

BBI INTERNATIONAL

B-7

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Stuttgart Ethanol Project - 100mmgy Stuttgart Interim Funding Schedule

Interim Period Engineering & Fees & Construction Startup Costs (page 7) (page 10)

Month

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Total

Construction

Startup Full Operation

Coal Online

Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08

8,225,000 7,050,000 8,225,000 8,225,000 9,400,000 9,400,000 10,575,000 10,575,000 9,400,000 9,400,000 8,225,000 7,050,000 6,475,000 6,550,000 0 0 0 0 0 0 0 0 0 0 118,775,000

4,467,730 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4,467,730

Rolling Stock & Spare Parts

Fire Protection & Potable Water

0 0 0 0 0 0 0 0 0 0 0 0 600,000 675,000 0 0 0 0 0 0 0 0 0 0 1,275,000

143,500 123,000 143,500 143,500 164,000 164,000 184,500 184,500 164,000 164,000 143,500 123,000 102,500 102,500 0 0 0 0 0 0 0 0 0 0 2,050,000

Interim Period Labor and Op. Expense (page 11-12) 0 0 30,077 30,077 30,077 30,077 30,077 30,077 30,077 30,077 225,158 225,158 235,158 235,158 2,488,839 1,311,906 0 0 0 0 0 0 0 0 4,931,913

Current Month Equity/Grant Disbursements Investment

12,692,730 7,050,000 8,255,077 8,255,077 9,430,077 9,430,077 10,605,077 10,605,077 9,430,077 9,430,077 8,450,158 7,275,158 6,710,158 6,785,158 2,488,839 1,311,906 0 0 0 0 0 0 0 0 128,204,720

(55,182,000) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (55,182,000)

Subordinate Debt

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Sub-Debt Interest (Earnings)

Senior Debt Interest (Earnings)

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(106,223) (88,864) (68,448) (47,982) (24,526) (2,869) 72,230 147,861 215,705 284,029 345,896 399,879 450,241 501,492 522,674 535,669 0 0 0 0 0 0 0 0 3,136,765

Senior Debt Loan (Equity) Balance

(42,595,493) (35,634,357) (27,447,728) (19,240,633) (9,835,083) (407,874) 10,269,433 21,022,371 30,668,152 40,382,258 49,178,312 56,853,348 64,013,747 71,300,397 74,311,910 76,159,485 0 0 0 0 0 0 0 0 76,159,485

Engineering & Construction Cost Summary

Month

Monthly Draw (% of EPC Contract)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 TOTAL

7% 6% 7% 7% 8% 8% 9% 9% 8% 8% 7% 6% 5% 5% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100%

BBI INTERNATIONAL

Building & Office Equipment 35,000 30,000 35,000 35,000 40,000 40,000 45,000 45,000 40,000 40,000 35,000 30,000 25,000 25,000 0 0 0 0 0 0 0 0 0 0 500,000

EPC Contract 7,350,000 6,300,000 7,350,000 7,350,000 8,400,000 8,400,000 9,450,000 9,450,000 8,400,000 8,400,000 7,350,000 6,300,000 5,250,000 5,250,000 0 0 0 0 0 0 0 0 0 0 105,000,000

B-8

Site Development 357,000 306,000 357,000 357,000 408,000 408,000 459,000 459,000 408,000 408,000 357,000 306,000 255,000 255,000 0 0 0 0 0 0 0 0 0 0 5,100,000

Rail 199,500 171,000 199,500 199,500 228,000 228,000 256,500 256,500 228,000 228,000 199,500 171,000 142,500 142,500 0 0 0 0 0 0 0 0 0 0 2,850,000

Grain Receiving and Storage 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Waste Heat Steam Generator 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Construction Contingency

Monthly Total

140,000 120,000 140,000 140,000 160,000 160,000 180,000 180,000 160,000 160,000 140,000 120,000 100,000 100,000 0 0 0 0 0 0 0 0 0 0 2,000,000

8,225,000 7,050,000 8,225,000 8,225,000 9,400,000 9,400,000 10,575,000 10,575,000 9,400,000 9,400,000 8,225,000 7,050,000 6,475,000 6,550,000 0 0 0 0 0 0 0 0 0 0 118,775,000

STUTTGART ETHANOL, LLC FEASIBILITY STUDY

DRAFT REPORT JULY, 2006

Amortization Schedule - Quarterly Senior Debt Principal Interest Term

$82,773,000 8.500% 40 Quarters

Quarter 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

BBI INTERNATIONAL

Loan Balance 82,773,000.00 81,439,372.86 80,077,406.15 78,686,497.64 77,266,032.33 75,815,382.13 74,333,905.62 72,820,947.72 71,275,839.48 69,697,897.68 68,086,424.62 66,440,707.75 64,760,019.41 63,043,616.43 61,290,739.89 59,500,614.73 57,672,449.41 55,805,435.57 53,898,747.69 51,951,542.69 49,962,959.59 47,932,119.09 45,858,123.23 43,740,054.97 41,576,977.75 39,367,935.14 37,111,950.37 34,808,025.93 32,455,143.09 30,052,261.50 27,598,318.67 25,092,229.55 22,532,886.04 19,919,156.49 17,249,885.18 14,523,891.85 11,739,971.16 8,896,892.16 5,993,397.74 3,028,204.05

Interest Pmt 1,758,926.25 1,730,586.67 1,701,644.88 1,672,088.07 1,641,903.19 1,611,076.87 1,579,595.49 1,547,445.14 1,514,611.59 1,481,080.33 1,446,836.52 1,411,865.04 1,376,150.41 1,339,676.85 1,302,428.22 1,264,388.06 1,225,539.55 1,185,865.51 1,145,348.39 1,103,970.28 1,061,712.89 1,018,557.53 974,485.12 929,476.17 883,510.78 836,568.62 788,628.95 739,670.55 689,671.79 638,610.56 586,464.27 533,209.88 478,823.83 423,282.08 366,560.06 308,632.70 249,474.39 189,058.96 127,359.70 64,349.34

$3,092,553.39 quarterly loan payment $12,370,213.55 annual loan payments

Principal Pmt 1,333,627.14 1,361,966.71 1,390,908.51 1,420,465.31 1,450,650.20 1,481,476.52 1,512,957.89 1,545,108.25 1,577,941.80 1,611,473.06 1,645,716.86 1,680,688.35 1,716,402.97 1,752,876.54 1,790,125.16 1,828,165.32 1,867,013.84 1,906,687.88 1,947,205.00 1,988,583.10 2,030,840.50 2,073,995.86 2,118,068.27 2,163,077.22 2,209,042.61 2,255,984.77 2,303,924.44 2,352,882.84 2,402,881.60 2,453,942.83 2,506,089.12 2,559,343.51 2,613,729.56 2,669,271.31 2,725,993.33 2,783,920.68 2,843,079.00 2,903,494.43 2,965,193.68 3,028,204.05

B-9

Cash Sweeps 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Loan Balance 81,439,372.86 80,077,406.15 78,686,497.64 77,266,032.33 75,815,382.13 74,333,905.62 72,820,947.72 71,275,839.48 69,697,897.68 68,086,424.62 66,440,707.75 64,760,019.41 63,043,616.43 61,290,739.89 59,500,614.73 57,672,449.41 55,805,435.57 53,898,747.69 51,951,542.69 49,962,959.59 47,932,119.09 45,858,123.23 43,740,054.97 41,576,977.75 39,367,935.14 37,111,950.37 34,808,025.93 32,455,143.09 30,052,261.50 27,598,318.67 25,092,229.55 22,532,886.04 19,919,156.49 17,249,885.18 14,523,891.85 11,739,971.16 8,896,892.16 5,993,397.74 3,028,204.05 0.00

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10