Arkansas Ethanol Presentation to

Arkansas Ethanol

• Presentation to

• Arkansas County

• Farm Bureau

• September 26, 2006

Ethanol Production: Corn and Sorghum

Wet mill processing plants produce more valuable by-products than the dry mill process. In addition to the ethanol, wet mill plants produce:

• Wet mill processing plants produce more valuable by-products than the dry mill process. In addition to the ethanol, wet mill plants produce:

• Corn gluten meal (which can be used as a natural herbicide or as a high protein supplement in animal feeds)

• Corn gluten feed (also used as animal feed)

• Corn germ meal

• Corn oil

• Carbon dioxide (CO2 for soft drinks or dried ice) and

• High fructose corn syrups.

• Wet mill plants also cost substantially more to build and have higher operating costs than dry mill processing plants, and hence are usually much bigger than dry mill plants in order to achieve economies of scale.

Ethanol plants produce one key product other than ethanol: an ingredient for animal feed known as distillers grains solubles (“mash” or DGS). Cargill in Memphis, Tyson in Pine Bluff, and other poultry, catfish, dairy, and other feed plants prefer DGS to whole grains.

• Ethanol plants produce one key product other than ethanol: an ingredient for animal feed known as distillers grains solubles (“mash” or DGS). Cargill in Memphis, Tyson in Pine Bluff, and other poultry, catfish, dairy, and other feed plants prefer DGS to whole grains.

• Dried DGS (DDGS) is usually preferred for ease of transportation.

Two major costs in ethanol production: natural gas and feedstock (usually corn).

• Two major costs in ethanol production: natural gas and feedstock (usually corn).

• Ethanol production requires energy to heat fermentation process.

• Drying DGS requires most heat

• Dry DGS are in high demand for export.
• Wet DGS hard to transport, need feedlot next door

Natural gas

• Natural gas

• Cheaper to install
• Volatile prices

• Coal

• Adds ~$35 M to cost of plant
• Gives cogeneration capacity

• Wood waste and other cellulose sources

• Can use fluid bed process
• Readily available and inexpensive at some sites (e.g. Pine Bluff).

University of Texas, Mississippi State, and University of Missouri studies of ethanol plants of 80-100 mgpy capacity

• University of Texas, Mississippi State, and University of Missouri studies of ethanol plants of 80-100 mgpy capacity

• Directly create 50-60 jobs paying more than $37,000 per year (total payroll >$2 million)

• Additional 120 jobs throughout the regional economy.

• Impact on regional household income would be at least $79 million during construction and $41 million annually from operations.

• Contribution to local and state tax revenues will be about $2.4 million during construction and $1.3 million annually.

State consumption and incentives

Federal Regulations and Ethanol

• Ethanol first started being used as a fuel additive in the late 1970s when EPA began phasing out lead in gasoline. Removing lead from gasoline lowered the octane level of gasoline. Because of its high octane content, ethanol soon established a role as an octane enhancer.

• The Clean Air Act Amendments of 1990 established the Oxygenated Fuels Program and the Reformulated Gasoline (RFG) to control carbon monoxide and ground-level ozone problems. Both programs require that certain urban areas in “non-attainment” add oxygen to their gasoline: 2.7 percent by weight for oxygenated fuel and 2.0 percent by weight for RFG. Blending ethanol with gasoline is one way to meet the oxygenation requirements. Methyl tertiary butyl ether (MTBE) was also used to meet the requirements but is now being discontinued.

Largely due to Government policies, ethanol production grew from about 62 million gallons in 1976 to over 2 billion gallons in 2002

Blenders credit

• Blenders credit

• E10 .52 X 10% = 5.2 cents/gallon E10
• E85 .52 X 85% = 44.2 cents/gallon E85

• Ethanol plants obtain blenders license readily

• Malta Bend, Missouri, plant

• Use of blenders license depends on market

• MFA objected to Malta Bend use of blenders credit
• Arkansas plants exporting to Texas would not conflict with local distributors’ blending credit.

Energy Policy Act of 2005 Has Major Effect on Bioenergy Development

• Renewable fuel standard – renewable fuel blended with motor fuel must increase from <4 billion gallons in 2005 to 7.5 billion gallons in 2012

• Federal fleets required to increase their use of alternative fuels

• MTBE banned in the United States within 4 years and immunity to liability disallowed

Estimated Effect of the renewable fuels standard (RFS) on future ethanol production

California alone is expected to consume 1 billion gallons of ethanol by 2010 to replace MTBE.

• California alone is expected to consume 1 billion gallons of ethanol by 2010 to replace MTBE.

• Texas (easily accessible by an Arkansas plant) is expected to require the second highest amount of ethanol to replace MTBE.

• At least 2 billion gallons more are needed to replace MTBE

• Wall Street Journal, 5/5/2006

Both Supply and Demand Policies  Increase Ethanol Production

• Supply Side Incentives

• CCC Bioenergy Program
• Energy Tax Incentives Act of 2003
• Energy Policy Act of 2005

• Demand Side Incentive

• Renewable Fuels Standard
• State Mandates

Total Current Capacity at 101 ethanol biorefineries 4797.9

• Total Current Capacity at 101 ethanol biorefineries 4797.9

• Total Under Construction (32)

• /Expansions (6) 2047.5

• Total Capacity 6845.4

• Updated: June 1, 2006  

NREL Projections of Future Ethanol Production

75% of all new Brazilian cars are flex-fuel cars which can run on E85 (85% ethanol)

• 75% of all new Brazilian cars are flex-fuel cars which can run on E85 (85% ethanol)

• GM, Ford and Chrysler will produce 900,000 flex-fuel cars in 2007

• Toyota plans to sell E85 cars in U.S. in 2008

• Ethanol is still less than 3% of 140 billion gallons of gasoline sold in the U.S. every year.

• Source: Financial Times, 4/19/06

Increase Production of American-made Biofuels

• Increase Production of American-made Biofuels

• Doubles the percentage of renewable fuels sold in America in six years.
• Extends tax credit for ethanol and biodiesel through 2015 and increases tax benefits to small biofuel producers.

• Expand the Market for and Distribution of Biofuels

• Increases the percentage of “flex-fuel” vehicles that run on ethanol, or gasoline.
• In seven years, 75 percent of all cars made in America would be flex-fuel cars.
• Increases the number of gas stations offering ethanol (E-85) and biodiesel through new incentives and requirements.

• Encourage Local Domestic Ownership

• Provides federal incentives to smaller ethanol and biofuel plants, so that independent, locally-owned facilities that produce biofuels can grow and thrive, improving our rural communities.

Ethanol production in Arkansas faces a current lack of feedstock (corn or sorghum), higher price of grain, and aflatoxin fears.

• Ethanol production in Arkansas faces a current lack of feedstock (corn or sorghum), higher price of grain, and aflatoxin fears.

• A feasibility analysis by BBI (www.bbibiofuels.com), shows 36 million bushels of corn can be obtained locally and by rail at Stuttgart for $2.61 per bushel and locally, by rail and barge at Helena for $2.60/bushel.

• To maximize benefits to Arkansas, feedstock availability must increase.

• Corn is excellent rotation crop for cotton

• If the 250,000 acres decrease in rice acres projected early this year in Arkansas had all gone into corn production, the 36 million bushels needed for a 100 mgpy plant could be achieved.

• Besides price increase, what will help farmers decide to grow corn? Ownership.

Benefits

• Benefits

• Plant has more secure and local supply.
• Arkansas’ economic benefits increase.
• Farmers gain ownership in plant.
• Local commitment to plant increases.

• Drawbacks

• Expected yields may not materialize and thus farmers may not deliver as promised.

SIKESTON, MO, April 5, 2006 (AP) - An ethanol plant that's planned for southeast Missouri will provide up to 65 jobs.  Construction of the $205 million plant in Sikeston is expected to start in November.

• SIKESTON, MO, April 5, 2006 (AP) - An ethanol plant that's planned for southeast Missouri will provide up to 65 jobs.  Construction of the $205 million plant in Sikeston is expected to start in November.

• Bootheel Agri-Energy says it will buy 160 acres in an industrial park for a plant that will produce 100 million gallons a year.  Once completed, it will be the largest ethanol plant in the state and one of the largest in the country.

• The plant will use about 35 million bushels of corn a year.  Company officials announced the plant in November officials when they had narrowed the list to three sites in Sikeston and Scott City.

Bootheel Agri-Energy LLC in Sikeston, Missouri expects 100% return on investment at current prices.

• Bootheel Agri-Energy LLC in Sikeston, Missouri expects 100% return on investment at current prices.

• Not on river, will bring in corn by rail & truck
• Coal-fired, not natural gas

• At $1.46/gal, 30-40% ROI is projected depending on plant size and fuel source.

At $1.86/gallon value of ethanol and 24 cents/gallon for DDGS, value of ethanol is $2.10.

• At $1.86/gallon value of ethanol and 24 cents/gallon for DDGS, value of ethanol is $2.10.

• Subtracting corn at 70 cents/gallon and natural gas at 33 cents record gross margin of $1.07.

• 100 mgpy plant has gross margin of $107,000,000.

• Source: FAPRI, University of Missouri

Most ethanol is sold on flat price 6 month contracts which are currently over $2.50 per gallon.

• Most ethanol is sold on flat price 6 month contracts which are currently over $2.50 per gallon.

• Ethanol sold on spot market has reached above $3/gallon.

• Date: Thursday, May 11, 2006 Iowa: 2.9519 Illinois: 2.9005 Kansas: 3.0019 Michigan: 2.8500 Minnesota: 2.9032 Missouri: 2.9739 North Dakota: 2.9652 Nebraska: 2.9492 South Dakota: 2.9809 Wisconsin: 2.7906

ENERGY OVERVIEW

• U.S. currently uses approximately

• 138 billion gallons of gas
• 35 billion gallons of diesel
• 8 billion gallons of ethanol will be needed just to replace MTBE.

Share prices of ethanol producing companies are rapidly increasing. The largest U.S. ethanol producer ADM has seen its share price climb 85% so far this year.

• Share prices of ethanol producing companies are rapidly increasing. The largest U.S. ethanol producer ADM has seen its share price climb 85% so far this year.

• May 10, 2006, ADM announced plans to increase annual production 50% in next 2 years to 1.575 billion gallons.

• Pacific Ethanol, plant under construction, Bill Gates invested $85 million for next 4 plants.

• Sikeston plant raised $70 million in 5 months.

Most ethanol plants privately held by farmers.

• Most ethanol plants privately held by farmers.

• 2nd largest ethanol producer, Verasun, raised $419.8m in an IPO. Shares closed >30% above the offer price. Financial Times, 6/15/06.

• Hawkeye Holdings and US Bioenergy will have IPOs this week and in October (respectively).

• Private placement is quicker due to less SEC regulation, but must limit number of investors.

Whether return on investment will be higher or lower at a Delta plant than at plants in the Upper Midwest will be influenced by demand from Texas for ethanol to replace MTBE.  Some analysts contend Texas will require the second highest amount of ethanol to replace MTBE of any state. 

• Whether return on investment will be higher or lower at a Delta plant than at plants in the Upper Midwest will be influenced by demand from Texas for ethanol to replace MTBE.  Some analysts contend Texas will require the second highest amount of ethanol to replace MTBE of any state. 

• Demand for co-products of ethanol production (DDGS) by feedmills in Memphis (Cargill), Mississippi (poultry and catfish feed plants), and Arkansas (poultry and catfish) could also make return on investment higher from a Delta plant than from Midwestern plants. 

Feasibility analysis on best sites for ethanol in Arkansas.

• Feasibility analysis on best sites for ethanol in Arkansas.

• All financials for business plan

• 5 year pro forma income statements

• Expected return on investment

• Estimated equity needed

• Plant employment structure 

$51,000 grant awarded by USDA/VAPG will:

• $51,000 grant awarded by USDA/VAPG will:

• Establish foundation for equity drive
• Finalize ownership team
• Incorporate business structure
• LLC or hybrid New Generation Cooperative/LLC

• Grant must be matched by local contributions before funds will be released by USDA.

Two phase equity drive

• Two phase equity drive

• Accredited investors only, private placement
• Recruit ~100 investors at $30,000 each$3 million
• Purchase discounted shares at 50 cents on dollar
• Perform engineering studies, construction plans, hire management, develop final prospectus
• 2nd phase: two classes of stock
• raise at least $60-70 million
• committed delivery of 15 million bushels

We plan to pattern our efforts on the recent equity drive for an ethanol plant in Sikeston, Missouri. 

• We plan to pattern our efforts on the recent equity drive for an ethanol plant in Sikeston, Missouri. 

• Raised more than $70 million in less than 6 months. 

• The Sikeston group chose a private placement over a public offering to save legal costs and time (to take advantage of high investor interest and increasing ethanol prices).