Biomass Power Project Development: From Woods to Watts

1. BIOMASS PROJECT DEVELOPMENT AND FINANCING:“FROM WOODS TO WATTS” Presented by:Thomas Suffield, Principal, Cedars Capital, LLC Presented to:Renewable Power Project Finance: The Tutorial Infocast: Houston, Texas March 12 , 2008

2. Thomas Suffield, Principal: Cedars Capital LLC • Education: • Background: • Cedars Capital, Houston, Texas based boutique Investment & Project Advisory Firm • Downstream Power Plant Development and Financing • Development of gas, coal and renewable fired power projects • Equity and Debt Project Financing and Capital sourcing for Commercial Entities • Track Record: • Developed, Acquired or Financed over 2,500 MWs, valued at over $3.5Billion. • www.cedarscapital.comtsuffield@cedarscapital.com (713) 554-3017

3. Project Description • 24 MegaWatt biomass power plant being constructed within the Abitibi recycled newsprint paper mill in Snowflake, Arizona. • 2 year pre-construction development timeline • Financial Close and Construction Start, September, 2006 • $55MM Project Financing led by CoBank, represents the U.S. Farm Credit System • Projected Commercial Operations, December 2007 • Capture ½ of Eligible Production Tax Credits • Good mix with AZ’s wind and solar power

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

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

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

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

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

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

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

11. Approvals • Permitting: Minimal given existing Abitibi footprint • Air Quality Permit issued by AZ Dept of Environmental Quality, without reopening the existing permit for the Abitibi Plant • Construction permit issued by Navajo County for buildings • Large Generator Interconnection Permit and Transmission Agreement • Bond Approvals • Western States typically don’t utilize all of their tax exempt bond issuing capacity granted by U.S. Treasury/I.R.S. • AZ Dept. of Commerce awarded Private Activity Bond allocation • Bonds issued by the State • Show Low Industrial Development Authority was able to authorize up to $39.25MM in bonds • Project qualified under IRS guidelines as a “Solid Waste Treatment Facility” • Project was able to incorporate the authorized amount

12. Risk/Reward Analysis • Development Risk • Developer Provided Consideration/Credit Support to Power Off-takers • Equipment/Development Risk • Permitting Risk • Financing/Interest Rate Risk • Construction Risk • Construction Guaranties/General Contractor Wrap • Developer Support • Operating Risk • Equipment, Fuel Sourcing, Payment Risk, Performance/Operator Risk (PPA compliance) • Financial Risk • Bonds are swapped, eliminating interest rate risk • PPA escalation: fixed rate, inflation adjusted • Pricing Risk: Costs may still increase faster than revenues • Abitibi Viability/Operational Risk • Regulatory Risk • FERC, AZ utility regulation and environmental laws • Tax law • Investor Risk • Bond Holders are only exposed to JPMorgan/Chase credit risk, not project risk

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

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