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NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007. Overview. Farm Credit System – Ethanol Background Sources of Debt Capital Underwriting Considerations. AgriBank Overview.

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nextgen energy board meeting lending observations jim jones august 30 2007
NextGen Energy Board Meeting

Lending Observations

Jim Jones

August 30, 2007

overview
Overview
  • Farm Credit System – Ethanol Background
  • Sources of Debt Capital
  • Underwriting Considerations
agribank overview
AgriBank Overview
  • Comprised of 18 Farm Credit Associations that provide financial products to agricultural producers and agricultural related business within 15 states (See map)
  • $49.6 billion in assets
    • Wells Fargo $415.8 billion
    • US Bank $205.9 billion
    • Farm Credit System (inc. AgriBank) $130.0 billion
ethanol industry data as of 7 31 07
Ethanol Industry(Data as of 7/31/07)
  • Industry Capacity
    • 114 plants
    • 6.5 bgy capacity
    • AgriBank District helped finance 58 projects (52% of capacity)
  • Under Construction or Development
    • 87 new construction / 11 Expansion Projects
    • 7.4 bgy of capacity
    • AgriBank District has commitments to 57 plants (58% of capacity)
farm credit system ethanol portfolio as of june 30 2007
Farm Credit System Ethanol Portfolio(as of June 30, 2007)

AgriBank District: $1.7 billion

Other Farm Credit

System Lenders: $1.8 billion*

Total System

Ethanol Commitments: $3.5 billion

* Includes Farmer Mac commitments and guarantees

current sources of debt
Current Sources of Debt
  • Farm Credit System (since 1992)
    • Provided approximately 2/3’s of debt capital prior to 2005
  • Commercial Banks: First National Bank of Omaha, Home Federal Savings & Loan, Community Banks
  • Insurance Companies
  • Foreign Banks: West LB, Society Generale
future sources of debt
Future Sources of Debt
  • Issues
    • Farm Credit is Full: little remaining loan capacity to finance additional ethanol projects unless existing volume is paid down rapidly. (Hold Limits)
    • Blender Wall: Rate of growth exceeding blender capacity results in:
      • Ethanol priced at variable cost of production.
      • Idling of ethanol plants.
      • Portfolio stress and slow rate of debt pay down.
      • Reduced industry enthusiasm and capital investment.
if supply out paces demand
If Supply out paces demand…
  • Price of ethanol will drop to incent more blending capacity and/or less capacity utilization until equilibrium is satisfied
  • Contribution Margin = net revenues less variable costs (corn, utilities, chemicals)
  • Contribution Margin is the signal to producers on whether to vary production rate or stop production
  • In oversupplied commoditized markets, pricing typically reverts to a variable cost-plus basis. A value-added basis (gasoline related) only arises when negotiating leverage is more balanced between buyers and sellers.
  • Variable Costs = cash costs incurred to produce an incremental amount of product.
underwriting guidelines
Underwriting Guidelines

Historical – Dry Mill Plant

  • Equity: 50% for start up/ 40% existing
    • Mitigators:
      • Experienced Management/ Construction
      • Cash Sweeps/ Retention of Earnings
      • Debt per gallon (less than $0.90)
  • Working Capital: 5% of sales or $0.15 /gallon
  • Repayment Capacity: 115% (Net income + Interest + Depreciation divided by Principal + Interest + Capital Expenditure + Dividends)
  • Limitations on Dividends
  • Loan Term: 7 to 10 years (May include cash sweeps to reduce debt faster)
  • Feasibility Study: Corn procurement, marketing, permitting, rail access, infrastructure, technology, etc.
underwriting guidelines1
Underwriting Guidelines

Cellulosic Ethanol: No current guidelines but…

  • Similar to Dry Mill Ethanol Plant with following
    • Equity: 50%
    • Working Capital: 10% to 15% of sales
    • Repayment Capacity: 115%
    • Dividend Limitations
    • Cash Sweep Provisions
    • Loan term 7 to 10 years
underwriting guidelines2
Underwriting Guidelines
  • Other Considerations
    • Scale of project: Larger or smaller than today’s ethanol plants
    • Experienced Contractor
    • Reliable Technology – low cost operation
    • Feedstock Availability/Procurement
    • Federal Subsidies/Mandates and term of programs.
    • Loan Guaranty – to mitigate technology and start up risks
    • Purchase Agreements (Tolling)
federal incentives lenders perspective
Federal IncentivesLenders Perspective
  • Federal Incentives (CCC production credit, Production credit) are typically not relied upon in the underwriting process.
  • Federal Subsidies and Mandates: Important but ultimately industry must be financially viable without Federal support to attract lenders. Large Commercial Banks have avoided the industry due to political risk.
  • Loan Guarantees: Best credit enhancement
    • Issue: size of guaranty relative to cellulosic projects
    • Typically do not guaranty lender during construction phase