ABFC ConferenceNew Orleans, LAJune 9-10, 2015

Jordan SolomonManaging Director & CEOEcostrat Inc.

Biomass Supply Chain RiskUnderstanding, Measuring and Mitigating

Ecostrat Supply Chain Risk Methodology for Biomass Ecostrat Supply Chain Risk Methodology for Biomass

Supplier ExposureCompetitor ExposureResource Availability Exposure

Replacement SuppliersInventoriesLiquidated damages

Supply CurvesGrowth to Drain AnalysisResource Demand EvaluationRoad Network AnalysisMarginal Cost of replacing lost supply

Supply Chain Risk Exposures

Impact Analysis of Risk Events

RiskMitigation Strategies

Risk Minimization

ASSURANCEOF DEBT

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

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

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

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

Construction RisksFixed price, date certain, turnkey EPC contract with.liquidated damages.Completion guarantee by Sponsors.

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

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

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

Proper Project Financing StructureProper Project Financing Structure

Lack of credit depth of most suppliers. Rapidly-evolving woodsheds:

• Increasing demand on fixed fiber supply puts fiber suppliers in a power position.

• Many competitors leads to instability of supply.• Spot fiber prices have increased by 30% in certain

woodsheds over the past two years.• Long-term fiber supply contracts are increasingly

difficult to obtain. Many, small fragmented sources of supply.

• Strong incentive to breach, especially for small – medium sized suppliers.

Project sponsors will demand mitigation of feedstock supply risk.

Sources of Supply RiskSources of Supply Risk

Source: Fitch Renewable Energy Forum 6/23/11Note: Includes Public, Private Ratings and Credit Assessments

Non-Investment Grade Investment Grade

Financings Depend on Project RiskFinancings Depend on Project Risk

> 100 basis points> 100 basis points

Balance Sheet Suppliers: most are not investment grade Multiple suppliers: Dilute Risk of Breach/Insolvency Long term contracts: rare, especially in the southeast Contracts: Use an experienced professional Small woodshed (65 mile max; sensitivity to diesel, to

shorthaul) Wood Fiber Studies/ Feedstock / Supply Assessments. What

makes a good study? Minimize capital provider’s perception of feedstock risk

Actual Supplier vs Competitor focus? Important Macros: Growth to drain, historical stumpage Sensitivity Analysis: Stumpage, Distance, Demand, Diesel, Weather “Real” Supply Curves Optionality, Optionality, Optionality

Traditional Feedstock Risk Mitigation Traditional Feedstock Risk Mitigation ToolsTools

Maintain Optionality: Carry a large BAMBAM can partially mitigate risk of supplier breach and insolvencyReal Risk versus Perceived Risk: Evidencing BAM is important for risk perception of capital providers.

The Biofuel Supply Network®® and MarketWatch®®

Traditional Feedstock Risk Mitigation Traditional Feedstock Risk Mitigation ToolsTools

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Biofuel Supply Network® - St. Louis, MO Woodshed

Long-term contracts are rare and are only as good as the covenant behind them.

A BAM helps assure availability of quantity -- it doesn’t mitigate the risk of price increases in the overall woodshed.

The consequence: Long-term perceived risk of fuel supply is high. Difficult to finance new projects. Project ratings tend to be low, and capital costs

high.

Problems with the Traditional Model: Problems with the Traditional Model: Insufficient Risk MitigationInsufficient Risk Mitigation

Biomass Supply InsuranceBiomass Supply Insurance®®

A Solution to Manage Supply Risk A Solution to Manage Supply Risk Insurance policy designed for biomass projects. Backed by A rated insurance syndicate:

investment grade credit. Download feedstock risk to one investment-

grade entity Bankable guarantee of both fuel cost and

biomass quantity. Decreases project risk rating. Impact on capital cost: ~100 basis points less

expensive.

Upstream Coverage: Covers differentials in supply cost due to supplier breach or insolvency. Quantity Quality

Downstream Coverage: Covers loss resulting from a total or partial Reduction in Supply which leads to a reduction in Output. Penalties due to loss of production, missed shipments.

Insured is responsible for 10% of loss

CoveragesCoverages

Two year automatic rolling terms Not at underwriter’s discretion.

Catastrophic coverage Not useful for small claims: project must be able to absorb

“normal” feedstock “bumps”. Policy’s function is to bump projects into bond ratings. For

that to happen, it does not need to take care of “fender benders”.

Liability Caps: How high? When do they kick in? Deductibles. Caps should cover debt servicing, not more.

Term and Liability CapsTerm and Liability Caps

Initial Placement Fee Annual Premium:

project specific Indicative range: $0.75 - $1.75 per ton

Payable in advance with reconciliation at year-end.

PremiumsPremiums

Underwriters look for info that enables them to clearly understand and quantify feedstock risk

Supply Study is the “due diligence”: Actual Supplier vs Competitor focus? Macro vs Granular focus? Important Macros: Growth to drain, historical stumpage, “Real” Supply Curves. Weather impacts.

Importance of Feedstock Supply Importance of Feedstock Supply StudiesStudies

No contracts – no coverage Input during the LOI – Contract negotiation

stage Professional input can be beneficial

It does not do anything the supply contracts do not already do. It simply makes the contracts covenants and warranties stronger.

Importance of Supply ContractsImportance of Supply Contracts

Professional grade Feedstock Studies. Specific deliverables for underwriters must be addressed.

Supply Contracts with established companies. In certain cases, supplier must provide financial

information (basic to balance sheet).

Qualifying Projects Must Have:Qualifying Projects Must Have:

Many projects can only contract on the spot/shorter term

In certain cases, the Policy can function as price cap When spot feedstock prices increase past projects ability to

service debt.

Feedstock Price Caps: The ExceptionFeedstock Price Caps: The Exception

Prequalification assessments discussion

Submission Packages 30 – 40 hours

Timeline for approval: 1-3 months for approval

Do I Qualify?Do I Qualify?

Biomass Supply Studies | Fiber Supply

Jordan Solomon President and CEOjordan.solomon@ecostrat.comTel: 416-968-8884 x222

www.ecostrat.com

Biomass MarketWatch: a simple tool to provide developers with a quick and easy way to make an initial high level determination of fiber cost.

Biomass MarketWatch: consolidates actual sell prices of suppliers within the

project woodshed, calculates transportation costs to the project site, aggregates data into an estimate of delivered fiber cost. is free

Real-time, area-specific determinations of FOB purchase price for major categories of woody biomass in North America

www.biomassmagazine.com: click Fiber Price Analysis

Biomass MarketWatchBiomass MarketWatch®®