Missouri Biomass Aggregator Business Plan

29
Missouri Biomass Aggregator Business Plan October 2011

Transcript of Missouri Biomass Aggregator Business Plan

Page 1: Missouri Biomass Aggregator Business Plan

Missouri Biomass Aggregator Business Plan

October  2011 

Page 2: Missouri Biomass Aggregator Business Plan

The business plan was developed for Missouri Stover Products (Leonard, Missouri) as a part of the Missouri Value-Added Grant Program through the Missouri Agricultural and Small Business Development Authority. All information in this business plan is their intellectual property. Any outside use requires prior approval. The Commercial Agriculture Program at the University of Missouri completed this business plan. This program is an interdisciplinary group of faculty in agricultural economics, agricultural engineering, animal science, and veterinary medicine. This team is one of several teams in the Commercial Agriculture Program whose mission is to create new opportunities for Missouri entrepreneurs dedicated to profitable and sustainable agriculture and food systems. Team members that contributed to this business plan include: Joe Horner, M.S. Department of Agricultural and Applied Economics Ryan Milhollin, M.B.A. Department of Agricultural and Applied Economics For further information contact: Joe Horner - (573) 882-9339 (phone) or [email protected] (e-mail)

Page 3: Missouri Biomass Aggregator Business Plan

Table of Contents

I. EXECUTIVE SUMMARY ................................................................................................................ 1

1.1. Project Objectives ................................................................................................................................................... 2

1.2. Mission Statement ................................................................................................................................................... 3

1.3. Keys to Success ....................................................................................................................................................... 3

II. COMPANY SUMMARY .................................................................................................................. 4

2.1. Management and Personnel .................................................................................................................................. 4

2.2. Organization Structure ........................................................................................................................................... 5

III. MARKETING PLAN ..................................................................................................................... 6

3.1. Products .................................................................................................................................................................... 6

3.2. Sales and Marketing Strategy ................................................................................................................................. 7

3.3. SWOT Analysis ....................................................................................................................................................... 8

IV. IMPLEMENTATION PLAN ......................................................................................................... 9

4.1. Plan of Work ........................................................................................................................................................... 9

4.2. Timeline .................................................................................................................................................................. 11

V. FINANCIAL PLAN ........................................................................................................................ 12

5.1. Capital Investments and Capitalization ............................................................................................................. 13

5.2. Model Assumptions .............................................................................................................................................. 14

5.3. Pro Forma Income Statement ............................................................................................................................ 17

5.4. Pro Forma Balance Sheet .................................................................................................................................... 21

5.5. Pro Forma Cash Flow Statement ....................................................................................................................... 23

5.6. Financial Ratios Summary ................................................................................................................................... 25

5.7. Sensitivity Analysis ................................................................................................................................................ 26

Page 4: Missouri Biomass Aggregator Business Plan

1

I. Executive Summary

This plan demonstrates the business case for a new limited liability company named Missouri Biomass Aggregator (MBA), which will collect and process biomass from a 35 mile radius fuel shed. MBA will create value by organizing the contracting, logistics, surge storage, shredding, and mixing of multiple biomass feedstock streams to meet customer contract specifications to be delivered as needed. Because this infant industry is still emerging, strategic and operational flexibility is fundamental throughout this plan. Technologies for large scale densification of biomass into pellets, cubes, pucks, briquettes, and bricks exist and are being refined to serve emerging, larger-scale, remote biomass-to-energy conversion facilities. MBA is designed to facilitate the future co-location of biomass densification facilities or energy conversion facilities into an adjacent biomass energy park to minimize costs. MBA facilities will consist of a forty acre industrial site purchased with an existing rail spur and good highway access close to major highways. Buildings on-site will include a small office building with scale house, truck scales, a receiving and storage yard, shredder, covered storage and conveyors. Equipment will consist of trucks and trailers, loaders, horizontal electric shredder and conveyers. MBA will start with $1.8 million in capital, including $400,000 worth of working capital. Half of the capital will come from equity investors with the other half coming from debt financing amortized over ten years at 7%. No government grants were assumed in this business plan, which allows this business to stand on its own commercial merit. Key risks include weather, developing a supply and a market for the biomass as planned, maintaining price spreads, and supplying a demand heavily influenced by government energy policy.

Exhibit 1.1 MBA Projected Financial Summary Year

2013 Year 2014

Year 2015

Year 2016

Year 2017

Biomass Sales (tons) 30,000 50,000 75,000 100,000 100,000Total sales $1,800,000 $3,075,000 $4,727,813 $6,461,344 $6,622,877Gross margin as % of sales 13.2% 9.2% 9.9% 10.4% 10.4%Net income before taxes ($63,354) ($37,937) $122,247 $297,897 $316,056Net cash flow ($28,424) ($49,800) $49,675 $157,846 $233,509Return on owners’ equity (7.6%) (4.7%) 13.9% 27.8% 24.7% The MBA projected financial summary above depicts the base case assuming biomass can be sold at $60 per ton of dry matter while the purchase cost of biomass feedstock will average 77% of that price, with inflation running at 2.5% per year. When the facility utilization approaches 75% in year three, MBA projects a positive cash flow and a positive return on owners’ equity. Percentage returns on owner’s equity are in the mid-20s when the facility is operating at full capacity. At full capacity, cash flow supports paying dividends equivalent to 35% of profits while still amortizing debt and building cash in the business.

Page 5: Missouri Biomass Aggregator Business Plan

2

1.1. Project Objectives

This plan demonstrates the business case for a new limited liability company named Missouri Biomass Aggregator (MBA), a generic example of an agricultural biomass aggregator sourcing feedstock from a biomass dense area approximately thirty five miles in radius. This business will handle the contracting, logistics, surge storage, shredding, sizing, and mixing of multiple biomass feedstock streams to meet the specific needs of emerging energy buyers such as power plants, cellulosic biofuel refineries and biomass compacters, as well as any existing biomass customers such as livestock producers and landscaping operations. Technologies exist and are being refined for large scale densification of biomass pellets, cubes, pucks, briquettes, and bricks to serve facilities converting biomass to energy. The form of densification needed by these facilities will determine the particular markets and contracts developed. Some of these biomass densification facilities or energy conversion facilities may even choose to co-locate with the biomass aggregator to minimize costs. The objective of the MBA model is to demonstrate an aggregator creating and capturing value by organizing the biomass supply chain from the feedstock source to densification or energy conversion. Business functions:

Create the solid business counterparty required by energy companies desiring to execute long term, large-volume biomass supply contracts

Create and manage contracts to purchase biomass from original sources based upon dry matter tonnage and energy content

Create a viable local market for biomass (corn stover, wheat straw, grass hay, miscanthus, wood chips, etc.) by developing new and innovative local supplies, encouraging biomass producers, and encouraging custom biomass harvesting contractors to adopt innovation

Provide or organize transportation and initial quality control for biomass from the source Provide shredding of biomass to meet customer quality specifications Provide opportunity to mix biomass feedstocks to meet demand specifications Arrange reliable and low cost delivery to the final user

Page 6: Missouri Biomass Aggregator Business Plan

3

1.2. Mission Statement

The mission of Missouri Biomass Aggregator is to earn profits by organizing the biomass supply chain from the source to the buyer while helping to develop an emerging industry that will increase markets and create jobs in rural Missouri. 1.3. Keys to Success

As an entity developing a new market for a low-margin/high volume business for the green energy market, keys to success include:

Reliability - Demonstrate total contract reliability to sources and customers for biomass to build confidence and volume

Cost Control – Basic logistical efficiency, control of shrink and minimization of capital investment and operating costs are critical to financial success

Flexibility – The biomass based energy industry emerging in the U.S. is highly dependent upon government energy and food policies that will change as the industry matures over the next decade

Volume –Achieving planned sales volumes is a necessary condition to achieving costs and returns sufficient to survive long enough to be seen as a reliable supplier

Political awareness – Government policies, programs, and incentives drive this infant industry

Page 7: Missouri Biomass Aggregator Business Plan

4

II. Company Summary Missouri Biomass Aggregator is in business to earn profits by organizing the biomass supply chain. The entity will have the capacity to buy 100,000 tons of different kinds of biomass during the year. The facility will be planned to handle 2,000 tons per week. Approximately twenty semi-truck loads per day will be delivered to the plant. The plant will also have the capacity to receive biomass by rail as well. The facility will consist of a forty acre site purchased with an existing rail spur and good highway access close to major north-south and east west arteries, serving a biomass area approximately 35 miles in radius. The company will buy and sell biomass on the basis of dry matter tons delivered. Shredded, mixed biomass will be delivered by conveyor to a co-located densification entity, energy conversion facility, or direct to the truck or rail car provided by buyers. 2.1. Management and Personnel

Missouri Biomass Aggregator will be designed to operate with a minimal amount of employees. Each position and their roles within the business are described below. Manager

Creates and markets biomass contracts to potential sources of biomass Buys and sells biomass according to specifications provided by the end market Coordinates all shipments of biomass to and from the facility, including management of two

owned trucks and contracting of other trucking as needed Encourages custom harvesting companies to invest in supplying biomass Encourages the establishment of new co-located MBA biomass customers Oversees shredding and blending operations of the facility Manages inventory of assets and supplies

Sales Associate

Cultivates development of new markets, which could include remote or co-located energy generators, bio-refineries, or compactors such as pellet mills

Merchandises biomass to customers Paid $1.00 per ton for every ton of biomass sales contract they deliver

Administrative Assistant

Provides assistance and support to the facility manager Performs multifaceted general office support Performs accounting functions such as accounts receivable and accounts payable for the

business Handles truck weighing, biomass samples & recording Handles payroll and human resource record keeping

Page 8: Missouri Biomass Aggregator Business Plan

5

Skilled Laborers Provides assistance in loading and unloading biomass to and from trucks Oversees short term storage of biomass feedstocks Performs shredding to biomass standards as directed by the facility manager Manages product quality control measures

Truck Drivers

Provides initial quality control checkpoint and biomass storage training to sources Picks up biomass at the source and deliver to the facility or directly to buyer Performs short runs every day averaging 35 miles round trip Cross trained to handle loading and unloading of biomass Cross trained to operate shredder and conveyors

2.2. Organization Structure

The most suitable structure for Missouri Biomass Aggregator that would provide maximum flexibility and simplicity to its owners would be a Limited Liability Company (LLC). Limited Liability Company The limited liability company (LLC) is a legal entity that has both the characteristics of a corporation and a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, treated as a non-corporate business organization for tax purposes, with profits and losses passed through the entity and distributed to the owners via a K-1 federal income tax form. This structure also provides the flexibility in capital and management structure that can be found in a partnership. In Missouri, a person(s) wanting to form an LLC will have to have an operating agreement—a plan on how the business will be operated—and filing Articles of Organization with the Secretary of State’s Office.

Page 9: Missouri Biomass Aggregator Business Plan

6

III. Marketing Plan 3.1. Products

Missouri Biomass Aggregator will procure different flows of biomass by season, cost and availability; shred those materials to the desired customer specifications; and then deliver the new shredded biomass to the customer by dropping it onto their truck or by conveying it to their co-located facility. All tonnage will be bought and sold on a ton of dry matter basis. By co-locating in an adjacent bioenergy park, customers may focus upon building their own market for pellets, cubes, pucks, briquettes, advanced biofuel, or green electricity rather than worrying about biomass availability. It is anticipated that many of these businesses would have long term contracts with the aggregator. Potential sources of biomass include, but are not limited to:

Corn stover Fescue hay Warm season grass hay Food processing or other diverted landfill residues suitable for conversion Miscanthus Urban wood waste or wood chips from logging operations

Different customers may desire a different mix of biomass to fit a specification for their plant or their densification business. For example, custom blends allow the aggregator to create biomass that fits into specific energy density, lignin, and ash constraints. The aggregator will have the capacity to create a custom mix of biomass to meet the specifications of a client, using a least cost formulation software familiar to feed or fertilizer plant operators. This software easily allows reformulation to lower feedstock costs by taking advantage of seasonal availability and price cycles. Feedstock agreements will need to be secured with all input suppliers. Basic components that need to be written into these contracts include:

General description of the product (corn stover, wood residue, etc.) Moisture content Contaminants and what level is allowable (dirt, etc.) Right of refusal if product does not meet product quality Terms and time of pickup or delivery Terms of payment and price for feedstock Quantities Length of contract and termination clauses

Risk mitigation will play an important role in a biomass aggregator business. Most end markets will need assurances that they are dealing with a credible and stable supplier. Since the biomass aggregator business is essentially a middleman, it is important that credible biomass input suppliers are secured that will allow delivery according to contractual obligations.

Page 10: Missouri Biomass Aggregator Business Plan

7

3.2. Sales and Marketing Strategy

Sales and selling prices of shredded biomass can be found in Exhibit 3.2.1. It is expected that it will take several years to reach the optimal capacity of the biomass facility as markets for biomass are in early stages of development and will need some time to mature. A commissioned sales person will be the key marketer that will spend much time cultivating relationships with potential product users. It will important for this sales person to identify the product specifications and preferred form of biomass for these potential buyers. Some of these biomass densification facilities or energy conversion facilities may even co-locate with the biomass aggregator to minimize costs. Exhibit 3.2.1 Sales Forecasts for the Biomass Aggregator Business

Category 2013 2014 2015 2016 2017 Biomass sales (tons) 30,000 50,000 75,000 100,000 100,000Selling price (per ton) $60.00 $61.50 $63.04 $64.61 $66.23Total sales ($) $1,800,000 $3,075,000 $4,727,813 $6,461,344 $6,622,877 Biomass markets will evolve and change over time. Markets that have few barriers to entry, simple in operation and pay the highest returns should be targeted by the biomass aggregator business. Markets estimated by the authors can be found in Exhibit 3.2.2. Exhibit 3.2.2 Biomass Markets for Shredded/Densified Products

Market Potential Size of Market

Livestock industry or bedding or heating SmallCoal-fired power plants LargeCellulosic ethanol/advanced biofuel plants LargeFurther densification plants LargeOther industrial applications Small As an example of the scale possible in the biomass business, one 50 million gallon per year cellulosic ethanol plant would buy as much biomass as five to seven of these biomass aggregation facilities would buy when running at full capacity. Still, the biomass to energy industry is in its infancy in the United States and will take time and marketing to develop. Small scale densification business utilizing simple technologies such as briquetting, cubing, or puck making may be able to co-locate with this facility and develop markets over time by working with specific industries or furnace makers. Examples would include stove manufacturers serving nearby poultry or swine operations, small municipalities using combined heat and power co-generation facilities to power industrial parks, etc.

Page 11: Missouri Biomass Aggregator Business Plan

8

Coal-fired power plants will face increasing pressure over time to add more renewables to their portfolio in the state of Missouri. The University of Missouri combined power and heat plant is one market and Ameren has also indicated interest in their plants. But it is important to note that these plants could gobble up a lot of biomass with even minimal inclusions rates of one to five percent, so the market could develop quickly if prices reach a satisfactory point. A key driver in this market evolving is that plants will want a credible market supplier to handle all of the procurement, storage, transportation and quality control of corn stover and other biomass feedstocks. To minimize risk, they will seek the establishment of a long term contract to mitigate any feed and handling investments that a plant will make for biomass feedstocks. The cellulosic industry is evolving as many companies are investigating through demonstration and pilot plants. While two demonstration plants exist in Missouri today, no commercially viable plants are in operation in Missouri. Abengoa Bioenergy is currently prospecting the southeast region of Missouri to develop a 50 million gallon plant. But there will come a date when a business will most likely decide to set up operations and look at various biomass feedstocks to supply its needs. Other industrial applications for using biomass could develop as well in the future, but it is impossible to predict at this point when, prices, and where they will develop. 3.3. SWOT Analysis

Strengths Flexibility sourcing feedstocks Not tied to single major customer Scale achieves low capital and operating

costs Capacity to lower costs and raise sales by

custom blending to specifications

Weaknesses Infant industry starting from scratch with no

established customers or demand Biomass supply will have to be cultivated to

achieve facility throughput High volume, low margin business subject to

failure if market does not materialize as expected

Opportunities Biomass to energy technologies are already

operating in other parts of world Pricing and incentive trends indicate future

profit opportunities Aggregator creates opportunities for lower

risk startup of other energy businesses to co-locate in adjacent green energy park

Threats Public policy and funding for green energy

could dissipate with budget constraints Emerging technologies for large scale

cellulosic biofuels and biomass gasification may take longer than expected to commercialize large scale

Lower cost logistical systems may emerge to make regional aggregators non-competitive

Page 12: Missouri Biomass Aggregator Business Plan

9

IV. Implementation Plan

4.1. Plan of Work

The Missouri Biomass Aggregator facility will be a broker for 100,000 tons of biomass per year after the operation reach full capacity, which would be 2,000 tons per week during a five day work week. Approximately twenty semi-truck loads per day will be delivered to the plant. Initial tonnage procured and sold in years one through three was reduced as the business volume grows toward operating at full capacity. The facility will consist of a forty acre site with an existing rail spur and good highway access close to major north south and east west arteries, serving a fuel shed approximately 35 miles in radius. Three phase electricity and natural gas lines would also be needed. An unused grain elevator, ready-mix plant, or feed mill would be an ideal site because existing buildings and roads could be used. A layout similar to Exhibit 4.1.1 would include:

Office with scale house Storage lot for one week of inbound material capable of holding 3 stacks of 400 tons each of

covered biomass Shredding building equipped with an electric horizontal shredder conveying custom

shredded material to three covered biomass piles Conveyor belts to convey shredded biomass to final user Co-located with final users of shredded biomass (briquettes, pellet mills, puck makers,

cellulosic biofuel maker, biomass gasifier – generator).

Page 13: Missouri Biomass Aggregator Business Plan

10

Exhibit 4.1.1 Biomass Aggregator Facility Layout

Page 14: Missouri Biomass Aggregator Business Plan

11

4.2. Timeline

The operation was designed to be built in short time span. The facility would need three to four months to build and equip the operation site with the necessary capital investments and improvements to begin operations. With a start-up operation, it is expected that biomass sources and demand from end users will not be reached in earlier years. Exhibit 4.2.1 is an expected yearly progress for biomass that can be sourced and sold by year of operation.

Exhibit 4.2.1 Capacity Utilization and Tonnage by Year

Year Capacity Utilization

Tonnage Processed

Year 1 30% 30,000Year 2 50% 50,000Year 3 75% 75,000Year 4 100% 100,000Year 5 100% 100,000

Page 15: Missouri Biomass Aggregator Business Plan

12

V. Financial Plan

This financial plan was based on the development of the Missouri Biomass Aggregator business that will buy and process biomass for potential end users. Further sections will discuss the investments, capitalization, assumptions, financial output, and sensitivity of this business that are important to consider when making a decision to develop a new business.

Page 16: Missouri Biomass Aggregator Business Plan

13

5.1. Capital Investments and Capitalization

Exhibit 5.1.1 displays the anticipated capital expenditures for building the business. Significant purchases for this business include land, buildings, truck scale, grinding/conveying equipment and truck/trailers. Total investments and working capital needs are estimated to total $1.8 million.

Exhibit 5.1.1 Capital Investments for Biomass Aggregator Business Capital Investments Unit Price Total

Land and improvements Land with existing rail road spur and zoned industrial 40 $5,000 $200,000All weather drive (gravel) $15,000Electric and lighting (3-phase) $25,000Water supply (well or city water) $5,000Waste treatment (lagoon/septic or city) $5,000 Buildings Office building (modular) $30,000Covered open span structures (6,000 sq. ft. each) 3 $36,000 $108,000Asphalt flooring and concrete aprons 20,000 $3 $60,000 Equipment Office equipment 1 $10,000 $10,000Electronic truck scale 1 $175,000 $175,000Self-propelled pay loader (used) 1 $50,000 $50,000Horizontal electric grinder with conveyor 1 $470,000 $470,000Truck and trailer 2 $50,000 $100,000Conveyor system 3 $45,000 $135,000Car 1 $12,000 $12,000 Working capital Working capital $400,000 Total $1,800,000

A working capital investment of $400,000 was included in the financial model. The financial model projects a positive cash flow in year three of operation. This would allow for the working capital investment to be recouped fairly quickly should the investors choose to do so. The financial model is based on the investors providing 50% equity into the operation. This would result in acquiring long term debt financing for $900,000. The financial model assumed a 7% interest rate with a 10-year repayment would be needed for the loan.

Page 17: Missouri Biomass Aggregator Business Plan

14

5.2. Model Assumptions The financial projections begin in January 2013 (after the initial construction period). The facility was designed to have an annual capacity of 100,000 tons of biomass, but start with a low utilization and grow into full capacity in year four. The plant will operate in 8 hour shifts, 5 days a week to achieve maximum capacity. Years 3-5 will result in running multiple shifts to keep the grinder operational to achieve product output that is needed. The business will have one income stream (shredded biomass) that will be sold for $60 per ton in year one and inflated in future years by 2.5%. Sales forecasts in the first five years of operation can be found in Exhibit 5.2.1. Exhibit 5.2.1 Sales Forecasts for the Biomass Aggregator Business

Category 2013 2014 2015 2016 2017 Biomass sales (tons) 30,000 50,000 75,000 100,000 100,000Selling price (per ton) $60.00 $61.50 $63.04 $64.61 $66.23Total sales ($) $1,800,000 $3,075,000 $4,727,813 $6,461,344 $6,622,877 Biomass purchases for the biomass aggregator business can found in Exhibit 5.2.2. The entity’s weighted average net cost of purchased biomass will be 77%, which would be approximately $46 per dry matter ton in year one that would be the price paid to the source. Future years would represent $47-51 per dry matter ton that would be paid to local suppliers at the source. All biomass will be purchased on a dry matter basis using arrival weight and adjusting for moisture content. Appropriate dockage will be figured for non-conforming moisture levels. The weight averaged purchase price of cost of goods sold includes the cost of shrinkage that may occur between the time the biomass is purchased and sold. The business needs to maintain a two week inventory of biomass on site to avoid delays in providing end markets product when needed. Exhibit 5.2.2 Biomass Purchase Cost

Category 2013 2014 2015 2016 2017 Cost of materials (%) 77% 77% 77% 77% 77%Cost of materials ($) $1,386,000 $2,367,750 $3,640,416 $4,975,235 $5,099,616Desired inventory on site ($) $69,200 $115,300 $172,600 $230,000 $230,000Purchases of biomass material $1,455,200 $2,413,850 $3,697,716 $5,032,635 $5,099,616 Direct labor assumptions can be seen in Exhibit 5.2.3. Each direct labor employees (laborer or truck driver) would work 2,000 hours each per year and are paid at a $12 per hour rate. After factoring in a 7.65% benefit rate, each employee is expected to cost $25,836 annually. Future wage rates have been adjusted with a 2.5% annual inflation rate. Exhibit 5.2.3 Labor Force and Costs for the Biomass Aggregator Business

Category 2013 2014 2015 2016 2017 Direct labor (persons) 2.0 3.25 4.0 4.5 4.5Direct payroll and benefits (per person per year)

$25,836 $26,482 $27,144 $27,823 $28,518

Total direct labor costs $51,672 $86,066 $108,576 $125,201 $128,331

Page 18: Missouri Biomass Aggregator Business Plan

15

Other direct costs for the biomass aggregator will include electricity (grinding biomass), truck ownership and maintenance costs, fuel, and building/equipment repair and maintenance. These yearly costs are detailed in Exhibit 5.2.4. Adjustments were made based on equipment usage and mileage per year to determine these direct costs. Fuel was estimated at $4.00 per gallon. All costs were adjusted with a 2.5% annual inflation rate. All expenses will increase as the business expands in processing more biomass tons during the five year period. Exhibit 5.2.4 Other Direct Costs for the Biomass Aggregator Business

Category 2013 2014 2015 2016 2017 Electricity (grinding) $73,200 $125,050 $192,264 $262,761 $269,330Truck taxes, insurance, and license

$7,200 $7,380 $7,565 $7,754 $7,947

Truck tires, repairs, fuel and lubrication cost

$45,167 $77,160 $118,634 $162,133 $166,187

Building and equipment repair and maintenance

$0 $127,875 $191,233 $257,685 $263,877

Total $125,567 $337,465 $509,696 $690,333 $707,342 Overhead expenses for the biomass aggregator business can be seen in Exhibit 5.2.5. Selling expenses represent the sales commission for the sales associate and are paid on per ton sold basis (approximately cost of 1.7% of sales). An administrative assistant and general manager will be hired to handle their respective functions that are needed in the business. Other general office related expenses such as office supplies, mail/phone, travel, utilities, property taxes, professional fees and other miscellaneous expenses were included. Utility expenses include electricity (other electricity use besides grinding), propane, and a small expense for water. Professional fees will include income tax preparation. All costs except selling commissions were adjusted with a 2.5% annual inflation rate. Exhibit 5.2.5 Overhead Costs for the Biomass Aggregator Business

Category 2013 2014 2015 2016 2017 Selling expenses (sales commission) $29,999 $51,249 $78,796 $107,688 $110,380

Administrative assistant (payroll and benefits)

$26,913 $27,585 $28,275 $28,982 $29,706

Facility manager (payroll and benefits) $53,825 $55,171 $56,550 $57,964 $59,413

General expenses Office supplies $1,200 $1,230 $1,261 $1,292 $1,325 Mail, phone, and fax $1,000 $1,025 $1,051 $1,077 $1,104 Travel $4,800 $4,920 $5,043 $5,169 $5,298 Utilities $1,200 $1,230 $1,261 $1,292 $1,325 Property taxes $1,000 $1,025 $1,051 $1,077 $1,104 Professional fees $5,000 $5,125 $5,253 $5,384 $5,519 Miscellaneous expenses $2,400 $2,460 $2,522 $2,585 $2,649

Total overhead expenses $127,336 $151,020 $181,061 $212,510 $217,823

Page 19: Missouri Biomass Aggregator Business Plan

16

Total labor force that will be used in the Missouri Biomass Aggregator business can be found in Exhibit 5.2.6. The labor force would include the facility manager, administrative assistant, and all direct laborers. The sales associate was not included since it is a commission-based position or even could be provided by an outsourced marketing company. Exhibit 5.2.6 Labor Force per Year

0

1

2

3

4

5

6

7

2013 2014 2015 2016 2017

Per

son

s

5 Years Commencing in 2013

Management

Clerical

Direct

Page 20: Missouri Biomass Aggregator Business Plan

17

5.3. Pro Forma Income Statement

The annual income statements for years 2013-2017 can be seen in Exhibit 5.3.1. The income statements reflect operations as a biomass aggregator. As the facility begins operation at the capacity of 30,000 tons of production annually, sales and expenses increase throughout the forecasted period. The change seen annually is due to the increase in production/sales in future years and the inflation rate of 2.5 percent being applied to sales and most expenses (excluding sales commission and depreciation). Total sales are made up of one revenue stream from selling shredded biomass. Gross margin is calculated by subtracting the direct costs associated with the production of the shredded biomass. Gross margin tells a firm if the buy sell relationship is strong enough to be able to pay for operation of the firm, not just the production of the product. From gross margin, overhead expenses are subtracted to leave income from operations. Cost of sales include materials/packaging/goods, direct labor and other direct costs. Materials/packaging/goods are made up of the cost of purchasing biomass from local sources. Direct labor is the expense associated with the wages, benefits, and taxes for the hourly employees. Other direct costs include the expenses associated with utilities for grinding, truck-related expenses and building/equipment repairs and maintenance. Overhead expenses include the labor expenses associated with the indirect employees as well as the other general and administrative expenses. Depreciation was computed using the straight-line depreciation method. Income before interest and taxes (EBIT) trends upward mostly due to the increase in tonnage sold and optimal use of assets as the plant reaches full capacity. The interest expense is associated with the long-term loan used to partially finance the necessary capital expenditures. Taxes are not included on this statement because their calculation was based on the business structure being an LLC and profits/losses/taxes will be passed to the individual member/investor level. Dividends were assumed in year three through five as the business has profits in excess of earlier year losses and member/investors will begin to have taxes that will need to be paid on the business. It is assumed that the total net income after dividends paid is transferred to reserves.

Page 21: Missouri Biomass Aggregator Business Plan

18

Exhibit 5.3.1 Annual Income Statements for Missouri Biomass Aggregator INCOME STATEMENTS Year 1 Year 2 Year 3 Year 4 Year 5

Years Ending Dec 2013 2014 2015 2016 2017 Thousand dollars Total sales 1,800.0 3,075.0 4,727.8 6,461.3 6,622.9

Cost of sales: -Materials/packaging/goods 1,386.0 2,367.8 3,640.4 4,975.2 5,099.6 -Direct labor 51.7 86.1 108.6 125.2 128.3 -Other direct 125.6 337.5 509.7 690.3 707.3 Cost of sales 1,563.2 2,791.3 4,258.7 5,790.8 5,935.3 Gross margin 236.8 283.7 469.1 670.6 687.6 Overhead expenses: -Selling 30.0 51.2 78.8 107.7 110.4 -Management/admin staff 80.7 82.8 84.8 86.9 89.1 -General 16.6 17.0 17.4 17.9 18.3Depreciation 111.9 111.9 111.9 111.9 111.9Total operating expenses 239.2 262.9 292.9 324.4 329.7

Income from operations (2.4) 20.8 176.2 346.2 357.9 EBIT (2.4) 20.8 176.2 346.2 357.9 Interest expense/income:

-Interest expense 63.0 60.7 55.8 50.7 45.2 -Interest income 2.1 1.9 1.9 2.4 3.3 Net interest expense (Income) 60.9 58.8 54.0 48.3 41.9 Net income before taxes (63.4) (37.9) 122.2 297.9 316.1 Taxes Net income (63.4) (37.9) 122.2 297.9 316.1 Dividends declared 43.0 104.0 110.0 Transferred to reserves (63.4) (37.9) 79.2 193.9 206.1

Page 22: Missouri Biomass Aggregator Business Plan

19

Other indicators that indicate the financial health of a business can be found in Exhibit 5.3.2. Current ratio represents the company’s ability to meet short term obligations on time. A rule of thumb for most businesses is to not fall below 2.0 and the biomass aggregator business only slightly dips below 5.0 in year three. Gross margin is the difference between sales and cost of goods sold and remains steady after year one. Net income before taxes becomes positive in year three, which demonstrates that profits will be generated to its investors at that point. Exhibit 5.3.2 Key Business Indicators for Missouri Biomass Aggregator

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-6

-4

-2

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017

Tim

es

Per

cen

t

5 Years Commencing in 2013

Net income before taxes as % sales Gross margin (as % sales)

Current asset ratio (Right axis)

Page 23: Missouri Biomass Aggregator Business Plan

20

A cost and expense analysis for the biomass aggregator business can be found in Exhibit 5.3.3. Depreciation expense and management/admin staff will decrease each year since no additional capital investments and staff (non-direct laborers) are added, straight line depreciation was used, and the business sales grow in the first four years. Cost of sales will initially increase as the business is growing, but will level off near 90% of sales. Exhibit 5.3.3 Cost/Expense Analysis for Missouri Biomass Aggregator

80

85

90

95

100

105

2013 2014 2015 2016 2017

As

% o

f Sa

les

5 Years Commencing in 2013

Cost of sales Selling Management/admin staff General Depreciation

Page 24: Missouri Biomass Aggregator Business Plan

21

5.4. Pro Forma Balance Sheet A yearend balance sheet for years ending December 2013 through 2017 can be seen in Exhibit 5.4.1. Cash at bank is assumed to begin at $400,000 at the beginning of 2012. Cash at bank will begin increasing in year three as the business begins to sustain profits. Accounts receivable is assumed that all customers will pay within a 2 week cycle. It is also assumed that two weeks’ worth of inventory will be available at all times for customers. Fixed assets for the biomass aggregator business will be $1.4 million. Accumulated depreciation is based on an overall average 8% rate per year. Economic depreciation will vary by asset by expected life and salvage value. Net asset value will decrease over time as fixed assets depreciate and no new capital assets are expected to be purchased in the first five years of operation. Accounts payable reflects the assumption that 100% is to be paid before the end of two weeks. Payroll taxes/benefits payable that are expected to be outstanding at year-end is 4.2% of year total. The long-term liabilities section reflects the ten year loan ($900,000) necessary to partially finance the capital expenditures. It is reduced each year by principal that is paid off according to the loan terms. Dividends will be declared and returned to member/investors in year three. After factoring in those dividends, owner’s equity will begin to grow above the initial investment in year four as retained earnings turns back into a positive balance.

Page 25: Missouri Biomass Aggregator Business Plan

22

Exhibit 5.4.1 Annual Balance Sheet Statements for Missouri Biomass Aggregator BALANCE SHEETS Year 1 Year 2 Year 3 Year 4 Year 5

Years Ending Dec 2013 2014 2015 2016 2017

Thousand Dollars

ASSETS

Current assets: Cash at bank 371.6 321.8 371.5 529.3 762.8 Accounts receivable 69.0 117.9 181.3 247.8 254.0 Inventory 69.2 115.3 172.6 230.0 230.0 Total current assets 509.8 555.0 725.4 1,007.1 1,246.8 Fixed assets: Fixed assets (gross) 1,400.0 1,400.0 1,400.0 1,400.0 1,400.0 Less: accumulated depreciation 111.9 223.7 335.6 447.4 559.3 Net fixed assets 1,288.1 1,176.3 1,064.4 952.6 840.7 Net intangible assets Total assets 1,798.0 1,731.3 1,789.8 1,959.7 2,087.5 LIABILITIES

Current liabilities: Accounts payable 55.8 92.6 141.8 193.0 195.6 Payroll taxes/benefits 5.5 7.0 8.0 8.8 9.0 Total current liabilities 61.3 99.6 149.9 201.8 204.6 Long-term liabilities: Long-term debt/notes 900.0 833.0 762.0 686.0 605.0 Total long-term liabilities 900.0 833.0 762.0 686.0 605.0 Equity: Equity investments 900.0 900.0 900.0 900.0 900.0 Retained earnings (63.4) (101.3) (22.0) 171.9 377.9 Total owners' equity 836.6 798.7 878.0 1,071.9 1,277.9 Total liabilities & equity 1,798.0 1,731.3 1,789.8 1,959.7 2,087.5

Page 26: Missouri Biomass Aggregator Business Plan

23

5.5. Pro Forma Cash Flow Statement Exhibits 5.5.1 and 5.5.2 display the annual cash flow statements for years 2013-2017. The equity investment ($900 thousand) would occur during the construction period in late 2012 and is not reflected since it is prior to these statements. The cash balance will start growing more rapidly in year three when the operation generates a positive annual net cash flow. The lowest cash balance that is achieved is $321,800 in year two, but the opening working capital of $400 thousand can absorb the negative cash flow in the first two years of operation and will be repaid back to the business by year four.

Exhibit 5.5.1 Annual Cash flow for Missouri Biomass Aggregator

(100)

0

100

200

300

400

500

600

700

800

900

2013 2014 2015 2016 2017

Th

ousa

nd

Dol

lars

5 Years Commencing in 2013

Net cashflow Net cash balance (deficit)

Page 27: Missouri Biomass Aggregator Business Plan

24

Exhibit 5.5.2 Annual Cash flow Statements for Missouri Biomass Aggregator CASHFLOW PROJECTIONS Year 1 Year 2 Year 3 Year 4 Year 5

Years Ending Dec 2013 2014 2015 2016 2017

Thousand Dollars Cash receipts Cash sales & accounts receivable 1,731.0 3,026.1 4,664.4 6,394.9 6,616.7 Interest received 2.1 1.9 1.9 2.4 3.3 Total cash receipts 1,733.0 3,028.0 4,666.3 6,397.2 6,620.0 Cash payments Materials/goods accounts payable 1,399.4 2,377.1 3,648.5 4,981.4 5,097.0 Total direct cost payments 175.1 420.0 613.8 810.3 830.3 Total overhead expense payments 124.0 147.6 177.5 208.9 214.1 Dividends paid 43.0 104.0 110.0 Long-term debt/note repayments 67.0 71.0 76.0 81.0 Prior-year payroll taxes/benefits paid 5.5 7.0 8.0 8.8 Interest paid 63.0 60.7 55.8 50.7 45.2 Total cash payments 1,761.5 3,077.8 4,616.6 6,239.4 6,386.5 Net cash flow (28.424) (49.800) 49.675 157.846 233.509 Closing net cash balance (Deficit) 371.6 321.8 371.5 529.3 762.8

Page 28: Missouri Biomass Aggregator Business Plan

25

5.6. Financial Ratios Summary Key financial indicators for the biomass aggregator business can be found in Exhibit 5.6.1. In year four of operation, the business will be generating a return on owner’s equity (ROE) greater than 20 percent. Annual sales to asset ratio demonstrates how productively a business is using its assets and triples (times) from year one into year four as the business increases biomass tonnage sales. Exhibit 5.6.1 Ratio Analysis Summary for Missouri Biomass Aggregator

Years Year 1 Year 2 Year 3 Year 4 Year 5

ending Dec 2013 2014 2015 2016 2017

As % sales: -Materials/packaging & goods 77.0 77.0 77.0 77.0 77.0 -Direct labor 2.9 2.8 2.3 1.9 1.9 -Gross margin 13.2 9.2 9.9 10.4 10.4 -Overhead expenses 7.1 4.9 3.8 3.3 3.3 -Income from operations (0.1) 0.7 3.7 5.4 5.4 -Net income before taxes (3.5) (1.2) 2.6 4.6 4.8 Sales as % breakeven 99 108 160 207 209 Net income before taxes/total assets % pa) (3.5) (2.2) 6.8 15.2 15.1 Return on owners' equity (% pa) (7.6) (4.7) 13.9 27.8 24.7 Annual sales/total assets (times) 1.0 1.8 2.6 3.3 3.2 Annual sales/net fixed assets (times) 1.4 2.6 4.4 6.8 7.9 Net debt (cash surplus) as % of owners' equity 63 64 44 15 (12)Net Interest cover (times) na 0.4 3.3 7.2 8.6 Current asset ratio (times) 8.3 5.6 4.8 5.0 6.1 Accounts receivable (days sales *) 14 14 14 14 14 Inventory (days sales) 14 14 13 13 13 Accounts payable (days total costs *) 12 11 12 12 12 Average number of employees (headcount) 4.0 5.3 6.0 6.5 6.5 Annualized sales per employee ($000) 450.0 585.7 788.0 994.1 1,018.9

Page 29: Missouri Biomass Aggregator Business Plan

26

5.7. Sensitivity Analysis

Another measure of the financial feasibility is to conduct a sensitivity analysis relative to changes in market conditions. Two major drivers in the viability of the biomass aggregator business are the input price and selling price of biomass. The following results demonstrate the financial implications on net income (5 year average) of changes in selling prices (shredded biomass) and cost of materials (biomass purchases).

Exhibit 5.7.1 Sensitivity Analysis on Net Income before Taxes (5 year Average) Year One Price (Future years are increased by 2.5%)

$50 per ton

$55 per ton

$60 per ton

$65 per ton

$70 per ton

Cost of Materials (Biomass) as % of

Sales

73% $116,800 $213,500 $310,200 $406,900 $503,600 75% $40,200 $129,500 $218,600 $307,700 $396,700 77% ($37,200) $45,300 $127,000 $208,400 $289,800 79% ($118,700) ($39,900) $35,100 $109,200 $183,000 81% ($200,900) ($129,700) ($58,700) $9,500 $76,000