NextGen Energy Board Meeting Lending Observations Jim Jones August 30, 2007

Overview  Farm Credit System – Ethanol Background  Sources of Debt Capital  Underwriting Considerations

 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 AgriBank Overview

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) 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  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  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.

Why the concern about Blender Wall? Since MTBE has been replaced Ethanol demand has been relatively flat.

Source: Houston BioFuels Consultants

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 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 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 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 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