Fw: Ethanol memo Page 1 of 1

Melissa Pringle -+, ---* "- - -,."--*pv------ "-..-""- ------=-- ---- -"-

From: Bernie Morton [bmorton@Sussex-strategy.com]

Sent: Wednesday, March 18,2009 1 :31 PM

To: Melissa Pringle

Subject: UOlT

Attachments: Economic Impact Study RFF Final.pdf

Dear Melissa,

Could you please distribute the attached report conducted by the University of Ontario Institute of Technology to Members of Councils, and please include on upcoming agendas of the appropriate committees dealing with the FarmTech Energy ethanol facility proposal, as well as jobljob creation and the local economy.

Any questions regarding the report itself can be directed to UOlT and Professor Raymond Cox, 905-712-8668 x 2878, raymond.cox@uoit.ca

Many thanks, Bernie Morton obo FarmTech Energy Corp.

**********

Bernie Morton Vice President Sussex Strategy Group Inc. 101 Yorkville Avenue, Suite 203 Toronto, ON, M5R 1C1 t. (416) 644-4756 c. (416) 723.5533 bmorton@sussex-strategy.com www.sussex-strategy.com

1

Economic Impact Study

For a

Renewable Fuels Facility

In Oshawa

Prepared for

March 2009

Prepared by

Prof. Raymond A. K. Cox, B.Sc., B.Comm., M.B.A., Ph. D., CCM, CMA, CFA

2

Executive Summary

The economic impact of a biomass-based renewable fuels facility (RFF) in Oshawa, developed

and operated by Farm Tech Energy Corporation is examined in this report. The economic effects

are tabulated including the direct effects from construction and production operation; indirect

effects from the economic vertical integration support both upstream and downstream; and the

induced results on other businesses from the boost in spending in Oshawa.

The biomass-based renewable fuels facility is comprised of phase 1 capacity and then a doubling

of plant capacity stage labelled phase 2. The economic impact is addressed with the metrics of

number of persons securing jobs from different sources combined with the total lifetime, in

person-years, of the facility taking into consideration its’ longevity. The dollar impact is

measured in 2009 constant dollars as well as nominal dollars adjusted for inflation. In addition,

payments to government entities are presented as other economic benefits. Corollary benefits

such as the increased utilization of Port of Oshawa are not quantified in dollars.

The collection of payments in phase 1 and with phase 2 of the fee type for the recipient are:

building permit fees to the City of Oshawa of $385 thousand (phase 1) and $680 thousand (with

phase 2); development cost fee to the City of Oshawa of $220 thousand (phase 1) and $440

thousand (with phase 2); water bill annual payments to the Region of Durham of $500 thousand

(phase 1) and $1 million (with phase 2); electric annual payments to Oshawa PUC of $3.5

million (phase 1) and $7 million (with phase 2); federal and provincial income taxes per annum

of $8.4 million (phase 1) and $16.8 million (with phase 2); and, annual property taxes to the City

of Oshawa of $1 million (phase 1) and $2 million (with phase 2).

The jobs impact of the renewable fuels facility includes 50 (phase 1) and 65 (with phase 2)

persons at the RFF and 650 (phase 1) and 1,300 (with phase 2) persons from indirect effects as

well as 300 persons for the construction stage totalling 1,000 (phase 1) and 1,965 (with phase 2)

persons. With a 25-year facility life the total person-years of jobs is 17,950 (phase 1) and 35,025

(with phase 2).

For the projected facility life of 40 years the direct impact of the RFF is 2,000 (phase 1) and

2,600 (with phase 2) person-year jobs; the indirect results generate 26,000 (phase 1) and 52,000

(with phase 2) person year jobs; construction providing 450 (phase 1) and 900 (with phase 2)

person-year jobs; and the total jobs impact is 28,450 (phase 1) and 55,500 (with phase 2) person-

years.

3

The constant 2009 dollar impact of the RFF on construction is $388.5 million (phase 1) and $651

million (with phase 2). The annual direct labour income is $8.2 million (phase 1) and $11.6

million (with phase 2). The increased annual business revenue is $346.5 million (phase 1) and

$693 million (with phase 2).

For the conservative projected facility life of 25 years the constant 2009 dollar effects in phase 1

for construction, direct labour income and business revenue are $388.5 million, $205.8 million

and $8,662.5 million respectively. With phase 2 the constant 2009 dollar impacts for

construction, direct labour income and business revenue are $651 million, $288.8 million and

$17,325 million respectively. These effects make for a total constant dollar impact for a 25 year

facility of $9.2568 billion (phase 1) and $18.2648 billion (with phase 2).

In consideration of the expected facility life of 40 years the constant 2009 dollar impact in phase

1 for construction, direct labour income and business revenue is $388.5 million, $329.3 million

and $13,860 million respectively. With phase 2 the constant 2009 dollar impact for construction,

direct labour income and business revenue becomes $651 million, $462 million and $27,721

million respectively. These impacts add up to a total increase, measured by constant 2009

dollars, in the economy of $14.5778 billion (phase 1) and $28.833 billion (with phase 2).

Due to inflation the actual economic impact of the RFF will be in nominal dollars. Constant

dollars are adjusted for inflation at the 1948-2008 historic rate of 4%. For a 25 year facility phase

1 impacts for construction, direct labour income and business revenue amount to $393.6 million,

$341.5 million and $14,430.3 million whereas with phase 2 these amounts for the respective

categories are $659.6 million, $483.1 million and $28,860.6 million. Thus, the total nominal

dollar impact is $15.1654 billion (phase 1) and $30.0033 billion (with phase 2).

For the projected 40 year life facility the nominal dollar impact for construction, direct labour

income and business revenue is $393.6 million, $779.2 million and $32,926.3 million

respectively. With phase 2 the nominal dollar impacts for construction, direct labour income and

business revenue rise to $659.6 million, $1,102.3 million and $65,852.7 million respectively.

Thus, with the 40 year longevity the total nominal dollar impact of a biomass-based renewable

fuels facility in Oshawa is $34.0991 billion in phase 1 and magnifies to $67.6146 billion with

phase 2.

4

Economic Impact Study for a Renewable Fuels Facility in Oshawa

Introduction

The economic impact of Farm Tech Energy Corporation developing and operating a biomass-

based renewable fuels facility in the City of Oshawa is the topic of this study. The economic

aspects of this proposed facility are examined including the direct effects that are immediate

from employment of workers in the construction phase and subsequent production stage; indirect

impacts resulting from the upstream and downstream support jobs created from the main

business such as an enriched agricultural sector and transportation industry positions; and, the

chain reaction of induced results from the spending of money derived from direct and indirect

activities. This economic flow of activity is depicted in the following figure:

Figure 1

Renewable Fuels Facility

______|___________________|_______________|____________|____________|______

Direct Employment Purchases from Purchases of Other Purchases Payment

At Facility Farmers Transportation of Goods and of Taxes

| | Services Services by and Fees

| | | All Firms

| __|________________|______________|______

| |

Personal Income Indirect Jobs

|

Personal >> Spent in >> Induced

Income Local Jobs

| Economy |

| |

| |

>> Payment of Taxes<<

5

The contribution of the renewable fuels facility propounded by Farm Tech Energy Corporation

(owned by Farm Tech Growers Cooperative comprised of 1700 farmers) also extends to the

payment of property taxes (to the City of Oshawa, Region of Durham and Education), federal

and provincial incomes taxes, water usage remittances to the Region of Durham, hydroelectric

outlays to Oshawa PUC Networks, Inc., development cost fees, and building permit fees as well

as other infrastructure improvements for the City of Oshawa.

Overview of the Economic and Employment Base of Oshawa

An overview of the current economy of the City of Oshawa is provided for context. However,

what with the global financial market meltdown coupled with the deep recession with

ramifications to the manufacturing industry in Ontario and in particular the automotive making

sector in Oshawa the present economic activity is expected to adversely change. That and there is

great uncertainty about future economic prospects especially in light of proposed protectionist

measures from the U.S., risky bailout packages and unprecedented forecasted government

deficits. The following Table 1 presents a thumbnail sketch of the current condition of the

Oshawa Census Metropolitan Area.

Table 1

Oshawa Economic Data 2008

GDP $16.016 Billion

Population (Metropolitan) 353 Thousand

(City) 156 Thousand

Employed Labour Force 185 Thousand

Personal Income per Capita $36.968 Thousand

CPI Inflation Rate 2.8 Percent

Unemployment Rate 6.9 Percent

6

The statistics above (from Statistics Canada) indicate an economy close to the norms of Canada

as a whole. However, the economic growth rate of Oshawa has slowed down tremendously in the

most recent year with the income level slipping combined with a higher inflation rate compared

to the rest of the nation. Moreover, the unemployment rate of 6.9 percent is higher than the

national average and with General Motors of Canada, by far the largest employer, and other auto

parts suppliers in the supply chain as the backbone of the industrial base coupled with the dim

prospects of this industry the jobs situation is expected to be a serious challenge. In fact, given

GM bonds in the U.S. recently trading for yields in excess of 50 percent the likelihood of severe

business conditions, if not bankruptcy, for the foreseeable future are credible.

Table 2

Industry Composition of Oshawa 2007

Industry Percent

Industrial 26

Office 34

Transportation and Communication 7

Wholesale and Retail Trade 15

Non-commercial Services 17

Total 100

While the Oshawa (CMA) is to a large extent diversified (0.87 where 1.0 is diversified;

Conference Board of Canada) there continues to be a heavy reliance on the industrial category

exasperated by the concentration in the auto sector. Furthermore, both the direct and indirect jobs

relying on the auto sector induce jobs in the other industries of the local economy.

7

The Commerce of the Renewable Fuels Facility

Farm Tech Energy Corp. offers to develop and operate a renewable fuels facility (RFF) in

Oshawa. The commerce of this RFF begins by procuring regionally produced agricultural inputs.

These biomass materials will enable the RFF to conduct the fermentation of sugar into the

renewable fuel of ethanol. Ethanol has a variety of uses including colourings, feedstock,

flavourings, fuel, scents and solvents.

The three major markets for the outputs for the Farm Tech Energy Corp. RFF are carbon dioxide

(for the beverage industry), feedstock and fuel. The primary biomass to be used for ethanol

production at the envisioned Oshawa RFF is corn. Projections are for 500 thousand tons of corn

annually of which 350 thousand tons are acquired locally, to be converted by the RFF.

A strength of the Oshawa location is its central point to the corn farming sector extending three

and one-half hours west and four hours east (transportation time). Presently the corn producers

export 75 percent of their crop outside of the region. Of the total of roughly $170 received per

ton of corn approximately $25 per ton is trucking cost to current customers. See Chart 1 in the

appendix showing historical corn prices in Ontario. Given the RFF would be the new client of

this industry the transportation cost plummet to about $7 to $8 per ton. The irony of the supply

chain now is that most of the feed supplies derived from corn are imported from outside the

region to livestock farms that are concentrated in the York and Durham regions.

The primary output of the RFF is ethanol to be used as a biofuel added to gasoline for cars and

trucks. In addition, this complies with Government of Ontario requirements of 5 percent ethanol

content in gasoline (effective January 1, 2007) and a nationwide 5 percent (by 2010) ethanol

content mandate from the Government of Canada. These renewable fuel requirements are

expected to become more stringent over time with societal concerns about the depletion of fossil

fuel energy sources such as oil. Moreover, the heightened concern on the reliance on oil and its

detrimental effect on the environment is particularly acute in the U.S. This circumstance is

expected to create an export opportunity for RFF generated biofuel. Chart 2 in the appendix

shows the historical price of ethanol.

8

A second strength of the Oshawa location is the proximity to the Greater Toronto Area (GTA)

ethanol market. The closest major distribution terminal is within seventy kilometres (in Toronto

at Keele and Finch) serving the GTA. This facility is furnishing a reliable source of renewable

energy at stable prices to combat the risk of price spikes in the cost of gasoline. See Chart 3 in

the appendix for the historical retail gasoline prices in Toronto.

A third strength of the Oshawa location is the space for expansion to double the production

capacity of the facility as well as the infrastructure, to a large extent, is already in place.

A fourth strength of the Oshawa location is the short distance to the Port of Oshawa. The

movement of the inputs and outputs is 40 tons per truck, by lake freighter it is 25 thousand tons.

This port advantage is ever more important when the RFF is expanded. Corn can be imported

outside of the local draw area and ethanol can be exported to the U.S. market. The specific RFF

location put forward, adjacent to the asphalt plant and harbour, is a never developed lot zoned for

industrial use in keeping with the activity of the surrounding area. It is expected that initially the

biomass transported by ship will be 30 percent of the total volume of the inputs as well as the

international export of the outputs. The feedstock co-product of distillery grain contains high

protein and fibre for the livestock industry. The volume of distillery grain is expected to be 176

thousand tons per annum. In addition to the port as a shipping point the road system (Highway

401 and to be completed Highway 407) and rail system accommodate the other transportation

modes. Furthermore, the RFF will cause the need to have a trucking terminal in the city as well

as maintenance and repair services. The activity of the RFF will also foster the development of

Oshawa as the business centre for the agricultural community in Southern and Eastern Ontario.

Economic Benefits to Oshawa

As the following analysis will show the economic benefits to Oshawa having a renewable fuels

facility are immense. This economic impact will measure the incremental dollar change in the

City of Oshawa and Region of Durham economy. Increased number of jobs is also tallied to

capture the positive effects of the RFF.

9

Direct impacts include salary income of the employees, property taxes, water fees, hydro

payments, development cost assessment, building permit fee and port usage fees. The longevity

of the RFF is estimated to be from 25 to 40 years.

Indirect impacts are activities such as payments made to the upstream corn farmers and the

downstream transportation entities. Some professionals may classify these specified effects as

direct given they are paid by the RFF. Nevertheless, we are placing these impacts in the indirect

category. Induced impacts include, in part, the increased commerce and professional activity

reflected by greater spending in the businesses of the area.

Separate multipliers are used for construction, salary income and business revenues. While not

all the money created by the RFF is retained in the area to recirculate, the leakages are expected

to be far less than an undiversified rural town. Oshawa is the economic engine of the Region of

Durham and is to a great extent diversified from the perspective of the manufacturing industry.

The estimate of the business revenue, salary income and construction multipliers is 2.10, 1.96

and 2.10 respectively.

The RFF will have a capacity to produce 210 million litres per year with the option of doubling

its size to 420 million litres per year given the available space. There is anticipated to be minimal

downside risk of demand for the product as the supply of ethanol in Canada in 2009 is 1.2 billion

litres and the projected domestic demand in 2010 is 2.3 billion litres. There are no other proposed

RFFs in Ontario at this time. See Table 3 for a list of the operating RFFs in Canada.

Upon observing Table 3 the renewable fuels facilities in Canada come from 5 provinces

(Alberta, Saskatchewan, Manitoba, Ontario and Quebec) using 6 different biomass materials

(wheat, corn, wheat straw, canola, animal fats and tallow) producing 2 different biofuels

(ethanol, and biodiesel). Three of the RFFs are in rather large cities Ottawa, Hamilton and

Montreal but for the most part they are located in smaller cities such as Red Deer and Chatham.

The construction of the renewable fuels facility will employ 300 construction workers over an 18

month period. When the plant expansion is undertaken the construction job creation is replicated.

10

The cost of the first plant is $185 million with the land being leased. The plant expansion is

estimated to cost $125 million.

Table 3

Renewable Fuels Facilities in Canada 2009

City Province Biomass Biofuel

Aylmer ON Corn Ethanol

Belle Plaine SK Wheat Ethanol

Chatham ON Corn Ethanol

Collingwood ON Corn Ethanol

Foam Lake SK Canola Biodiesel

Hamilton ON Tallow Biodiesel

Hensall ON Corn Ethanol

Johnstown ON Corn Ethanol

Lanigan SK Wheat Ethanol

Lloydminster SK Wheat Ethanol

Minnedosa MB Wheat Ethanol

Montreal QC Animal Fats Biodiesel

Ottawa ON Wheat Straw Ethanol

Red Deer AB Wheat Ethanol

St. Clair ON Corn Ethanol

Sturgeon AB Canola Biodiesel

Tiverton ON Corn Ethanol

Unity SK Wheat Ethanol

Varennes QC Corn Ethanol

Weyburn SK Wheat Ethanol

From the pro forma financial statements the annual (unless noted otherwise) taxes, utility

expenses and fees are the following: building permit $385 thousand (one-time), development

11

cost fee $220 thousand (one-time), water payments $500 thousand, hydroelectric payments $3.5

million, federal and provincial income taxes $8.4 million, and property tax $1 million. See Table

4 for a summary of these benefits. With the plant expansion the benefits are magnified more so

with additional fees most notably the annual water and hydroelectric payments rise to $2 million

and $7 million respectively as well as a doubling of the federal and provincial incomes taxes to

$16.8 million along with additional building permit, development cost fees and property taxes .

Table 4

Other Economic Benefits

Phase 1 With Plant Expansion

Building Permit $385 thousand $680 thousand

Development Cost Fee $220 thousand $440 thousand

Water Payments (per annum) $500 thousand $1 million

Hydroelectric Payments (per annum) $3.5 million $7 million

Federal and Provincial Income Taxes (per annum) $8.4 million $16.8 million

Property Taxes (per annum) $1 million $2 million

The RFF itself will generate annual revenues of $165 million with an employee payroll of $4.2

million and 50 jobs. When the plant expansion is done an additional revenue stream of $165

million is created along with adding 15 jobs and $1.3 million payroll. This makes for $330

million revenues annually as well as $5.5 million of salaries for the 65 employees. Note, the

average annual income of the employees is high at about $85 thousand.

The next step in the analysis is to factor in the multiplier effect of the construction, business

revenue, and employee payroll to estimate the cumulative impact on the economy. Table 5

12

highlights the impact on jobs. The first phase of the RFF, in Panel A, creates 17,950 person-years

of jobs when using the minimum longevity projection. The total jobs creation rises to 28,450

person-years with the high longevity facility life forecast. Furthermore, when the RFF expands

its capacity as shown in Panel B the amount of job creation elevates to 35,025 person-years for

the low facility life estimate and magnifies to 55,500 person-years jobs for the high facility life

estimate.

Table 5

Jobs Impact

Panel A – Phase 1

Source Persons Person-Years (25) Person-Years (40)

RFF 50 1,250 2,000

Indirect * 650 16,250 26,000

Construction 300 450 450

Total 1,000 17,950 28,450

Panel B – Phase 2 with Plant Expansion

Source Persons Person-Years (25) Person-Years (40)

RFF 65 1,625 2,600

Indirect * 1,300 32,500 52,000

Construction 600 900 900

Total 1,965 35,025 55,500

* Ministry of Agriculture, Government of Ontario

13

Table 6

Constant Dollar Impact

Phase 1

Source Per Year 25 Years 40 Years

Construction * $260.0 million $388.5 million $388.5 million

Business Revenue $346.5 million $8,662.5 million $13,860 million

Labour Income $8.2 million $205.8 million $329.3 million

Total $614.7 million $9.2568 billion $14.5778 billion

Panel B

Phase 2 with Plant Expansion

Source Per Year 25 Years 40 Years

Construction * $436.0 million $651.0 million $651.0 million

Business Revenue $693 million $17,325 million $27,720 million

Labour Income $11.6 million $288.8 million $462.0 million

Total $1.1406 billion $18.2648 billion $28.833 billion

* Construction period is for 18 months and then ceases.

14

The dollar impact of the RFF is captured in Tables 6 and 7. Table 6 expresses the impact on the

economy of Oshawa using constant 2009 dollars. There is a sudden injection of economic

activity arising from the construction phase in Phase 1 to be followed by the business revenue

and employee salaries injections. From Panel A the 25 year life facility generates a total of

$9.2568 billion into the local economy whereas the 40 year life projection makes for $14.5778

billion of increased GDP output for Oshawa. The positive effects of phase 1 are augmented when

the RFF expands. Panel B of Table 6 exhibits the constant dollar impact on the Oshawa economy

with the facility expansion. The lowest estimate of improved economic output (25 year life) is

now $18.2648 billion. This rises to $28.833 billion for the high life facility figure.

While Table 6 provides data on the economic impact of the renewable fuels facility, with and

without expansion, over the life of the facility the actual dollar impacts are more accurately

captured by the nominal dollar figures as presented in Table 7. That is, in the future the economy

will naturally experience a decline in the purchasing value of the dollar (inflation) which should

be factored into the calculations. From a historical perspective the average arithmetic average

inflation rate in Canada from 1948 to 2008 was 4 percent on an annual basis. Using that past

experience as a guide the constant dollar projections from Table 6 are adjusted by the estimated

future inflation rate of 4 percent compounded annually. The results of this adjustment are shown

in Table 7 as the nominal dollar impact.

In Table 7, Panel A, the nominal dollar impact on the economy for the RFF at a 25 year life level

increases by $15.1654 billion. This economic effect mushrooms to $34.0991 billion for the 40

year life of the facility. When the RFF doubles its capacity, Panel B, the 25 year facility life

causes the economy to become $30.0033 billion greater and at a 40 year facility life the impact

on the economy becomes a staggering $67.6146 billion.

15

Table 7

Nominal Dollar Impact

Panel A

Source 25 Years 40 Years

Construction * $393.6 million $393.6 million

Business Revenue $14,430.3 million $32,926.3 million

Labour Income $341.5 million $779.2 million

Total $15.1654 billion $34.0991 billion

Panel B

Phase 2 with Plant Expansion

Source 25 Years 40 Years

Construction * $659.6 million $659.6 million

Business Revenue $28,860.6 million $65,852.7 million

Labour Income $483.1 million $1,102.3 million

Total $30.0033 billion $67.6146 billion

Note: Assume the inflation rate is 4 percent per annum (average rate for 1948-2008).

* Construction period is for 18 months and then ceases.

16

Summary

The construction and operation of a renewable fuels facility in Oshawa would provide a

tremendous lift to the economy in terms of increased GDP, numerous high paying jobs,

multiplier effect on direct and indirect jobs in the supply chain as well as induced jobs in other

sectors of the business fabric of the city and region. Specifically, factoring in the expansion

phase the all inclusive increase in person-years by having the RFF is projected to be 28,833 jobs.

Furthermore, the incremental impact of the RFF in nominal dollars is estimated to be a

significant $67.6146 billion to the local economy. Moreover, the advanced technology of this

RFF converting biomass into biofuel meets the objectives of the Ministry of Energy and

Infrastructure of the Government of Ontario “positioning Ontario and the GTA for future energy

sustainability” (The Honourable George Smitherman, Deputy Premier). Lastly, Oshawa is

known as a progressive city, knowledgeable in the realization that it is the private sector that

creates everlasting jobs in this country. As the economic clouds of doom form above us, this

shovel ready renewable fuels facility will make both an important short-run and long-run impact

to the economic vitality of the city and region.

17

Appendices

Chart 1 ................................................Corn Prices 2000-2008

Chart 2 ................................................Ethanol Prices 2005-2008

Chart 3 ................................................Gasoline Prices 2000-2008

18

Chart 1

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