vireol bio energy holdings limited - cocoon...

Vireol Bio Energy Holdings LimitedHopewell Bioethanol Plant, Virginia

October 2014

32 Hopewell Bioethanol PlantCocoon

Investment Opportunity 3

Executive Summary 4

Re-commissioning and Operation of the Hopewell Plant 5

Production 6

Staffing, Partners and Counterparties 7

Ethanol, DDGS and Corn Outlook 8

VBE's Ethanol Marketing 10

Financial Projections for VBE and VBEH arising from the Hopewell Ethanol Plant 11

Potential Upsides 12

Risk Management 13

Political Support for the Plant 14

Preference Shares and Development of Additional Projects 15

Corporate Structure and Payment Stream for Preference Shares 17

Inclusion of Senior Debt 18

Key Risk Analysis 19

Conclusion 21

Appendix 1 – Summary of Key Partners 22

Contents


Investment Opportunity y Vireol Bio Energy Holdings Ltd (“VBEH”) is the 100% owner of Vireol Bio Energy LLC (“VBE” or the “Operator”).

y VBE is operator of a 62 million gallon ethanol plant (the “Plant”) in Hopewell Virginia.

y The Plant was built in 2010/11 at a cost exceeding $200 million.

y The Plant was commissioned but never operated commercially. It was acquired by Future Fuels LLP (“FF LLP”) for $185 million in March 2013.

y FF LLP determined to recommence operations in October 2013, leading to the Plant being switched on in April 2014, and since then it has been operated by VBE.

y The Plant is expected to generate EBITDA of over $30 million per annum in all full operating years, producing 62 million gallons of corn Ethanol.

y The Plant is expected to run at 100% of nameplate capacity from January 2015.

y FF LLP currently has debt of only £3.5 million, on-lent to VBE. Otherwise the entities are debt free.

y The Plant is in a location benefiting from Federal New Markets Tax Credits, a form of federal funding that could provide up to c.25% of any new capital projects on site. This is available for an eight year term thus extending well beyond the redemption of the Preference Shares.

y VBEH, the UK-based holding company of VBE, is raising £5,000,000 through the issue of redeemable preference shares of £1 each which entitle the holder to an annual dividend equal to 15% of the issue price (the "Preference Shares"). The minimum investment shall be £10,000 and the proceeds of the Preference Share issue will be used to provide additional working capital and collateral facilities and develop certain identified projects.

y Using the Base Case assumptions, the Preference Share dividends enjoy 20x coverage and the redemption enjoys 3x coverage without any additional cashflow from new developments.

y As indicated in the structure chart below, this payment will be made prior to any dividends to the ordinary Shareholders of VBEH.

Vireol Bio Industries/ Vireol Mgmt Services

Vireol Bio Energy Holdings Ltd

Vireol Bio Energy LLC

Preference Share Investors

Ethanol Ventures Limited (EVL)

Future Capital Partners Limited

Future Fuels No. 1 LLP

15% 20% 5%

100%

15% Annual Dividend

UK

US

Rent Payments

60%

Dividend


Since re-commissioning in April of this year, FF LLP and VBE have successfully delivered the initial Plant start-up and achieved stable operations in excess of 80% of capacity. The focus is now on increasing operations to nameplate capacity (62 million gallons per annum) and potentially beyond this level. The 100% output is anticipated to be achieved by January 2015 at steady state operations. This is assisted by the full complement of staff, with all key positions now filled. The performance of employees during the early phases, technically the most challenging, has been admirable and bodes well for the Plant’s operational life. This performance has been mirrored by a strong record on health and safety, a key consideration of FF LLP and VBE.

The economics for ethanol are favourable, with the US ethanol price receiving support from strong domestic and international demand. A record 2013 corn harvest has been followed by an equally strong harvest in 2014, thus pressurising the corn price, which at $3.50 – $3.75 per bushel has fallen to a four year low. Naturally the abundance of corn and other grains has reduced the substantial Dry Distillers Grains Soluble (DDGS) premium that was witnessed through the 2013/14 winter months. However, projections for this have always been linked to corn prices.

VBE has met all of its contractual obligations for the purchase of corn and sale of ethanol, establishing itself as a dependable and reliable counterparty. This is considered a key attribute given the lack of local competition in ethanol production as well as its intent to optimise local corn supply. VBE is also working closely with The Scoular Company (“Scoular”) and the Virginia Grain Producers Association to strengthen relationships with the local agricultural community.

VBE has appointed leading risk consultant Atten Babler (“AB”) to work with VBE on a range of short-term and longer-term trading strategies. On the basis of their detailed knowledge of the corn, DDGS and ethanol markets, coupled with the understanding they have built up in recent months of VBE’s operational performance, trading commitments and objectives, AB will work closely on delivering short and long-term trading positions in order to ensure reliable cashflow on an ongoing basis while retaining upside potential wherever achievable.

Political support for the re-opening of the Plant remains robust, particularly in light of the importance of the agricultural sector to the wider Virginian economy. This has been demonstrated through the delivery of the Agriculture and Forestry Industries Development (“AFID”) grant of $500,000 (comprising 2 x $250,000) and the Biofuel Producers Incentive Grant (“BPIG”) of $4,500,000. Dialogue at both the City of Hopewell and Commonwealth of Virginia level is ongoing and a variety of future initiatives are under discussion.

Executive Summary


The Plant has achieved successful start-up and stabilisation and is now moving towards operation at full capacity of c.62 million gallons (c.170,000 gallons per day). The following sections provide greater detail on the status of the Plant, the Operator, key partners and the various initiatives undertaken to date and to be undertaken that will optimise the operating cashflow and capital value of the Plant.

Re-commissioning and Operation of the Hopewell Plant


Having achieved the successful start-up and re-commissioning in April 2014, the Plant has now reached operational stability, producing ethanol at a range of 70 - 80% of capacity on a reliable basis (see table below – figures as at October 23rd 2014).

Production table

Days Rolling Average 30 20 10 5

Gallons/Day (‘000) 127 129 137 176

% Nameplate Capacity 73% 74% 79% 101%

From this strong operational basis, production will be gradually increased towards full capacity during the coming months.

Naturally, certain challenges have been faced and overcome during the start-up period. Whilst difficulties associated with achieving steady load with the dryers were anticipated, the major surprise was a series of power supply interruptions affecting the Dominion Power (“Dominion”) network. These arose initially from a tornado that struck Virginia (but not Hopewell) and which damaged the distribution network. The resulting power outage caused a series of blockages in pumps and pipes that arose in the following days and weeks, triggering intermittent operation. The issues have been resolved and in early September 2014 Dominion introduced a second connection to the Plant, which has made the grid connection more robust against potential future power supply interruptions.

In terms of the ramp-up period to full capacity, VBE has deliberately taken a prudent and cautious approach driven by a number of factors as follows:

y In relation to DDGS, though there is a strong market for this product in Virginia, unlike many other states in the US, there is not yet a developed market for wet distillers grains. This is readily usable particularly by dairy farmers (cattle favour it) and the absence of this market meant there was a strong financial driver to ensure that the value of the DDGS could be captured from the outset. This depended upon the reliability of the dryers in order to produce the DDGS but critically, in the event of sub-optimal performance, excess levels of syrup are produced for which there is a cost of transportation and disposal (VBE incurred costs of $95,000 in May, $90,000 in June and $54,000 in July 2014).

y The management of VBE had indicated prior to commissioning that the dryers were likely to be the most complex element of the Plant to optimise, as their performance is in part related to the balance of the stillage coming through post ethanol. However, the significant efforts to achieve commissioning appear to have been successful with a 10 day period in September witnessing one dryer able to manage capacity and remain operational for 99.75% of the time. Further, during October, the Plant has been running frequently in excess of 80% using both dryers.

y VBE has recruited a very high calibre Operations team with strong processing knowledge and experience. However, given that there are no other ethanol plants in Virginia, there was limited specific knowledge of ethanol production. Therefore there was by necessity an intensive period of “on-the-job” learning. Moreover, in terms of complexity, the Katzen design is the most sophisticated technology on the market as it is able to produce ethanol from multiple feedstocks (e.g. corn, barley, wheat, sorghum). This again drove a prudent approach.

y Finally, given that the Plant had been mothballed for several years, there existed the risk of equipment failures, seizures and corrosion. This is best discovered through small incremental capacity increases, as has taken place, rather than a rapid increase, noting also that a failure at full operating conditions could have a very significant negative effect.

In relation to the key issues related to production, whilst both dryers are now operational, the Plant should be able to operate at higher capacity using both dryers or more flexibly at lower capacities using a single dryer. With regard to the boilers, these have been “tuned” resulting in far greater reliability during load changes. In addition, persistent failures of the feed-water pumps, understood to be the result of the long-term Plant mothballing, resulted in their replacement with new pumps, which delivered greater reliability with far greater flexibility.

The benefits of this prudent approach have been demonstrated by the Plant operating at more than 100% for five consecutive days in mid-October.

Production


Staffing, Partners and CounterpartiesThough recruited from scratch, key members of the Operations team possess considerable experience of ethanol or similar processing environments.

The recruitment of staff has been extremely successful with modest turnover and all major posts are now filled. The Plant operates on the basis of two 12 hour shifts of four people plus one “floater” and a Shift Coordinator, together with support and maintenance staff.

Staff training was undertaken in association with key vendors, including Katzen, who had undertaken the original technology design. The combination of the intrinsic capability of staff and the experience and expertise of the key vendors has allowed a rapid growth in knowledge of the Plant and is anticipated to result not only in the Plant achieving 100% of nameplate capacity but potentially significantly exceeding this level, as de-bottlenecking in critical areas is undertaken. This will be an ongoing process over the coming 18 months.

A major exercise has now been implemented to optimise the Plant operations, including the redefinition of certain roles and responsibilities (already underway for Process Operators), a team-building programme, a training and development programme, the development of standard operating processes, a trouble-shooting approach, a benchmarking plant and the framework for a continuous development approach.

As referenced above, the successful Plant start-up and stabilisation has been undertaken in association with and through the co-operation of a number of key counterparties. A structure diagram is provided below and brief background on each is contained in Appendix 1.



Columbia: Gas Supply

Scoular: DDGS Offtake

Murex: Ethanol Offtake

Scoular: Corn Supply

Shell: Gas Marketing

Dominion: Electricity Supply

All agreements necessary for the operation of the Plant are now in place.


In mid-2013, when FF LLP took the decision to restart the Plant, it was apparent that the US ethanol market was approaching a more balanced position in terms of supply and demand as a result of the increasing ethanol mandate, limited new capacity and greater export potential. This more balanced scenario has unfolded and, as indicated by Citibank in its recent publication1, is anticipated to continue in the coming years.

In summary, the provisional mandate of 13.2 billion gallons has been backed by strong ethanol exports and negligible imports (driven by the low corn cost environment), lending support to the 2014 price which has averaged in excess of $2.15 per gallon.

US Ethanol Production2014 is likely to see a record year of production for ethanol of some 14 billion gallons, representing an increase of 5% over 2013 and marginally above the previous record in 2011.

3 Yr Aug (”11-’13) ‘11-’12 ‘12-’13 ‘13-’14 YTD

12000

12500

13000

13500

14000

14500

15000

SepAugJulJunMayAprMarFebJanDecNovOct

Monthly U.S. Annualized Ethanol ProductionChg. vs. Jul. ‘14 -3.1%Chg. vs. Aug. ’13 +9.3%‘13-’14 YTD (Avg) +10.3%

Gal

lons

(Mill

ions

)

Source: Atten Babler; USDA; EIA

The past 12 months have also seen a major shift in the import and export mix; with:

y minimal imports to the US; and

y significant growth in exports from the US.

The following graph indicates annualised US imports for each of the past three years, together with the 2011-2013 three year average:

Monthly U.S. Annualized Ethanol Imports

0

200

400

600

800

1000

1200

SepAugJulJunMayAprMarFebJanDecNovOctG

allo

ns (M

illio

ns)

3 Yr Aug (”11-’13) ‘11-’12 ‘12-’13 ‘13-’14 YTD

Weekly imports were 0 barrels/day for the second week in a row compared to 36,000 barrells.day last year

Source: Atten Babler; USDA; EIA

Consistent with expectations in September 2013, US exports have grown to some 800 million – 1 billion gallons. This has been the result of:

y significant cost competitiveness of US ethanol; and

y the growth of domestic demand in Brazil limiting its capacity for export.

The US has become the exporter of choice and, on the basis of competitive corn prices (and thus competitive ethanol prices) over the coming years, this is likely to continue.

The price has been extremely volatile, particularly on the upside, as a result of low inventories, particularly on the East Coast, which were compounded by transportation interruptions during harsh winter conditions (the “Polar vortex”) resulted in rolling stock being stranded, thus significantly delaying delivery schedules. In PADD 1 (the US East Coast, including Virginia), ethanol prices spiked at more than $3.50 per gallon. Though this was a temporary issue, it did signal strongly to the wider market the value of “destination” ethanol plants, such as Hopewell, able to continue supplying the market in the event of such harsh winter conditions.

Ethanol, DDGS and Corn Outlook

1 Citibank – US Ethanol: A Goldilocks Processing Environment


Low inventories have also been a feature of the ethanol market throughout Q1 and Q2 of 2014. Notwithstanding their recent increase, these have remained below the five year average and have supported the ethanol price as the corn price has reduced.

U.S. Ethanol Stocks by PADD

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

8/14

6/14

4/14

2/14

12/1

3

10/1

3

8/13

6/13

4/13

2/13

12/1

2

10/1

2

8/12

6/12

4/12

2/12

12/1

1

10/1

1

8/11

6/11

4/11

2/11

12/1

0

10/1

0

8/10

6/10

Bar

rels

(Milli

ons)

East Coast (PADD 1) Midwest (PADD 2) Gult Coast (PADD 3) West Coast (PADD 5)

Stocks levelling out in the East

Source: Atten Babler; EIA

CornA key feature in recent years of the corn market has been the high price. The significant growth of ethanol production until 2010-11 resulted in significant new demand for corn. This additional demand naturally created some pressures and resulted in reduced stock carry-over. Thereafter, back-to-back poor harvests in 2011 and 2012 lowered the supply of corn resulting in record high prices.

Historically for soft commodities such as grains, the key remedy for high grain prices is high grain prices. This is because the high price of grains (including corn) incentivises high planting of the next crop whilst the high revenues from the existing crop result in greater investment and so higher yields. The high price of corn in 2012 triggered significant planting and high yield in 2013, resulting in a record harvest. Though acreage of corn planted was reduced in 2013/14, the near-perfect weather and strong yield delivered a further record harvest. The impact on the corn price has been significant.

The record harvest of 2013 and repeat in 2014 has resulted in massive stock carry-overs (actual and projected), which is a key driver of the corn price. This may be illustrated by the following table indicating the growth in “Ending Stocks” over these two years:

Stock Carry-overs

Year 2013/14 2014/15

Beginning Stocks (Bushels m) 821 1,181

Ending Stocks (Bushels m) 1,181 1,808

The growth of overall grain supplies and subsequent reduction in price has naturally reduced the demand for DDGS, with China reducing its imports. Consequently, the substantial premium to the corn price has been eroded and it is likely that the DDGS price will reduce to a slight discount to the price of corn. This is in line with projections and adds substance to the presence of DDGS acting as a mitigant to ethanol production in a high corn cost (low corn supply) environment.

However, taking an overall view of the ethanol, corn and DDGS markets, on the basis of the above, the operating margins for ethanol producers are not only attractive but the fundamentals appear to be in place for this to persist in the coming years.


During July and August, as a result of the unexpected outages associated with the power supply failures and knock-on effects, VBE took the deliberate decision to procure quantities of ethanol in order to safeguard and meet in full all of its marketing commitments.

This is a key long-term strategy in order to ensure that VBE is seen as a reliable long-term player and to establish relationships with key buyers of ethanol, particularly in PADD 1 and across the Eastern seaboard. As VBE operates the only plant in this area, it is anticipated that this will result in VBE becoming the supplier of choice and ultimately benefitting from additional margin associated with its locational benefits.

VBE's Ethanol Marketing


The ethanol and corn markets have moved favourably for ethanol producers over the past 12 to 18 months. This has been as a result of both greater ethanol demand supporting stronger ethanol prices and higher corn supply reducing corn prices. In order to provide forward-looking projections of the market, a scenario using ethanol at $2.10 per gallon and corn at $3.50 per bushel has been developed.

The basis for this scenario is that during the past 12 months the ethanol price, despite a reduced mandate of 13.2 billion gallons, averaged $2.15 per gallon during Q3 2014. According to Citibank, “seasonal CME ethanol prices have been in the range of $2.10 - $2.45 per gallon in recent cycles and for 2014 / 15 we expect levels to generally wrap around the lower-end and slightly below this trading band”. Therefore in the absence of any issues that would reduce ethanol demand and significant upside potential through the possibility of a higher Mandate and greater utilisation of E15 and E85 (15% ethanol blend and 85% ethanol blend, respectively), the annualised figure of $2.10 per gallon was selected as representing a prudent assumption.

In relation to corn, in view of the starting position of significant corn storage of 1.18 billion bushels for 2013/14 and the projected increase to 1.8 billion bushels, there are few indicators of any pressure for an increase in the price of corn and thus the price has been set at $3.50 per bushel. Though the corn price has already fallen below this price in the early part of the harvest and notwithstanding minimal grain demand (as globally there were strong harvests) nevertheless again an annualised figure of $3.50 per bushel was felt prudent.

The key cashflow line items and EBITDA of each of these scenarios is as follows:

Example

Ethanol Price $2.10 per gallon

Corn Price £3.50 per bushel

Average EBITDA p.a. (6 full operating years 31-Aug-16 to 31-Aug-21) $31.8 million

Financial Projections for VBE and VBEH arising from the Hopewell Ethanol Plant

PROjECtED Annual Statements $M, Nominal

Year Ending: 31-Aug-15 31-Aug-16 31-Aug-17 31-Aug-18 31-Aug-19 31-Aug-20 31-Aug-21

Revenue 154.7 167.2 171.0 175.3 179.7 184.8 188.9

Variable Costs (114.2) (122.7) (125.5) (128.6) (131.8) (135.5) (138.5)

Gross Profit 40.4 44.5 45.5 46.7 47.9 49.3 50.4

Fixed Costs (9.71) (9.19) (9.42) (9.66) (9.9) (10.15) (10.4)

EBITDA (pre-rent) 30.71 35.29 36.08 37.03 38.0 39.14 40.0

Rent (to FF LLP) (3.5) (4.2) (4.9) (5.6) (6.3) (7) (7)

EBItDA 27.2 31.1 31.2 31.4 31.7 32.2 33.0

Figures do not include the additional projects.

Figures assume 100% capacity from February 2015.


The growth of E15 and E85 have been discussed for some time and appear to be gaining momentum, in large part associated with the cost advantages of higher ethanol blending (ethanol trades at a significant discount to petroleum). The Environmental Protection Agency (EPA) has publicly endorsed this approach on a non-mandated basis and this is now coming to fruition through such initiatives as that of Protec Fuel, a major supplier to over 200 retailers in the US, recently announcing a multi-phase plan to introduce E15 in major metropolitan areas including Virginia.

Naturally, the move to higher blending will provide significant support to the ethanol price as well as demonstrating the fallacy of the so-called “blend wall” (which requires that E10 be the highest mandated blend because of concerns that ethanol may damage cars built before 2002).

Finally, though the initial mandate announcement for 2014 had been revised down to 13.2 billion gallons on a provisional basis, Citibank refers to the statement of EPA Chief Administrator McCarthy, who recently indicated that RFS2 blending mandates “will adjust” amid a “rise in gasoline sales”. Citibank infers from this that such adjustment will be “presumably higher”2, thus adding additional demand for ethanol.

Potential Upsides

2 Citibank (op cit) reference maximum capacity is 15.01 billion gallons. The maximum sustainable capacity is calculated by reference to the 2013/14 run rate of 95% rather than the historic average of 91%, which would deliver a sustainable capacity of 13.67 billion gallons.


It is clearly recognised that an ethanol producer’s profitability depends on commodity price risk management. Moreover, an effective risk management programme must take into account corn purchases, ethanol and distillers grains sales, natural gas and electricity usage, the local market conditions for corn supply, and the impact of broader energy markets.

To this end, VBE has contracted Atten Babler Risk Management to provide services including commodity exposure monitoring, market risk and opportunity monitoring, market analysis, hedge position analysis and hedge execution according to this risk management policy. Speculative positions (i.e. those undertaken on an unmatched basis) are expressly prohibited.

The overall objective is to limit the impact of crush margin volatility on cash flows and business operations by maintaining a disciplined focus on hedging margins with matched positions. This approach seeks to maximise certainty while minimising risk.

VBE has developed this risk management policy which specifies the control points used to implement and manage a physical and derivative commodity hedging program. The specific purpose of the hedging program is to limit commodity risk through hedging transactions in the cash, futures and over-the-counter derivative markets. Atten Babler Risk Management and the management team monitor the market daily for risk and opportunity. Daily online reports are also reviewed to identify and track all exposure, P&L and forward risks and opportunities.

Risk Management


Prior to its announcement to restart the Plant, FF LLP and VBE enjoyed strong support at both local and state level for this approach. This support has been evidenced through the granting of local (City of Virginia) and state (Commonwealth of Virginia) financial support to VBE in the forms of approvals for subsidies from the AFID and BPIG.

In early August 2014, the Hopewell (Va.) City Council approved payments of $250,000 to VBE comprising $125,000 for each of the next two years. These will match a $250,000 payment that VBE will receive from the Commonwealth of Virginia Governor’s Office. The BPIG was approved as part of the overall Commonwealth of Virginia budget in June 2014. This provides for payments of approximately $1.5 million per annum for each of the next three years, subject to the Plant achieving agreed production targets. In addition to the financial support, VBE and FF LLP maintain an ongoing dialogue investigating areas of mutual co-operation, particularly across the agricultural sector.

Moreover, within the US Ethanol industry, VBE is being recognised as having an important role to play on the basis of:

y its location, on the East coast;

y its flexibility, as a multi-feedstock producer; and

y its status as one of the most modern ethanol plants in the US.

VBE was delighted to have recently been invited to join Growth Energy, the major vehicle for the promotion of the ethanol industry and is rapidly developing a strong relationship with this organisation and its CEO, Tom Buis.

VBE participated in the Growth Energy Advocacy Conference in September and with its unique proximity to Washington DC, held positive discussions at the White House and Capitol Hill regarding ongoing support for the ethanol industry.

US Agriculture Secretary Tom Vilsack delivered a presentation at the conference indicating that the White House is committed to boosting the use of ethanol in the country’s gasoline supply, and pledged to boost production to 15 billion gallons per year.

Political Support for the Plant

Todd Haymore, Secretary of Agriculture and Forestry speaking at the Plant, September 2014


Overview of OfferingVBEH, the 100% owner of VBE and with the co-operation of FF LLP, is seeking to raise £5,000,000 through the issue of 5,000,000 Preference Shares of £1 each, ranking in priority to the payment of dividends by VBEH to holders of ordinary shares.

The key terms of the Preference Shares are as follows:

y The Preference Shares will entitle the holder to an annual dividend equal to 15% of the issue price, on a preferred basis to other ordinary equity holders;

y The proceeds of subscriptions for Preference Shares will then be forwarded by way of a loan to VBE at an interest rate of 15%;

y The Preference Shares will be non-voting;

y The Preference Shares will be non-transferrable, other than in circumstances where there is no change in beneficial ownership;

y The Preference Shares will be redeemed, at the option of the Company, no earlier than 12 months from issue and no later than 60 months from issue;

y Preference Shares will be issued to subscribers on a monthly basis until a total of £5 million is fully subscribed or 30 March 2015;

y Dividends shall accrue from the date of issuance of the relevant Preference Shares and a reconciliation shall take place for all holders of Preference Shares at or around the first anniversary of the initial issuance, with those holding Preference Shares for less than a year receiving their pro-rata share of the dividend for that part of the year for which the Preference Shares have been held;

y Dividend payments shall be made annually thereafter;

y In the event of VBEH being unable to make a dividend payment in full, then any part outstanding shall accrue and be payable as soon as practicable thereafter, subject to VBEH having sufficient available profits;

y Redemptions of Preference Shares will be made only on a dividend payment date;

y Redemption may be made in full or in part;

y All dividend payments shall be 15% and no account is taken of personal taxation that may be due on such sums;

y The Preference Shares will benefit from second ranking security over the underlying Plant and assets, behind senior secured debt (“Senior Debt”); and

y The Senior Debt will be limited to £10 million ($16 million) compared to c.$185 million that FF LLP paid for the Plant. Note there is currently only £3.5 million of senior ranking debt in place.

Uses for the FinanceWith the Hopewell Plant having been successfully commissioned, in addition to working capital and trading lines, VBE and FF LLP have identified a range of value-adding projects for implementation in the coming years. These vary in size, cost and complexity and not all will be implemented, but as the Plant reaches full capacity, greater focus will be applied to determine the final selection and order for these to reach fulfilment.

Alongside the Preference Shares, the investment for these will come from a range of sources. This includes VBE, VBEH and FF LLP working with Stonehenge Capital Company LLC on the potential to access funding under the New Markets Tax Credit, which will provide a significant cost of credit advantage. Other avenues include retained earnings, vendor finance and an additional raising of funds within FF LLP.

The projects identified to date and their costs are on the following page.

Preference Shares and Development of Additional Projects


Hopewell Bioethanol Plant

Project Approx. Cost ($m) Vendor Finance Gross Inc ($/yr)

1a Oil extraction 2.2 Y 1.6

1b Oil extraction (Stillage) 5.0 Y 3.3

2 Rail track extension (poss) 1.0 Y 0.3

3 Yield improvement 1.5 Y 0.8

4 Capacity Increase (debottlenecking) 2.5 N 1

5 Biodiesel processing (extracted oil) 2.0 Y 0.4

6 Link ethanol off-loading to rail 0.7 N 0.3

7 Increase denaturant storage & E85 blending 0.5 N 0.4

8 Double grain storage capacity 1.5 Y 1

9 Increase ethanol storage 3.0 Y TBC

10 Grain dryer 2.0 Y 0.4

11 CO2 Extraction 8.0 Y 1.3

12 Biomass boiler 15.0 Y TBC

Total 45.1

The projects have been selected because they all add significant short-term cashflow and long-term value to VBE and thus VBEH. Moreover several of projects 1-8 have payback periods of less than 36 months, thus making them ideally suited to the use of the Preference Shares raise envisaged in the document.

With the exception of 1a and 1b (which are mutually exclusive), the projects are able to be implemented in isolation or in parallel with other projects, with the only constraints being finance and management time. However, it is likely that the CO2 extraction and the biomass boiler projects would be longer term arrangements and would not be amongst the early projects to be implemented.




Preference Share Investors

Ethanol Ventures Limited (EVL)

Future Capital Partners Limited

Future Fuels No. 1 LLP

15% 20% 5%

100%

15% Annual Coupon

Step 6: Dividends to Shareholders of VBEH

Step 5: Balance Remitted to VBEH

Step 4: Retention of Earnings

Step 3: Rental Payments

Step 2: Debt Servicing Obligations

Step 1: VBE Operating Costs

As indicated on the structure chart below, the cash waterfall is as follows:

y VBE generates revenues and meets operating costs and existing debt obligations from the production of ethanol and DDGS;

y rental payments for the use of the Plant and assets at Hopewell are paid to FF LLP;

y remittance of interest and, where relevant, loans is made to VBEH to meet the priority VBEH obligations (including Preference Dividends);

y to the extent required, earnings are retained within VBE;

y the remaining balance is remitted to VBEH; and

y dividends made to Ordinary Shareholders of VBEH.

Corporate Structure and Payment Stream for Preference Shares

60%

Vireol Bio Industries/ Vireol Mgmt Services


VBE and VBEH are investigating the potential for the raising of up to $16 million (£10 million) of senior secured debt finance. To the extent that this finance is raised, it will rank prior to the Preference Shares. It is anticipated that this will be raised at an interest rate of between 7-8% per annum (though this may differ with term and structure), delivering an annual interest burden of £700,000 - £800,000 ($1,120,000 - $1,280,000) and principal of approximately £2,000,000 ($3,200,000). As evidenced in the projected Annual Statements on page 11, this total debt servicing requirement of £2,700,000 - £2,800,000 ($4,320,000 - $4,480,000) is comfortably achievable by VBE to VBEH from the EBITDA generated by VBE even assuming no additional revenue from the development of new projects.

Thereafter, and critically for potential investors in the Preference Share, based upon the EBITDA analysis, the preferential dividend payments of a maximum £750,000 per annum (c. $1,200,000 assuming £1 = $1.6) can also be serviced on the same basis (i.e. assuming no additional projects being developed).

In reality, however, it is anticipated that the projects will be self-funding over a two year period and generate strong cashflow thereafter.

Inclusion of Senior Debt


The operation of the ethanol Plant at Hopewell, by its very nature, has certain risk characteristics. The following section provides an outline of some of the key risks identified. Where some degree of mitigation exists this has also been indicated.

Environmental The Hopewell site has in the past been used for other industrial purposes and there are binding waivers for any environmental issues with the Commonwealth of Virginia that pre-date the use of the site for ethanol production. There is a risk that there have been further environmental issues at the site since ABE’s inception, however, there has only been limited production that could have created any issues. Moreover the re-commissioning of the Plant did not involve any new civil engineering or piling works and thus the likelihood of disturbing any pre-existing contamination is remote. Since operations began, VBE has received notification of two minor violations relating to discharges to an on-site pond and to the city sewerage system. Neither is considered to have any other impact than potentially a modest fine for the company and remedial actions have been implemented to ensure no further issues arise.

Legislative Risk The RFS Mandate for 2014 remains subject to confirmation. The indicative target was 13.2 billion gallons and the industry has been operating to that level since the middle of the year. It is widely anticipated that the final target will be some 13.6 billion to 13.8 billion gallons, but there is no certainty that this will be forthcoming or, if it is, of the timing of such.

Forward Looking Statements Certain statements contained in this document including as to anticipated revenues and costs, timetables and production constitute forward looking statements. Such forward looking statements involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the project or its assets to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements.

Force Majeure The project may be adversely affected by risks outside of its control, including labour unrest, adverse weather conditions, civil disorder, war, subversive activities or sabotage, fires, floods, explosions or other catastrophes, epidemics or quarantine restrictions. It may be possible for the project to insure against economic loss from such events.

Availability and Price of Feedstock The value of cereal crops is determined globally and as such is subject to market forces as well as the vagaries of the weather. In the US, the ethanol production industry was largely driven by a need to expand the market and deliver support for American farmers. The record 2013 corn crop added approximately 1.18 billion bushels of corn to stocks, which will be supplemented by another record crop in 2014. Consequently, future years will begin with high stock levels, which are anticipated to maintain stable and moderate corn prices. However, successive years of stock draws from low yields, alternative crop growth or adverse weather conditions could result in stock draws, erode these levels and result in higher prices.

technical Risks Bioethanol production facilities include a large number of items of equipment and thus there is an obvious risk of mechanical failure. The use of proven and reputable suppliers in the construction process mitigates but does not entirely eliminate this risk.

Agricultural Risk The main source of starch sugar required to produce ethanol comes from crops, including corn. As with any agricultural operation, there are risks that crops may be affected by pests, diseases and weather conditions. Unusually high levels of rainfall can disrupt operations. Unusually low levels of rainfall that lead to water availability falling below the minimum required for the normal development of corn may lead to a reduction in subsequent crop levels. Though this is mitigated for the immediate years ahead, nevertheless it remains a long-term risk.

Offtake Risk There is an established market for bio-ethanol in the US. VBE has entered into a long-term offtake agreement with Murex, a leading ethanol trader and exporter, which substantially reduces the risk of finding an end-user for the product. However, any unanticipated and materially negative event to impact Murex (e.g. insolvency) could potentially have an adverse impact on VBE’s ability to secure ultimate buyers of the product.

Operation The Plant is staffed and operated by a skilled workforce that has successfully undertaken commissioning. The Plant uses proven technology (Katzen) and the key items are appropriate for the Plant design.

Key Risk Analysis


Economic Factors The revenue generated by VBE and distributed to VBEH is affected by many factors including government policy, inflation rates, industry conditions, tax laws, economic growth, and fluctuations in utility prices. Where possible the project insures and mitigates against such economic factors, including through the use of an extensive hedging strategy. Nevertheless there are factors that remain outside of the control of management.

Permits and Licences The project has received all necessary operating consents. However, there can be no assurance that all permits, consents or regulatory approvals which the project needs in the future will be obtained.

Suppliers The project’s activities and business model are dependent to some extent upon the availability of third party services. There can be no assurance that these arrangements will not give rise to disputes and/or issues in the future.

Illustrative Figures Figures set out in this document have been prepared on the basis of the assumptions stated. Prospective investors are reminded that such figures are given by way of illustration only and do not constitute forecasts.

Risks relating to the Preference SharesNo liquidityThe Preference Shares are not listed on an exchange, therefore there will not be a market for the sale and purchase of the Preference Shares. In addition, the Articles of Association of VBEH provide that the Preference Shares are not transferrable except in certain limited circumstances, such as where a transfer would not result in a change in beneficial ownership.

Payments are made out of distributable profitsThe VBEH may pay dividends on the Preference Shares only if and to the extent that payment can be made out of the profits of the Company available for distribution.

Winding upOn a return of capital or a distribution of assets, whether or not on a winding up, holders of Preference Shares will only be entitled to distributions in liquidation only after the claims of all creditors of VBEH have been satisfied.


The successful completion of the initial start-up and stabilisation phases has demonstrated the core viability of the Plant and the strong capability of the management team. The intrinsic value will begin to be released once the Plant achieves full capacity through the ongoing operation of the assets.

The ongoing challenge of maximising the Plant value will continue to be met through solid market analysis coupled with a rigorous review of future commercial opportunities but these are only achievable as a result of the strong foundations that have been laid to date.

These fundamental improvements to the US ethanol market over the past 18 to 24 months have been recognised by Citibank, who observe that the “US ethanol processors appear to be benefitting from a well-balanced biofuel market”. Limited capacity has been developed in recent years and, as noted by Citibank, capacity “is also unlikely to grow much in the next few years according to company reports and per chats with producers”.

Taking a prudent approach of assuming that the EPA will settle on a Mandate for US ethanol of approximately 13.2 billion gallons3 and export potential of 800 million to 1 billion gallons, this delivers overall demand (domestic and international) for US ethanol of approximately 14.2 billion gallons.

With most capacity that is commercially able to be brought back on line having already been re-commissioned, absolute capacity (including mothballed plants likely unable to be commercially restarted) is approximately 15 billion gallons. Assuming Plant operational rates of 91% (the average of the last 5 years), this delivers supply of 13.65 billion gallons and assuming 2014 operating rates of 95%, this delivers supply of 14.25 billion gallons. Consequently, there exists a broadly balanced market, notwithstanding potential increases to the Mandate and E15 and E85.

Against this backdrop, corn stocks have increased significantly and these “record Northern Hemisphere new-crop harvests should continue to buttress ethanol margins”. Consequently, the outlook for ethanol producers appears more attractive than for many years.

Conclusion

3 Citibank (op cit) reference maximum capacity is 15.01 billion gallons. The maximum sustainable capacity is calculated by reference to the 2013/14 run rate of 95% rather than the historic average of 91%, which would deliver a sustainable capacity of 13.67 billion gallons.


Scoular: The corn supplier and DDGS offtaker is The Scoular Company. This is a 120-year old company with more than $6 billion in sales. It operates 90 independent business units that provide diverse supply chain solutions for end-users and suppliers of grain, feed ingredients, and food ingredients. Its 700+ employees are engaged in buying, selling, storing, and handling grain and ingredients as well as managing transportation and logistics worldwide.

Murex: Murex is a leading marketer and distributor of domestic ethanol, export ethanol, crude oil, Renewable Identification Numbers, and other gasoline blendstocks to major oil companies and regional refiners. Murex has one of the most extensive distribution systems in the US. Headquartered in Addison, Texas, the company uses multiple supply points, efficient low-cost transport options, and superior market intelligence to provide quality products to customers.

Norfolk Southern: As a leading transportation provider, Norfolk Southern operates 20,000 route miles in 22 states and the district of Colombia. It also supports international trade with service to every major Eastern seaport, 10 river ports, and nine lake ports, and operates the most extensive intermodal network in the East.

Columbia Gas: As with electricity, the Gas Supply Agreement with Columbia is a standard form document for large industrial users. Under the terms of the agreement, Columbia will be the exclusive supplier of gas into the facility, until such time as the agreement is terminated, though the gas may be procured under the terms of the Gas Marketing Agreement. Columbia, with headquarters in Chesterfield County, is one of seven energy-distribution companies of NiSource Inc. (www.nisource.com). The company serves more than 250,000 residential, industrial and government customers in 86 communities, making it the third-largest natural gas utility in the Commonwealth of Virginia.

Shell: Shell’s supply programs allow retail energy companies to focus on sales, while knowing they can back those transactions with energy hedge purchases at competitive prices. Shell Energy is an active participant in all wholesale power and gas markets, providing retailers a one stop shop, regardless of the markets they enter. Shell Energy North America Is a major market participant, marketing more than 13.9 bcf of gas each day, and 50 million MWh of power annually. VBE has a $1.5 million letter of credit in place for gas procurement with Shell.

Dominion Power: Dominion is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 23,500 MW of generation, 11,000 miles of natural gas transmission, gathering and storage pipeline and 6,400 miles of electric transmission lines. The Electricity Supply Agreement with Dominion is the standard form document for large industrial users. Under the terms of the agreement, Dominion will be the exclusive supplier of electricity until such time as the agreement is terminated.

Virginia Grain Producers Association: The Virginia Grain Producers Association (VGPA) represents Virginia’s corn and small grains producers. Its strategic plan focuses on Market Infrastructure, Media, Influence and Information Technology. The Association’s resources combined with staff and Board efforts include leadership meetings and travel, annual events and producer programs implemented to support busy grain producers and Virginia’s corn and small grains industries. Its stated vision is to “Brand Virginia Grain Producers Association as the representative on issues pertaining to corn and small grains and as such, provide value to agriculture and all Virginia.”

VBE hosted a visit of Virginia and Maryland grain producers and will continue to foster strong links to VGPA, in order to address shared strategic goals as well as to optimise the benefits of local grain production, including corn, milo, wheat and barley, that will benefit the Virginian agricultural community as well as being the most cost-effective feedstock for the Plant.

Appendix 1 – Summary of Key Partners

For further information please contact:

Cocoon Wealth LLP 10 Old Burlington Street, London, W1S 3AG

T: +44 (0)207 478 2800 | F: +44 (0)207 478 2801 E: [email protected] | W: cocoonwealth.com

This document relates to the Vireol Bio Energy Holdings Limited (the “Company”) and is issued and approved by Cocoon Investments Limited (“Cocoon Investments”) which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

If you are in any doubt about the content of the this document and/or any action you should take, you are strongly recommended to seek advice immediately from an independent financial adviser authorised under the Financial Services and Markets Act 2000 (FMSA) who specialises in advising on opportunities of this nature. Nothing in this document constitutes investment, tax, legal or other advice by Cocoon Investments. An investment in the Company will not be suitable for all recipients of this document and your attention is drawn to the section headed “Key Risk Analysis”.

All statements of opinion or belief contained in this document and all views expressed, statements made and all projections and forecasts regarding future events or the anticipated future performance of the Company represent Cocoon Investments’ own assessment and interpretation of information available to them as at the date of this document. No representation is made, or assurance given, that such views, statements, projections, forecasts or anticipated future performance are correct, attainable or complete or that the objectives of the Company will be achieved. The views, statements, projections, forecasts and anticipated future performance are based upon various assumptions and estimates which involve significant judgment and analysis and which are subject to uncertainties and contingencies; actual results could differ materially from those set forth in such projections, views, statements, forecasts and anticipated future performance. Prospective investors must determine for themselves what reliance, if any, they should place on such statements, views or forecasts and no responsibility is accepted by Cocoon Investments in respect thereof.

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