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APPENDIX H Financial Considerations The goal of this appendix is to provide guidance to project developers and other decision mak- ers with respect to the key financial considerations that must be addressed when considering an alternative fuels project. This is intended to serve as a road map to the issues that are most likely to surface when putting together the financial and business plan for this kind of facility. When creating the business case for alternative fuel processing facilities, the project developer needs to pay special attention to risk factors (i.e., those variables outside her/his control) that may have a substantial impact on the project's economic viability. In particular, as of 2011, proj- ect developers need to recognize that alternative fuel facilities are likely to require large amounts of capital, employ technology that is unproven at scale, and operate in an uncertain market envi- ronment. As such, the projects would likely be considered high risk by financiers. Project devel- opers need to take into account that different financial supporters have different attitudes toward risk and require different kinds of assurances before committing to support a venture. H.1 Sources of Finance Project developers of alternative jet fuel production facilities can seek funding from both private- and public-sector organizations and may use a mixture of both to create a viable finance structure. H.1.1 Private Sector Private-sector funders are made up of a diverse range of private and publicly traded entities that offer different products, including equity, senior debt (similar to commercial bank loans), and mezzanine debt (debt with equity characteristics). Typically, projects require both equity and senior debt, and often mezzanine debt. The mix of these products is referred to as the proj- ect's "capital structure." Each of these products has a different risk/return profile: equity providers take on the highest level of risk within the capital structure and therefore require the highest rates of return to jus- tify their investments; providers of bank debt accept lower rates of return because they receive interest and get paid before equity holders if the investment goes bankrupt; mezzanine debt providers expect rates of return that are between equity and debt holders. H.1.2 Public Sector Public sources of financing include local, regional, and the federal governments. Project devel- opers should explore diverse local and regional initiatives that may be in place to support 97

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98 Guidelines for Integrating Alternative Jet Fuel into the Airport Setting regional economic development. The alternative fuel industry is currently a high priority for the federal government because of its potential to generate jobs, reduce dependence on foreign oil, and improve the quality of the environment. The federal government, primarily through the USDA and DOE, is providing incentives such as grants, loans, loan guarantees, subsidies, and tax credits. The USDA offers extensive support programs to encourage rural development (USDA 2010e) and is committed to supporting the development of alternative aviation fuel as part of these ini- tiatives. USDA recently joined with CAAFI, the ATA, and the Boeing Company in a resolution to "accelerate the availability of sustainable aviation biofuels in the United States, increase domestic energy security, establish regional supply chains, and support rural development" (ATA 2010a). The agreement includes the formation of a Farm to Fly working group that will identify and facil- itate funding of feedstocks and production facilities focused on alternative aviation fuels. H.1.3 Biorefinery Assistance Loan Guarantee Program--Section 9003 of 2008 Farm Bill The USDA program of particular relevance to a developer of a jet fuel biorefinery is the Bio- refinery Assistance Loan Guarantee Program (USDA 2010n). This program, administered by USDA Rural Development, provides loan guarantees for the construction or retrofitting of rural biorefineries to assist in the development of new technologies for the development of advanced biofuel made from renewable biomass other than corn (USDA 2010d). Such loan guarantees can be used to support private-sector loans and are intended to make it easier to obtain financing by reducing the risks a banker would have to assume. As a result, this agency should be contacted by any airport that is interested in biorefineries. H.2 Business Case Evaluation Criteria In addition to being aware of the different possible sources of finance, it is helpful for project developers to understand business case evaluation criteria that are likely to be used by potential financial supporters. The evaluation of any business case proposal is a high-level assessment of the reasonableness of the project, including the assumptions regarding a project's inputs and outputs, their impact on expenses and revenues, and how they affect the economic viability of the enterprise. A key aspect of the business case evaluation is to help identify the elements of the project that may have the greatest impact on its viability. Important evaluation criteria for alternative fuel business plans are discussed in the following six subsections. H.2.1 Customers and Other Stakeholders Who are the customers; what is their interest in the project? Are the customers willing to enter into binding purchase agreements to help reduce the financial risk and solidify the project's financial viability? Would customers agree to long- term purchase agreements? Do the fuel buyers need to assume all the risk in a cost-plus contract or a fixed price agreement, or will the various participants in the project share in the risks? Which stakeholders have the greatest interest in the project and does that interest translate into them being willing to take a greater share of the risk? These stakeholders may include users of the alternative jet fuel as well as users of alternative diesel, renewable electric power, and other by-products.

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Financial Considerations 99 H.2.2 Demand for Alternative Jet Fuel Is there sufficient demand for the product(s) in the region to justify an alternative jet fuel facility? What would be the minimum economic size for the processing facility? H.2.3 Feedstocks and Production Technology What are the feedstock's availability, supply reliability, and cost? What is the project's overall environmental sustainability, including its impact on water use, land use, and life-cycle GHG benefits? It is likely that projects that are identified as not sensi- tive to these considerations may face stiff opposition and may engender less community sup- port, both of which could increase the project's risk profile. Will new technologies for production of alternative fuels affect the project? For instance, novel production methods could divert feedstocks to more efficient processes or reduce the cost of competing fuels. H.2.4 Capital Costs Can the required financial capital be attracted? This is particularly important for all projects involving new technologies. Is the engineering and design firm willing and able to guarantee both construction costs and development schedules? Are the technology providers willing and able to guarantee performance of their technology offering? H.2.5 Permitting and Regulatory Concerns Have all regulatory, permitting, and social equity issues been identified and satisfactorily addressed? If not, the project may be delayed, resulting in higher capital costs. If existing or new federal, state, and local governmental policy is important to the project's economic viability, can the policy be changed during the project's life and how would that affect the project's viability? This applies to policies and regulations on which any GHG or other environmental credits and financial mechanisms rely and to feedstock or fuel price subsidies, if any. Successful projects depend on all the involved parties honoring their contractual obligations. Which of those obligations are essential to the project's success and what are the implications if one or more contracts are broken? This would include feedstock supply, infrastructure avail- ability, and customer purchases. H.2.6 Management Team What is the quality and depth of the team that will manage this project? For new ventures in mature businesses, the business case evaluation can be based on bench- marks from existing businesses. The alternative fuels industry, in particular for aviation use, is a new and developing field, involving new technologies, feedstocks, and logistics that make it dif- ficult to identify reliable benchmarks for comparison. A good starting point for evaluating busi- ness cases for aviation alternative fuels is the information from demonstration projects [see Appendix J and IATA (2009)], although project developers need to be aware that this informa- tion may change as the industry matures. Over time, as commercial-scale projects are developed, more information will be available to help in the evaluation of this kind of venture.