FEASIBILITY STUDY

ALH Corporation
485 Clyde Avenue
Mountain View, CA

94042

-4

FEASIBILITY STUDY

A project to design and build an alcohol plant usually begins with a
feasibility study (sometimes called a project development study). The feasi
bility study defines the probable costs and profitability of the project,
identifies important problems, outlines answers or approaches to these problems,
and shows what additional information is required to make a final evaluation.
In addition, many feasibility studies assemble all this information into a
financial prospectus or proposal for funding, so that after the study the
client has the financing package ready, has applied for or actually received
funding, and is ready for engineering and construction.
Planning a Feasibility Study

A feasibility study usually combines conceptual engineering activities
with market and financial analysis. The study emphasizes the market analysis
for feedstock and products, since the costs of feedstock and the income from

products and by-products dominate the profitability of most alcohol projects.

However, it is also necessary to identify at least roughly what technologies

the plant will use and what the plant will look like, as well as what it will

cost, how it will operate, and where it will be located. Such information
defines capital and operating costs as well as the mix of products, including
both alcohol and the many by-products. Often the feasibility study is itera
tive, examining various sites, feedstocks, market situations, plant sizes,

and plant technologies until the most profitable combination is discovered.
For a large plant, the feasibility study often iterates on the level of de
tail, beginning with a brief overview study, and then adding detail for those
options which appear attractive.

ALH engineers have performed feasibility studies for energy facilities
ranging from small boiler conversions to three major coal gasification facili
ties to more than ;feen large solar installations. For fuel alcohoT facilities
we have done feasibility studies for:

• a 1 million gallon per year corn-to-ethanol facility associated
with a poultry feed mill

• a 5 million gallon per year corn-to-ethanol plant adjacent
to a grain elevator

t a 132 million gallon per year corn-to-ethanol facility

We combine a complete background of feedstock and product market information
with engineering and process technology to cover every aspect needed in a
feasibility study. We will be glad to explain to you how our earlier studies
were planned and carried out, and how the plan was shaped by the objectives
and circumstances of each case. Then we will work with you to plan your

Study, and to tailor the plan to your specific requirements.

Making a Conceptual Design, a Costing^ and a Schedule

The engineering portion of the feasibility study begins by selecting
a tentative size and process, and then develops a process flow diagram defining
flows of materials, conditions and equipment. Engineers then prepare plot

plans and general arrangements. Costings are done to within 10% or 15%
accuracy, usually based on guidelines and prior experience, accounting for:
• equipment requirements (considering any already on hand)
«

materials

e

operating costs

• working capital

• site factors
^
« safety and environmental considerations
f)

water supply

«

energy supply

For a sizeable alcohol facility, these last three aspects usually

dominate the engineering considerations. Providing water supply and water

pollution control is extremely important, and sometimes is difficult and
costly. Providing energy to the plant in the best way often has a decisive
effect on plant profitability and, when waste fuels are used, sometimes poses
difficult engineering problems. Choice of the right fuel can help in 0^)7

taining government support, if it is desired. Similarly, electing to build
a cogeneration facility which also produces electric power can, in some
locations, greatly increase the amount of support available.

Other important design considerations which must be evaluated in at

least a preliminary way during the feasibility study are:

• plant size, and whether or not the plant should be built as
a series of modules or "streets".

• plant technology, especially yeast concentrations, temperatures,
and reaction times, and whether the process is batch, as is

usual, or continuous, which is uncommon in fermentation due to
the risks of contamination

• materials selection

D energy recovery and "cascading", to minimize energy requirements
§ for starch feedstocks, the amount of pre-processing and protein

separation before cooking, hydrolysis, and fermentation; and

the amounts and techniques of solids separation at various steps
in the process

• the amount of instrumentation and automatic control

i

• yeast recovery

• separation technology: number of distillation stages and amount
and type of final water extraction

»

by-product drying

To evaluate these, the study team seeks the right balance between

capital cOst, yield or output rate, energy efficiency, reliability, and risk.

Sometimes it it necessary to do the feasibility study in some detail for

several approaches, particularly for unusual feedstocks or situations where
capital costs are relatively large. For plants using corn and sugar cane and
sugar beet, well-tried technology usually proves best.

After the conceptual design is complete, the engineering team makes a

preliminary list of key equipment, a rough costing, and a preliminary schedule
for design and construction. The costing and the construction schedule will
be needed in subsequent analyses of cash flow and profitability.

ALH brings to a feasibility study a total capability in process engi
neering. We can help in any aspect of technology evaluation and costing.

ALH has no proprietary or patent position in hydrolysis, fermentation, or
separation technologies. Our clients rely on us for a completely unbiased
and objective evaluation of all technologies which can contribute tO'a
project.
Selecting and Characterizing the Feedstock

At the start of some feasibility studies, the feedstock has not been
selected. The study must determine the best feedstock. Site data and agri
cultural information must be pulled together to evaluate possible crops.
Climate and soil data, environmental aspects, crop yield information, fermen
tation and harvesting needs, and handling, storage and processing practices
must all be characterized and evaluated.

ALH has done several such studies

in close teamwork with specialists experienced in local agriculture and agri

cultural economics, including representatives of the U. S. Department of

Agriculture, state and local agriculture departments, the technical committees
of growers' and processors' organizations, and agricultural schools and uni
versities.

The outcome of these studies is a detailed specification of the opti
mum feedstock, its properties, and how it should be grown, harvested, and
processed. If you need help with this part of a feasibility analysis, we would
be glad to assist.
Assessing Environmental Impacts and Problems

Environmental assessments are in a sense a part of the conceptual

design task. However, under current regulatibns the environmental portion of

the feasibility study can be so important that it deserves separate consideration
and discussion. Environmental impacts may require costly engineering solutions,
and environmental problems may imply lengthy delays in the permitting process.

Sometimes an alcohol project will even have to solve the environmental prob
lems of other local projects or facilities in order to offset any new dis
charges from the alcohol plant.

The conceptual design process must take care to identify discharges

(especially water discharges) and to outline engineering solutions. Sometimes
entire pollution control systems or projects must be included with the alcohol
plant study, especially for feedstocks rich in sugar, for which residue dis
posal can be a serious problem.

The various agencies involved in permitting must be identified and the

permitting process defined. Information requirements must be identified and
plans formulated for developing the information. A schedule must be made for the

future permitting process; for a large plant this schedule can sometimes con
trol all other activities. Lastly, the permitting activities must be costed;
for large plants these costs can be significant.

The ALH staff has a complete background in environmental impact assess

ment. We regularly prepare such studies and assessments for a wide range of
clients from utilities to small chemical plants. To support this activity
we maintain a staff dedicated to sampling and measuring emissions and dis-

charges and interpreting the results. We also have our own chemical analysis
laboratory specializing in environmental problems.

Because of our combined experience in alcohol plants and environmental

assessment, we were selected by the U.S. Environmsntal Protection Agency to

survey the environmental problems of small alcohol plants throughout the U.S.
Under this program we will be helping E.P.A. and plant operators to identify
and solve discharge problems.

Many feasibility studies need this kind of background. If yours does,

we would be glad to help;
Making a Market Study

The market study portion of a feasibility study determines how feed
stocks are best acquired and how products and by-products are best sold. For

small plants, this part of the feasibility study often is short and simple:
the feedstock may be captive, the by-product uses may be on-site as well, and
the alcohol sales might be a simple contract with a local gasoline distributor.
For large plants the market study can grow to become the largest single portion

of the feasibility ;study.

A large plant using corn as a feedstock, for example, may need a num
ber of sources df supply, some from hundreds of miles away. Cropping patterns
need to be considered, as well as transportation practices and costs by rail,
truck, and barge Or ship. The study must evaluate risks of supply interrup

tion by crop shortages and transport disruptions. Purchasing mechanisms need

to be evaluated and some conclusions formulated about the possible methods of

guaranteeing future prices, including forward contracting and futures contract
purchases. Finally, prices need to be projected over severaT years.

Similarly, for many plants the feasibility study must make a careful

assessment of markets for by-products such as corn gluten meal, corn gluten

feed, corn germ meal, distillers dry grains, citrus pulp, and carbon dioxide.
The cash flows from sales of these by-products can be critical to overall

plant profitability, and for larger plants the sales prices of large quantities
of by-products must be projected. Sometimes to find a buyer and to define a
price the study must conduct allied studies such as experiments to determine
the nutritional properties and value of protein-rich by-products.

For the alcohol product, the feasibility study usually tries to

identify the specific purchasers, the likely prices, the probable form of

the delivery contract, and possible penalties for non-delivery. Prices are
usually first projected by taking current prices and allowing for increases at

the rate of projected gasoline ppice increases (usually taken as the assumed
inflation percentage rate plus 2% or 3%, but other more sophisticated pro
jections are available from government and industry sources). Allowances are
then made for expected changes in government price support and subsidy pro

grams (including entitlements), expected changes in the willingness of the
public to pay a gasohol premium, expected prices for synthetic (i.e., from
ethylene) alcohol, import prices (chiefly Brazilian—also affected by subsidy
policies, and expected changes in local production and import). If the.market
radius is large, transport prices must be included in the projections.

ALH can help you with every aspect of a market study. We have an

especially deep background in corn and wheat purchasing and handling, and we

are also specialists in marketing feedstuffs derived from grains, soybeans,
and citrus. We have several decades of experience in forward contracting and
in futures markets operations. We can bring to a market study this complete
range of experience.

Computing Cash Flows

This portion of the feasibility study integrates the results of the
conceptual engineering study - with its associated schedule of capital re-quirements for engineering and construction - with the cash flows suggested
by the market study, producing a year-by-year (or quarter-by-quarter or monthby-month) cash flow for the proposed project. This would be a simple mechani
cal task except for the complication of taxes and the financing structure.

Computing cash flows requires that the financial structure of the

venture be specified (See our Information Sheet on "Financing an Alcohol Venture .)
This in turn specifies the debt burden and the rate of interest payments and
debt retirement, and any cash flows due to entitlements provisions. With this
information cash flows and profit before depreciation and taxes can be calcu
lated. A depreciation schedule and an assumed tax rate then produce an
after tax profit result. To this are applied the various investment tax
credits and business energy investment tax credits, and the alcohol produc

tion tax credit. (Use of some of these credits is restricted by the method of
financing.) If not all the tax credits can be taken, even after carryforward
and carryback provisions, the venture will usually have to be restructured,

as the credits can have a decisive effect on the attractiveness of the project.

The calculations therefore may take several iterations before the final

ourcome of project cash flow over time can be developed. This cash flow can
then be used for the key step in the feasibility study: the assessment of
profitability and return on investment.

The financial staff of ALH is prepared to help you with tax advice, in

cluding all aspects of the complex and continually changing tax program stimu
lating synthetic fuels production. We would be happy to work closely viith
you and your tax advisors to help you make full use of the tax provisions.
Assessing Profitability

Assessing, profitability of the proposed project is the central purpose
of the feasibility study. After market and technical portions of the study
have identified costs and cash flows, the profitability assessment

c decides on the methods of computing profitability and the methods
of assessing profitability or comparing alternatives,
• computes profitability and compares alternatives
t evaluates the meaning of the results in terms of the market and
technical inputs to the analysis

Of these, the second involves mere calculation. The first and third require

careful thinking and deciding.

In the first aspect, we can work with you to select the method best
for your circumstance, if you have not already selected the method. If you
haven't, we can help you understand the advantages and disadvantages of all
the many methods, from simple payback methods to the most elaborate discOuntcash-flow/internal-rate-of-return methods. All alcohol projects of any size
would probably be evaluated with one of the more elaborate methods which in
clude the time-value-of-money in a continuous-compounding fashion: either
a,net present value method or an internal-rate-of-return method.
{

Once the results have been computed by whatever method is selected,
the third aspect of evaluation must provide an interpretation, especially in
terms of risks. Any given case, or scenario, involves hundreds of individual
cost estimates or assumptions and technical performance estimates and assump
tions. Profitability results mean nothing if detached from some idea of the
risks in these assumptions. For,example, if the alcohol plant availability
has been taken at 330 days per year but there is a 50 percent chance, that
centrifuge performance will be insufficient to maintain column performance,
without 70 days of cleaning instead of 35, clearly the more pessimistic case
should be given equaT attention. Similarly, it is usually necessary to examine

a range of market price scenarios. And lastly, because alcohol project profit
ability depends critically on government subsidies and support, it is prudent
to examine several projected courses of government actions for subsidy leyels
and tax policies.

We can help you account for the risks in several ways. Often all the
uncertainties in a project are lumped into a general feel for overall level

of risk, and the required rate of return specified accordingly: high tor

high risk projects (uncertain feedstock prices, no established technology
for this feedstock, new and relatively unproven processes, potenpal permittinq delays). For other situations it seems worthwhile to do a full staustical analysis of all the scenarios and compute expected returns and variations.
Sometimes it is sufficient to examine a fey key sensitivities (high-impact
assumptions) and then restructure the project accordingly. This is the key
part of a complex feasibility study. We must work hand-in-hand with you at
this point to make certain that all factors are properly included and evalu

ated, and that you fully understand the design, the assumptions, the profits,
and the risks.

Preparing for Financing

An important part of most feasibility studies is some amount of pre
paration for financing. Hence, the study may include sections which are

presentations to obtain financing. Such sections typically summarize the

technical and economic results of the study, show site maps, present supporting

legal documents (permits, leases), and describe the proposed financial struc
ture and approach to obtaining capital. Our information Sheet On Financing

an Aclohol Venture" describes some of these issues in detail.)

We would be glad to help you construct such presentation materials.

We have complete art and publications departments, with word processors,

composers, a photo lab, and a printing shop.
Preparing for Fnnineerin"

Most feasibility studies include a ta^k which uses the information
developed during the study to make at least a brief plan for subsequent
engineering:

t

what are the major problems to be solved?

• how will the plant be designed and built?

c what major equipment needs to be designed and specified?
• who should have responsibility for:
- engineering
- environmental documentation

- permitting
- procurement
- construction

• who will manage the project? What will be the relationships
between the contributingrparties?

t

what will the client's role be?

• what is the projected schedule and cost for engineering and
construction?

What are the milestones and review points?

Planning for engineering during the feasibility Study can improve the
chances of getting financing and can make possible a quick start once finan
cing is obtained. The ALU engineering staff can help you prepare plans for
engineering. As an engineering company, we know what needs to be done.
Keeping First Things First

Feasibility studies can range from a two-page quick look to 2,000

pages of exhaustive analysis, but even the largest feasibility study should
provide the client with simple, clear, brief, and unequivocable answers to

some key questions:

• How profitable is this project?

• What is the best way to obtain feedstock? to sell products?

• What will the project cost and how long will it take to build it?
t What are the key assumptions, risks, and sensitivities in these
conclusions?

t

What is the best financial structure for the project?

• What additional information is needed?

• What needs to be done next to get the project designed and built?

If the feasibility study is a large one, for a major plants it is usually best
:to begin with a brief study which comes to preliminary answers to these ques

tions quickly. If the conclusions seem to warrant further work, the study
can be expanded and deepened. Sometimes it is best to work through several
expansions, but the discipline of starting small helps keep even a big study
fdcussed on the important topics.

We want to work with you to do the job you need—specific to your

project and your budget. If you can do most of the study yourself, we will
help you with those pieces you can't do. If you prefer, we will do the entire
study. But in either case, we want to do your study efficiently. Our experience
shows that starting with a quick look, and then building up the level of detail
in later phases, usually saves you money and effort. We can help you at each
step and at each step we will tie the results to the key questions you want
answered.