ECM Ethanol Capital Management LLC Special Report The Food Vs. Fuel Controversy Is Over: New Ethanol Technology Now Produces Food October 2008Special Report The Food Vs. Fuel Controversy Is Over: New Ethanol Technology Now Produces Food. EXECUTIVE SUMMARY ECM’s top executives recently met with a company whose leaders and scientists have developed and have in the production pipeline stunning technological advances for the ethanol industry. These advances will end the controversy about food vs. fuel, enhance revenue and reduce operating costs for ethanol biorefineries, The new technology will have the ability to provide significant investment opportunities with potentially higher rates of return. ICM, Inc., the leading ethanol technology provider in North America, is responsible for these advances. ICM’s proven track record of excellence has allowed it to become the leading process-design engineering firm for ethanol production in the US, ECM executives spent two days at ICM’s new state-of-the-art scientific and engineering facilities, meeting with ICM founder and CEO David Vander Griend, scientists, PhDs, and other technology experts from his staff. ‘The focus of the meeting was the dramatic new technology developed by ICM that processes corn into food products for human consumption and greater amounts of ethanol.Summary Conclusions of the Special Report New manufacturing technology ends the debate on food versus fuel by simultaneously producing, from a single kernel of corn, food for human consumption and ethanol to fuel cars and trucks. ICM’s new technology will produce corn oil, food grade protein for human consumption, feed protein from syrup, high protein distiller grains and raw material for cellulosic production, and result in more than a 20% inerease in ethanol production. The buildings and equipment necessary to implement this new technology can be integrated with existing biorefineries. Investors will have new opportunities to profit from this innovation, Fully implemented, ICM projects a 2 year payback of the roughly $200 million investment, which would provide a 70% annual return on investment when the project is fully implemented. Ethanol biorefineries adopting the new technology are projected to experience increased earnings and improved cash flows, which could translate into higher investment valuations and greater potential returns for investors.New Technology Creates Both Food and Fuel ICM’s new technology incorporates a series of processes that provide additional revenue from food, ethanol and feed products. Each process creates additional revenue streams, increases operational efficiency and reduces operating costs, thereby increasing carnings. The first phase of the process is dry fractionation. Dry Fractionation Dry fractionation is the process of breaking the cor apart into its component parts. « The first component, the endosperm, is a combination of highly fermentable starch used to produce ethanol and a high protein feed product. * The second component, the pericarp (bran), is processed into an animal feed product, used for combustion to reduce energy costs, or used as a feedstock for cellulosic ethanol. * The third component, the germ, is processed into com oi ‘The endosperm accounts for about 82% of the kemel’s dry weight and is the source of energy (starch) and protein for the germinating seed. Starch is the ‘most widely used part of the Ketel and is used in food, fuel and other products. “The pericarp (bran) is the outer covering that protects the kernel and preserves the nutrient value inside. Bran may be used for food products or as ‘an alternative to natural gas as a fuel for running the ethanol plant. ‘The germis the only living past of the com kernel. About 25% of the germ is com oil—the most valuable part ofthe Kernel. Com oil may be used to produce food-grade oil, animal feed and bi ‘The tip cap is the attachment point ofthe kernel tothe cob, through which water and nutrients flow—and is the only area of the kemel not covered by the pericarp.Increased Ethanol Capacity Dry fractionation increases ethanol production by 20% because the process separates the endosperm from the other components of the kernel, and only the endosperm, which contains the highly fermentable starch, is used to produce ethanol. Through dry fractionation, bran and germ are separated from the starchy endosperm and not passed through the production process for ethanol. Instead, the bran and germ are turned into food for human consumption. In contrast to dry fractionation, today’s biorefineries process the entire com kernel into ethanol and inexpensive distiller grains for livestock and poultry. Natural Gas Reduction The new ICM process may also lower natural gas costs for the ethanol biorefinery by burning the bran to replace some of the natural gas used in the plant. There is an 68% potential reduction in the cost of natural gas if the bran and other by-products are burned to provide energy for the biorefinery. To achieve this reduction in the cost of natural gas, biorefineries may add a solid fuel combustor, which can burn a wide variety of waste products to create the heat necessary for ethanol production, This will allow biorefineries to choose from a wide variety of fuels, including biomass and/or production co-products, depending on pricing and availability. Low- cost combustible biomass might also include low-priced materials such as wood chips, com stalks, corn cobs, and municipal solid waste. As a result, biorefineries will have energy options that will help mitigate high natural gas prices. According to ICM, the combination of dry fractionation and a solid fuel combustor will reduce the amount of natural gas used from 32,000 BTU per gallon of ethanol produced to 10,000 BTU, with an estimated $23 million annual reduction in the cost of natural gas. Corn oil extraction As a result of corn fractionation, com oil can be produced from a component of the corn, Corn oil is marketed to companies that have corn oil-refiningsystems to further process this oil as food for human consumption. The corn oil may also be used as nutritious animal feed supplement or for biodiesel production. As compared to a traditional corn oil-extraction process, ICM’s processing technology retains the protein value of the corn, and therefore the corn oil is sold for a higher price. Many ethanol plants are adding just the corn oil extraction part of the process to existing facilities. Some plants in which ECM is invested are adding @ corn oil extractor, and others are now planning or considering doing so. The corn oil extraction process alone is projected to increase a biorefinery’s profit by about 14% per year. Human Food-Grade Protein Human food-grade protein is a high-value co-product recovered in the com oil production process. It sells for twice as much as an unprocessed corn component protein. Human food-grade protein has nutritional aspects comparable to an egg white. Fiber is a by-product of creating human food-grade protein from the germ, and can be used for animal feed or in ICM’s fiber-to-ethanol process. Cellulosic Ethanol from Corn Fiber The final phase of ICM’s technology implementation enables the biorefinery to produce cellulosic ethanol in addition to corn-based ethanol. This phase will convert fiber, a lower value component of corn, into much higher-value ethanol through a cellulosic process rather than through traditional corn starch fermentation. The corn fiber-to-cellulosic ethanol technology is expected to increase the profitability of an ethanol biorefinery by approximately 12% per year. Deploying the New Technology ‘The new dry fractionation process is already in operation at a facility that has been successfully producing ethanol and food for human consumption since November 2007.The technology is built in phases that can be implemented separately or all together to maximize additional earnings, For existing biorefineries, ICM guarantees that all phases will be completed and in full production by 2012 if construction begins in early 2009. ICM expects that its new technology will significantly improve a biorefinery’s earnings and provide an outstanding return on investment, ICM has estimated that the additional profit generated through its new technology will pay for the investment in less than 2 years if all parts of the process are fully implemented and provide an estimated 70% annual return on investment if the investment is fully funded through equity. The return would be higher if it is leveraged with debt. The equipment to implement the technology and the buildings to house the equipment are projected to cost $200 million. The proforma earnings for cach phase are as follows: = Germ Production and Bran $34 million = Corn Oil 19 million = Food-grade Protein 42 million = Feed-grade Protein 16 million * Cellulosic Ethanol 29 million $140 million Other Benefits From a risk management perspective, corn oil provides a hedge against the cost of corn, because the price at which corn oil and other corn-derived products are sold will rise or fall with increases or decreases in the cost of corn. Therefore, in an environment of high corn prices, corn oil will mitigate the negative impact that high corn prices would have on profitability. By combining the food outputs and additional ethanol production that result from implementation of the new technology, an ethanol plant may be profitable even if ethanol prices fall and corn continues to remain high, For example, an ethanol biorefinery that adopts the full dry fractionation process will remain profitable even if the price for ethanol were to drop to $1.80 per