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1 Project Introduction

1. Start-up Summary CFF is a company with limited liability, which offers 80% shares for outside investor. Other 20 % owned by its founder and director, Spivak Mykhaylo. The start-up costs associated with legal expenses, maintaining office and facilities, salaries, etc are to be financed by direct owner investment. We expect investor to finance purchase of machinery, equipment, chemicals and fuel. The assumptions are shown in section 7.1. Project Financing. Objectives 1. Start production of biodiesel by the end of 2003. 2. Maintain Net Profit Margin 30% with selling price no higher than that of conventional fuels. 3. Increase the sales to more than 2 million EUR by the third year. Mission Statement CFF is a manufacturing company dedicated to developing better energy solutions for benefit of a whole society. We bring innovative technologies and unlimited supply of energy sources without damaging and polluting environment. Our product replaces conventional diesel and becomes the most perspective fuel of 21 century due to its environmental friendliness, renewability and low costs. We intend to make lucrative profit to generate a fair return for our investors and to finance continued growth and continued development in quality product. We also maintain a friendly, fair, and creative work environment, which respects diversity, new ideas, and hard work. 1.2 Team Introduction

1.3 Keys to Success The key success factors in the biodiesel project are:
y y

Competitive Prices: Unless the importance of the biodiesel products is fully understood by consumers, well not be able to sell it above market price of conventional diesel. Constant Product Quality: This makes sense in any case but because we are first on the market, good reputation and constant conformance to performance standards of conventional diesel are especially important.

High-profile Management Team: products delivered on time, costs controlled, marketing budgets managed.

2. Production Summary
2.1 Plant Location The project is planned to serve Poltavas and neighboring regions (see map). Total projects area is approximately 30,000 square km, of which the total arable land is 18,000 square km, that includes 3,000 square km (300,000 ha) for rape cultivation. Physical location of the processing plant is 30 km from Poltava, near a railroad station and an elevator with total storage and processing capacity of 10,000,000 tons of grain per year. Cultivation of rape-seed requires 5,000 ha of arable land and will take place on the rented fields of local agricultural enterprises. Exhibit 1. Project Area

Company has the following facilities: garage for agricultural machinery with a total surface of 1,000 square meters, an administrative building of 100 square meters, the plant building for the biodiesel production of 1,000 square meters. Territory of the plant is fenced; available for storage and other equipment in 5,000 square meters. Exhibit 2. Biodiesel Plant

The process Technological Scheme can be seen in the following chart:

3. Marketing Plans

3.1 Market Analysis Although biodiesel can be marketed as an ordinary fuel and our calculations in the financial section are based on the present market price of conventional diesel, we believe, that most perspective customers are farms, in-city transport companies and those who need the lowest possible pollution levels in their technological processes: warehouses, owners of generators, etc. The reasoning is the following: farms are suppliers of raw materials and can receive biodiesel as a payment, in-city transport companies feel constant pressure to reduce their fleets pollution levels and will be happy to buy biodiesel, other users may also need non-polluting fuel for such reasons as safety, comfort, ecological concerns. These customers will definitely choose the biodiesel against the conventional diesel, if the product pricing is approximately the same in both cases. A summary of the market analysis is given in Table 1 and Chart 1. Assumptions about annual growth are based on historical trends and the current economic situation in Ukraine. It is necessary to underline that this market segmentation does not differ significantly from that of the EU countries, our potential customers, except broader usage of biodiesel in on-highway transportation. Columns show number of potential (corporate) users around the country (except for farms) according to statistical data: transport companies, wholesalers, and other organizations, whose annual consumption of biodiesel may exceed 1,000 EUR. For this reason, the market for biodiesel is worth an estimated 150 million EUR in 2003, and is projected to grow at 37% per year. Table 1. Market Segmentation Market segmentation. Rape meal is a by-product of oil extraction and is valued for high protein content. We are planning also to sell rape-seeds in order to stabilize cash position in the periods when production of biodiesel would be insufficient: at the end of season, between production cycles. Our primary target customers for these two types of products are agricultural enterprises of Poltava region and exporters. The demand in this market segment, especially in the latter one, can be regarded practically unlimited in our case. 3.2. Market Trends The most important trend in the fuel market is the growing prices. Although with some limitations, this was true for years and seems to be accelerating due to political and economic reasons. Biodiesel prices may grow even faster, because of its ecological friendliness and concerns in all industrialized countries about the level of environmental pollution. It is necessary to assume, however that because of a future increase in the biodiesel production over the world and possible inventions of other alternative fuels (methanol, etc), prices of biodiesel can not exceed those of petrodiesel more than 10% (as it takes place in Germany now). We are part of the rapidly growing biofuel business, which also includes producers of heating oils and oleochems. At present, biodiesel is being produced in more than 20 plants (see

Appendix , section 10.5), most of which are located in Germany, with capacities ranging from 1.000 to 80.000 tons of biodiesel per year and total annual production of 1.020.000 tons. In this respect, in the long term, our plant with the capacity of 5.000 tons per annum may appear uncompetitive on European market. However, because production of biodiesel in countries of former Soviet Union did not start yet, we believe in rapid growth and production expansion. Market prices of biodiesel are 10-15 % higher than those of conventional diesel despite of tax exemptions for biofuels in many European countries (Germany, France, Czech), which is explained by high labor and energy costs in Europe. Because in Ukraine they are 30-35 times less than in Europe, our project will be able to generate competitive (5% less than market) prices for such sustainable fuel, as biodiesel. Our main competitors in Ukraine are the producers of petrodiesel. As long as the sale of petrodiesel is subject to excise and other taxes, our product would remain competitive on the Ukrainian market. Biggest problem may appear if state imposes the above-mentioned taxes for biodiesel, which however, is highly unlikely, because of the strategic importance of alternative fuels for the country. 3.3 Marketing Strategy 1. Emphasize inherent qualities of biodiesel and focus on target markets. We must differentiate biodiesel from other fuels. We need to establish our business offering as a clear and viable alternative for our target markets. 2. Produce high quality fuel. 3. Offer competitive price at the level of the conventional diesel fuel. 4. Create strong distribution channels to ensure stability of production. 5. Emphasize key advantages of our product. 6. Build a relationship business: long-term relationships, not single-transaction deals with customers. Become their fuel supply department, not just a vendor. Make them understand the value of our relationship for the whole society and economy. 7. Focus on fuel distributors and big consumers as key target markets (see Sales Strategy) 3.3.1 Strategy Pyramid For placing emphasis on quality, our main tactics are technology expertise and developing our own supply network. Our specific programs for technology are continuos learning and research.

Specific programs for supply include cultivation of rape-seed and cooperative agreements with local farms. Our second strategy is the products low cost. The tactics are reaching the lowest possible cost of raw material by using most productive breeds of rape, fertilizers and herbicides, implementing the most effective operations in production. 3.3.2 Value Proposition We think our value proposition is quite clear and can be quite easily distinguished from most of the others in the market. We offer ecology-friendly and renewable type of fuel at a reasonable market price. Our project brings also new jobs and high-technology to Ukrainian agriculture and makes a further step towards the energy independence of the Ukrainian economy. 3.3.3 Competitive Edge Our most important competitive edge is entering Ukrainian agriculture and fuel supply industry with the most advanced technologies and gaining experience and market share before the intrusion of new competitors. 3.3.4 Positioning Were positioning our product for those, who need and want to use non-polluting, ecologically friendly fuel. Unlike mineral fuel, biodiesel is renewable energy source, with comparable cost and performance. 3.3.5 Price We must charge appropriately for this unique type of fuel, but we want also to predict revenues as close as possible and to eliminate market risk, so we plan to sell biodiesel at current market price for petrodiesel. 3.3.6 Promotion We depend on direct contacts as our main way to reach new buyers. As we grow, however, we need to change the way we promote ourselves: 1. Advertising: We'll be developing our core positioning message: "Clean Fuel of Future" to differentiate our service from the competition. We will be using local newspaper advertising, radio, and cable TV to launch the initial campaign. 2. Seminars, exhibitions and other promotion and charity campaigns. 3.3.7 Distribution

We focus on the market need for environment friendly fuel distributed through the authorized gas filling stations. We will also maintain close relationship with transport companies and agricultural enterprises. 3.4 Strategic Alliances We depend on our alliance with local producers of rape-seed (and their state representative Ukrripak) to generate continuos supply of raw material in the future, with Ukrainian diesel traders (especially gas filling station and bigger regional company: Poltavanaftoproduct) to ensure stable and planned production and sales. Because we plan to rent land and cultivate rape, cooperative agreement with neighboring agricultural enterprises is essential. They are suppliers of labor force, additional raw materials and equipment. We plan to outsource rape cultivation in the future, so this cooperative would be a base for creating a suppliers network. This cooperative would provide joint cultivation, harvesting of rape, production of vegetable oils. Creation of distribution network requires a reliable and strong partner, so we plan to start strategic cooperation with Poltavanaftoproduct, the biggest fuel trader in the region. The reasoning is the following: one of the authors already has good experience doing business with this company; the company has selling capacity (gas filling stations, delivery services, certification laboratories, etc.) of 5 million tons of fuel per year and is in good financial condition. We want underline, however, that we are not limited only by this option of cooperation: the further we move, the more options would appear. Use of biodiesel in Germany increased from 10 million liters per year in 1992 to 300 million liters in 2001 with prices at petrol stations around 1.5 DM per liter. We plan cooperation with one of the biggest distributor of biodiesel in Germany, company Oelmhle Leer Connemann GmbH & Co, to sell our products on European market. 3.5 Product Four products are planned to be produced and sold (in consequent order): biodiesel, rape-seed, rape meal and rape-oil. Production starts with cultivation and harvesting of rape-seed, processing it into rape-oil with rape meal as a by-product, and ends with the final production of biodiesel from oil (see the chapter on the Technology). The explanation for such a long technological cycle is a necessity to ensure the supply stability of the raw material, the rape-seed, to produce final product biodiesel of premium quality. 3.5.1 Product Description Biodiesel is the name for the methanol-ester-based biofuel made from vegetable oils or animal fats. In this business plan biodiesel will be produced from rape-oil, but equipment could be utilized also for processing other vegetable or waste cooking fats. Rape (canola), however has proved to be a best crop for the production of biodiesel, because of high productivity and oil content (45%).

Biodiesel is a clear liquid, without unpleasant odor or handling characteristics, of virtually the same viscosity as mineral fossil diesel oil. For this reason, it may be used in a standard diesel engine without additional modifications. It may also be blended with petrodiesel to improve quality of latter. There are also examples of crude rape-oil usage (not processed into biodiesel) in specially designed diesel engines, or blended (50/50) with petrodiesel oil in ordinary diesel engines. 3.5.2 Product Performance Biodiesel shows similar fuel consumption, horsepower, torque, and haulage properties as conventional diesel fuel and provides significant lubricity improvement over petroleum diesel fuel. Lubricity results of biodiesel and petroleum diesel using industry test methods indicate that there is a marked improvement in lubricity when biodiesel is added to conventional diesel fuel. Even biodiesel levels below 1 percent can provide up to a 30 percent increase in lubricity. Biodiesel will soften and degrade natural rubber compounds over time, so users must replace them with elastomers in order to use pure biodiesel in the engine. Cold weather can cloud and even gel any diesel fuel, including biodiesel, but users of a 20 percent biodiesel blend will experience even a further decrease of cold flow properties (cold filter plugging point, cloud point,) of approximately 2 to 3C. 3.5.3 Key Advantages of Biodiesel 1. Biodiesel is the only alternative fuel that runs in any conventional, unmodified diesel engine. It can be stored exactly like petroleum diesel. 2. Biodiesel can be used alone or mixed in any ratio with petroleum diesel. 3. The use of biodiesel can extend the life of diesel engines because it is more lubricating than petroleum diesel fuel, while fuel consumption, auto ignition, power output, and engine torque are relatively unaffected. 4. Biodiesel is safe to handle and transport because it is as biodegradable as sugar (pure biodiesel degrades 85% to 88% in water within 28 days), 10 times less toxic than table salt (lethal dose is greater than 17.4 g/kg body weight, while for salt (NaCL) it is 1.8 g/Kg), and has a high flashpoint of about 200C compared to petroleum diesel fuel, which has a flash point of 70C. 5. Biodiesel is a proven fuel with over 20 years of use in Europe and 30 million successful US road miles. 6. Combustion of biodiesel provides over a 75- 90% reduction in environmental pollution and a 90% reduction in cancer risks. 7. Biodiesel is the only alternative fuel to meet all environmental and human health requirements for energy sources.

3.5.4 Sourcing The major planned source of raw material is rape-seed. To ensure stability of supply, we are planning to cultivate them on 5,000 ha of rented fields. Cost allocation for this stage of business plan is presented in the Appendix part. The average yield from winter oil-seed rape in Ukraine is around 3 tons of seed per hectare during a 270 day growing season. The seed is pressed to extract the oil content of about 30% by weight, the remaining cake (rape meal) being used either as high protein content cattle fodder or burnt as an energy source for the production of electricity. Final output, therefore is 1 ton of biodiesel per hectare. The energy cost of producing the crop is about 15% of the yield - the same as fossil oil. The main difference is that the energy is renewable and come from the eco-friendly crop itself. 3.5.5 Future Products and Services Glycerol is a by-product of our technological process, but it needs further cleaning. We are not planning to install glycerol processing equipment in the first 3 years, because this equipment requires additional 40% investment and we want to ensure quality and uninterrupted production of biodiesel, as a flagship product. However, after successful implementation of this biodiesel project, we are also planning to sell cleaned glycerol, which could generate an additional 10% turnover.

4. Sales Plans
4.1 Product Assortment Biodiesel is planned to be sold using direct mail, seminars, promotion programs and advertising in business newspapers. Because biodiesel is a valuable fuel for in-city transportation companies, direct mail to these and other companies would be effective tool in promotion. Ecology, energy, technology related seminars are effective in finding regional representatives, partners, suppliers and buyers of our product. Promotion programs are: discounts to those carrying our trademark and symbolic, support to ecology and renewable energy concerned organizations, participation in regional fairs and events. Total budget for all these programs is shown in the Profit and Loss Statements, among the Advertising and Miscellaneous expenses. Rape-seed is a commodity product which sells on agricultural exchanges, to producers of rapeoil and exporters. We plan to contact directly all these customers, because they are not so numerous and can ensure reliable business relationships. Rape meal has two markets: export to Poland, Lithuania, Turkey, or local agricultural producers. We prefer the latter option, because it would save a great deal of administrative and transport expenses, plus it would open the opportunity to use rape meal as a payment for rent, leasing of equipment, rape-seed (we plan also to buy rape-seed for further processing).

Rape-oil sales are omitted from the business plan due to high uncertainty factors. However, our plant will be able to provide this type of product and it remains a real option for us to sell rapeoil. 4.2 Sales Strategy Our major intention is to keep levels of monthly production, sales, and collections together. For this reason we planned storage capacities only for one months production, located plant near elevator (rape storage facilities) and railway (transportation network). Because biodiesel is highly liquid product, this goal can be implemented with right choice of distributors and suppliers (see also: Strategic Alliances). 4.3 Sales Scenarios Because cultivation itself is a risky business (due to weather conditions), we prepared 3 variants of sales: normal, when yield of rape is normal and all sales would take place in Ukraine, pessimistic, when yield of rape is 50% of normal, and optimistic with normal yield and sales to Germany for 70% of German market price. Summary of the risk events is presented in the risk assessment chapter We expect to start sales at the end of 2003 and to reach the full plants capacity by 2004. We plan to decrease gradually the sales of rape-seed and increase the sales of biodiesel instead. Nevertheless, it will still remain important so as to ensure cash stability during the year between possible interruptions in biodiesel production cycles (due to technological, organizational reasons, etc).

5 Milestones
The following table lists the first year milestones, with dates and budgets for each. The milestone schedule indicates our emphasis on planning the implementation. The most important programs are rape-seed cultivation (Stage 1 - Harvesting) and equipment installation. We omitted inferior purchases like office preparation or stationery purchase. Detailed description of each milestone is given below. Table 2. Milestones Milestone Start Date dd.mm.yy 1.01.03 1.01.03 1.02.03 1.03.03 1.03.03 End Date dd.mm.yy 676,000 158,000 110,000 30,000 Capital expenses

1 2 3 4

Equipment order Purchase of tools and tractors Site preparation Installation of oil processing equipment 5 Farm preparation

1.03.03 1.04.03 1.04.03

6 7 8 9 10 11 12 13 14 15 16

Rape-seed stage 1 Rape-seed stage 2 Rape-seed stage 3 Rape-seed stage 4 Rape-seed stage 5 Rape-seed harvesting Equipment payment 50%, installation Equipment and maintenance Oil processing Biodiesel processing Sales of biodiesel Total capital expenses in EUR

1.04.03 1.06.03 1.07.03 1.08.03 1.09.03 1.10.03 1.06.03 1.07.03 1.04.03 1.12.03 15.12.03

30.04.03 1.07.03 1.08.03 1.09.03 1.10.03 1.11.03 1.10.03 1.11.03 31.12.03 31.12.03



1. Equipment orders will be possible after negotiations with producers of different parts and having completed the installation plan. This plan will be done by design institution using equipment producers drawings and specifications. Milestones budget is a cost of equipment (50%) plus cost of installation plan. 2. Quantity of agricultural tools needed was estimated for a farm with a total arable area of 5-10 kha. 3. Site preparation includes mainly construction works: fence, building, roof repair, building bases for equipment and storage capacities, installation storage reservoirs, energy supply and fire detection equipment. These works will be performed by subcontractors. 4. We can start the oil processing right after site preparation, because this does not require complicated technology. So, installation of oil processing equipment (oil presses, filters, cisterns) and the offer of oil processing services can be started at the beginning of the year. (Milestone 14) We did not plan cash inflows from these services. 5. Farm preparation is soil fertilizing (depends on qualities of soil, may be omitted) and processing. Milestones budget includes costs of fuel, fertilizers and labor force. 6. Stage 1- Sowing of rape, cost of seeds, fuel and labor force costs are assigned here. 7. Stage 2- Stage 5: entering of herbicides and chemicals additives to fasten the rape ripening. Costs of herbicides and accelerators were included. 11. Harvesting will be done by subcontractor (lease terms), because this stage requires expensive and productive equipment. Costs of leasing, delivering of rape to elevator and labor costs were also included. 12. Payment of another 50% costs of equipment will be done after delivering it to the site, inspection, installation and testing. Works will be done by subcontractor (construction works) and equipment supplier. Budget includes costs of equipment, installation, labor force. 13. Equipment and maintenance includes works with electricity, water, air supply equipment, biodiesel processing equipment, and implies the testing and the improvements. 14. Oil processing costs include energy, labor force, maintenance.

15. Processing of biodiesel is possible when sufficient (100 tons) quantity of oil will be pressed. Costs include chemicals, energy, labor force. 16. Sales are possible when minimum railway transporting quantity (60 tons) produced. By that time, well find clients, sign sales agreements and plan delivery for the next 3 months. Rape cultivation timing has key importance in the project implementation. While any short delay in the equipment installation can be bearable, the first year harvest of the rape-seeds can`t be missed.

6. Risk Analysis
All the three types of risks were analyzed in the risk pyramid: Country risk, Sector risk and Company risk. Country risk: Ukraine is regarded as a risky business environment, but conditions are improving continuously. The country has entered a stable growth period after the former years decline. Country risk of the project is minimized in our case, due to the personal experience of one of the authors. Moreover, we determined the electricity costs to be higher than in normal cases, so as to finance the assurance of continuous electricity supply, an extra service in the country. Sector risk: The main sector risk is the unpredictable output of the rape in each year. The necessary measures are assured in the project budget to cover this risk. The appropriate cultivation conditions can be maintained by the proposed agricultural equipment, moreover, insurance was also planned to cover weather risks. Other part of the sector risk comes from the technology itself, the greatest threat may come from latest developments in the biodiesel processing. A more cost effective production method requiring totally new equipment could make our plant obsolete. Therefore new inventions concerning the biodiesel fuels should be closely tracked, the cooperation with the local scientific organizations in the region is primarily aimed at minimizing this type of technological risk. Company risk: Because of the newest technology, the company has a bit more risk than that of a traditional firm. The highly qualified and fully committed management team will do its best to decrease it as much as possible.

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The overall risk of the project is moderate, which is expected to decrease over time.

Having considered all these types of risks, the following weigting allocation has been made for the three profitability scenarios: Normal scenario 50% Optimistic scenario 25% Pessimistic scenario 25%

7.7 Break-even Analysis According to the normal scenario, we can regard 2005 as the reference year for the normal production. Total sales 2,130,680 EUR Production quantity: 5,000 tons Unit sales price: 426 EUR / ton Total costs are 538,060 EUR Variable costs can include chemicals and energy (see Appendix), since farm cultivation costs are fixed costs. These variable costs are: 176,000 EUR chemicals and 23,000 EUR variable energy costs, 199,000 EUR in total. Labor is not regarded as a variable cost, no worker should be fired in a bad situation, even if some money could be saved for a short time. Thereby the unit variable cost: 39.8 EUR / ton Fixed costs are 339,060 EUR As a result, the break-even quantity of the biodiesel production is 878 tons / year. The gross margin / sales ratio is above 80%, thats why the break-even quantity is so low, due to the exceptional conditions of the project. Let us think a little bit longer. Total payroll burden of the plant is 89,250 EUR / year. If we were giving 8 times more wages for everyone (not a good salary in Western Europe), that would mean an extra 624,750 EUR / year. Fixed costs in that case would be 963,810 EUR The break-even quantity would immediately rise to 2,496 tons / year. Nearly 3 times more than it has been originally planned.