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BUSINESS VEHICLES FOR ACCOMPLISHMENT

Patrick F. Mahoney, P.E., D.E.EEnergy Answers Corporation

79 N. Pearl StreetAlbany, New York 12207

Phone: (518) 434-1227; Fax (518) 436-6343e-mail: pmahoney@energyanswers.com

Presented at the 14th Annual AHC Corporate Affiliates Workshop

June 21 & 22, 2005Saratoga, New York

Good morning: I am pleased to be here to participate in another AHC Workshop,“Achieving Results”, and hope that I can contribute something of value to our discussion. BrucePiasecki has asked me to talk as an entrepreneur about the creation and successful operation ofthe companies I have been associated with since my graduation from Rensselaer PolytechnicInstitute as a civil engineer. Our discussion evolved into the purpose or mission of each of thebusinesses and the term business vehicles for accomplishment seemed appropriate to describe thevarious companies and partnerships I have been involved with.

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The vehicles shown represent the complexity of organization or business structureutilized to accomplish professional and business objectives. The more difficult the challenge, themore efficient and powerful the business vehicle must be to meet the challenge and accomplishthe objectives.

Fresh out of school with some summer experiencein the engineering and construction business, my goalwas to learn and practice my engineering profession, tohelp design solutions to problems and to see thosesolutions built, and maybe in some small way, make ourplanet a better place to live. And for a few years that was my professional focus at a smallengineering firm participating in the design of dams, reservoirs, water and wastewater systems. It gave me valuable knowledge, experience and exposure to a variety of projects. Myprofessional goals were expanding and I began to place a great value on productive achievement,on solving problems and on implementing solutions. The evolution of the companies and otherbusiness vehicles which we established at Energy Answers closely follows my personal desire toutilize my talents, knowledge, and experience and networks of talented individuals to solve moreand more complex problems.

In 1970, after receiving my professional engineering license, I formed the engineeringfirm of Smith & Mahoney with Ben Smith, a renowned local engineer, who was the soleproprietor of the small engineering firm I first went to work for.

A full service surveying, engineering andplanning firm dedicated to the implementationof efficient, innovative solutions to municipal

and private sector infrastructure and sitedevelopment problems.

Smith & Mahoney P.C. was the first business vehicle I created to expand myopportunities to solve problems. It was a professional corporation and we could assemble a teamof professionals with expertise in numerous disciplines: Civil, Mechanical, Electrical andEnvironmental Engineering; Architecture; Urban Planning; Economics; Government Relations;etc. With the formation of a company, one intends to increase the opportunities foraccomplishment and, at the same time, takes on a variety of risks – most seriously, the obligationto employees to keep them fully engaged and stimulated and to shareholders to keep the companyprofitable. But with those obligations comes the opportunity and resources to pursue solutions tomore difficult and challenging problems.

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The engineering business grew to more than sixty productive, creative, employees. Weaccomplished a number of noteworthy projects and earned good profits for the shareholders. Smith & Mahoney received the Outstanding Civil Engineering Achievement in New York Statein 1982 for a municipal waste-to-energy and materials recovery system, and also in 1984, theNew York Governors and U.S. Department of Energy award for a “distinguished contribution” tothe development of renewable energy resources.

The resource recovery project had been conceived in 1970 when the Mayor of Albany,Erastus Corning II, an avid conservationist, had asked us if we would evaluate the alternatives tolandfilling for the City’s solid waste. Our conclusion at that time was that a resource recoverysystem including combustion for energy recovery and sale could reduce the need for landfillingby 90%, but the economics were not favorable, due to low fuel prices.

In 1973, that changed with the dramatic increase in the price of petroleum products asindicated on the #2 fuel price graph. During my presentation, I will refer back to this graphseveral times since the fluctuations in the price of fuel has had a dramatic impact on our economyand energy dependent businesses.

At Smith & Mahoney wehad, in response to a client’s desireto recover resources rather thanbury waste, developed some uniquesystems and filed several patentapplications for those systems, theapproach was a big step forwardfrom incineration and even waste-to-energy in that the system wasdesigned to efficiently recovermaterials as well. The resourcerecovery facility designed forAlbany was the third generation ofattempts to burn garbage for energy. Let me quickly describe theevolution of that industry since thetechnology developed at Smith &Mahoney became the reason forcreating Energy Answers Corporation.

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The idea of burningwaste to reduce volume andgenerate energy is not new. New York City had a heatrecovery incinerator as early as1897 and many urban areasfollowed suit as land becamemore valuable. Incineratorsoperated with virtually no airpollution control systems in theU.S. up until the early 1970'swhen concern over air pollutionand potential health impactsprompted regulatory agencies todemand closure or the additionof air pollution control systems.

It wasn’t until after the “Energy Crisis” of 1973, when fuel prices tripled, that municipaland commercial waste was again viewed as an energy source and the “waste-to-energy” industrywas born. Many facilities were proposed and built and were essentially incinerators with heatrecovery units and primitive air pollution control systems.

But, these facilities were, in many cases, not good neighbors and the local andenvironmental communities began to oppose “waste-to-energy”. There were problems to solveand, at Smith and Mahoney, we had the good fortunate to have a client who was committed tothe “resource recovery” concept.

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After some effort as consulting engineers to market our engineering solution tocommunities with waste problems, it became apparent that the only way to advance thetechnology and design and build new facilities would be through an entity capable of taking theresponsibilities and risks of design, financing, building, owning and operating. Our evaluationhad indicated that the most likely and appropriate locations for these systems were locationswhere landfilling stood to contaminate public and water supplies, where energy prices were fairlyhigh, and where there was adequate waste to justify a large scale system. Long Island, Floridaand Southeast Massachusetts/Cape Cod were our targets and, because of documented landfillcontamination of the sole source Cape Cod aquifer, that area became our Number1 priority. Nocommunity or communities in that region were capable of assuming the risks of siting, designing,financing, building and operating a large facility and a Smith & Mahoney evaluation of thisresource recovery opportunity commissioned by a private investor led to the formation of EnergyAnswers Corporation.

The Company was formed byGordon Sutin (an experienced industrialengineer and an expert in materialshandling and waste combustion), myself,and several socially conscious investorsinterested in environmental and energyinvestments which had a public benefit,as well as a profit opportunity. EnergyAnswers was formed in February 1981 asthe vehicle to implement a resourcesolution on a large scale.

Our first project was theSEMASS Resource Recovery Facilitywhich took five years to develop and 2 ½years to build. Originally a 2000 ton/daysystem, it is now a 3000 ton/day, 80 MWfacility that initially cost $270 million toput into operation. The company hadadequate capital through our investorsand adequate talent to manage thenumerous tasks required to design,finance, build, own and operate.

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After 50 years of stableenergy prices, in less than a decade,we saw a ten-fold increase inenergy prices. We were able tonegotiate a 20-year power saleagreement with CommonwealthElectric which became the cornerstone of the project. As always,high prices stimulate newdevelopment of energy and fuelsources, and low or stable energyprices tend to inhibit new energyand fuel source development. Afterthe construction of our SEMASSproject, energy prices woulddecrease and not reach 1982 pricesagain until 2004.

The SEMASS Partnership (a limited partnership) was the vehicle we created to finance,build, own and operate the SEMASS Resource Recovery Facility. The price peak in the early80's made it attractive for a number of the partners who were to be part of the SEMASSPartnership. This price peak also allowed Energy Answers, the 51% General Partner, to attractsuch financial giants as The Industrial Bank of Japan (at that time a AAA rated bank) andPrudential Power Funding, to provide debt financing for the project. The limited partnersbrought into the project provided the project equity and included:

Bechtel:A highly capable and financially strong contractor interested in developing a newbusiness line in renewable energy facilities. Assumed design, build, construction cost,schedule and performance test risk, and invested some of their expected profits in thePartnership.

Stephens:An investment banking firm from Little Rock, Arkansas was primarily interested inenergy and investment tax credits, which were made available by the federal governmentas their means of encouraging new energy generating projects to counter rising energyprices. Stephens contributed a large portion of the project equity for the majority of thetax credits.

Florida Power & Light:Wanted to build a “green” portfolio (to address criticism of environmental groups to twocoal fired generators they were attempting to build in Florida). At about the same time,they invested in a large solar generation project and a large wind project. Their coal firedplants were approved and their appearance in the renewable energy arena was short lived.

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Joy Niro:The supplier of the dry scrubber for our air pollution control system. It was the first dryscrubber installed on a waste combustion facility and we required an investment fromthem to ensure their availability for several years after start-up, in case of problems in theperformance of the new system.

Thus the vehicle (a limited partnership), wascreated by Energy Answers Corporation toaccomplish its goals. This partnership was muchmore complex, and included much bigger companieswith a variety of objectives and goals of their own,which they in turn could accomplish through theirparticipation in the SEMASS Partnership vehicle. The expansion of SEMASS to a 3000 tons/day, 80MW Resource Recovery system was completed in1995 and is the last major waste combustion facilitybuilt in the U.S. It has been an unqualifiedeconomic, technical and environmental success.

If we look at the energyprice graph again, we can see thedeclining fuel costs through the80's and 90's; this wasaccompanied by falling disposalcosts in the U.S. due to thepermitting of mega landfills by thelarge waste collection companies. The two major revenue streams forour competitive private sectorresource recovery approach towaste management had beensignificantly reduced and we had toeither seek a new challenge or findways to improve our projecteconomics for resource recoverysystems. We chose to focus onimprovement of our product in allof the ways shown.

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While our operations teamfocused on increasing efficiency,energy generation, and materialrecovery and looked for high valuewaste fuels, our technologydevelopment team focused onenhancements for the nextgeneration plants, developed apatented sludge injection system forsolid fuel boilers, and experimentedwith various technologies formaking products out of ash fromwaste combustion systems, and weat the development companyadvanced the industrial ecologyconcept in island economics.

The industrial ecology concept holds that like nature certain industries have wastes thatcan be used to provide energy or create new products and some industries generate waste that canbe used as feed stock for other industries. This was the basics for a major project we haveproposed in Puerto Rico, the Renova Project. Our corporate philosophy of resource recoverystarts with the sites for our facilities. We look for abandoned or underutilized industrialproperties, quarries, landfills or functioning industrial properties with room for an energygenerating and materials recovery system within the fence. Our proposed site in Puerto Ricoincludes an abandoned sugar mill and an abandoned paper mill; we have proposed to reactivatethe paper mill. But that is another story for another time. The vehicle we created for that projectwas somewhat complex, in that we believe that to succeed in permitting a project such as this, wemust have a strong local partner orpartners. In this case ourdevelopment partner is a PuertoRican real estate developmentcompany owned by a RensselaerPolytechnic Institute classmate ofmine. Together Energy Answersand Interlink act as joint GeneralManagers in a Limited LiabilityCorporation. The mix ofshareholders in the Renova Projectincluded the largest local bank, thelargest local newspaper, severallarge contractors, the three largestfood and beverage importers on theisland, concrete products

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manufacturers, etc. all contributing capital with limited liability and involvement in themanagement of the project. Energy prices are high in Puerto Rico and new landfills areinappropriate so the economics work quite well. We lived in Puerto Rico for five years while wewere developing this project concept and attempting to bring it to construction.

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Another Island with a waste disposal crisis and high energy prices is St. Croix in the U.S.Virgin Islands. Retail energy price is close to $0.25/KWh and EPA has mandated closure of theisland’s only landfill. On the island we identified a site and developed a master plan forconverting a recently closed Alumina refinery into an eco-industrial park with a resourcerecovery facility at the heart of the redevelopment plan. The vehicle we chose for accomplishingour goals at St. Croix Renaissance is a Limited Liability Limited Partnership with EnergyAnswers and two other general partners, one local, as the management team for the project. Theintent expressed in our master plan is to attract industrial tenants with high energy demands(preferably steam as well as electricity), and which can take advantage of the deep water port andcargo handling capabilities of the site. Ownership opportunity for major tenants is anticipatedand the U.S. Virgin Islands has a great tax benefits program to help us attract equity partners.

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So that brings us to todayand today’s environmental andmarket conditions and theopportunities that the currentconditions present. Let’s returnagain to our fuel price chart, and aseveryone in the room is aware, theprice of crude oil has been above$50/bbl for six months now andmany are predicting that it will staythere - we’ll see. But high energyprices stimulate consideration ofother fuel and energy alternativesand government legislation and taxincentives which have historicallystimulated private investment inenergy solutions.

Another major factornow on the radar screen ofall responsible corporateexecutives is theenvironmental and humanhealth risks of conductingbusiness. The impact of thesuccess of the tobacco classaction suits, the Kyotoprotocol debate, productionand manufacturing wasteimpacts on naturalresources, and human healthhave made corporategovernance much morecomplex. Our resourcerecovery system and theauxiliary technologies wehave developed haveenormous environmental benefits:

• Greenhouse gas reduction - (entire projected U.S. obligation could be satisfiedwith a change in policy from landfill to resource recovery)

• Air pollution emissions control and reduction• Materials recover and reuse• Land conservation

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With the high energy costs and significant environmental benefits, Energy Answers isnow looking to capitalize on the unique position we are in to offer new solutions and build newfacilities.

You likely have noticed that the more recent business vehicles all address corporatepartners’ desire to limit risk and liability. Limited Liability Corporations, Limited Partnerships,and Limited Liability Limited Partnerships all were created with the protection of participants inmind. Energy Answers Corporation in each case has taken the general partner or generalmanager’s role, and in addition to project development and operating responsibilities areresponsible for risk allocation and risk management. Our company has five subsidiaries whichare designed to perform the functions we have chosen to offer and to excel at.

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There are examples of new business alliances which are the most recent vehicles we havecreated or proposed to create to accomplish the objectives of multiple partners. Several yearsago, we acquired the Pittsfield, Massachusetts waste-to-energy facility which was put intocommercial operation in 1981 and was nearing the end of its originally expected useful life. Ouroperations and technology development team upgraded the facility, improved the efficiency ofenergy generation, and installed materials recovery and processing. Then we negotiated a new10-year contract with the City of Pittsfield for waste disposal and renegotiated our energy salesagreement with Crane & Company, Inc. Crane & Co. is a high quality paper manufacturer whichactually produces the paper for all U.S. currency as well as currency paper for other nations. OurPittsfield Resource Recovery Facility provides them with their process steam.

In order to finance the improvements to the facility, we had to satisfy banks and ourshareholders that we had long-term revenue streams under contract. In 2004, our Pittsfieldfacility received the ASME “Small Combustion Facility of the Year” award and is serving ourpartners well.

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The second example is one of a potential project in the developmental process and so wecannot identify the potential partners or location. But, we can discuss the objectives of ourindustry partner and how we have proposed to structure a solution.

The potential partner is a major food processor with the objectives of responsiblyaddressing some pressing environmental issues including odors, solid waste and sludgemanagement, along with the impact of rising energy costs.

After an evaluation of all issues, we have proposed a business alliance to address all oftheir issues, which we project will result in savings of more than $4.5 million/year and a paybackon the new facilities of less than 5 years. We would propose to structure this similar to ourPittsfield project where the business arrangement is contractual with both the industry, themunicipality and with other parties. The ownership of new facilities will be a Limited LiabilityCorporation with Energy Answers as the General Manager and Operator.

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Finally over the years of pursuing resource recovery opportunities, I have noticed what Ibelieve to be positive trends away from public regulatory agency dictated solutions toenvironmental problems and a more proactive private sector role in addressing the realenvironmental issues.

Governmental regulationand actions have not worked wellon a global scale so the concernedresponsible environmentalists,some from within corporations,have begun to identify sources ofenvironmental releases and todevelop mechanisms to induce theprivate sector to makeenvironmental issues a highcorporate priority.

We recover $1000/day inU.S. coins from the SEMASSboiler ash. It is symbolic of theunrecognized value in the materialsour society discards and the levelof recovery that can be achieved.

We have producedconcrete products withsuperior characteristics(light weight/ high strength)from combustion residuesafter the removal of metals,and these are also symbolicof the foundation that aresource recovery approachto waste management andenergy needs, provides for asustainable future.

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Conclusion:

At this point in time, with risingglobal energy demand, increased localconcern for the environment, globalwarming mitigation agreements andgovernment incentives for solvingthese problems, the prospects for theprivate sector solution providers tostructure economically attractivealternatives is excellent. The vehicleswe create to accomplish businessobjectives can be used toappropriately allocate the projectrisks, protect the participants, yieldsignificant profits for all and providean opportunity for major corporationsto make significant contributions toimproving our environment. We atEnergy Answers look forward to thenew challenges.

Thank you for your time and attention.