Fundamentals of Financing Performance Contracting Projects

1. E P S NERGY ERFORMANCE ERVICES EPS Fundamentals of Financing Performance Contracting Projects Thomas Dreessen Chief Executive Officer,EPS Capital Corp. October 31, 2001 Phone: 215-230-9871 Fax: 215-340-3972 Email: tkd@epscc.com 1

2. E P S NERGY ERFORMANCE ERVICES EPS Energy Services Company (“ESCO”) • A Performance Contracting Company that: • develops and implements energy efficiency projects “EEPs” on a turn-key basis • risks its payments on the performance of equipment and services implemented

3. E P S NERGY ERFORMANCE ERVICES EPS “ESCO” GUARANTEE • Customer’s current operating costs will be reduced by an amount at least equal to the debt service required to repay the turnkey Construction Price for ESCO to implement and finance EEPs.

4. E P S NERGY ERFORMANCE ERVICES EPS ESCO Must Manage Risks • Development • Construction • Technology • Cost Overruns • Operations & Maintenance • Performance (Savings)

5. E P S NERGY ERFORMANCE ERVICES EPS Development Risk • ESCO provides the working capital to develop a “paid from savings” project. If no such project exists, no cost to customer. • ESCO must provide/arrange appropriate long term project financing.

6. E P S NERGY ERFORMANCE ERVICES EPS Development Barriers • Identify “Qualified” Customers - GOVERNMENT: Stable Financials; Significant Procurement Barriers and No Incentive - INDUSTRY: Limited Procurement Barriers and Good Incentive; Less Stable Financials • Obtain “VIABLE” Project Financing

7. E P S NERGY ERFORMANCE ERVICES EPS Project Financing Risk • Identify Project Finance Strategy • Create Viable Project Finance Strategy • Obtain Commitment from Financing Sources • Finance from Savings of EEPs • Close Contracts with Financing Sources

8. E P S NERGY ERFORMANCE ERVICES EPS Implementation Risk • Achieve Turnkey Price • Adhere to Design Specifications • Meet Completion Deadlines • Meet Commissioning Requirements • Comply With Regulatory and Legal Issues

9. E P S NERGY ERFORMANCE ERVICES EPS Operating Risk • Savings Guarantee to Customer that the “turnkey” costs of implementing and financing the EEPs will be paid-from-savings.

10. E P S NERGY ERFORMANCE ERVICES EPS Two Primary Structures • Guaranteed Savings - 90% • Shared Savings - 10%

11. E P S NERGY ERFORMANCE ERVICES EPS Guaranteed Savings “Market Risk” CUSTOMER Fixed Repayment Schedule Savings Guarantee Lender/Investor ESCO “Performance Risk” “Credit Risk”

12. E P S NERGY ERFORMANCE ERVICES EPS Revenues Customer Revenues ESCO Capital & Interest Loss Covered by ESCO End of Contract with ESCO Guaranteed Savings Illustration

13. E P S NERGY ERFORMANCE ERVICES EPS Shared Savings Customer “ESCO” Performance & Credit Risk Project Services Savings Guarantee Lender/Investor 100% Funding

14. E P S NERGY ERFORMANCE ERVICES EPS Industrial Customer Case Study • Paper Manufacturer in Asia • Locally owned and operated • Sells “Specialty Paper” products • No significant exports

15. E P S NERGY ERFORMANCE ERVICES EPS Project Summary • Seven (7) Energy Efficiency Projects (EEPs) • Construction Price US$ 5,000,000 Annual Benefits: • Annual Savings US$ 1,765,000 • Annual Debt Service US$ 1,145,000 • Net Annual Cash Flow US$ 620,000

16. E P S NERGY ERFORMANCE ERVICES EPS Summary of EEPs • DESCRIPTION Construction Savings Simple Payback • Price Years • #1 Pocket Ventilation Pre-Heat US$ 100,000 US$ 45,000 2.2 • #2 Vacuum Pumps Power Reduction 696,000 253,000 2.8 • #3 Refining Power Reduction 882,000 267,000 3.3 • #4 Wastewater Aeration Power Reduction 110,000 33,000 3.3 • #5 Pumping Power Reduction 196,000 65,000 3.0 • #6 PM Steam/Condensate Optimization 696,000 312,000 2.2 • #7 On-site Power Generation Upgrade 2,320,000 790,000 2.9 • Total $ 5,000,000 $ 1,765,000 2.8 Yrs.

17. Project 7 Year Cash Flow INDUSTRIAL CASE STUDY ENERGY PROJECT E P S NERGY ERFORMANCE ERVICES 7 YEAR CASH FLOW EPS 31-Oct-01 (IN US$) PROJECT FINANCING: INFLATION ASSUMPTIONS Enter "1" if no Depreciation/Taxes 1 Energy 3.0% Total Construction Price $ 5,000,000 Operations & Maintenance 5.0% Construction Interest 14.0% 350,000 Finance Fees 1.0% 54,040 Total Funding Required $ 5,404,040 Construction Period - Months 12 Long Term Debt Terms: Interest Rate: 12.0% Years: 7.0 CASH FLOW: YEAR > 0 1 2 3 4 5 6 7 Total PROJECT SAVINGS: Energy $ - $ 1,500,000 $ 1,545,000 $ 1,591,350 $ 1,639,091 $ 1,688,263 $ 1,738,911 $ 1,791,078 $ 11,493,693 Operations & Maintenance - 265,000 278,250 292,163 306,771 322,109 338,215 355,125 2,157,632 TOTAL GROSS SAVINGS - 1,765,000 1,823,250 1,883,513 1,945,861 2,010,372 2,077,126 2,146,204 13,651,326 DEBT SERVICE (Principal+Interest) - (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (8,013,271) - ESCO Share of Savings at: 50% (310,124) (339,249) (369,380) (400,554) (432,810) (466,186) (500,725) (2,819,027) OWNER CASH - ANNUAL - 310,124 339,249 369,380 400,554 432,810 466,186 500,725 2,819,027 - OWNER CASH - CUMULATIVE - 310,124 649,372 1,018,752 1,419,306 1,852,116 2,318,302 2,819,027

18. E P S NERGY ERFORMANCE ERVICES EPS Financing is Key ESCO Ingredient • ESCO is a Service Company not a Bank • ESCO cannot invest its Working Capital to Develop & Implement EEPs unless “Reliable” and “Commercially Viable” Long-term Project Financing is Available

19. E P S NERGY ERFORMANCE ERVICES EPS Project Financing Barriers • Traditional Local Bank Lending not applicable: • Corporate Lending • Rates too high • Repayment Term too Short

20. E P S NERGY ERFORMANCE ERVICES EPS Project Financing Barriers • International “MDB” Lending not applicable: • Size of EEPs is Too Small • Due Diligence too Cumbersome • Require Hard Currency Repayment

21. E P S NERGY ERFORMANCE ERVICES EPS Major Causes of Financing Barriers • Not Due to Lack of Available Funding • Inability of EEPs to Access Funding • “Disconnect” with Traditional Methods: • Traditional is Asset-Based Lending • EEP is Project Cashflow-Based Lending

22. E P S NERGY ERFORMANCE ERVICES EPS Major Causes of Financing Barriers • No Lending Infrastructure for Complex EEPs • No immediate Solution because Energy Efficiency Market is Not Developed Enough to Motivate Local Banks to Invest in Setting up EEP Lending Infrastructure.

23. E P S NERGY ERFORMANCE ERVICES EPS International Energy Efficiency “Project” Financing Protocol • “IEEPFP” is a Protocol that Becomes the Guideline used by Local Banks in International Markets to Finance Energy Efficiency Projects “EEPs”.

24. E P S NERGY ERFORMANCE ERVICES EPS “IEEPFP” Content • Customer Lending Criteria & Analysis • Customer Credit Information Needed • Credit Review and Loan Approval Procedures • Standard Loan and Security Agreements • Standard ESCO & Construction Agreements

25. E P S NERGY ERFORMANCE ERVICES EPS “IEEPFP” Content • Training Manuals for Loan Officers • Training Workshops with EEP Case Studies • Procedures for Evaluating EEPs • Risk Assessment Guidelines for EEPs • Investment Criteria for EEPs

26. E P S NERGY ERFORMANCE ERVICES EPS Investment Criteria for EEPs • Creditworthy Customer • Enforceable & “Balanced” Contracts • Proper Licenses & Permits • Experienced ESCO/Contractor • Proven Commercial Technologies

27. E P S NERGY ERFORMANCE ERVICES EPS Investment Criteria for EEPs • Acceptable Project Economics (Risk Profile) • Adequate Return to Lender & ESCO • Compliance with Environmental Regulations • Must follow International Measurement and Verification Protocol “IEMVP”.

28. E P S NERGY ERFORMANCE ERVICES EPS Create an EEP Fund • Funding from Ratepayer Fees: • U.S. “System Benefit Charge” • Brazil through 1% ANEEL Fund • Thailand through the ECF ($ 250 Million) • India through Energy Conservation Act

29. E P S NERGY ERFORMANCE ERVICES EPS EEP Fund Profile • Utilize ESCO “Guaranteed Savings” Structure versus old “Shared Savings” • Creates a Growth Model for the ESCO and Energy Efficiency Industry • Simplifies Requirements of Local Banks

30. E P S NERGY ERFORMANCE ERVICES EPS EEP Fund Profile • Utilize Funds to “Buy-Down” Interest Rate to Below Market Rates • Utilize Funds to Guarantee a Portion of the Loan Losses to the Local Banks • Have 10-Year Repayment Terms from Local Banks Including One-Year Moratorium

31. E P S NERGY ERFORMANCE ERVICES EPS EEP Fund Profile • Repay in Local Currency • Managed by individuals who have previous private sector project financing experience • Provide Fast Loan Approval - “IEEPFP” • No Government intervention and procedures • Require use of IEMVP

32. E P S NERGY ERFORMANCE ERVICES EPS Benefits of IEEPFP & Fund • Establish Commercial Mechanism for the Financing of EEPs in International Markets • Create Local In-Country Banking Staff Trained in Project Financing of EEPs • Eliminate Currency Devaluation Risks

33. E P S NERGY ERFORMANCE ERVICES EPS Benefits of IEEPFP & Fund • Provide Incentive to Implement EEPs • Deliver Long Term Savings thru IEMVP • Create Commercial Lending Sector for EEPs • Provide a Conducive ESCO Environment

34. E P S NERGY ERFORMANCE ERVICES EPS Benefits of IEEPFP & Fund • Provides a Method to Aggregate EEPs • Provide a Reliable CO2 Reduction Progam • Create a Fund that Will Sustain over Time