Dave Birr, President Synchronous Energy Solutions, Inc.

1. Evaluating and Managing Project Financing Dave Birr, PresidentSynchronous Energy Solutions, Inc.

2. Outline • Separation of Agreements • Project Construction • Non-Appropriation Risk • Project Term • Savings Guarantees • Security Interest • Rising Energy Prices and Interest Rates

3. Project Financing Considerations • Level of technical detail necessary to obtain financing • Nature of security interest (collateral) provided • Limited to extended terms of financing • Credit worthiness of site

4. Project Financing Considerations • Credit worthiness of ESCO • Coincidental timing of financing with project commencement • Role, if any, of performance guarantee

5. Separation of Agreements • Performance contract and financing contract must be: • Separate and stand-alone documents • No right of offset against lease payments • No obligations assumed by lender • Payment commencement not tied to project completion

6. Project Construction • Payment and Performance Bonds • Required by statute in many jurisdictions • Covering total project cost • Listing lender as additional insured • With reputable insurance company • Escrow Agreement • Customer and lender approve draw requests • Disbursements to ESCO or subcontractors • Escrow earnings to customer • Acceptance certificate upon project completion

7. Term of Contract • Savings guarantee should match financing term • Useful life of measures • Operational life • Technological obsolescence • Fixtures to long-life buildings

8. ESCO Savings Guarantee • Viewed as additional (not primary) protection • Can customer make lease payments without savings? • Credit quality is the focus (due to non-appropriation provision) • Are utility rebates also guaranteed by ESCO?

9. ESCO Savings Guarantee • Can the ESCO honor the guarantee? • Credit profile of ESCO • Past performance of ESCO projects • Shortfall procedure • Lenders prefer “pay first, resolve later”

10. COST FACTORS FOR PROJECT FINANCING • Performance risk (i.e., % stipulated savings and quality of technical savings analysis) • Termination risk (i.e., facility closing) • Experience and credit strength of ESCO

11. COST FACTORS FOR PROJECT FINANCING(continued) • Length of term • Transaction costs • Percentage of projected savings which are guaranteed

12. COMMERCIAL AND INSTITUTIONAL ENERGY EFFICIENCY PAYBACK ACCEPTANCE RATE (REVEALED PREFERENCE) Based on 485 Case Studies Reported in Energy User News

13. KEY CHARACTERISTICS OF PROJECT FINANCING • Short transaction cycle • Easy to execute and occurs quickly after technical approvals are obtained • Flexibility of financing • The use of third party tax exempt financing offers customized structures to maximize agency benefits

14. KEY CHARACTERISTICS OF PROJECT FINANCING • Use of standardized financing documents • Need to be familiar and acceptable to lenders • Construction progress payments • Standard industry practice to permit ESCOs to receive progress payments during construction

15. KEY CHARACTERISTICS OF PROJECT FINANCING • Time delays in securing approvals • Inform fiscal personnel about the project early in the process to avoid delayed execution of project financing and project implementation

16. Tax-Exempt Lease / Purchase • Available for qualified tax-exempt (Governmental) obligors • IRS Section 103(a) • Section 501c3 - utilizing a conduit issuer or other public authority • Does not create long term debt • Includes non-appropriation language • No voter approval required • Fixed rate upon commencement • No issuance costs • Limited legal fees • Shortest timeframe to complete financing

17. Tax-Exempt Lease / Purchase • Terms up to 20 years—consistent with state ESPC legislation • Provides 100% of project funding needs • Design, installation, progress payments • Payments commence upon project completion • Simplified documentation

18. Tax-Exempt Lease / Purchase • Master contract for multiple locations or project phases • Commonly used to finance: • Boilers, chillers, controls, lighting, etc. • Distributed generation assets • Renewable energy projects • Other assets classes such as healthcare, technology, transportation • Flexibility

19. Financing Considerations • Typical Considerations • Bundled Solution • Budget Neutral (or positive) Cash-flow • Costs Payable from Savings • No Up-Front Payments • No Mortgage • Minimum Impact on Existing or Future Indebtedness • Integration Within Capital Budgeting Process Identify Project and Financing Objectives Up Front

20. FINANCING THE PROJECT • Mandate evaluation of ESPC before approving capital funds for energy projects • Require analysis of the cost of delay for energy efficiency projects • Encourage transaction cost economies by combining capital funds with ESPC financing • Allow agencies to retain a greater share of excess project savings as an incentive to do energy performance contracts

21. FINANCING THE PROJECT • Protect operating budgets from cuts when pledged to pay for an ESPC • Minimize transaction costs by doing large projects • Reduce procurement transaction costs for ESCOs • Require preliminary technical proposals and technical samples from completed projects

22. FINANCING THE PROJECT • Allow operations and maintenance savings when clearly documented. • Consider the LCC of replacement equipment • Develop clear, efficient, and effective procurement procedures • Develop standardized documents for project reviews and evaluations

23. FINANCING THE PROJECT • Streamline approvals process • Clearly define the roles of agencies • Standardize procurement and contracting procedures and documents • Reduce approvals and reviews to the minimum consistent with due diligence

24. FINANCING THE PROJECT • Focus technical resources on the quality of project reviews • Executive Order of the governor should designate the lead ESPC agency and hold them accountable • Key staff meet with their peers with successful ESPC programs • Train staff thoroughly

25. FINANCING THE PROJECT • Shorten the contract development and approval process  • Bundle procurement of multiple facilities for the same agency • Retain experts for proposal evaluation and project technical negotiation • Develop simple checklists for project compliance with state program requirements