Risk Management Class

8/11/2019 Risk Management Class

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Risk Management 1

Enron Energy ServicesRisk Management 101

April 12 2000


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p 000

Risk Management 2

Risk Management

What Everyone on the Front End of Deals Should Know

Not Just Theory.The Application of Risk Management In

EESOs Pricing, Contracting and Delivery to Limit the

Potentially Immense Risk Associated With Our Long TermContracts

What i s Risk Management?


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Risk Management 3

Todays Agenda

Deal Structure Overview - Frameworkfor How the Pieces Fall Together

Commodities

Volumetric Risk

Assets - Energy Savings

Operations & Maintenance

Deal Issues


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Risk Management 4

DEAL STRUCTURE

OVERVIEW


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Risk Management 5

Client Baseline Costin Traditional Model,Including:

Savings

Commodities Equipment O & M Admin Capital

Traditional Model Innovative ModelTime

Clients New Baseline Cost

ContractExecution

EESCost Curve

(Managing Inputs in aComplex Supply Chain)

(Managing Results - Light,Conditioned Air, Process Energy,Managed Space - As They Impactthe Core Business)

ClientBaseline

Cost Level

Base Economics Contain Risk

Key Risks :

What Are theObstacles AssociatedWith Driving CostsFrom A to C?

Who Is in Control ofThose Obstacles?; Is itEES, Customer orother External Forces?What Happens toCapital Spent in anUnwind?

(A)

(B)

(C)


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Risk Management 6

Synergies of the Cost Equation

V E x R E Assets x Cost + + V L x R L

UTILITIES CAPITALEXPENSES

MAINTENANCEEXPENSES

+ +TOTALENERGYBASELINE

= ADMIN.+

Scope

Energy InfoManagement,Commodity &

Negotiation

CapitalProjects &

DSM

Operations &Maintenance

FacilityManagement

Operations &Maintenance


Negotiation


Negotiation


Negotiation


Negotiation

CapitalProjects &

DSM

CapitalProjects &

DSM

CapitalProjects &

DSM

FacilityManagement

Internaional Comprehenive

I n t e r n a

t i o n a

lOperations &Maintenance

U . S .

C o m p r e

h e n s

i v e

V a l u

e


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Risk Management 7

Predominant (Asset) Deal TypesRisk Management = Deal Structure

Shared SavingsGenerallyCommodities dealswith performancebased projectcomponents. Commodities:Fixed Or Indexed,Pay for ActualVolumes

Projects:Shared Savings -Customers Option to

Proceed O&MGenerally N/A,can be added

Example:Owens Corning

Fixed PriceGenerally Fully BundledDeals. Customer Paysa price equating to adiscount off of baselinecosts.CommoditiesFixed Or Indexed,Pay for HistoricalVolumes

ProjectsSavings Accrue toEESOs Benefit

O&MIf in, adds SynergyIf Out requirescustomer commitment

Example:Simon Properties

Actual PlusGenerally FullyBundled Deals.Customer pays for Actual consumptionPlus the savingsdocumented from

projects and/or O&M Commodities:Fixed Or Indexed,Pay for ActualVolumes

Projects:

Verified Savings -EESOs Option to Proceed

O&MCan be In or Out

Example:Tyco


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Risk Management 8

COMMODITIES

RISK MANAGEMENT


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Risk Management 9

What is Risk?

1) The likelihood or probability that an event occurs AND

2) The consequences or impact if it does occur

Risk Management is the systematic approach ofcontrolling or influencing either or both of thesecharacteristics of risk

There are many different fields of risk management (e.g.financial, environmental, health and safety, etc.)Risk vs. Reward - every endeavor entails risk; objective isto quantify the risk and evaluate against the reward


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Risk Management 10

How Does EES Manage Financial Risk?

Identify all elements of risk associated with atransaction (e.g. commodity supply, capital, O&M, etc.)

Assign profit/loss responsibility to individual groupscalled risk desks for each element of risk

Monitor and report risk positions on a daily basisthrough the use of risk books

Maintain open risk positions within corporatelyestablished limits

Properly structured transactionsComprehensive contract terms and conditions

Active and innovative hedging of open risk positions


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Risk Management 11

How do Risk Desks Manage Risk?

Know the risk position their book is incurring for eachtransaction (e.g. long, short, swap, index, location, timeperiod, etc.)

Identify all of the key components that affect the riskelement they are managing (e.g. market price, quantity of

consumption, pattern of consumption, etc.)Identify all of the key variables that affect each riskcomponent (e.g. market price => intersection of supply anddemand curves and all of the underlying factors that affecteach curve)

Enter into additional transactions that offset or hedge openpositions

All risk management is done on a portfolio basis not on aindividual transaction basis


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Risk Management 12

Characteristics of Risk EES Manages

Can usually only influence the consequences if anevent occurs not the probability (e.g. change in marketprice => we do not have market power and thereforemust manage long/short open positions)

An exception is our behind the meter activities andservices which do provide a vehicle by which we canmanage some risk variables (e.g. DSM can affect theprobability that load consumption and load shapechange)


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Risk Management 13

EES Commodity Risk Management

EES commodity refers to the provision of electricity, naturalgas, fuel oils, water/sewage to a retail customers meter (i.e.supply side or in front of meter) Electric commodity reflects an all -in price at the meterinclusive of both wholesale electricity in deregulated,competitive markets and regulated, monopoly local utility

distribution company (UDC) delivery charges (transmission,distribution, transition costs, public programs) EES internally manages wholesale commodity riskseparately form utility riskWholesale commodity risk is managed in much the same

ways as ENA manages commodity riskUtility risk is unique to EES and managed through manyinnovative and creative approaches (e.g. utilityrepresentation, government/regulatory affairs intervention,DSM, retail index, etc.


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Risk Management 14

Variables of Electric WholesaleCommodity Risk

Fuel Prices (Natural Gas, Oil, Coal)Daily/Seasonal Weather (Weather Channel, InternalForecast, Earth Sat, Energy.net, National Weather Service)

Unit Maintenance/Unplanned Outages

Previous Day Electricity Prices

Transmission Congestion

Environmental, Recreational and Navigation Factors

Hydrologic Forecasts (Snow Pack, Reservoir Levels)Legislation/Rule Changes

Daily Position Report


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Risk Management 15

Development of the Forward PriceCurves

Short Term

Over-the-Counter (OTC) and NYMEX PriceDiscovery

Long Term (Where Price Discovery Is Not Available)

Supply

Generation Built and RetiredWeather PatternsFuel Mix

DemandEconomyIncomePower Intensity


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Risk Management 16

Energy Purchasing

Wholesale: West - 25 MW (6 days/wk x 16 hrs/day)

East - 50 MW (5 days/wk x 16 hrs/day)

Well defined markets trade hourly, Daily, Weekly (Balance ofa week), Monthly and Yearly

Newly Emerging Retail Markets: EES is Making Longer Term Markets to Match our retail

structures

EES is Making Markets in Less than Standard Blocks, 16on-peak 8 off-peak (Super Peak and Shoulder Peak)


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Risk Management 17

Market Developments

Power Exchange (PX) - Takes supply bids from sellers anddemand bids from sellers, Ranks bids and submits to the ISO apreferred least cost dispatch schedule, Publishes a marketclearing price..

Independent System Operator (ISO) - Controls combinedtransmission facilities of participating utilities, Coordinatesscheduling and real-time balancing, Manages transmissioncongestion, Procures ancillary services

Competing Power Exchanges (APX) - Separate from state

mandated PX, 168 hour forward market for energy, ancillaryservices, transmission rights - The APX is a continuousClearing Market


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Risk Management 18

Market Developments

EnronOnLine - Virtual trading floor with tight bid offer spreadsfor customers that want to trade with ENA

Feb 16 DowJones

EnronOnline has been averaging more than 1,000 trades a day.Since its launch in November, Enron posted more than $8.5billion in trades. At the rate of about $3 billion in trades permonth, Enron could log more than $36 billion in trades in 2000."This makes us one of the largest e-commerce companies outthere," Lay said.

EnronOnline initially traded U.S. and Canadian natural gas. Sinceits launch, it has expanded to coal, pulp and paper, andweather risk, among other things. By March, Enron plans totrade Australian Power, Lay said.


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Risk Management 19

Traded Products

Swaps (Daily, Monthly, Yearly or Longer)

Spreads (PV/COB)

Rolls (Q3 COB 00 for 01 )

Options (Call, Put, Swaption)

NYMEX Futures


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Risk Management 20

Commodity Risk Management

EES Manages its own separate Portfolio

Similar to Q1,Q2 1999 arrangement w/closer ENA/ECTcoordination

EES does not have to buy from ENA, can buy from market

EES has personnel on the 31st floor to manage/hedgecommodity risk within relatively tight position limits


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Risk Management 21

NYMEX Futures ContractPJM, Cinergy, Entergy, Palo Verde, COB

Trading Unit:

Futures: 736 megawatt hours (Entergy,Cinergy, PJM (COB, PV 864mWh) delivered over a monthly period.Options: One NYMEX Division electricity futures contract.

Trading Hours:

Futures and Options: 10:30 A.M. - 3:30 P.M. for the open outcry session. After-hours trading will be conducted via the NYMEX ACCESSelectronic trading system Monday through Thursday, 4:15 P.M. to7:15 P.M.

Trading Months:Futures: 18 consecutive months.Options: 12 consecutive months.


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Risk Management 22

NYMEX cont.

Price Quotation :

Futures and Options: Dollars and cents per mWh. Minimum Price Fluctuations: Futures and Options: $.01 (1) per mWh ($7.36 per contract). Maximum Daily Price Fluctuation Futures: $3.00 per mWh above or below the preceding day's

settlement price (the basic maximum fluctuation). Expandedlimits will apply when the contract trades at the maximum limit.Options: No price limits.

Last Trading Day:

Futures: Trading will terminate on the fourth business day priorto the first day of the delivery month.Options: Expiration will occur on the day preceding theexpiration of the underlying futures contract.


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Risk Management 23

NYMEX cont.

Exercise of Options :

By a clearing member to the Exchange clearinghouse notlater than 5:30 P.M. or 45 minutes after the underlyingfutures settlement price is posted, whichever is later, on anyday up to and including the options expiration.

Options Strike Prices:

Increments of $1.00 per mWh with five below and fiveabove the at-the-money strike price.

Delivery Rate :

2 MW throughout every hour of the delivery period (can beamended upon mutual agreement of the buyer and seller).


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Risk Management 24

NYMEX cont.

Delivery Period :

Sixteen on-peak hours: hour ending 0700prevailing time to hour ending 2200 prevailingtime. (This can be amended at the time ofdelivery by mutual consent of the buyer andseller.)

Scheduling:

Buyer and seller must follow transmissionprovider scheduling practices.


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Risk Management 25

NYMEX cont.

Delivery Unit : Is determined by the number of days inthe month (23 on-peak days, delivery unit is 736(23days x 16 hours/day x 2 mW/day)

Exchange of Futures for Physical: The buyer orseller may exchange a futures position for a physicalposition of equal quantity by submitting notice to theExchange. (Also traded on bi-lateral market)


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Risk Management 26

open

close

Support

Resistance

Moving AverageConvergence /Divergence(MACD)


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Risk Management 27

Ancillary Services and DeliveryRelated Costs

Delivery Related Costs which may be levied on theScheduling Coordinator Ancillary Services

Regulation Service or Frequency Control, SpinningReserve, Non-Spin Reserve, Replacement Reserves,Black Start Capability, Voltage Support, SchedulingService

Other Delivery Related Costs

Transmission, Distribution, Transmission Congestion,Transmission and Distribution system losses,Generation Capacity Charges, Imbalance EnergyCharges, Unaccounted For Energy (UFE) costs, ISO orPX administration charges


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Risk Management 28

VOLUMETRIC

RISK MANAGEMENT


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Risk Management 29

Consumption Risk

In Fixed Price Deals. Consumption risk is the possibility that thecustomers actual energy usage is different fromthe forecasted energy usage, either in total, or

month to month.

500,000

750,000

1,000,000

1,250,000

1,500,000

jan feb mar apr may jun jul aug sep oct nov dec

Expected

ActualThe expectedenergy usage is

based on meanconditions but actualenergy usage willfluctuate around thismean.

KWH


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Risk Management 30

Consumption DeskValue Creation

Volumetric GuaranteesPrimary Value Presents a Appealing Proposition To Certain Classes of

Customers To Remove Future Volatility

Allows for More Value From Commodities Desks Capture More Value by Allowing Commodity Desks to Lock in

Volumes Instead of Using Swing Options. EES Can GiveCustomer a Higher Discount Since Consumption Premium Will BeLess Than Cost of Swing Options.

Allows for More Value From EAM/AOPs DesksEnables EAM/AOPs Desks to Better Predict Volume SavingsWhich Can Provide a Larger Discount to Customer.


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Risk Management 31

Fixed Consumption Position Where it Can Be Applied

500,000

750,000

1,000,000

1,250,000

1,500,000

1,750,000

2,000,000

jan feb mar apr may jun jul aug sep oct nov dec

Baseline

Expected Consumption

When customers revenues and costs are relatively stable

When variability of usage/production is low

Baseline usage is higher than future expected usage (ex.Energy usage is weather driven and extreme weather yearcan be used as baseline.)

MallsOffice Buildings

Chain Stores


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Risk Management 32

Fixed Consumption Position Where It Shouldnt be Applied

Wherever There Is Unpredictable Variability in Consumption

Where Load During Baseline Year Is Lower Than Is Expectedto Continue (Due to Weather, Occupancy, Production, Etc.)

Industrials Generally Do Not Lend Themselves to FixedVolumetric Positions

150,000

160,000

170,000

180,000

190,000

200,000

210,000

j a n f e b m a r

a p r

m a y j u n j u

l a u

g s e p o c

t n o

v d e c

Expected Consumption

Baseline

Most Industrials

Customers in Flux


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Risk Management 33

Volumetric Collar Structure(Example for Electricity)

KWH

Baseline Volume

Volume after projects

Project Completion Date

Consumption Cap prior to projects Consumption Cap after projects

Time Deal Start Date

Impact of projects on load

Consumption Floor prior to projects Consumption Floor after projects

Customers pay fixed fee for services and commodities on a periodic basis as long

as their usage stays within a band. Above band, customers pay at market for thedifference. Below band, customers share benefits of reduced consumption .

k O i i 1


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Risk Management 34

Break Out Discussion Issue #1Moral Hazard

Fixed Price Deals:

Where a facility manager was incentivized to reduce energycosts prior to signing, that same facility manager can nowwaste energy with no recourse by EESO

For Example: Keeping Air Conditioning After Hours, Failing toTurn off lights

How can We Cure it or limit it?

Material Change by Facility

Set Restrictive Service Levels ( operating hours obligations ) Install elaborate monitoring and/or controls Charge a Risk Premium


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Risk Management 35

ENERGY ASSET

RISK MANAGEMENT

E A (AKA P j )


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Risk Management 36

Energy Asset (AKA Project)Value Proposition

Create Value by Extracting InefficienciesOut of Ignored or Underutilized AssetsInvest Capital

To Replace Outdated or Inefficient Equipment with Updated or New Technologies To Optimize Operations of Existing Equipment

Capture Synergy Provide Means to Coordinate Synergies Between Consumption and Procurement

Information Based Decision Making Gather and Manage Information (ie. metering) to Facilitate better informed

Decisions Apply Best-In Class Expertise & Best Practices Experience Deploying Appropriate Technologies & Operating Theories based on Full

Economic Impact (ie. Commodities volatility, life cycle cost, O&M cost) Scale

Apply EES Scale Advantages to Purchasing, Design and Systems.

E A


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Risk Management 37

Energy AssetRisk Elements/Mitigants

Overcoming Customers Business -As-Usual Decision Making EES Requires Nearly Full Decision Making Control Over Project Design Customer Generally Has Outdated Specifications and Opinions Customers Engineer Usually Needs to Justification to Keep Their Job

Avoiding Prescribed Approved/Non-Approved Project Types The Pre - Approved Project List Concept - Advantages & Pitfalls Limitations on Process/Process Support/Non-Process Functions

Timing of Deployment Are There limitations imposed on EES by the Customer Limiting Our Ability toInstall Projects on a Timely basis?

Are There Internal EES Constraints That Effect Timing of Deployment? Are There Technological or Regulatory Constraints the Effect Timing?

Gauging Magnitude of The Bet Depending on the Above Constraints, The Potential to Reduce Costs Is Gauged

Using Step by Step Process Shown on Following Slides


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Risk Management 38

EESTransaction

Fixed Price + Risk Premium

Delivery of ServicekWh/kW Savings Schedule

Customer

EAM Book

FacilityMgmt Book

Fixed UnitPrice

Deliveryof Service

CommodityBook

Fixed UnitPrice

Deliveryof Service

Capital Book

Fixed UnitPrice

Deliveryof Service

Fixed Price

Deliveryof Service

The EAM Book has Sold Something it Does not have. It sold a fixed amount of energy savings to the

Transaction. In exchange for this value, the Transaction gives the EAM Book a fixed price.The EAM Book adds value to the deal with minimal information managing risk on a portfolio basis.

EAM DeskPRE-CONTRACT


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Risk Management 39

EESTransaction

EAMBook

Fixed Price + Risk Premium

Delivery of ServicekWh/kW Savings Schedule

HVAC Project

Fixed UnitPrice

Deliveryof Service

Customer Fixed Price

Deliveryof Service

Lighting ProjetFixed Price

Delivery

of Service

Compressed Air Project

Fixed UnitPrice

Deliveryof Service

Post- Contract, the book makes itself whole (i.e. fulfills its contract) by purchasing projects

from a Service Delivery Group. The sum of the savings from these projects will hopefully be greater than the savings that the Book originally sold to the Transaction.

EAM DeskPost-Contract


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Risk Management 40

Key Concepts

Early Involvement of the Desks Clear Identification of Value Drivers & Limiters Creates

Better Internal & External Expectations and Strategies toMeet Our Goals

Understanding Where the Energy Is Used (I.E.The Energy Pie)

Total Energy Cost Alone Is Little Indication of SavingsPotential

One Primary Risk Mitigant is to Understand themagnitude of the cost we can effect.

Private Utility is Made of


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Risk Management 41

Private Utility is Made ofCommon Components

Operations of the Private Utility Vary Significantly By Industry Sector

EES Asset Modeling and Implementation Capabilities are Based OnExtensive Component Knowledge Across Many Industry Sectors

Cooling Lights Plugs

Steam Motors Air Handlers

Manufacturing Food

ProcessingCommercial

PropertyPublic

InstitutionFinancialServices

Under ly ing Compo nen t s Are Comm on

H ours ofOperation

Type ofAsset Used

Asset AgeEfficiencyControls


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Risk Management 42

Receiving Pasteurization Cooking &CoolingMelt Plastic

Resin Blow Molding

FLUID MILK PROCESS PACKAGING PROCESS

Lights

P R O C E S S

E N E R G Y U S A G E

LightsLightsPlugs

PlugsPlugsHVAC

HVAC

HVAC

HVACMotorsMotors

MotorsMotors

SteamSteam

Steam

Cooling

Cooling

Cooling

Cooling Comp. Air

Comp. Air

Motors

Energy Asset Pricing Model uses component knowledge to eliminates the need forspecific industry know

Understanding every complex manufacturing process is always necessary because theprocesses can be broken down into simpler common components.

Energy Consuming Components - Suiza


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Risk Management 43

HEATING COOLING LIGHTING MISC COOKING

BUILDING SERVICES PROCESS

P R O C E S S

E N E R G Y U S A G E

LightsPlugs

Fans

FansBoilers Motors

Energy Asset Pricing Model uses component knowledge to eliminates the need forspecific industry know

Lights Cooking

Simon Properties Shopping Malls are composed of common energy -consuming equipment . Most of this equipment canbe modified to optimize its base economics while simultaneously improving comfort and aesthetics.

Fans

Cooling

Energy Consuming Components - Simon

Asset Pricing Process:


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Risk Management 44

Step 1: Total Energy Spend

Step 2: Identify Significant Clusters

Step 3: Divide the Energy Pies per Cluster

Clusters Percent Cost AllocationVisit A1 - Heavy Process 7% 4,214,663$Visit A2 - Light Process 34% 19,357,554$Interviewed B Sites 20% 11,429,355$Unseen C sites 10% 5,741,696$California Sites 25% 13,847,398$Small Unsampled D Sites 3% 1,728,953$TOTAL 100% 56,319,620$

$ 56,319,620

Clusters Lighting HVAC Process Comp. Air Misc.Visit A1 - Heavy Process 13% 7% 61% 14% 5%Visit A2 - Light Process 15% 28% 29% 19% 8%Interviewed B Sites 23% 31% 26% 10% 11%Unseen C sites 45% 47% 0% 0% 8%California Sites 14% 59% 17% 0% 10%Small Unsampled D Sites 40% 45% 0% 0% 15%

Asset Pricing Process:Defining the Buckets

The Value: Blending Risk and Asset


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Step 4: Determine Gross Energy Savings by Component

Step 5: Determine the Costs (Simple Payback)

Clusters Lighting HVAC Process Comp. Air Misc.Visit A1 - Heavy Process 25% 12% 5% 22% 9%

Visit A2 - Light Process 19% 20% 3% 19% 9%

Interviewed B Sites 19% 20% 3% 19% 9%

Unseen C sites 19% 20% 0% 0% 9%

California Sites 7% 24% 0% 0% 9%

Small Unsampled D Sites 19% 20% 0% 0% 9%

Clusters Lighting HVAC Process Comp. Air Misc.Visit A1 - Heavy Process 4.54 4.70 4.54 4.83 3.79

Visit A2 - Light Process 3.69 3.75 1.84 2.41 3.81

Interviewed B Sites 3.96 3.87 1.85 2.41 3.79

Unseen C sites 4.00 3.87 - - 3.81

California Sites 3.98 3.93 - - 3.80 Small Unsampled D Sites 3.98 3.92 - - 3.80

Gross Savings Curve

Gross Capital Curve

How are the component curves developed...

The Value: Blending Risk and AssetManagement


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Risk Management

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Gross Savings Curveross Capital/Payback Curve

Air Compressors -A2 Sites

MeanSavings

SavingsUncertainty

(% +/-)

Total ProjectCost

SimplePayback

Capital CostUncertainty

(% +/-)

Annual Total Cost ofElectricity

End Use asa % of Total

Cost

Annual Costof Electricityfor End Use

Savings as a% of End Use

Cost

Macon, GA 190,603$ -40% 44,770$ 0.23 -30% 3,064,839$ 17.0% 521,023$ 36.6%

Mesa l, AZ 126,619$ -20% 887,233$ 7.01 -10% 1,766,222$ 20.0% 353,244$ 35.8%

Kingsway, OH 121,985$ -50% 120,274$ 0.99 -50% 1,282,500$ 23.0% 294,975$ 41.4%

Marshall, IL 30,633$ -40% 64,130$ 2.09 -40% 1,585,157$ 23.0% 364,586$ 8.4%

Aurora, OH 26,140$ -20% 62,557$ 2.39 -10% 2,207,568$ 22.0% 485,665$ 5.4%

Utica, NY 21,520$ -40% 60,500$ 2.81 -40% 1,848,864$ 23.0% 425,239$ 5.1%

Midl and, Ont -Stam pi n 9,802$ -40% 33,372$ 3.40 -10% 280,342$ 22.0% 61,675$ 15.9%

Mesa lI, AZ 0% -$ - 0% 3,482,258$ 20.0% 696,452$ 0.0%Fowlerville, MI 0% -$ - -20% 1,111,500$ 15.0% 166,725$ 0.0%

Auburn, NY 0% -$ - -40% 611,979$ 20.0% 122,396$ 0.0%

Hampton, VA 0% -$ - 0% 598,500$ 16.0% 95,760$ 0.0%

Total 527,302$ -37% 1,272,835$ 2.41 -17% 19,710,671$ 20.1% 3,961,928$ 19.0%

Curves Feed Into Pricing Model

Curve Development


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Risk Management

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Step 7: Run Model to Produce Risk-Adjusted Results

Step 6: Compute Net Annual Economics by Component

Frequency Chart

Certainty is 80.35% from 4.6% to +Infinity

.000

.007

.015

.022

.029

0

14.5

29

43.49

58

3.8% 4.4% 5.0% 5.6% 6.3%

2,000 Trials 3 Outliers

Forecast: Net Percent Savings (@50%)

Annual Gross Energy Savings 9,539,824$

Gross Capital Costs 35,555,663$Average Simple Payback 3.73 Capital Annuity Payment (6,277,842)$

Net Revenue Annuity 3,261,982$Commodity Baseline 65,675,894$

Gross Percent Savings 14.5%Net Percent Savings (@80%) 4.8%

Net Percent Savings (@ 50%) 5.0%Mid-Price (50%)

Offer-Price (80%)

Clusters Lighting HVAC Process Comp. Air Misc.Visit A1 - Heavy Process $26,738 $5,770 $27,508 $19,803 $5,765Visit A2 - Light Process $193,415 $372,165 $116,144 $413,318 $44,184Interviewed B Sites $145,008 $227,223 $59,757 $120,386 $38,133Unseen C sites $141,907 $173,308 $0 $0 $13,565California Sites $38,041 $590,887 $0 $0 $40,668Small Unsampled D Sites $38,285 $49,113 $0 $0 $7,674

583,394$ 1,418,466$ 203,408$ 553,508$ 149,989$

Deal Structure

Capital Costs

Gross Savings

Consistent Risk Adjusted Results


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Consistent, scalable, auditable approachVersatile by providing indicative pricing with little informationor detailed bottom-up pricing

Risk-based pricing distributions (bid/offer)

Directs efforts by identifying maximum potential value prior todispatching delivery capability

Continual improvement through updating price curves basedon experience and data collected

Advantages of Pricing Model


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Asset Resources and Capabilities

8 district across the US expanding worldwide

More than 150 in-house engineers

Relationships with more than 50 best-in-class consultants

Cross-functional processes in place to develop large-scaledeals integrating regional offices Development Managers/Pricing Managers

Centralized web-based information systems and knowledgesystems integrating business units

Technologies for remote building monitors and controls

Post-contract web-based project approval process

Best Practice Intranet Knowledge Base


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Best-Practice Intranet Knowledge Base

http://inet/energyservices/arm.nsf

Break Out Discussion Issue #2


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Break Out Discussion Issue #2Capturing Synergies

Structuring/pricing/delivering to Capture SynergiesSynergies Are Automatically Captured in Fixed Price FullyBundled DealsIn Shared Savings and Actual+ Deals, Specific MechanismsHave to Added to Capture Synergies

Its Not Always Straight Forward, For Example: Replacing an Electric Chiller at End of Life, With No Performance Incentive Action: Replacement at Lowest cost to meet maintenance budget Result: Slight reduction in Energy and Maintenance Costs

EESO Solution Under Bundled Approach: Action: EESO Invests additional capital to install dual drive chiller to arbitrage

energy costs and automates control of plant. Result: Energy, Operations and Maintenance costs are Significantly Reduced.

How Does EES Capture & Track The Appropriate Benefits? How Does the Deal Structure Effect the Customers Desires to Police our Savings Verification?


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Risk Management

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OPERATIONS

AND

MAINTENANCE

RISK MANAGEMENT

(aka AOPs)



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Operations & MaintenanceValue Proposition

Risk Quantified Maintenance

Reactive, Preventative, Predictive Maintenance and CapitalReplacement Optimized

Work Force OptimizationInsource vs. Outsource of Tasks Appropriate Skill Sets

Clustering Logistics Management (aka vendor management)

Centralized Call & Dispatch CenterCentralized Supply and/or Procurement of Goods and Services

Portfolio Management

NegotiationScale & ScopeLeverage

Synergies



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Risk Management

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Operations & MaintenanceRisk Elements

Baseline Information Can Be Difficult to Obtain - Potential todisagree on suitable baseline post-contractInheriting Deferred MaintenanceReplacement Capital Risk

Labor - Inheriting Limitations on FlexibilityService Levels - Finalized Post Contract - Risk is that We get held tohigher standards than occurred during baseline period - Difficult to Discover. Operational (ie. temperature, light levels, humidity) Executional (maintenance schedules, response times)

Liquidated Damages Tied to Failure to Provide Service LevelsInheriting Equipment that is not Code Compliant



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Risk Management

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Operations & MaintenanceRisk Mitigation

Number 1: Structure Limits Risk Most Effectively

Fully Bundling All Elements - Commodities, Assets, O&M, Capital - KeepsBoth Parties From Being at Odds.

Careful Baselining - If Its in the Baseline, the Cost Is Accounted For-Simple Catch-all Concept Requires Much More Than Accounting to Find the Holes.

Adding in Risk Premiums - The More Unrewarded Risk EESO Takes On,the Higher the Cost to the Transaction and the Lower the Customers Discount.Balance Is Key to Driving Value.

Material Change Clauses - Trigger a Reprice or Penalty in CertainCircumstances.

Deal Bifurcation - Structure in Ability For Either Party to End Just the O&MPortion If Agreement Is Not Reached by the End of Transition



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Operations & MaintenancePricing Process

Similar to EAM Desk, The AOPs Desk Has Sold Savings It Does Not Have

Primary Pricing Methodology Is Application of a Diagnostic Developed by AndersonConsulting

Achieving Savings Is Predicated on EES Ability to Close the Gap BetweenDiagnostic Results and Best Practices. For Full Benefits, Customer Needs toRelinquish Control Over:

Labor Force Preventative & Reactive Maintenance Procedures & Decision Making Capital Replacement Service Levels All O&M Budgets

As Opposed to EES Internal Engineering Staff Developing Projects for the EAMDesk, The AOPs Desk Relies on Third Party Contractors to a Great Extent to ObtainSite Specific Information That Feeds Into the Diagnostic

Separate and Distinct From Pricing, There Is a Need for Creation of O&M SalesCollateral to Demonstrate Details of EES Intended Scope


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DEAL ISSUES

DISCUSSION

Deal Issue #3


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Deal Issue #3Baselining

Baseline Methodology and Results Can Make or Break theDealBaselining Methodology Must be Set Forth In The Agreement

Subject Matter Experts Need Input on Creation of Baseline

First Pass at a Baseline is usually low - Its easier to misscategories than to have inadvertently included data

Deal Issue #4


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Deal Issue #4Service Levels

Operat ional Service Levels in Fixed Price Deal Required Temperature, Humidity, Light Levels, Steam

Pressure, Compressed Air Pressure, etc.

Customer Asserts Certain Service Levels claiming theserepresent the way business was conducted in the baselineperiod.

Some Historical Service Levels Are Very Difficult toSubstantiate

Existing Equipment may be incapable of meeting requiredservice levels

Cost to Meet the Asserted Service Levels can be substantiallyhigher than to meet the historical Service Levels

Deal Issue #4


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Service Levels Continued

Execut iona l Service Levels in Fixed Price Deal

Preventative Maintenance Schedules

Response Times

Notification Procedures

ReportingSimilar Issue: Customer Makes Assertion That They Have

Always Had a 30 Minute Response Time.

Historic Levels Difficult to Ascertain

New Standards Can Cost More to Deliver Than HistoricExecutional Service Levels

Deal Issue #4


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Service Levels Continued

Case Study: Simon Properties Group

Based on informal Spot Checking, it became clear that Asserted Service Levels were not being maintained

Two Solutions:

Built in a mechanism to discover and document ServiceLevel Exceptions Built in extensive Existing Conditions Language that

waived EESO obligation to meet Service Levels ifExisting Equipment is unable to achieve Desired Level

Code Compliance Risk, with 90 day discovery period

Required Mobilization of HSB to All Sites to discoverexisting violations

Deal Issue #5


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Replacement Capital

Should The Capital necessary to Replace equipment during the

contract term be based on the historical baseline?Should we provide a discount to the historical baseline?Can be a significant difference between our prediction of capitalnecessary to replace equipment on our watch, compared to historicalspending (ie. 3x)

Equipment Condition at End of Contract - How does customerbecome comfortable that we are not deriving savings by running theirequipment into the ground

Takeover = Turnover Methods to verify conditions are similar

FCI - Costly, subjective Cost of Catastrophic Replacement Insurance can be a goodindicator

Who Should Benefit from Consumption Savings?

Cl i Th ht


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Closing Thought

The Ultimate Risk Management Lies in the Art ofKnowing What You Are Doing.

The More Informed The Entire Deal and

Development Teams Are, The Greater

Our Ability to Identify and

Mitigate Risks.

Risk Management Class

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