Business Models and Best Practices for

Energy Efficiency Investments

Joyce M. Ferris – Blue Hill Partners LLC

Sean O’Neill – Transcend Equity Development

Zach Axelrod – Skyline Innovations

Jim Thoma - Green Campus Partners

1

It’s not about the money

2

Blue Hill Partners

Experienced investors in energy

efficiency and sustainability technology

and service businesses

3

Through our portfolio companies we have

extensive experience with large

property owners

Office

4

Higher Education Government

http://upload.wikimedia.org/wikipedia/commons/3/3c/Yale_Art_and_Architecture_Building,_October_20,_2008.jpg

Owner’s dilemma

College or

University

Technologies

Services

Capital Students

and faculty

?????

ResourcesCampus

community

Buildings and

infrastructure

Sustainability

The solution

College or

University

Technologies

Services

Capital

Buildings and

infrastructure

Sustainability

Students

and faculty

Campus

Energy

Efficiency

Initiative

ResourcesCampus

community

Barriers to deploying energy efficiency

and sustainability

• Lack of businesses with integrated

solutions approach

• Lack of innovative capital for enabling

businesses with integrated solutions

approach

7

Property owners want solutions not

products

8

VS

VS

Power Purchase Agreement

allowed the solar industry to

sell electricity not solar

panels

Charging by the minute

allowed telecom industry to

sell communication, not cell

phones

Lack of efficiency in

driving efficiency

9

Funding new business

models for driving energy

efficiency and

sustainability

10

Key attributes of new business model

Funded solutions

No adverse balance sheet impact

Transparent process

Risk allocation

Customized and innovative approach

11

Cracking the Energy Efficiency Code for Privately Owned Real Estate

June 1, 2011

13

Buildings are the major drivers of energy use, the

largest driver in urban areas.

CO2 Emissions by Sector, New York City 2005

77%

3%

20%

Buildings

Transit

On-Road Vehicles

14

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1919 or Before

1920 to 1945

1946 to 1959

1960 to 1969

1970 to 1979

1980 to 1989

1990 to 1999

2000 to 2003

Sq

uare

feet

(Millio

ns)

US Commercial Buildings by Year of Construction

Most buildings in the U.S. are old.

72%

15

Privately owned large buildings represent a

~$100 B market for energy efficiency.

ASSET CLASSBldgs(MM sf)

Retro-

fitted to

date

$/sf to

retrofit

Market

size($ MM)

Office Bldgs > 50,000 sf 5,612 15% $6 $28,621

Enclosed Malls 1,681 15% $7 $10,001

Educational Buildings 3,207 15% $8 $21,808

Healthcare 2,468 15% $8 $16,782

Multifamily > 50 units 4,688 15% $3.5 $13,947

TOTAL $91,159

16

Energy systems in most of them are often original

for three key reasons.

Leases make the landlord

responsible for capital.

Tenants get operating

savings from retrofits.

$1 Operating Savings ≠ $1 NOI

5-year Simple Payback ≈ 10-year Landlord Payback

Prohibition of Transfer or Encumbrance.

The sale, transfer, disposition or

encumbrance, whether by operation of law or

otherwise, of all or any part of the Mortgaged

Property without the written consent of

Beneficiary shall constitute a default

hereunder.

Debt Carrying Capacity

Capital Needs

17

Common thread underlies these three barriers -

obligations on the balance sheet.

Commercial &

Residential

•Violation of mortgage

•Encumbrance to sale

Universities & Hospitals

•Negative impact on credit rating

•Reduced access to capital

Multi-tenant Commercial

•Financing ≈ lease

• Lease = capital, not operating

•Split incentive

On

Balance

Sheet

Debt

18

Conventional approaches cannot solve these

problems.

Lease purchase finance is on balance sheet debt

Savings “guarantee” is not a credit enhancement

Very expensive deployment model

19

MESA addresses all three barriers by selling

energy efficiency as a service.

Privately

Owned Building

Pay utility bills

Approve/reject

proposed modifications Propose building

modifications

20

Contract

Duration

How MESA Works

21

Utility

Charges

Savings

Potential

How MESA Works

22

Utility

Charges

Savings

Potential

How MESA Works

23

Utility

Charges

Savings

Potential

How MESA Works

24

Project

Funding

How MESA Works

25

Why does MESA work?

Asset

Income

OperatingExpenses

NOI

(inclusive of energy costs)

MESA

NO SPLIT INCENTIVE - MESA a GAAP auditable operating expense

NO LEVERAGE BARRIER – no debt or liens to violate mortgage

BALANCE SHEET NEUTRAL – no impact on host balance sheet

26

MESA is a proven transaction vehicle and carbon

reducer.

Savings Performance

Average 30% savings across ~40 retrofits

Baseline is the MESA bill. IPMVP Option C is the billing process.

Transcend installs real-time Active Energy Management at its expense

Accounting Validation

▪ Off balance sheet to host property

▪ GAAP valid operating cost, not capital

Pressure tested through multiple transactions, 30+ buildings

Validated by internal opinions for publicly held companies

27

What does MESA accomplish for a landlord?

Expense neutral retrofit

• Tenant pass-throughs unchanged

• Cost recovery language – not used

Increased Yield

• Replaces landlord capital expenditure

• Very economically attractive

28

Characteristics of a MESA candidate building.

Energy usage

> $2.50/gross sf net of

submeters

> 75 kBTU/gross sf

Energy Systems

Heating and/or cooling

centralized, not floor-by

floor

HVAC expense

allocated pro rata, not direct

metered

Leases (if any)

Large proportion of

modified gross or net

leases

Turnover does not exceed

40% in a given year

29

In Chicago, PACE funds have been repurposed

to back MESA.

4/21/2010 DOE awards $25 MM in ARRA funds for PACE to CMAP

1/28/2011 CMAP issues RFP for commercial and industrial retrofits

4/20/2011 Awards $9 MM to Transcend for loan loss reserve to support C&I Program

Providing Efficiency as a Service to the

Small to Medium Commercial Market

Zach Axelrod, CEO

June 1, 2011

About Skyline

Founded in November 2009 with a customer-centric focus:

Customers need cold air, hot water, light – not electrons or BTUs.

Skyline provides these services on a per-consumption basis

in an easy, turnkey, guaranteed savings format

Skyline focuses on energy saving needs and

challenges of mid-sized businesses

SOLUTION

IMPLEMENTATION

PROBLEM

IDENTIFICATION

LONG-TERM

MANAGEMENT

• Energy critical, not

core to business

• No dedicated energy

specialist

• Incremental effort for

non-behavioral

solutions

• Capital access and

spending priorities

• Assume performance

and payback risk

• Ongoing maintenance

expenses

• Energy savings as a

service

• Cool air, hot water,

lights on at lower

marginal rate

• Outsource complexity

with turnkey solution

• Zero capital outlay

• Guaranteed savings

model

• Maintenance and

monitoring included

BA

RR

IER

SK

YLIN

E

Mid-commercial market characteristics

DECISION-MAKING SPEED

RESIDENTIALSMALL-MID

COMMERCIAL

MUNICIPAL +

UTILITY

VALUE TO OUTSOURCED

TECHNOLOGY SELECTION

PROJECTS OF

FINANCEABLE SIZE

ATTRACTIVE PROJECT

ECONOMICS

✔✔

✔✔

✖

✖

✔✔✖

✔✔✖

Deploying savings to mid-sized businesses

LARGE C&ISMALL-MED

COMMERCIAL

TRANSACTION COSTS

PROJECT VOLUME

AUTOMATED FINANCING

HIGH LOW

PROJECT CUSTOMIZATION LOW HIGH

PROFITABILITY

DRIVERS

LOW HIGH

HIGH LOW

COMPETITIVE FRAMEWORK DO NOTHING MULTIPLE PROVIDERS

TARGETED PROJECT SIZE $50,000 - $500,000 OVER $1,000,000

DESIRED SOLUTION TARGETED MEASURES COMPREHENSIVE

Delivering efficiency -- efficiently

FOCUS

EXECUTE

OPTIMIZE

SCALE

Focused providing highly

monitored solutions targeted

to specific industry verticals

and short sales cycles

Highly replicable project

development with finance

and operations automation

to enable rapid scaling

Extensive system

monitoring and data

analytics for continuous

optimization of project

performance

Enterprise-class operations

management to minimize

transaction costs and

execute projects profitably

Drive continuous improvement in deploying efficiency to preserve margins

Further long term opportunity from profitably

delivering meaningful savings today

• Up-sell potential: evolving from individual to bundled solutions

• Less competition: bidding against the status quo (begrudgingly do it

yourself)

• Long term contracts: entrenched as energy advisor with ongoing contact

The value of packaged, financed efficiency solutions for the mid-sized

commercial segment extends far beyond implied cost-of-capital

Development, Investment and Financing of

Energy Efficiency and Distributed Generation Projects

June 1, 2011

Green Campus Partners, LLC ▪ Raritan Plaza I ▪ 110 Fieldcrest Avenue ▪ Edison, NJ 08837 ▪ (732) 917-2300

About GCP

38GCP Confidential

GCP is a highly specialized energy project development and investment firm

focused on EE and DE projects serving institutional clients with energy

intensive facilities.

GCP principals have closed more than $5 billion of energy projects utilizing

equity, tax advantaged equity, structured project financing and private and

public debt (taxable, tax-exempt and tax credit bonds).

GCP has structured and funded more than $300 million of energy projects

since the firm’s founding in April 2009.

GCP’s principals have deep experience providing financing solutions to

healthcare and higher education clients.

GCP is a portfolio company of Hudson Clean Energy Partners, a $1.5 billion

private equity fund headquartered in Teaneck, NJ.

GCP is a member of NAESCO, ACORE and the US EPA CHP Partnership

GCP Business Model

39GCP Confidential

Project Types

• Energy Efficiency

• Renewable Energy (Distributed Solar Wind, Biomass, Bio-Gas, LFGTE and Small Hydro)

• Distributed Energy (CUPs, Combined Heat & Power and District Energy Plants)

• Facility Infrastructure

Client Segments

• Healthcare & Higher Education

• Federal, State & Local Governments

• Public Education

• Investment Grade Corporations

• Municipal Utilities

Capital Raising

• Strategic & Project Consulting

• Financial Advisory & Structuring

• Financing Arrangement & Private Placement

• Capital Markets Solutions

GCP Investment & Project Finance (Asset Ownership)

• Energy Savings Agreements (Energy Efficiency)

• Power Purchase Agreements (Renewables)

• Utility Service Agreements (CUP & CHP)

Energy ProjectCo-Development &

Investment

Co-Development Business Model

40GCP Confidential

• Financial development & modeling

• Transaction structuring &

documentation

• Contractor management

• Project ownership & management

• Project capitalization

• Tax credit & incentive monetization

• Project administration

• Regulatory & legal compliance

• Project development, engineering

and design

• Equipment & technology planning &

procurement

• EPC contracting and construction

management

• Sub-contractor and vendor bidding,

selection and management

• O&M with performance guarantees

Co-

Development

Team

Design

Architect

Engineer

Legal

Tax/Acctg

Regulatory

Contractor(s)

End-Use Client(s)

Strategic Options

41GCP Confidential

Building owners typically have two strategic options

for financing energy projects:

1. Direct Investment “Ownership Model”

a) Cash purchase or debt financing

b) Typically provides lowest cost of ownership

c) Consumes capital and debt capacity

2. Third Party Investment “Service Model”

1. Outcomes procured via services agreement

2. Maximize value of tax and production incentives

3. Operating expense - ideally off balance sheet and off-credit

Ownership Model Funding Options

42GCP Confidential

Capital Allocation and Cash Purchase

Tax-exempt Debt

GO or Revenue Bonds

Private Activity Bonds

Municipal Lease

Tax-exempt Lease or Installment Purchase Agreement

Taxable Debt

Construction/Permanent Loan

Equipment Lease

Tax Credit Bonds

CREBs, QSCBs and QECBs

Service Model Overview

43GCP Confidential

Customer enters into a Services Agreement (ESA, PPA or USA) with GCP

ProjectCo

ProjectCo enters into a Site Lease with Customer to ensure unrestricted access to,

and control over the Project

Customer has no Project ownership control or fixed purchase option

ProjectCo has all rights, risks and responsibilities of Project ownership

ProjectCo contracts with a contractor to engineer, procure and construct the

Project

GCP capitalizes ProjectCo to fund its acquisition of the Project

The Customer makes volumetric, unit priced payments to ProjectCo for all services

delivered but otherwise has no fixed payment obligations

The transaction typically has an accretive effect on Customer’s income statement

without requiring capital investment

Customer has no minimum payment obligation, capacity charge or “take or pay”

arrangement but must take services on a “first-use” basis

Service Agreement Characteristics

44GCP Confidential

Site Control – Customer conveys site control to ProjectCo via site lease.

Right to Use – Customer has no right to use or control of the plant.

Ownership – ProjectCo has full ownership including equity at risk, control

over the operation of the plant, potential for economic losses and gains, etc.

Executory Services Contract - the parties have ongoing and relatively

equal obligations to perform throughout the term of Service Agreement.

Unit Pricing – host Customer and any additional off-takers pay unit prices

for services received from the Project.

Contingent Payment Obligations – Customer has no “take-or-pay”, fixed

capital cost recovery or other minimum payment obligations.

Measurable Outputs – ProjectCo produces and sells measurable services

(energy savings, electricity or thermal energy) to Customer(s).

Fulfillment of Obligations - ProjectCo can fulfill its obligations, at its cost,

via alternate sources of services to the Project itself.

Transfer of Project Title – Service Agreement has no fixed-price purchase

option or provisions for automatic transfer of title to the Customer.

Basic Service Agreement Structure

45GCP Confidential

Project Company

EPC Contractor

Client Investor(s)GCP as

Developer & Sponsor

Advise &

ManageDevelopment

Agreement

Utility or Savings

Payments

Invest

Site Lease Payments

Utility or Energy Services

AgreementSite Lease

O&M Contractor

Contact Information

Joyce Ferris - Blue Hill Partners LLC

joyceferris@bluehillpartners.com

Sean Neil – Transcend Equity Development

Sean.Neill@transcended.com

Zach Axelrod – Skyline Innovations

zaxelrod@skylineinnovations.com

Jim Thoma – Green Campus Partners

jim.thoma@greencampuspartners.com

46

mailto:joyceferris@bluehillpartners.commailto:Sean.Neill@transcended.commailto:zaxelrod@skylineinnovations.com