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Transcript of 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
Energy InfoManagement,Commodity &
Negotiation
Energy InfoManagement,Commodity &
Negotiation
Energy InfoManagement,Commodity &
Negotiation
Energy InfoManagement,Commodity &
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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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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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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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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OPERATIONS
AND
MAINTENANCE
RISK MANAGEMENT
(aka AOPs)
Operations & Maintenance
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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
Operations & Maintenance
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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
Operations & Maintenance
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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
Operations & Maintenance
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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.