CHP Finance Sub-committee Meeting No. 3Wednesday July 9, 2014

Attendees: John Boyd, John Christmas, Tom Abele, Rob Wright, Bill Lunsford, Bruce Hepke, Lissa McCracken, Cheryl Eakle, Greg Guess, Lee Colten, Errol Wagner, Mark Stallons, Eric Mathis, Robert Chatham

Agenda: 10 min – Welcome, Introductions, set-up 20 min - Hannon Armstrong Presentation

John Christmas from Hannon Armstrong discussed a funding structure that has been shown to achieve off credit treatment for the public end-user. (Please see attached Memo describing an energy services agreement (ESA).)After the recession it has been a difficult time to raise tuition or taxes to pay for capital expenditures. The ESA is a way for the end user to pay for energy upgrades without affecting borrowing capacity that is needed for regular projects such as roads. Rating agencies including Moody’s and S&P have interpreted this mechanism as “off credit” for the end user.Some examples of projects include Baltimore schools and the city of Louisville. Louisville is able to undertake a $26 million project that is in phase one of a long term sustainability plan while not risking other capital priorities.ESAs are more expensive than traditional financing, but the end user is absolved of liability in the event that anticipated savings are not met. ESAs can be structured as long as 25 years while most tax exempt projects run out at 15 years. Hannon Armstrong has taken on $100 million worth of ESA projects since inception in 2013.

15 min – Presentation Discussion – AllRobert Chatham – Can you contrast ESA vs a power purchase agreement (PPA)? John Christmas – An ESA is a performance contract paid for by savings, so efficient cogeneration may be a viable option. Construction money from the lender is placed in an escrow account for construction, maintenance, measurement and verification. During operations the saved amount serves to pay back the loan. If there is a shortfall in savings then the contractor pays the difference. Harshaw Trane and Johnson Controls are contractors that have worked with Hannon Armstrong. Customer has no out of pocket expenses.After the term of the loan, the customer may pay a fee to assume ownership.Hannon Armstrong will come up with a more detailed flow diagram showing the contractual obligations versus a traditional tax exempt loan.Lee Colten – If the end user defaults is there a lien placed on the property? No. The lender is very specific about what projects are chosen. For example no colleges with under 1000 students enrolled are accepted.

If the end user does not own the equipment, is the contractor seen as a utility? Payments are not based on units of energy.Errol Wagner – I would recommend requesting a ruling from the Public Service Commission (PSC) on that question. Lee Colten proposed to write a letter to the PSC requesting a staff opinion on the issue. Wagner – If the contractor is a utility such as Owen Electric, then the PSC will review the contract and any associated rate changes.

20 min – Tracking Sheet Review and Update Policy Issues – Policy Committee has not discussed the referred issues yet.

Thermal Sales - Mark Stallons – Inland Container/International Paper buys steam from the Spurlock Plant. (Fleming Mason Cooperative) Power Purchase Agreements – See PSC Position Memo Definition of a Utility – See Referenced KRS

USDA RED LG Program? Schedule a subject matter expert to discuss? Biomass CHP eligible for Incentives for Energy Independence Act (IEIA) KEDFA?

ThinkKY.com RUS financing? Schedule a subject matter expert to discuss? (DEDI will follow up) ESPC – Eastern Illinois Case Study (John Boyd will pass along case studies)

Energy Savings Agreements (See above) Shared Savings Agreements

Critical ROI Input Parameters – Natural Gas Pricing Presentation tentative for Aug. 13th

Industrial Revenue Bonds – Update August meeting Rebates – Equip. Manufacturer or Utility? (No programs currently in place) Utility cost Calculations – Presentation August 13th Feed in Tariffs – Possibility from TVA? TVA has formed a stakeholder group

for DG. 15 minutes - Roundtable Discussion, New Items, Additional Feedback 10 min – Next steps and action item recap

Next Call scheduled for August 13th (Second Wednesday every month) Interim communications: E-mail John Boyd and Greg Guess (may also copy team) DEDI will work with Hannon Armstrong and others to draft a request for PSC staff

opinion of CHP financing scenarios John Boyd will pass along case studies for CHP ESCs Committee will research into CHP relevance of USDA, KEDFA, and RUS programs

and request a subject matter expert where possible to discuss with the team Hannon Armstrong will distribute a more detailed process flow for ESA VS

traditional More research for thermal sales opportunities

http://southeastchptap.org/