2. 2012 ADC ANNUAL CONFERENCE| PAGE 2 2 Successful Energy Projects MODERATOR: Seth Kirshenberg, Partner, Kutak Rock, LLP, Washington, DC SPEAKERS: Robert Helwig, Deputy Director, Office of the Secretary of Defense, Facilities, Energy, and Privatization Directorate, Washington, DC Kim H. Burke, Managing Director, Jones Lang LaSalle, Washington, DC Robert Eidson, Senior Energy Advisor, Booz Allen Hamilton, Arlington, VA Peter Flynn, Vice-President, Bostonia, Boston, MA

3. DoD Energy Issues and Opportunities August 6, 2012

4. 4 2012 ADC ANNUAL CONFERENCE| PAGE 4 Facilities Energy Core Strategy Reduce Demand Expand Supply Enhance Security Advance New Technology

5. 2012 ADC ANNUAL CONFERENCE| PAGE 5 5 Why does DoD do renewable energy? Renewable energy is a key element of our strategy in part because it contributes to the security of the energy supply on our installations

6. 6 2012 ADC ANNUAL CONFERENCE| PAGE 6 Key Energy Goals Legislative and Executive Mandates – EPAct 2005, EISA 2007, NDAA – EO 13423, EO 13514, Presidential Memorandum Key Targets  Facility Energy Efficiency  Reduce facilities energy intensity by 30% by 2015 and 37.5% by 2020 (2003 baseline)  Federal government will enter into $2 billion worth of facility energy efficiency performance contracts (by the end of calendar year 2013)  Facility Renewable Efficiency  Consume 7.5% of electric energy from renewable resources by 2013  Produce or procure 25% of facilities energy from renewable sources by 2025  Each Service has a 1GW renewable energy capacity goal

7. 7 2012 ADC ANNUAL CONFERENCE| PAGE 7 Methods to Achieve Energy Goals 1.Appropriated Funding  Can include MILCON or a subset of MILCON, funds from the Energy Conservation Investment Program which is focused exclusively on energy.  Operations and Maintenance (O&M) and other funds can also support a variety of energy projects.  Appropriated funding is constrained in the current budget environment and can’t - by itself - meet the needs for the Department. 2.Power Purchase Agreements – (40 U.S.C. 501 / FAR Part 41)  This is the basic authority to procure energy. However, there is a time constraint of ten years which can make purchasing renewable energy difficult.

8. 8 2012 ADC ANNUAL CONFERENCE| PAGE 8 Methods to Achieve Energy Goals 3.“Enhanced Use Leasing” – (10 U.S.C. 2667)  Authorizes the Service Secretaries to lease non-excess property.  EULs can be used for large-scale renewable energy projects but must include payment (in case or in-kind) by the lessee of consideration for an amount not less than the fair market value of the lease interest.  If an EUL is related to energy production, then a certification by ODUSD (I&E) is required prior to issuing a contract solicitation or other lease offering as per 10 U.S.C. § 2662.  An EUL can not be developed primarily for government use.  The term of an EUL can be for more than five years if the Secretary concerned determines that a lease for a longer period will promote the national defense or be in the public interest. General Counsel has explained that the ceiling for an EUL is the useful life of the asset being considered.

9. 9 2012 ADC ANNUAL CONFERENCE| PAGE 9 Methods to Achieve Energy Goals 4.Energy Savings Performance Contract (ESPC) – (42 U.S.C. 8287)  This enables a Service Secretary to enter into contracts for the sole purpose of achieving energy savings and benefits ancillary to that purpose.  The Military Departments may enter into a multiyear contract under this authority for a period not to exceed 25 years. 5.Energy Service Agreements (ESA)  ESPCs can incorporate the purchase of on-site renewable energy, if the result is lower energy consumption and costs. However, this requires special consideration.  ESPCs with an ESA, requires Office of Management and Budget (OMB) review as per a Aug 16, 2011 memo. The Services must submit the EPSC to OSD and work through OSD for OMB review.

10. 10 2012 ADC ANNUAL CONFERENCE| PAGE 10 Methods to Achieve Energy Goals 6.Utility Energy Service Contract (UESC) – (10 U.S.C. 2913)  Under this authority a utility is authorized to install, maintain, and finance energy and energy related improvements for the Department. The utility in question is able recover the resulting energy savings to pay for the project over a period of time.  DoD may enter into UESCs for up to 10 years. 7.Utility Privatization – (10 U.S.C. 2688)  Enables a Secretary of a military department to convey a utility system, or part of a utility system, under the jurisdiction of the Secretary to a municipal, private, regional, district, or cooperative utility company or other entity.  The term for this authority has a ceiling of 50 years.

11. 11 2012 ADC ANNUAL CONFERENCE| PAGE 11 Methods to Achieve Energy Goals 8.2922a Special Agreement Authority – (10 U.S.C. 2922a)  This authority enables a Service Secretary to enter into a multi-year contract for up to 30 years for energy production facilities on real property or on private property.  It also includes the purchase of the energy produced from such facilities.  Invoking this authority requires ODUSD (I&E) approval.  The costs of contracts under this authority for any year may be paid from annual appropriations for that year.  This authority is solely for the Department of Defense.

12. 12 2012 ADC ANNUAL CONFERENCE| PAGE 12 Approval Levels VehicleApproval Level Appropriated FundingService level or in the case of ECIP, OSD and Congressional level Power Purchase AgreementsService level Enhanced Use LeasingOSD level (for projects that include land with an annual fair market value of $750K+ requires OSD Certification) Energy Savings Performance ContractService level Energy Service AgreementsOSD level, OMB review Utility Energy Service ContractService level Utility PrivatizationService level 2922a Special Agreement AuthorityOSD level

13. 13 2012 ADC ANNUAL CONFERENCE| PAGE 13 Use of Third Party Financing DoD owned assets currently represent less than 20 percent of renewable energy portfolio –DoD will continue to make some investments in renewable energy, either as stand-alone projects through ECIP or by incorporating renewable energy into or normal facility construction and O&M investments Vast majority DoD’s renewable energy comes from systems financed and operated by outside investors –The geothermal plant at China Lake represents almost half of the total renewable energy either purchased by the department or produce on DoD installations To reach renewable energy goals, DoD will depend almost entirely on its success with third party financing mechanisms like power purchase agreements and associated land-use agreements to build large scale renewable projects

14. 14 2012 ADC ANNUAL CONFERENCE| PAGE 14 Issues Withdrawn Land Complexities  Certain projects may require interagency agreement between the Department of Interior and DoD  Issues regarding withdrawn land terms and revenue sharing can delay or permanently disrupt a project Unstable Project Economics  Unknown future price of electricity, RECs, grid auxiliary services  Expiration of government supported subsidies/financial support such as the Department of Treasury 1603 grant program Limited Transmission Access  Transmission constraints can be caused by either a lack of physical infrastructure or congestion in the existing infrastructure State RPS and Policy Constraints  States may slow or stop their legislative/regulatory demand for RE. Other factors such as interconnection policy can also impact project development Long Project Lead Times  Large RE projects can take many years to complete and can require burdensome permitting and development costs and delays (e.g., NEPA requirements)

15. 15 2012 ADC ANNUAL CONFERENCE| PAGE 15 Examples of Approved 10 U.S.C. § 2922a Projects  Marine Corps Air Station Miramar 3 MW – Landfill Gas 15 year contract Received USD AT&L approval on February 15, 2011  Naval Air Weapons Station China Lake 3.78 MW – Solar PV 20 year contract Received DUSD(I&E) approval on September 27, 2011  Marine Corps Air Ground Combat Center 29 Palms 1.16 MW – Solar PV 20 year contract Received DUSD(I&E) approval on December 29, 2011  Davis-Monthan Air Force Base 14.2 MW – Solar PV 25 year contract Received DUSD(I&E) approval on June 12, 2011

16. 16 2012 ADC ANNUAL CONFERENCE| PAGE 16

17. Structuring Transactions Issues and Opportunities August 6, 2012

18. 2012 ADC ANNUAL CONFERENCE| PAGE 18 18 What is Scoring?  Scoring is the process of measuring the budgetary effects of pending and enacted legislation against a baseline (i.e., changes in government spending or receipts)  CBO/OMB baseline is a projection of federal spending and receipts under current law  Measures spending actions taken by:  Legislative Branch  Keeping track of legislation that affects spending or receipts  Holding Congress accountable for its power of the purse  Executive Branch  Measuring execution of Congressional appropriations (apportionment and accounting)  Holding Agencies accountable for spending actions

19. 2012 ADC ANNUAL CONFERENCE| PAGE 19 19 Purpose of Scoring Scoring has two functions: – Information: To determine the effects of proposed legislation (i.e., changes to current law) on the budget – Enforcement: To assist in enforcing budget rules Spending and revenue levels associated with budget resolution (Budget Act) Statutory limits on discretionary spending (Budget Control Act of 2011) Constraints on increases in deficit as a result of new direct spending and revenue legislation (Statutory PAYGO Act of 2010)

20. 20 2012 ADC ANNUAL CONFERENCE| PAGE 20 What Governs Scoring? Baseline: Section 257 of Balanced Budget and Emergency Deficit Control Act of 1985, as amended (“Gramm-Rudman-Hollings”) Scorekeeping Guidelines: Joint explanatory statement accompanying the conference report to the Balanced Budget Act of 1997  Set of 16 rules/guidelines to ensure scoring is consistent with established conventions (and with requirements of budget rules)  Reviewed annually by scorekeepers; any changes must be agreed to by all scorekeepers Other Guidelines:  The Constitution  OMB Circular A-11  Antideficiency Act (codified in Chapters 13 and 15 of Title 31 of the United States Code)  Congressional Budget and Impound Control Act of 1974 (Public Law 93-344), as amended  Budget Enforcement Act of 1990  Government Performance and Results Act of 1993

21. 21 2012 ADC ANNUAL CONFERENCE| PAGE 21 Who Participates in Scoring? House and Senate Budget Committees Congressional Budget Office (CBO) – Focus:  LEGISLATIVE: What is the cost of new legislation? CBO checks to see if legislation exceeds congressional spending limits Office of Management and Budget (OMB) – Focus:  LEGISLATIVE: Checks to see check if legislation exceeds Congressionally-legislated limits  BUDGET EXECUTION: Looks at how much of an agency’s appropriations will it have to use when it executes on Congressional appropriations (such as for leasing)  Guidelines for Capital projects are found in OMB Circular A-11, Appendix B  Implements Antideficiency Act – no agency can obligate the Government to pay more than the amount appropriated

22. 22 2012 ADC ANNUAL CONFERENCE| PAGE 22 Capital VS. Operating Expenditures Operating Costs: Costs that keep the government “operating" Capital Costs: Expenditures that are equivalent to the purchase of a capital, or fixed asset (such as a building, piece of machinery, aircraft carrier). OMB A-11 defines capital assets as: land, structures, equipment, intellectual property that are used by the Federal government and have an estimated life of two years or more.

23. 23 2012 ADC ANNUAL CONFERENCE| PAGE 23 CBO “Third-Party Financing” (from CBO Economic and Budget Issue Brief, June 1, 2005) Third Party Financing: “Intermediary other than the U.S. Treasury can raise money in private capital markets on behalf of a federal program…” Transactions include:  Project financing (example: when bonds are issued to raise capital to build military family housing or government office buildings)  Contractor financing (example: when contractors fund energy-conservation improvements in federal buildings)  Customer financing (example: when municipal utilities prepay the Tennessee Valley Authority for electricity) “Relying on third-party financing generally increases costs to the government.” CBO determines whether a project is governmental on a case-by-case basis, if the government:  Initiates the project, selects the developer, and specifies the project’s parameters;  Has significant economic interests as an owner, beneficiary, or lessor;  Retains substantial control over the project’s assets, business operations, and management; and  Serves as the sole or primary source of capital backing the project’s financing.

24. 24 2012 ADC ANNUAL CONFERENCE| PAGE 24 How does OMB Define “Alternative Financing”? OMB Circular A-11 http://www.whitehouse.gov/omb/circulars_a11_current_year_a11_toc requires:http://www.whitehouse.gov/omb/circulars_a11_current_year_a11_toc Agencies are required to submit to their OMB representatives the following types of leasing and other non-routine financing proposals for review of the scoring impact: Any proposed lease of a capital asset where total Government payments over the full term of the lease would exceed $50 million. It should be assumed that options to renew will be exercised. All financing proposals that are non-routine in nature and involve unique or unusual concepts or characteristics such as those listed below:  Outlease-leaseback mechanisms;  Establishment of public-private partnerships or limited liability corporations;  Issuance of debt by a third party that includes an explicit “full faith and credit” guarantee of debt repayment by the Government or an implicit guarantee of repayment from Federal funds that removes a substantial amount of the investor’s risk.  Special purpose assets for which there is no real private sector market;  Enhanced-use leases with leasebacks with annual payments above threshold levels  Projects constructed or located on Government land

25. 25 2012 ADC ANNUAL CONFERENCE| PAGE 25 Examples of Alternative Financing Transactions Debt backed by full faith & credit of the US Capital leases Public/private partnerships Share-in-savings contracts Enhanced use leases Outlease/leasebacks Common characteristic – defer cash payments while giving the Government the use of assets Source: OMB

26. 26 2012 ADC ANNUAL CONFERENCE| PAGE 26 Public/Private Partnership Defined Applies only to government lease-backs from public/private partnerships with substantial private participation. Includes special purpose entities for which the Government is a beneficiary. Substantial private participation means: – Non-Federal partner has majority ownership share of the partnership and its revenues; – Non-Federal partner contributed at least 20 percent of the total value of the assets owned by the partnership; and – Government has not provided indirect guarantees of the project, such as a rental guarantee or a requirement to pay higher rent if it reduces its use of space. Source: OMB

27. 27 2012 ADC ANNUAL CONFERENCE| PAGE 27 Public/Private Partnerships (Continued) Total value includes assets contributed by Government (except land) and all improvements made to the asset. Contributions by the non-Federal partner of cash, real assets, and loans for which the non-Federal partner is responsible for repayment count towards meeting the 20 percent threshold. Federal direct loans or loan guarantees do not count towards the 20 percent threshold. Source: OMB

28. 28 2012 ADC ANNUAL CONFERENCE| PAGE 28 “Traditional Scoring” OMB: If part governmental, considered totally governmental Treat borrowing by the partnership as Federal borrowing Require agency to obligate BA equal to the amount borrowed CBO: Scores full cost (plus additional costs, such as costs of borrowing) when scoring proposed legislation

29. Successful Energy Projects: Issues & Opportunities Robert Eidson, Booz Allen Hamilton August 6, 2012

30. 2012 ADC ANNUAL CONFERENCE| PAGE 30 30 Successful Energy Projects  For today’s discussion, large-scale energy projects are defined as follows:  On federal property  Financed through private investment  The federal host may or may not be an off-taker  Focus is on renewable energy and/or natural gas-fueled projects

31. Why are Today’s Chances for Success Better?  Increased requirements for energy-secure critical missions  More states are enacting renewable portfolio standards for utilities  OMB wants the DoD energy programs to succeed  There are an increasing number of project successes:  VA Medical Centers – 5 co-gen projects with natural gas  Recent Air Force and Navy successes in the West and HI  Fort Detrick, Fort Carson, etc.  Executive branch leadership motivated by mandates, DoD policies and strong commitments to make a difference!  Army’s Energy Initiative Task Force  Navy’s 1 GW programs  Air Force EUL and PPA successes

32. What are the Key Issues to Success  What are the economics?  What is the installation paying today? Forecasted in the future?  Are there state incentives (RPS), tax credits, etc.  Who is buying the energy?  It is a credit-worthy entity – such as the federal government?  Are they willing to make a long-term commitment?  Who is delivering the energy?  Are there requirements for up-time performance  Is the owner/operator credit-worthy?  How is mission affected?  Will the interconnection of the project enhance energy security?  Will the energy facility be compatible with mission?

33. What are the Key Issues to Success (cont’d)  What are the Interconnection and regulatory issues?  Are there regulatory limits to interconnection with the local grid?  Are there opportunities for net metering?  What are the real estate issues?  Is there adequate land to the technology being deployed  What are the NEPA requirements?  Can the service reduce risk by completing NEPA prior to acquisition?  How will the energy be acquired?  DoD’s PPA authority provides for construction and operation of energy facilities on DoD land – and for DoD to acquire the energy through annual appropriations for up to 30 years

34. Other Enabling Authorities & Vehicles  Land-use authorities: Enhanced-use leases (10 USC 2667), Easement authority (40 USC 1314)  10-year utility authority (FAR 41)  Community-based approaches: Federal Grant & Cooperative Agreement Act (31 USC 6305)  Performance contracting authorities for energy efficiency and renewable energy: ESPC and UESC authorities (10 USC 2913)

35. Program Challenges  OMB “scoring” is budgetary policy (Circular A-11, Appendix B) that governs and limits long-term obligations undertaken from assets built on federal land  State RPSs not always conducive to structuring competitive renewable energy power rates  Transmission constraints in areas of high resources limit acquisition opportunities  DoD’s budget challenges generally not willing to pay a premium for renewable energy

36. The Way Forward  DoD, DOE and DOI are working on collaborations to improve chances of success and share resources.  Working with local communities and utilities is critical to success  Communities have similar requirements and issues and are usually motivated to collaborate with military installations  Engaging with industry is important to the long-term success of any sustainable energy program  Centralized approaches with high-level support are key program success  One-off approaches will not achieve the level of success required to meet the stringent Presidential and DoD mandates

37. Questions? Bob Eidson Booz Allen Hamilton Eidson_robert@bah.com 423-773-1496

38. Successful Energy Projects: Issues and Opportunities Peter Y. Flynn, Bostonia Partners August 5, 2012

39. 2012 ADC ANNUAL CONFERENCE| PAGE 39 39 Presentation Overview  Renewable Energy Financing Background and Basics  Key Drivers of Renewable Energy Economics  Importance of Long Term Authority  Financing & Contracting Options  White Sands Missile Range, U.S. Army, ESPC  Additional Considerations for Renewable Energy Projects  Conclusions

40. 40 2012 ADC ANNUAL CONFERENCE| PAGE 40 Bostonia Introduction  Founded in 1998, Bostonia Partners is a full-service investment bank with primary market focus in energy and real estate, and additional services in structured finance and advisory  Bostonia Global Securities, the broker/dealer affiliate, provides direct access to investors and daily participation in the capital markets  Bostonia ranked seventh among all banks for domestic private placements in 2009 – 2011

41. 2012 ADC ANNUAL CONFERENCE| PAGE 41 41 Renewable Energy Financing Basics  Energy financing is “project finance”  Cash flow driven  Non-recourse debt  Projects are capital intensive (low cash flows vs. high project costs) with important requirements  Investment grade developer and Power Purchase Agreement counterparty  Large projects required to justify tax equity structure / achieve economies of scale  Proven Technologies  Capital stack typically consist of various sources  Debt (supported by PPA revenue and contracted RECs)  Tax equity if renewable energy project  Sponsor equity

42. 2012 ADC ANNUAL CONFERENCE| PAGE 42 42 The Key Drivers of R.E. Economics  Generation Market with electricity prices to support Power Purchase Agreement at “grid parity” with or without escalators  Renewable Portfolio Standard – Renewable Energy Credits (RECs)  Federal and State Tax Incentives RPS Policies Average Price per kWh

43. 2012 ADC ANNUAL CONFERENCE| PAGE 43 43 Importance of Long-Term Authority  Based on 10 MW Solar Project @ $3.50 / Watt All-in Cost

44. 2012 ADC ANNUAL CONFERENCE| PAGE 44 44 Importance of Long-Term Authority  Based on 10 MW Solar Project @ $3.50 / Watt All-in Cost

45. 2012 ADC ANNUAL CONFERENCE| PAGE 45 45 Financing and Contracting Options PPAUESC / ESPCEUL

46. 2012 ADC ANNUAL CONFERENCE| PAGE 46 46 White Sands Missile Range, NM  Project Overview  $18,000,000 ESPC for US Army in White Sands, New Mexico  Largest military installation in the US  ESPC includes 4.465 MW Solar PV array (ground mount and carport) and an Energy Management Control System  Solar array will produce 10.4 million kWh and contribute approximately 10% of total energy consumption at the installation  Project will create total cost savings of approximately $44 million over the 25-year contract term based on escalation of electricity rates  Siemens Government Technologies will construct and operate the system, completion is expected in December 2012  Financing Overview  Unlike a traditional ESPC, private ownership of the energy assets allowed the project to monetize federal tax credits  Long-term Energy Services Agreement (ESA) allows Government to acquire solar power without upfront capital or a buy down of project capital cost  Title to non-solar ECMs will vest with the Government at acceptance  Government will pay same utility rate it currently pays and will own the RECs

47. 47 ESPC Financing Structure

48. 48 ESPC RE Financing Structure

49. 49 Additional Considerations  Potential issues & challenges  PPA pricing  Termination for convenience  Recapture during tax benefit period  RECs  Insolation and shading  Potential Complexities  Site control  Relocation  Roof Replacement  Novation/assignment  Procurement method  OMB scoring  State utility laws  Additional Value  Renewable Energy Credits (RECs) – ownership, price, and value  Energy Security

50. 2012 ADC ANNUAL CONFERENCE| PAGE 50 50 Conclusions  Long-term contracting authority is essential for financing  Efficient way to raise capital and keep energy pricing low  ESPC is an important tool for meeting Federal energy goals and achieving energy security  Established program and traditional ECMs can subsidize renewable energy projects  RE projects are complex with steep learning curves  Important to assemble the team early – including the financing  Projects need a “champion” at the installation  Work with a public/private mentality and remain adaptive and flexible  Markets, incentives, and technologies drive projects  Important to understand federal and state incentives, standards, and energy prices in order to determine complete revenue picture  Important to determine what technologies are best suited to specific geographic conditions

51. 2012 ADC ANNUAL CONFERENCE| PAGE 51 51 Peter Y. Flynn Executive Vice President 617-226-8103 Direct 617-437-0150 Main pflynn@bostonia.com Contact Information 51