Deloitte Consulting LLP August 2012 Positioning P3 for Success and Applications for Energy Sustainable Energy Workshop 2012 Deloitte Consulting LLP August 2012

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Contents Positioning P3 for Success Definition of P3 A Case Study and Lessons Learned Applications for Energy Strategic Considerations P3 Execution Challenges Solutions

Positioning P3 for Success

Definition of P3 I P3 enables an overall energy and sustainability strategy and the definitions are broad A public-private partnership, or P3, refers to a contractual agreement formed between a government agency and a private sector entity that allows for greater private sector participation in the delivery of public projects. Compared with traditional procurement models, the private sector assumes a greater role in the planning, financing, design, construction, operation, and/or maintenance of public facilities.

Definition of P3 II At the Federal level, there are lesser-known tools in the P3 toolbox that can be used to great affect Government | Commercial Partnership Description Alliance Agreement Alliance Agreements are legal documents between one or more parties, for the purpose of competitive intelligence, drafting documents or to get information about transactions within a particular industry or sector. Public-Private Ventures A special-purpose public/private venture refers to a business entity that is created by public and private parties for a single specified purpose and whose activities are predetermined by the contracts and other arrangements. Enhanced Use Lease for R&D Test-bed An EUL is a contract calling for the lessee (user) to pay the lesser (owner) for use of an asset. Patent License Agreement A license to commercial companies to utilize patented government-developed technology commercially. The government retains the rights to use the technology for government purposes. Government | Non-profit Partnership Description Memorandum of Understanding (MOU) A bilateral agreement between parties, indicating an intended coordination and collaboration between agencies, rather than a legal commitment. Memorandum of Agreement (MOA) Document written between parties to cooperatively work together on an agreed upon project or meet an agreed objective (Can also be a legal document that is binding).

A Case Study and Lessons Learned I A successful P3 can come together through many different types of transacting mechanisms Deloitte served as strategic advisors to the Government of Bulgaria on the long-term concession of Bulgaria’s Black Sea Coast airports. We performed an options analysis in close consultation with the Government, proposed amendments to the enabling environment for P3, assisted the Government to create a core base of stakeholder support, managed interactions with strategic investors, assisted in the conduct of the competitive tender, and built the capacity of the Civil Aviation Authority to be a strong partner for this P3. The Government received 4 proposals from leading airport development groups, and accepted the proposal from Fraport, the international arm of the Frankfurt International Airport, with an estimated total value in excess of $500M USD, while securing the long-term development of these strategic assets.

A Case Study and Lessons Learned II Establishing governance up-front helps to ensure a successful transaction and subsequent operate environment Project Development and Implementation: Pre-feasibility activities Due Diligence: legal, environmental, technical and social Developed capital expenditure plan for 10-years Identified problem with Civil Aviation Act Financial Analysis Developed traffic forecast and financial modeling Clear projections on key issues: future costs /returns to public sector and user charges International Market Study At the macro-level by sector Detailed review of individual aviation projects Options Analysis Public vs. private operation Issue: To bundle the airports to make more attractive

A Case Study and Lessons Learned III Selecting the optimal framework is a first step to a functioning governance model for the P3 Selecting a Model

Applications for Energy

Strategic Considerations I ERCOT faces some difficult supply challenges in the near-term future According to the most recent ERCOT capacity report, reserve margins are forecast at less than 10 percent by next year ERCOT, May 2012 Coal and natural gas make up the largest share of generating capacity in Texas with more reliance on gas expected in the future ERCOT, May 2012

P3 Execution Challenges I Breaking down barriers to P3 execution requires tenacious problem solving Future Energy Prices Developing a strategic view of future prices is critical to success Above or Behind the Meter Direct interaction with the grid will be one of the larges and most tangible sources of value for the P3. The P3 should be structured to optimize the strategic objectives of both parties in the transaction. Own or Lease Asset ownership comes with risk and will greatly impact pricing considerations Risk Management Establishing a governance model that can last the duration of the lifecycle Contracting The federal government has an array of available tools but their use is complex Mandates versus Value Selecting the optimal balance of mandates versus value will drive tactical considerations such as the type of contracting vehicle used. $.05 per kwh price electric $50M annual energy cost 3% annual energy goal 1055 GWh annual energy consumption Raising Capital New funding sources require networked outreach to stakeholders 727,485 metric tons of carbon emitted per year

P3 Execution Challenges II NIST Supplemental 135 has serious analytical shortcomings, which can lead to faulty P3 pricing Measures of future prices are based on census zone, which has little direct applicability to electric markets South Region According to NIST forecasts, electricity escalators are flat out to 2022, excluding general inflation

P3 Solutions II Even before considering spot prices and DR opportunities, long-term energy economics in Texas yield potential Our analysis shows that TRE South could see significant price increases by 2030 with more than a doubling of prices from today’s level in nominal terms. With large generating capacity needed in the region, a number of pricing assumptions should be evaluated to determine future strategy.

P3 Solutions III Although energy prices are local, energy markets are integrated and have global reach In today’s world, local decisions quickly bump up against international factors. Long-lived P3 assets will be impacted by these factors well into the future.

P3 Solutions IV International markets could be knocking at America’s door; what are the scenarios to consider? A recent Deloitte analysis forecasts a marginal affect on domestic gas prices as a result of LNG imports. Despite varying worldviews, strategic flexibility enables strong organizations. Impact of LNG Exports on Average US Citygate Gas Prices Price Impact by Region As compared to the NIST 135 census regions, local markets and regions are a key factor in forecasting future prices. Source: Deloitte MarketPoint

P3 Solutions V With a compelling and targeted value proposition, sources of capital reach beyond traditional buckets Tried and true P3 tools for energy will be a major source of project funding with ARRA funds expended While not typically a source of outsized returns, energy project financing can go a long way to solving the asset / liability mismatch facing the U.S. and other developed economies

Solutions V Structured processes help drive execution through the transaction phase and beyond Sample Level 0 Process Steps for PPA and EUL Select Agent Issue Info Request Issue Quals Request Develop RFP Issue RFP Administer RFP Evaluate Proposals Award Design Project Construct Project Commission System M&V Performance End Oversight Level 0 Process Steps 13 PPA Develop scope Notice of Opp. Issue Notice of Opp. Evaluate Proposals Select Contractor Lease and Mgmt. Plan Issue Lease Design Project Construct Project Commission Project M&V Project End Oversight Level 0 Process Steps 12 EUL Source: Federal Energy Management Program

Conclusion Energy and sustainability strategy drives capital budgeting decisions and P3s support and enable execution After designing a project that best meets an organization’s strategic goals and objectives there are many P3 options that can support successful implementation and operations. Careful consideration is required to ensure that both parties achieve the maximum risk-adjusted value from the projects while ensuring the transaction gets done and service is maintained.

Thank You

For more information Alexander Kasuya Manager, Deloitte Consulting akasuya@deloitte.com www.deloitte.com www.deloittemarketpoint.com