Energy Asset Monetization and Risk Shifting (CPE Eligible)

As the higher education and healthcare institutions face unprecedented challenges in the form of lower state support and increased operational costs, energy asset monetization and risk transference onto 3rd-party entities specializing in the maintenance of utility assets may be just the thing to help these institutions direct more funds toward their core "businesses."

Transcription:

Matthew Neuringer (00:08):

All right, good morning. Good morning. Everybody pumped for, so there was a slide that called this an Asset Monetization. Just to start, this is not an asset monetization, so this is a energy as a service project. So we're excited to talk about energy as service in that context. So we've got the Henry Ford Health slide up here. My name is Matt Neuringer and I'm a Partner at Orric and on behalf of Orric, we are extremely proud and excited to not only introduce but also facilitate today's panel, which less than a year ago was a transaction and an innovative financing structure that was just a twinkle in the eye of the Kiewit team and the rest of the Orric team as we were working through the procurement for this transformative and critical Henry Ford Health Detroit South Campus Central Energy hub project. As I mentioned, I'm a partner at or, and in particular I'm in our energy and infrastructure group in New York. Our team is about 150 lawyers doing energy infrastructure transactions and I think after this transaction I was anointed as an honorary member of our public finance group as well. But definitely save all your tough muni finance questions for Devin and Jenna and Chris in the audience.



(01:24):

You might remember me from past years bomb buyer infrastructure panels titled Energy to Service. Can we do it with tax exempt financing? Spoiler alert, this panel's going to answer that question and the answer is yes. And so we're here this morning to talk about the central energy hub project, which is a vital part of the larger redevelopment of the Henry Ford Health System's South campus. It's aimed at modernizing healthcare infrastructure and ensuring sustainability for future growth of the Henry Ford Health System. The central energy hub slated for completion in May of 2027 will serve as the backbone of the campus providing essential heating and cooling through a hot and cold water system that will tie into new hospital facilities through advanced technologies such as electrification, waste, heat recovery, and digital energy management. This morning, the moment you've all been waiting for will involve delving into the financing mechanisms behind the project, exploring the innovative procurement and bond structures that enabled this project's successful procurement to commercial and financial close in under 10 months. So we worked a few hours on the weekends from time to time. I think that's right. Today's panel will offer insight on how the financial framework has been designed to optimize costs, ensure long-term efficiency, and align with the strategic goals of both Henry Ford Health and the wider Detroit community. Alright, I've spoken enough so I'll introduce our panelists this morning. First is Lawren Green, Senior Vice President with Kiewit Development Company. I'll let Lawren introduce himself and then we'll move down the line.



Lawren Green (03:00):

Perfect. Thanks Matt. You can tell by the energy levels. There's a reason we chose Matt as the moderator here this morning. Lawren Green with Kiewit Development oversee our development investment in asset management activities across the US and Canada. Kiewit Developments, Kiewit's internal development and finance group. We invest balance sheet capital to support clients' projects that are being procured under a turnkey model where there's an equity requirement and we'll raise the debt as well. To date, we have not sold any of our investments, so we've made seven investments and still hold all of them. For those that don't know who Kiewit it is, we're one of the oldest North American construction companies founded in 1884. Last year we did just over 17 billion in revenue and we've got about 31,000 employees, both a mix of craft and staff. I think two things set us apart. I'd say having worked in private equity before qit and working with other contractors, our ability to self-perform. We are a craft-based contractor. We'll self-perform work and the other is the integration of our engineering. We've got two engineering hubs in Kansas City and Denver where we self-perform our engineering and be the engineer of record on our projects.



Matthew Neuringer (04:17):

Chris Hicks, President with Provident Resources Group.



Chris Hicks (04:20):

Good morning, I'm Chris Hicks, President of Provident. For those of you who are unaware of Provident, just given the infrastructure focus here at this conference, Provident is a national 5 0 1 C3 nonprofit partner. We are focused on a variety of core missions including healthcare, education and lessening. The burdens of government are kind of our primary focus as an organization. We're celebrating our 25th year and what better way to celebrate it than to try something new in the energy asset arena, which we're incredibly excited about with the Henry Ford transaction elsewhere around the country, we've done projects in I believe 27 states in the district. We have a little bit north of 5 billion in assets in our portfolio.



(05:10):

70% of that or so is in the education space. So we're very well known in the more traditional P three arenas for nonprofit finance, including privatized student housing. We've got 27,000 beds of that. But I think for purposes of this conference and for this audience, it's important to note that with multiple missions we have significant flexibility in the type of asset classes we can participate in. We've had the ability to do healthcare assets, parking assets, in this case, energy assets. Now we have a number of convention center hotel assets in our portfolio working in partnership with local government. And so we feel strongly that the nonprofit approach as a hybrid alternative between self-financing at the government level and traditional P threes is here to stay and is an alternative that's available to far more asset types and far more critical infrastructure assets than has been the case over the years. So very happy to be here. Thanks for having us and look forward to the conversation.



Matthew Neuringer (06:18):

Thanks Ben Djiounas from Managing Director at JP Morgan.



Ben Djiounas (06:23):

Great. Yeah, thanks Matt. Yeah, Ben Jonas active across infrastructure sectors and really pleased to be talking on this topic. We're the sole manager of the tax exempt bonds for Henry Ford Health Project, so



Matthew Neuringer (06:37):

Alright, thanks Ben. So now we'll get into the tough questions. We'll open up to Q&A as well, so we'd like to move through questions and then hopefully get some interaction from the audience. So Lawren, we'll start with you. If you could just share with us what exactly is the central utility project, what does it encompass and its importance to Henry Ford Health's plans moving forward?



Lawren Green (06:58):

Sure. So Henry Ford Health is developing essentially a new campus called the south campus and the initial phase is a new 21 story, about 1,000,003 square foot patient care hospital and supporting buildings. I think Henry Ford Health is intent on delivering the best healthcare they can in Michigan and arguably the world. They didn't necessarily want to be a utility operator. So from an early stage they made the sort of the philosophical leadership decision that they wanted to manage healthcare. They didn't want to manage all their utilities, so they took the approach of essentially a separate building, which you can see there, which is our project. So we're really, we're a teeny part of the overall campus, but we support the campus by providing heating and cooling. So what you see there is a plant that provides hot and cold water to heat and chill the new hospital. So for us, when you have a discussion with folks about the reason for a project and if someone's talking right off the bat about cost of capital and it's five bips or 10 bips, that might be a really good reason to do the project. But I think when they philosophically are making that decision because they want to focus on healthcare or they want to focus on education and research, that then I think really aligns their goals with our goals to deliver, whether it's energy as a service or water as a service to them.



Matthew Neuringer (08:38):

Thanks Lawren. And could you just follow up and just talk a little bit of how this sustainability in particular is a factor in the overall design of the project and how that's going to assist Henry Ford and their overall sustainability goals?



Lawren Green (08:50):

Yeah, I'd say they started developing a new campus, obviously need to make sure that they can do what they need to do on day one, but also look to the future. So their ultimate goal is to be sort of completely net zero by 2050 that started early in the design phase using hot water, not steam. So right off the bat, that lowers your generation capacity and is a technology that more and more folks are moving towards. The other is the plant has the ability to run entirely electrically. So as their PPAs come online that they've negotiated some of which are entirely green, they can essentially run the plant net zero by buying green power and asking us to operate it fully electorally if they want. The other was just the design around the building. So we from an early stage sort of looked at their conceptual massing and the building was quite large, which in many cases is good, lots of room to move around equipment. By pulling in our operator early in the design phase, we were able to dramatically shrink the building, which sounds obvious, but doing that does a couple things. One, it reduces capital cost, which is hugely important, but you also start reducing things like your embedded carbon for the building itself. So by reducing the building footprint through design and through equipment selection and working with our operator partner and embedding them in that design process, we also saved about 70% of the building square footage, which again leads to pretty substantial embedded carbon saving.



Matthew Neuringer (10:30):

Great. And how will the objectives of the project be assessed in plan for long-term, especially with respect to repair replacement and OM?



Lawren Green (10:39):

Yeah, so I think one of the, and you can debate the merits of a monetization approach versus an energy as a service under A-D-B-F-O-M or P three model approach and both have merits. I think one of the benefits of this approach is Henry Ford is really getting a fixed price for 30 years. So we've provided them a cost to operate and maintain the plant and that includes all of the maintenance and all of the lifecycle replacement. You only do that by working with a partner that understands what it takes to maintain equipment and when in an equipment's life they're going to need to replace it. So we've effectively built all of that in and it's a fixed price and if we're wrong, that's our risk as the private sector partner, not Henry Ford's. So I think they've passed that budget certainty risk to us, which if I'm a CFO or a treasurer of a hospital, that's really nice to know that other than the agreed pieces for escalation et cetera and pass through energy costs, what I'm paying is going to be fixed.



(11:47):

I think the other is, and you can't really see it, but on the backside of the building, we've essentially designed it for future expansion. So we designed the building down to the point of we know where the equipment will need to go as phases two and three of the hospital come on and the hospital didn't know when that was going to happen, so it didn't make sense to spend the money building a building now to house future equipment. But we've sized the building for the immediate equipment we need and we know where assuming equipment doesn't change, the new equipment would go. The other benefit of that approach is equipment will change, it'll get smaller, will change, so we may not even need the space that we've designed, but on the backside there's basically a wall that comes off and we expand. So we've sort of designed for expansion as well.



(12:37):

And I guess maybe the last piece is just on the performance and the cost certainty. This project, given the importance of the heating and cooling for the hospital has fairly rigorous KPIs in terms of how we need to perform. And I think we'll talk through the structure, but the benefit of the structure we put in place here is those KPIs, which really are the hospital's way of saying, Hey, I need heating and cooling and it's absolutely mission critical. The structure we put in place ensures that those flow down through the project agreement, through the project implementation agreement and we're on the hook for meeting those KPIs. So sort of at all costs that we'll be providing heating cooling for them.



Matthew Neuringer (13:22):

Awesome. Now onto the exciting stuff, the project structure chart, which if ever have a conversation with me, this is essential part of any discussion. So I'll give you a little bit of a high level overview and then Chris from Providence going to jump into some of the details on the practicalities and implementation. So on the screen you've got sort of a traditional project finance structure and then in the yellow boxes is really the differentiating factor that makes this financing structure unique. And as I mentioned before from start to finish, this is a very efficient procurement model for this project, given in particular the novel nature of the fact that we were able to interject this tax exempt financing solution without exempt facility bonds under 142 in under 10 months. And so what happened here is you've got your traditional project finance structure on the bottom, so your developer, your DB contractor, OM contractor and equity, and instead of the for-profit developer here, so the Kiewit SPV, which is Henry Ford Health Energy Partners being the direct contractual counterparty to Henry Ford Health instead Provident Energy, Henry how it's our Provident group, Henry Ford Energy LLC is the special purpose 5 0 1 3 borrower created for this transaction and is managed and controlled by Provident Resources Group.



(14:50):

And because Provident Resources group is a 5 0 1 C3, the SPV as a flow through entity has equivalent 5 0 1 C3 status for purposes of the transaction. So Providence's role is both serving as the direct contractual counterparty under the project agreement, which is also a lease. And the borrower under the financing documents, which in this case included a conduit issuer, which was the Michigan Finance Authority. The nice part about using the MFA was that the MFA is the typical issuer for Henry Ford Health. And so everything here was sort of standard operating procedure for Henry Ford as well as the MFA relative to the financing except for the fact that we had a project financing structure and the borrower that is liable for repayment of the debt is Provident Group, HFH Energy, LLC, and not Henry Ford Health. All of the substantive provisions in the project agreement that otherwise existed prior to this structure were effectively the same except for a couple of typical tax bond covenants that you'd expect to see as well as a net benefit to Henry Ford, which is the fact that the refinancing gain, if there is a refinancing in the future, has to go a hundred percent back to Henry Ford, all of the design and construction operations and maintenance.



(16:08):

And I know Chris is pretty handy with a shovel and a hammer, but he's not out there actually building the project Lawren and his team are. And so they're flowing all those obligations on a fully back to back basis under what we call the project implementation agreement, which is really a qualified management services agreement under RevPro 2017 13. So any modifications to the substantive terms were in that project implementation agreement between Providence SPV and the developer, SPV and Q. It as mentioned, has a complete ownership of the developer SPV and then again flows down all of those substantive obligations as in any other P three transaction to a design builder and an O&M. And what ties that all together on the critical interface points is the interface agreement. So Chris, could you just tell us a little bit about what qualified this transaction for tax exemption, how the bonds are repaid, and ultimately who has sort of responsibility for delivering the project relative to the structure?



Chris Hicks (17:13):

Yeah, of course. I think when you look at this graphic, what I like to focus on is the fact that this is the foundational structure of every project that we undertake with the ownership structure going through a nonprofit SPE before we form those SPEs, we do have to meet critical gating issues as far as our missions are concerned. Our mission of advancing healthcare in this instance was the IRS recognized focal point of why we're doing this project. And so that combined with the nonprofit nature of the SPV gave us the ability to borrow in the tax exempt market to ultimately lower the cost of borrowing on the overall transaction. So in terms of how do we get into that market, that's really the core logic behind that. And that's been proven time and time again over 25 years of our being in operation. And that's the same approach we take to any transaction. So the fact that our approach fits so nicely in the grand scheme of things really turned out to be a benefit for Henry Ford in this case as far as obligations and who's on the hook for delivering, et cetera, et cetera. We are the owner and the borrower of the improvements. So legally speaking, we are responsible for delivering the asset, operating the asset, maintaining all tax regs, reporting, continuing disclosure, et cetera, et cetera for the life of the financing, which in this case is 33 years.



(18:56):

But as Matt alluded to, the project implementation agreement allows us to transfer select obligations to the experts. And so that's how we apply that in terms of getting the actual asset built. However, we are a long-term partner in this, and so we strive to take as much if not all of the administrative burden away from Henry Ford as Lawren was alluding to. This is really meant to be a non-core asset for them. It's not their business to operate utility assets. Their business is to take care of people and so it shouldn't be their business to handle all of the bureaucracy and red tape that goes along with what I'm sure everybody in this room understands goes along with having tax exempt municipal bonds outstanding in the market. And so that's what operationally falls on Providence as an organization throughout the life of our engagement.



Matthew Neuringer (19:57):

Thanks Chris. And I'll just note, so Providence also receives an availability payment from Henry Ford for performing, and Ben and others will talk about how that's used for purposes of repaying the debt. And we'll just keep up the, actually I'll go back, just want to go back to the picture. So what other financing alternatives were contemplated for the project and what led to the tax exempt nonprofit approach, Ben?



Ben Djiounas (20:29):

Yeah, sure. I'll start with the alternatives contemplated. I think there's some good comments on the prior panel about this sector, but it's a true statement. The lease and concession agreement structure has emerged as a pretty active tool for assets in the utility space. Many examples across hospital systems like this, higher ed and frankly a number of municipal systems as well with billions of dollars of private capital raise in both the debt and the equity markets. Many, many of these large platform companies with infrastructure fund backing and a lot of these assets relatively unknown within the broader kind of poly finance financing construct.



(21:16):

And from a financing perspective, obviously on these portfolio companies, a lot of traditional kind of corporate facilities on these assets in particular for portfolios we're in the m and a context acquisition facilities and term loans. And on the project side specifically for this, in the long-term institutional markets, it's predominantly been the US private placement market and then as well as the bank market typically for revolvers CapEx facilities or interim funding. So I think the real crux of the question is what led to a tax exempt structure here and why was that utilized, which is I think a more natural conversation for this room. And I think the way I think about it is why not tax exempt up until this point? And I think of really three key factors, obviously low absolute rates up until 2022 and relative compression between financing markets maybe give a little bit less incentive to pursue this as well as John made a great comment on the prior panel and low reinvestment rates as well, which has obviously fundamentally changed.



(22:35):

A lot of these projects, not all are project financing, so they'll often have mixed uses of capital between CapEx and upfront payments, which aren't as naturally suited to tax down funding and as well as processes and procurements that just frankly haven't been set up to accommodate a creative and flexible approach like it was ultimately utilized here. So what did we have in this case? As we were evaluating options, we had relatively high absolute rates tax exempt to taxable ratios that were still high but particularly elevated this time of year ago and coming into the first quarter short-term rates are higher for reinvestment with your alternative is a drawdown structure that is a big factor in terms of uses the second factor, all new CapEx that was being applied with a nonprofit counterparty on the agreement. And in terms of process, frankly highly professional and diligent advisors and financiers willing to be creative and approach to get to an optimal outcome. I'm not just saying that to flatter my fellow panelists because we all know a P three transaction involves countless parties that all really need to get on board and work together to do something that's a little bit different. And we certainly had that here and I think once you do something once, you tend to see it in procurements that follow and we certainly expect that to be the case here. So hopefully set a model for this structure and the value of tax exemption for these types of assets.



Matthew Neuringer (24:18):

Thanks Ben. So Chris, could you just talk about in the structure like this sort, what roles and responsibilities fall on the beneficiaries in this case? Henry Ford?



Chris Hicks (24:29):

Yeah, of course. I mean at its most basic level, Henry Ford Health is essentially making the land available for the asset itself. They're making their availability payments and that's effectively as much as we'd like them to have to do, right? And there's a certain amount of reporting that goes into these kind of transactions and what I think was very efficient in how this transaction was structured is that all of any obligation by Henry Ford on a continuing disclosure basis is all being done as cross-referenced to the reporting they already do on their own financing as far as their core obligations. It really comes down to the availability payments as well as making that asset land available.



Matthew Neuringer (25:16):

Great, appreciate that. Lawren, anything you want to add to that? Maybe design side?



Chris Hicks (25:22):

I'm sorry, Matt, I totally forgot. We also, we have a management structure of our ownership entities at not only a board of managers but a project operating committee level entity that's created for every SPV we create. And as far as we're concerned, we're a steward of this asset for Henry Ford for 30 plus years, but it's very much their project and so they do have representation on the board of managers as well as the project operating committee so that we're in constant communication over the life of our engagement as well as with qit as our operating and management partner, maintenance partner. Certainly we're going to be kind of at the table throughout, so I'm sorry for interrupting.



Matthew Neuringer (26:10):

Yeah, no, that's great. I appreciate you mentioning that, Chris, that's really important. And I just wanted to talk a little bit about on the performance obligation side as well from the design side, what level of involvement Henry Ford has in monitoring and enforcing so that the risk allocation remains the same in this type of a structure relative to a traditional P three structure?



Lawren Green (26:29):

Yeah, for sure. I, and I think at just a pure conceptual level, I would say the controls they have here are just as strong as in a traditional P three structure, if not stronger when it comes to both design oversight and performance oversight once it's built. But if you go all the way back to sort of what their role was during the procurement, I think we sort of overlook it, but this only works if you have a pragmatic owner that's willing to understand an innovation or solution that you're putting forward and has the right advisors to do that. And Henry Ford did. So I think we put this on the table, they were pragmatic, they understood the benefit to them by working through this. So you need an owner that thinks that way and Henry Ford very much does during the bid phase. I'd say it was relatively typical in terms of they had an output spec in terms of what they needed.



(27:28):

Our engineers will probably tell me that it was too prescriptive. I don't think it necessarily was. I think that's just the battle you always see between an owner's engineer and the engineer on the design build side that tug of war wanting full flexibility to just deliver X, whether X is pounds of steam or hot and cold water. But I think they got that balance right of prescribing output specs with some specific design standards as well. So we had to bid to that. Obviously now that we're into the design phase, it's a fast moving design build. So from the beginning we set up what's essentially probably an eight or nine month design phase where we take them through and at various touch points. So we have sort of escalating touchpoint weekly, monthly, quarterly, Henry Ford health reviews, sort of where we're at in design and has a key say in specific decisions.



(28:29):

So again, they've staffed it properly, not too many people, but the right amount of people who have decision making ability. Then I guess when it comes time to actually turn the thing on and start providing heating and cooling, again, they were prescriptive in terms of what they wanted. They wanted to ensure they had heating and cooling and also that they had redundancy, how we gave them that redundancy and how we delivered it. We had to demonstrate that, but it was up to us. So does that mean, for example, under an emergency you've got 10 generators and two standing by for redundancy, does it mean you've got three bigger ones with one standing by? That was left to us as long as we met the requirements that they set out in terms of maintenance, essentially what we'll do is there'll be a monthly, a standard monthly operator and report, but in the meantime they'll have live cloud-based dashboard access to how the system is performing, where we're delivering hot and cold water, what the temperatures are, what the pressure is.



(29:38):

So they'll have, even though it's not their asset, they'll have a window into how this asset is delivering its services. If you take a step back, this is just a tiny piece of their overall program and their overall hospital. They have a facilities team that's still responsible for managing a hospital. So to Chris's point, we want to make that facilities team job easier to understand are they getting what they need from us, but not to sort of overstate the importance of our project relative to the bigger project. That dashboard also will show how we're performing against any of the key performance indicators and to the extent we're not meeting it, there's obviously financial penalties that flip into place on sort of an escalating basis. It's one thing to have a temperature reduction for 15 minutes. It's quite another to have a dramatic temperature reduction for 1, 2, 3 days at a time. So what we see is a fairly dramatic escalation of those penalties which sort of reflect the importance of the service, but also allow for the realities of pumps blow up. Transformers have issues. So I think that the KPIs or the right balance of understanding reality, but also understanding that this is a critical asset for them.



Matthew Neuringer (31:02):

I think to one unique element here is that skin in the game that was mentioned in the prior panel, we were able to achieve that here because to Lawren's point, as long as the Kiewit team and Oli team are executing and delivering on the maintenance and O&M side as prescribed, they're going to get a hundred percent of the availability payment, which includes both a capacity charge, which is what's to repay the debt as well as their O&M charge. If they do have deductions for non-performance, that can erode the entirety of the O&M charge, which includes any type of potential development fee that Kiewit would otherwise earn for really strong performance. And so they have skin in the game, so that equity return that they've placed into that developer, which went into paying for a portion of the project, that capital contribution effectively is only repaid based on strong performance. And so you were able to achieve that skin in the game component, not withstanding the structure. And that risk allocation then helps preserve the entirety of the KPI and the integrity of the KPI regime, not withstanding the fact that we were able to interject this non-for-profit structure. So I just wanted to highlight that point. Okay. So Chris, sorry. So what are the primary benefits of the financing approach to Henry Ford Health from your perspective?



Chris Hicks (32:38):

From our perspective, I really think it's the ability for them to focus on their core mission in addition to getting long-term budgetary certainty as it relates to the output from the facility through a long-term fixed rate financing. The real benefit is having kind the arm's length and hands-off benefits of a traditional P three while also enjoying the very same cost of funds and the market that they're used to participating in, as well as understanding that they've still got risk transfers in place through the o and m agreement, but also knowing that they can spend their time and their resources and their dry powder on what is a significant campus expansion. I think it's north of 2 billion if I remember correctly. And so that's really where their resources are meant to be deployed, and I think we take a lot of that off of them as an organization more than anything. I think the key benefit.



Lawren Green (33:42):

Thanks Chris. Yeah, I mean just to add, I think it's a nice marrying of the right risk allocation under a P three for performance and delivering a service. The service is heating and cooling and they've transferred that obligation to us as a group, but that transfer hasn't, because of the structure we put in place, they were able to affect that transfer and that risk allocation shift at almost the same cost of capital if they were out doing this in the market themselves. And to me, that's the magic of this is we got the right risk allocation at the absolute best price and they didn't have to choose one or the other. And I think to me, that's the real benefit of the structure.



Matthew Neuringer (34:29):

Ben, from an execution standpoint, how was the deal received in the muni market given the nonprofit ownership structure and the role of the private sector?



Ben Djiounas (34:38):

Yeah, no, it went really well. I probably wouldn't have volunteered to be on this panel if it didn't, but no, you saw that reflected in the order book, the yield spreads and of course we're talking about it today, but I think take a step back, I mean there was some industry first here and anytime you bring something to market with some innovation, which we really enjoy is the approach and how to position it. And that was really where we spent a lot of time as a team thinking through and communicating the story here. But I think ultimately there's no rewards for overcomplicating a structure. Matt can go through that and sleep, but ultimately how do we think about it and how do we message it and breaking down the pieces, obviously you have a large healthcare system as the backbone of this project that's pretty straightforward and easily digestible and K me understood and they were the source and are the source of the availability payments, which are an unsecured contractual obligation in a P three structure that can be broken down and understood.



(35:55):

And as well-worn path. There's key as a highly credit worthy construction counterparty capable to build this that can be broken down. And then overlaying the 5 0 1 C3 nonprofit structure to a new sector. And as Chris mentioned, a tremendous amount of precedent nationally on that structure. So when you break apart the pieces, it's all digestible. It's just how do you kind of put those together and how will the market think about it price? These different markets have different kind of sub-sectors of their own that price differently, but I think and ultimately for an essential asset. So our approach is really maximizing the eyes on the deal and the level of discussion which probably far exceeded for a 250 million transaction with a three rating. Lawren was very gracious, put 'em in front of a room with over 50 investors and did countless live, which in this day and age is just not something we do very often. But ultimately it was a well heard message and well received and I think as I mentioned earlier, I think cutting down a path to hopefully see more of these in the future. So yeah.



Matthew Neuringer (37:20):

Thanks Ben. And I'll also note just sort of backstopping the robustness of the structure was also the fact that you did have pretty comprehensive performance security behind both the design bill contractor and Veolia in the form of letters of credit and parent company guarantees performance and payment bonds. So the market presumably looked at all of that, including obviously the track record or Kiewit it and considered that in the execution. So we'll wrap it up with the last question, Lawren. So how does the project benefit the broader community in Detroit?



Lawren Green (37:55):

Yeah, and I don't know if anybody's from Detroit or has been to that part of the city. It's pretty exciting what's happening in that part of the city. So obviously the new practice facility for the Pistons is there. Henry Ford Health is building a new campus. They're building a mix of commercial and residential, so it's a hospital and a central energy plant that's really embedded in the community. And you'll look at that design and it doesn't scream utility building. It's set back, it's red brick, it's got glazing. It's designed to sit within the fabric of that community, which is going to be a mix of residential and healthcare. So to me, it's super exciting what Henry Ford Health is doing for Detroit and in that part of the city. I mean, they're transforming a large tract of land there, which I think is pretty exciting.



Matthew Neuringer (38:53):

Awesome. Well thank you to the panel. So I'll open up for Q&A. It looks like we've got at least a few minutes for any questions. Good, ahead. Well, this structure, oh, sorry, the question just sort of is in the context of bankruptcy, so very exciting and optimistic,



(39:29):

Optimistic question out of the gate. So it has not been tested, this is one of the first transactions as an energy service to use this structure. Obviously this structure is not novel. This has been used on a number of different assets across the country over the years, but for this structure, a unique feature that could be considered from a bankruptcy perspective, and now I'm just sort of completely going beyond my scope as a project finance lawyer and dipping into the bankruptcy side, is the fact that as essentially an entity that's providing utility type services, those are essential to the hospital system. And so from a bankruptcy code perspective, it's possible that a bankruptcy court could treat this differently than an otherwise would treat an executory contract because of the fact that they can't keep the lights on, they can't keep the power, they can't continue to function as a hospital without this. And so to the extent that a bankruptcy court were to view this in that lens, then it's possible that this could have some type of priority from a payment perspective so that they could literally keep the lights on



Ben Djiounas (40:55):

Move to hospitals.



Lawren Green (41:05):

I think the feedback and response from the hospital has been positive. We've had an initial sort of executive partnering session and a number of follow-ups just to make sure that we have an ability to escalate issues, but we're also talking through issues and what's on their mind. I don't want to speak for them. I don't think they're even thinking about that yet, only because they're sitting here today and they've got to deliver a new patient tower and it's marching now once the dust has settled, one of the goals that we all said was, and it was actually the hospital person, how do you measure success of this partnership? And she said that we want to do it again for a different type of asset. So I don't think it would be an acute care hospital, but is there a services building or a parking garage where they think, you know what, this is also non-core done it. So to me that was actually a sign that they're at least, but I think on the patient care piece, it would be a little too far probably outside of their comfort zone or execution plan, if you will.



Matthew Neuringer (42:33):

Chris or Ben,



Ben Djiounas (42:35):

Do you want me to repeat for the room? The question is what's kind a sweet spot for deal size and as a work in the context of a smaller facility?



Chris Hicks (42:46):

Yeah, I think from our standpoint, our mission as a 5 0 1 C3 is not measured by the size of the transaction. However, it is a math problem to some degree. I think it was alluded to in the prior panel that cost of issuance is cost of issuance and it doesn't always discriminate between a 5 million deal or a $500 million deal. And so if you're doing a transaction that's $15 million for example, you're most likely not going to have effective efficient execution. Not only, I don't want to speak for jp, but you're probably not going to get the level of attention that you want from an investor standpoint, which could drive your yields higher. But more importantly, those fixed costs that are upfront expenses associated with any transaction will likely take what is a very attractive yield and turn your all in TIC on a transaction like that, probably double it. So if you get north of maybe a 30 or $40 million threshold, you really start to see the efficiencies pick up a hundred, 200, 250 in this case was perfect. And I don't think as long as the market would bear it, I don't think there's a limit either. And so that's really the only size constraint. It's really a math problem more than anything and a demand problem, I would think.



Ben Djiounas (44:11):

Yeah, no agree with Chris and ultimately and the relative comparing the options on a relative basis so that even if it is smaller, it probably holds up. But yeah,



Matthew Neuringer (44:32):

The question is just about what was the savings yield in a transaction for tax exempt financing?



Ben Djiounas (44:38):

Yeah, I'm not going to give you an all in number, but just for context, the 10 year point on the curve was I think the yield was circuit 350 and all in was spread and the 10 year treasury at that point was north of that level plus incremental spread. So it was meaningful. Obviously the ratio environment at the time was highly supportive. It still is. So on that basis you're probably talking 150, 200 basis points or so.



Lawren Green (45:10):

Yeah, it was eight figures, which on a project of this size, which wasn't a huge project was, I mean it was meaningful for the hospital.



Matthew Neuringer (45:22):

I think we are out of time, but I'm sure the panel's going to be around afterwards. So happy to feel one-on-one questions, but appreciate everybody's time. Thank you.