FRANCHISE PURCHASE OPTION ANALYSIS

WHH Enterprises, Inc. October 2015

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Introduction

The City of Bushnell accepted the proposal from WHH Enterprises dated February 26, 2015 to provide consulting services related to the analysis of the purchase option in the expired franchise agreement with Sumter Electric Cooperative (SECO).

The City’s franchise agreement with SECO expired on August 18, 2011. The franchise agreement provides that the City;

At and after the expiration of this franchise, Grantor shall have the right to purchase the electric plant and facilities of Grantee located within the corporate limits of Grantor which are used under or in connection with this franchise or right, at a valuation of the property desired, real and personal, which valuation shall be fixed by arbitration as may be provided by law. Excepted from this reservation are power plants and high tension transmission lines owned by the Corporation and connected with its general system of distribution and used for the purposes of serving communities other than the Grantor herein. As a condition precedent to the taking effect of this franchise grant, Grantee shall give and grant to the Grantor the right to purchase herein so reserved. Grantee shall be deemed to have given and granted such right of purchase and satisfied this condition precedent by its acceptance of this franchise.

Note emphasized section. WHH believes that the right to purchase these facilities is clear and unequivocal.

This option to purchase the property of SECO that is used to provide electric service to customers located within the City and then provide retail electric service to the newly acquired residents of the City is a valuable option and it is prudent that the City carefully evaluate this option relative to its other alternatives.

WHH’s scope of services includes the following:

1. Prepare a capital cost estimate to extend the City’s existing electric distribution system inorder to provide electric services to designated properties within the City boundary butpresently served by SECO. Additionally, the capital cost estimate will include the cost of

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This inclusion of this language was required by F lorida Statutes prior to 1973 when it was repealed.

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any reconfiguration of SECO facilities necessary such that the two electric distribution systems can serve their respective customers in a reliable manner.

2. Develop a planning level estimate of the cost to acquire the customers currently located within the City limits and not being provided electric service by the City. The estimated acquisition cost will consider the value of any physical assets acquired, going concern value plus stranded costs, if any.

3. Propose a rate structure that may be necessary to facilitate the acquisition of the new customers.

4. Prepare a cash flow pro forma forecasting the cash inflows and all cash outflows associated with the proposed acquisition of territory. The pro forma shall include projected O&M costs and capital costs associated with service to the newly acquired services.

5. Based on the above analysis, develop a recommendation for consideration by the City regarding the feasibility of the proposed action.

The assignment has evolved since the initial award in March 2015. Preparation of the cash flow pro forma has assumed a greater focus of the analysis and the costs associated with the extension of City facilities and the reconfiguration of SECO facilities has assumed a lesser role as will be discussed later in the report. WHH has segregated its analysis into the following areas:

1. Develop an estimate of the acquisition costs associated with the territory and customers currently residing within the City limits but receiving electric service from SECO.

2. Develop a cash flow pro forma detailing all incremental cash flows associated with the acquisition of the new territory and customers.

3. Based on the results of the above analyses, WHH will recommend a course of action for the City.

Rate structures have to be approved by F lorida Public Service Commission based on a Cost of Service Study. This document lacks such a study. The City hasn’t completed a Cost of Service Study in 30 years per the City’s documentation.

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Purchase Cost Estimate

If the City elects to exercise the purchase option in the franchise agreement, the City will incur significant costs. WHH has separated these costs into the following categories. The first category is the compensation to SECO for the loss of customers and the portion of the SECO electrical distribution facilities that the City will acquire. This component of the purchase involves the highest cost and the value is the most subjective of the three components of the costs to exercise the purchase option.

The second component is the cost to sever and reintegrate the electrical distribution systems owned by SECO from the electric distribution system owned by the City. The existing electrical distribution system was designed without regard to political boundaries. If the City should acquire the customers residing within the City limits not currently being served by the City, then the electrical distribution systems of the two utilities (SECO and the City) must be separated and reconfigured such that each utility serves its customers and the resulting distribution systems operate independently of each other. If the City has to extend lines to serve the newly acquired customers, this component of the acquisition cost can be a significant portion of the entire cost to exercise the purchase option. WHH notes that there is less subjectivity in estimating this component of the acquisition costs since the cost is just the cost of extending lines from existing City distribution facilities to the newly acquired customers.

The last component is the cost of any stranded distribution and transmission assets. Stranded assets are facilities that SECO constructed and used to serve customers that are no longer necessary since the customers will be transferred to the City. The book value of these assets which SECO had expected to recover from customers which were subsequently transferred to the City are stranded assets. This component of acquisition costs is relatively minor.

The approached used by WHH to estimate the value of each cost component is discussed below.

Customer Acquisition Costs. As noted above, this is the largest component of the cost to exercise the

purchase option and the value is likely to be the most subjective. Some background regarding the purchase option in electric franchise agreements may be useful. Previously, Florida Statutes contained a provision requiring the inclusion of a purchase option in all franchise agreements. This provision (Chapter 167.22, Florida Statutes) was repealed in 1973 and since then electric utilities have resisted the inclusion of purchase options when franchise agreements have been renewed.

Some franchise agreements specify the methodology to be used in the valuation of the purchase option. However, WHH notes that the valuation methodology is not specified in the franchise agreement between Bushnell and SECO. Florida Statute 73.0715 which applies only to eminent

2This valu e is hardly subjective and in previous transactions in the State of F lorida was def ined in terms of Revenue Multipliers as appropriate methodology. Revenue is a known factor while the multiplier is typically set by arbitration.

Political boundaries of the City were highly modif ied through sporadic annexations. These annexations occurred subsequent to electrical system design.

There is a likely event of duplicated facilities that may result in F PSC contestation and layered cost.

Book valu e approach to the stranded assets is not appropriate here. SECO will be compensated on Fair Market Value basis.

On the contrary, this component was overlooked in signif icant detail without proper consideration of all assets involved.

Disagree. This amount is arrived at Revenue X Multiplier as set by an arbitrator. There are plenty of transactions in the State of F lorida that demonstrate how it’s typically calculated.

This option was originally included to allow the cities to buy assets if utilities abandoned them and to continue going concern. However, this language is now used in unintended ways for hostile takeovers.

Absent the specif ied methodology the calculations will be done through arbitration as evidenced by recent transactions in the State of F lorida.

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domain proceedings, does include some language regarding the valuation of electric utility property. Statute 73.0715 states:

73.0715 Valuation of electric utility property.—When any person having the right to exercise the power of eminent domain seeks the appropriation of property used for the generation, transmission, or distribution of electric energy, the jury shall determine solely the amount of compensation to be paid. Such compensation shall include the reproduction cost of the property sought to be appropriated less depreciation, together with going concern value, and, when less than the entire property is sought to be appropriated, any damages to the remainder caused by the taking.

The reproduction cost new less depreciation (RCNLD) is the cost to construct at the present time the electric facilities that will be acquired then discounted to reflect the remaining life. Note that although the above referenced statute applies only to condemnation proceedings, it has been WHH’s experience that arbitrators have applied the “reproduction cost less depreciation” methodology in previous arbitrations involving expired electric franchise agreements. Also, note the inclusion of “going concern value” in the statute. Both RCNLD and going concern value are discussed in greater detail later in this report. WHH has considered various approaches valuing the customers and distribution assets that the City would acquire upon exercise of the purchase option. Note that the valuation of these assets that the City would acquire is subjective. Ultimately, the value is the price that SECO would accept (or be forced to accept by arbitrators) and the price that the City would be willing to pay. The following analysis is an attempt to estimate this value within reasonable limits so as to provide the input required for the City to make reasoned decisions regarding the exercise of the purchase option. WHH considered three methodologies to estimate the value of the assets to be purchased. These are valuation estimates based on (1) the market value of similar publicly traded companies, (2) the reproduction cost new less depreciation (RCNLD) and going concern value referenced in the condemnation statute and (3) a discounted cash flow analysis. Each is discussed separately. Market value of publicly traded companies. Although there are not any pure electric distribution companies of a similar size to SECO that are publicly traded, there are some companies that WHH considers similar. WHH has identified four companies that may provide useful comparative data. These companies are Unitil Corporation, AGL Resources, Southwest Gas Corporation, and Atmos Energy Corporation. Only Unitil is involved with electric distribution and the other three

Public company comparisons are inappropriate here. This in not a proper method of valuation.

None of these companies represent the F lorida market and only one is an electric company while others are gas. This is not acceptable in prudent f inancia l analysis.

This is a text book F inance 101 example of investment valuation but hardly used in todays transactions in F lorida.

This is indeed a correct method.

This is not a correct methodology for valu ing utility transactions in the State of F lorida.

There are no forcing or willing options here. It’s simply an arbitration process to arrive at amounts that are ref lective of Fair Market Value.

The valu e is determined by using standard Fair Market Value measurements that are anything but subjective.

This is a prevailing measuring method in the State of F lorida today by arbitrators. This study completely disregarded this item in favor of obscure methodology.

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companies are natural gas distribution companies. However, the economic and risk profile are similar to an electric distribution company. In all cases these are regulated companies that distribute a commodity (electricity or gas) via a linear network of electric lines or pipes. The risks are relatively small in that generally there are not competitors (each company distributes in a service territory) and regulation lessens the risk of losing money. WHH believes that the relevant valuation metric is the multiple of Earnings before Interest, Taxes and Depreciation and Amortization (EBITDA). Each of the above companies currently trade at a multiple of EBITDA of between 7.8 and 8.9. The average multiple is 8.14. WHH has developed EBITDA of the customers that may be acquired by the City. Based on WHH’s analysis, the EBITDA (effectively operating earnings) is about $380,000. Using an EBITDA multiple of 8.14, results in an estimate of the value of these customers at $3.1 million. WHH notes that when valuing small companies, a small company discount is typically applied. Although in the context of Florida municipal or electric coops, SECO is not “small”. The annual revenues of the customers subject to acquisition by the City are about $3 million and the total revenues of SECO are about $360 million. However the annual revenues of the publicly traded companies identified above are in the billions of dollars. So relative to the peer group, the small company discount is certainly appropriate. This discount can be in the range of 25 percent and is based on the plausible premise that small companies are inherently more risky than larger companies. Application of a small company discount of 15 percent would suggest a value of these customers of about $2.6 million RCNLD plus Going Concern Value. The second valuation methodology considered by WHH is based on the provisions of Florida Statute 73.0715. This statute references the Reproduction Cost New Less Depreciation (RCNLD) methodology plus Going Concern Value. Reproduction Cost New Less Depreciation addresses a methodology to value the assets acquired which in this case are the electric distribution facilities serving the customers to be acquired. This methodology estimates the cost to construct the facilities today (as opposed to the historical cost to construct the facilities) and then depreciates the cost based on the age of the assets. For example, if a distribution line was constructed 15 years ago at a cost of $100,000, the book value of that line today would be about $50,000 assuming the line was depreciated over a 30 year life. However, the RCNLD value would be about $70,000 assuming the escalation in distribution line construction costs has averaged about 2.3 percent per year (cost to construct line today would be $140,000 less depreciation of 50 percent equals $70,000). The Going Concern Value is the value of an enterprise or business in excess of the value of the physical assets. So the application of this methodology is effectively just an estimate of the going concern value of an enterprise since any value assigned to the physical assets is just subtracted from the going concern value. WHH has previously estimated the going concern value using the market value of publicly traded companies.

EBITDA method application resulted in a signif icantly lower number compared to transaction in the State of F lorida market today.

There a signif icant inconsistency here in methodology usage and RCN LD method results are not shown. Why? Was the number too high?

There is nothing typical about dis-counting small companies. Any potential discount is designed to com-pensate investors for acquisition risk. SECO, by the admission of WHH, operates with virtually no risk per the paragraph above.

Electric and gas are not the same business and only one electric company comparison does not ref lect the Fair Market Value measurement.

This is an inappropriate method. Revenue X Multiplier is what is used in the State of F lorida today. Public company comparison is not su itable.

EBITDA method is not an appropriate measurement in this instance. SECO is a not-for-prof it cooperative utility not subject to federal tax and it operates in a different market.

Again, the discount has no historical basis in the State of F lorida in similar transactions.

Another arbitrary adjustment with no basis.

There is no basis for this number.

What peer group? Publicly traded gas companies? This is a stretch.

Another approach to estimating the going concern value is a discounted cash flow analysis that is detailed below. Discounted Cash Flow Analysis. This approach considers the incremental net cash that the contested customers represent. This series of cash flows can then be present valued over an appropriate period of time to estimate the customer’s value to SECO and remaining SECO customers. This analysis can be approached on a per customer basis or on a per kilowatt-hour sales basis. WHH has determined that an analysis based on a “per kilowatt-hour sales” basis is the best approach is this case. WHH has reviewed the recent financial reports of SECO and derived the following data. The data represents the average of the last two years. Sales data for the customers located within the City limits and served by SECO was provided by SECO staff.

Average Revenue per kW-hr Sold 12.19 Cents per kW-hr Net Operating Cash Flow per kW-hr Sold 1.53 Cents per kW-hrElectric Sales Acquired Customers 24,644,000 kilowatt-hrs Net Operating Cash Flow Acquired Customers $377,000

WHH notes that the Net Operating Cash Flow as determined above does not reflect any reduction for capital outlays. This adjustment is developed below. Generally, the annual capital outlays for an electric distribution utility such as SECO can be classified into one of two categories; (1) capital outlays for the expansion of the transmission and distribution system associated with new customers and growth and (2) capital outlays associated with the routine renewal and replacement facilities used to serve existing customers. The Net Operating Cash Flow that SECO would forego if the City exercised the purchase option should be reduced by the amount of capital outlays associated only with renewal and replacement of the distribution plant. The data included in SECO financial reports aggregates capital outlays of both the transmission plant and the distribution plant and also aggregates the capital outlays for growth related projects and renewal and replacement projects. Therefore, WHH is unable to estimate the reduction in Net Operating Cash Flow associated with capital outlays based on SECO financial reports. However, WHH has performed some analysis of this very issue in previous consulting engagements. WHH had determined that routine renewal and replacement capital outlays for distribution utilities are about 0.7 cents per kW-hr. In support of that estimate, WHH also notes that SECO has reported the value of gross distribution plant in 2014 of $605 million and reported

What about capital outlays for additional equipment, transportation and facilities that are required to serve new customers? City is increasing customer count by 30% without consideration for increased service levels. Not accurate at best!

This method is pla in wrong in this transaction. The RCNLD method is prevalent in the State of F lorida.

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that it is depreciated at an annual rate of 3.2 percent. This equates to an annual depreciation of 0.65 cents per kW-hr, in reasonable agreement with WHH’s previous analysis for other clients. In the interest of conservatism, WHH has adjusted the Net Operating Cash Flow by the lower of these two estimates resulting in the Net Operating Cash Flow per kilowatt-hour sold of 0.88 cents per kilowatt-hour sold. As previously noted, SECO staff has been very cooperative in providing the data needed to perform an objective and accurate analysis. They have advised that the customers currently residing within the City limits and being served by SECO have annual electric consumption of 26,644,000 kilowatt-hours. Based on the estimate of Net Operating Cash Flow per kw-hr less an allowance for renewal and replacement capital outlays, results is an estimate of annual Net Operating Cash Flow adjusted for renewal and replacement capital of $217,000 per year. The last input required to complete the discounted cash flow analysis is the escalation rate to the adjusted Net Operating Cash Flow. WHH has estimated that the Net Operating Cash Flow per kilowatt-hour sold will increase at the rate of inflation used in this analysis which is 2 percent. The result is that the present value of Net Operating Cash Flow over a 20 year period discounted at 6.5 percent is $3.34 million. Note that WHH has included a terminal value in the discounted cash flow analysis to represent the value of the customers beyond the 20 year horizon of this analysis, so in fact, this value is an estimate of the value of the customer into perpetuity. WHH believes that this represents fair value for lost revenues associated with the loss of these customers to SECO. In summary, WHH notes the following results of the various methodologies used to estimate the cost to acquire the 591 customers currently being served by SECO that are located within the corporate boundary of the City. Value of Publicly Traded Peer Group $3.06 Value of Publicly Traded Peer Group (15 Percent Small Company Discount) $2.61 Discounted Cash Flow Analysis $3.34 AVERAGE OF METHODOLGIES $2.98 Severance and Reintegration. Since the City is only acquiring a portion of the SECO territory, the severance and reintegration costs are just the cost for the City to extend lines from their existing facilities to the newly acquired customers. WHH notes that SECO has estimated these costs to be 3.55 million in their publication entitled “Bushnell’s Big Choice”. Also, previously, Power Services had prepared an interim report in which Power Services estimated the new construction costs under various scenarios to be between $1.2 and $2.2 million.

Generic data comparison that is not ref lective of the actual required cost outlay.

SECO could have provided more if asked to reach a more accurate analysis.

Does the City plan an automatic rate increase of 2% annually to create that inf lation? Cost of power has been going down for utilities across the state.

2% artif icia l inf lation on a 20-year period certainly makes the math more attractive. So, the annual rate increase is coming?

The correct numberis $234,467. Math is wrong.

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Although WHH did not perform a detailed analysis of the costs to extend the lines to all customers, WHH has developed a planning level estimate to extend approximately 10 miles of primary distribution at a cost of about $2.4 million. This is less than the SECO estimate but WHH believes the estimate is reasonable. In several cases, extending lines to contested customers would result in significant duplication of facilities which the Florida Public Service Commission would oppose. However with the exception of these few customers, WHH has included the costs to extend city owned distribution lines to all newly acquired customers in this analysis of severance and reintegration costs. WHH notes that another alternative may be available to the City to serve customers that are remote from the City’s existing facilities. Based on a high level preliminary analysis, WHH believes that it would be cost effective to provide a complete solar installation to selected customers that are remote from the City’s existing facilities. The solar installation would include a sufficient number of solar cells plus invertors, batteries and standby generator to provide 24/7 electric service to selected customers. Applying this approach to the most remote customers would save the City about $700,000 in severance and reintegration costs reducing the cost of severance and reintegration from $2.4 million to $1.7 million. If the City desires to reduce the initial investment in facilities this alternative may be attractive. Stranded Costs. Stranded costs are the unanticipated loss in value of existing assets that result from the purchase of a portion of the SECO electric system. In this specific case, if SECO constructed transmission or distribution facilities to serve specific customers, SECO would reasonably expect to recover the costs of these facilities over the life of the asset through its retail electric rates. If SECO should lose these customers, then the unrecovered cost of the assets represent stranded costs. The stranded costs of distribution assets are considered first. Note that any distribution assets that are acquired by the City are not stranded assets. SECO will receive the full value of these assets as part of the system purchase. The value of these assets are included in the purchase price. In the process of working with SECO staff, 19 separate areas have been identified that would be acquired by the City. In virtually all cases only the distribution assets serving customers in these 19 areas would be acquired by the City, and the value of these assets are included in the purchase price. Only in Area 7 (area between I-75 and CR 475 and north of CR 312) and Area 8 (area just east of US 301 and south of CR 542) were there any distribution assets that would not be acquired by the City but would become stranded. WHH notes that these two areas currently only have a total of six electric customers. WHH has estimated the value of these distribution assets to be $215,000. These two areas are depicted in the map on the following page.

Subsequently, the cost is understated as well. Actual cost - $4,800,000 This is an understated number of miles.

The accurate number is 20 miles.

Correct and agreed.

Where is the calculation of cost effectiveness? What customers will be forced “off the grid? ” Can the City support the solar project with the same level of service including refueling? Not likely.

The City may desire it but what about the customers that you will be disconnecting from the grid?

This study does not assign any valu e to stranded substation assets that carry the City’s load.

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Regarding transmission assets, it is more difficult to assign the cost of specific transmission assets to specific customers since the transmission system operates as a network. Therefore, WHH has estimated the value of stranded transmission assets by pro rating the book value of transmission assets over the entire customer base of SECO. The current book value of transmission assets is

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$14.016 million. WHH determined that the book value of transmission assets equals $75 per SECO customer or $4.70 per 1000 MW-hr. of SECO retail sales. WHH concluded that allocating the cost on the basis of MW-hr. sales is most appropriate in this case. Since SECO has advised that the annual sales of the customers that would be acquired by the City is 24,644 MW-hrs, the pro-rated book value of transmission assets is estimated to be $116,000. Therefore, WHH has estimated the value of stranded distribution and transmission assets to be $331,000. Acquisition Cost Summary. The following table summarizes WHH estimates of the acquisition cost of the customers and territory located within the City limits not currently being served by the City.

Cost Category Estimated Costs Customer Acquisition Costs $2,970,000 Severance and Reintegration Costs $2,400,000 Stranded Asset Costs $331,000 Total Costs $5,701,000

WHH believes that this estimate is conservative and the actual cost will most likely be less. However at this stage in the decision making process, WHH believes that conservatism is warranted.

This study does not assign any valu e to stranded substation assets that carry the City’s load.

This study completely disregarded the generation assets that are currently assigned to the City’s load. That cost is recoverable as evidenced by transactions such as Vero Beach vs FMPA. This valu e is estimated at $3.9 million.

Again, the cost components are not accurately identif ied ref lecting a signif icant margin of error in the calculations.

What is the basis for such beliefs other than opinions of a single consultant? The estimates of other parties or using simila r transactions ref lect a much higher valu e.

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Cash Flow Model Description

To properly evaluate the financial feasibility of exercising the purchase option, the cash flows resulting from the purchase must be compared to the cost of the acquisition. WHH has prepared a 20-year cash flow model that estimates the expected incremental cash flows associated with the exercising of the purchase option. Note that the model includes only incremental cash flows which are those incremental revenues and expenses that will result from the exercising of the purchase option. This section of the report will describe the model and the basis of assumptions used in developing the model. WHH has provided some detail regarding the model inputs which may not be necessary for persons familiar with electric utility operations; however, it is intended that this report be understandable to members of the public who may not be familiar with some of the electric utility terms used in the model. This section is necessarily tedious. The reader can skip this section if desired and review the next section which discusses the results of the model and review the attached spreadsheets. In this case, this section can be used as a reference when one questions the meaning of a term or the basis used to estimate the specific item in the pro forma. Description of the Model. The model is a cash flow model and includes all cash flows that are expected from the exercising of the purchase option. Since this is a cash flow model, non-cash expenses such as depreciation are not included. Note also that taxes are excluded since they are a pass-thru and do not impact the net cash resulting from the exercise of the purchase option. Taxes are the gross receipts tax all electric sales and sales taxes on commercial electric sales. Municipal service taxes are not included in the pro forma since the City receives these taxes in either case. The cash flow model assumes that the purchase option is exercised by the City and the City commences service to the newly acquired territory on January 1, 2017. Cash flows are estimated for a period of 20 years. The 20-year term is appropriate due to the long term nature of capital investments in electric utility facilities. Typically, utility equipment is expected to have a useful life of 30 years or more. With proper maintenance and ongoing capital upgrades, utility investments should be considered to be perpetual investments. Only a long term model is appropriate for these investments in facilities with lengthy expected lives.

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The contract between the City and FMPA requires a 5-year notice prior to commencement. The model is f lawed.

This is not an accurate method of measuring. RCNLD methodology is prevalent in the State today and it should have been considered. WHH methodology is wrong.

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WHH has modeled three different scenarios. However, each of the scenarios contain the following common underlying assumptions. Major assumptions used in the financial pro forma and sources of information are described below. Acquisition and Start-up Costs include the costs of acquiring the existing distribution system as developed in the previous section of this report. WHH has included $400,000 for professional service fees associated with the negotiation of the purchase agreement and legal, consulting and bond issuance expenses. General Inflation was estimated to be 2.0% which is the current forecast used by the Congressional Budget Office. The model is generally insensitive to this estimate since inflation will impact both revenues and expenses in a similar manner. Escalation Retail Electric Rates. Note this is a long term assumption. The Energy Information Administration (EIA), a department of the US Department of Energy forecasts the escalation in retail electric prices annually in its publication Annual Energy Outlook. The most recent publication forecasts the escalation of retail electricity prices at 2.6 percent annually. Note that since fuel prices constitute about 30 percent of the price of retail electricity, the forecasted escalation rate of the price of electricity is a function of underlying fuel price forecasts. WHH notes that the EIA forecasts natural gas prices, (the dominant fuel used for electricity production) at a 4.4 percent annual escalation rate through 2040. All Requirement Project Bulk Power Rate 2017. This is the forecasted rate for bulk power supply for the City for 2017. This forecast is based on information obtained from FMPA by WHH in April 2015. The forecast provided by FMPA was through 2020. Note the input below for the forecast in the post 2020 time period. WHH assumed an annual load factor for the City of 48 percent in converting the FMPA forecast of demand prices to equivalent energy prices. All Requirement Project Bulk Power Escalation Rate post 2020. WHH has forecasted an escalation rate in the ARP bulk power supply costs of 2.5 percent annually. This is based on the underlying inflation rate forecast of 2.0 percent plus current fuel price forecasts. Bulk Power Supply Market Rate 2017-2020. This is WHH’s estimate of the price for bulk power supply in the Florida market in 2017 and is based on recent responses to bids for bulk power supply for other municipal utilities.. Escalation Rate Market Price Bulk Power (post 2020). This is WHH’s forecast for the escalation rate in bulk power supply prices in the post 2020 time period and assumes slightly higher escalation rates (2.60 percent) reflecting the fact that current prices are weak.

This is a very low estimate especia lly considering bond issu ing fees and spreads.

Inf lating the revenues and expenses at the same rate? Is there a rate increase consideration here? SECO’s rate’s are projected as stable or declining.

Bulk power supply beyond 2020 is showing signif icant reduction in excess capacity. Current marginal cost pricing is not sustainable on the long term

Marginal cost pricing is projected to be signif icantly reduced by then. City will have to buy the power at full retail price which changes this analysis dramatically.

Gas prices are in a downward trend and actually just dropped below $2 per MBTU. Where is this coming from? Additional rate increases?

Bulk power market cannot be accessed by the City until after the 5-year notice is given to FMPA. Most of the current bulk power contracts do not exceed 5-year mark due to high volatility. Where is the market going to be by 2021? This is not an accurate analysis of the situation.

Again, this is another irrelevant point due to 5-year required notice to FMPA.

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Consumption in 2015 of Newly Acquired Customers. This is based on actual consumption data provided by SECO staff. New Customer Consumption Growth Rate. This is the expected rate of increase in electricity sales to the new customers and is consistent with industry forecasts for Florida based utilities. FPL, the largest utility in Florida and one of the largest in the US, has forecasted that electric consumption per customer will increase at a rate of 0.50 percent per year for residential and commercial customers. WHH has used this estimate in the pro forma’s to adjust electric consumption for future periods. WHH notes that SECO has experienced annual growth in retail sales per customer of about 0.9 percent during the last three years. Therefore the forecast may be slightly low, but it is conservative in that higher growth in consumption will improve the financial results for all cases. Distribution Losses. Distribution losses are the difference between the amount of electricity that is delivered to the City by FMPA (or other bulk power supplier) and the amount of electricity actually sold to the retail customers. The difference reflects the losses in transformers and electric lines. WHH has used 4.5 percent which is typical for distribution utilities that do not have a transmission system. Annual Load Factor Acquired Customers. Annual Load Factor is a measure of the consumption pattern of electric use. It is the ratio of the average hourly consumption to the peak hourly consumption during a one year period. Since the newly acquired customers include some large commercial users which typically have higher load factors than residential customers, WHH has estimated the load factor for the newly acquired customers at 52 percent which is slightly higher than the estimate for the load factor of existing customers. Annual Load Factor Existing Customers. Since the model includes only incremental cash flows from the newly acquired customers, the load factor for existing customers is only used to calculate the FMPA ARP bulk power costs on a MW-hr. basis. Bulk power costs are generally represented on a demand and energy basis and the load factor is used to convert the demand costs to an equivalent energy cost. Interest Rate on Long Term Debt. This is the average interest rate on the debt that the City will incur to finance the acquisition and is based on estimates provide by City staff working in consultation with their financial advisor. This analysis assumes an interest rate of 4.5 percent. Number Customers Acquired in 2016. This is the number of customers within the City limits and currently being served by SECO. This number was provided by SECO staff.

U.S. consumers may grow at that rate by Bushnell is not. There is no basis for these projections locally.

SECO covers a 2,000 mile territory and that growth includes The Villages. Is Bushnell growing at that rate? We don’t think so.

The rate on debt will likely be higher in 5 years when City can actually get to the open power market.

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Annual Electric Consumption New Customers. This number was also provided by SECO staff based on 2014 consumption data. WHH has escalated the consumption for all future years by the New Customer Consumption Growth Rate noted above. Total Consumption in Acquired Territory. This is the total of kW-hr sales for the newly acquired customers. Peak Demand Acquired Customers. This number is presented for informational purposes only and it is not used in the model. The peak demand is estimated from the annual consumption in Line 4 divided by the number of hours in a year and by the Annual Load Factor in Global Inputs. Average Bushnell Retail Rate. This represents the average of residential and commercial rates and is determined by dividing annual sales revenues by annual sales in kW-hrs. Average SECO Retail Rate. This represents the average of residential and commercial rates and is determined by dividing annual sales revenues by annual sales in kW-hrs. Since different scenarios assume different retail rates for the newly acquired customers, both the SECO average retail rates and the Bushnell average retail rates are used in the model. The rates in both cases are escalated at the same escalation rate (2.6% annually) for retail rates listed under the Global Inputs. Gross Revenues New Customers. This is a calculated result obtained by multiplying total consumption (Line 4) by the appropriate retail rate (Line 6 or Line 7) depending on the scenario. Net Revenues New Customers. This line in the model is the difference between gross revenues from the newly acquired customers less the incremental cost of bulk power supply (Line 8 less Line 9). Bulk Power Rate City of Bushnell. This is average cost of bulk power supply for the City. As explained in the report, WHH has modeled some scenarios in which the bulk power will be obtained from the FMPA ARP and in other scenarios the incremental bulk power requirement is obtained from the open market. In either case, the model uses the initial year rates and escalation rates from the Global Inputs above. Additional Bulk Power Supply Requirement. This model input is calculated from the Total Consumption in Line 4 and the estimate for distribution losses included in the Global Inputs. Bulk Power Supply Costs. This is a calculated result obtained from multiplying the Additional Bulk Power Supply Requirement (Line 10 by the Bulk Power Supply Costs (line 11).

Bushnell has not historically shown that growth rate. This assumption is f lawed.

This is not ref lective of the actual trends or projections.

Open market is not accessible by the City for the next 5 years.

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Net Revenues New Customers. This is also a calculated result obtained from subtracting the Bulk Power Supply Costs (line 11) from the Gross Revenues New Customers (Line 8). Incremental Electric Distribution O&M & Capital Expenses. If the City should acquire the additional customers and service territory, the City would incur incremental O&M and capital outlays. WHH has estimated these costs based on industry data. Average costs published by the American Public Power Association for similarly sized municipal utility systems were reviewed plus WHH considered existing cost data from the City. WHH notes that the estimated cost provided by SECO in their “Bushnell’s Big Choice” publication is actually slightly less than the WHH estimate. These costs were escalated for all future years based on inflation and increased sales. Loss of Franchise Fees. If the City should acquire the customers now being served by SECO the City would not receive the franchise fees that SECO currently pays to the City. The loss of these franchise fees represents an incremental cash outflow in the model (Line 14). Operating Cash Flow. This is the result of the model. Will the acquisition of the additional territory and customers have a positive or negative impact on the City? Are the cash flows sufficient to justify an investment of over $6 million? This line is the answer! Interpreting this result is the subject of the next section. This is a signif icantly

underestimated number.The answer may be different if the number is much higher.

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Model Results

The purpose of the model is to estimate the incremental cash flows that would result if the City exercised the purchase option in the franchise agreement. The Net Cash Flow is the amount remaining from all incremental electric system revenues after the payment of all incremental expenses, debt service, and incremental capital outlays. WHH has not made any assumptions regarding the use of these excess funds. Typical uses by other municipal systems include:

• Reduction in electric rates. • Additional capital investment in the utility system for improved reliability,

hurricane protection and aesthetics (e.g. increased undergrounding).

• Establishment of reserves to moderate abrupt changes in bulk power supply costs. • Additional transfers to the general fund to lower ad valorem property taxes.

Since Net Cash Flow is the cash left over after payment of all expenses, debt service payments and ongoing system capital investments, it is a direct measure of the incremental financial benefit of the City exercising the purchase option and acquiring the additional customers. These incremental cash flows are displayed in Line 51 of the model However, the question before the City is “Are these Net Cash Flows sufficient to justify the investment in the purchase of customers?” Several metrics can be used to measure the financial benefit of the net cash flow resulting from exercising the purchase option. These are discussed below. Internal Rate of Return. Internal Rate of Return is the average return on the invested capital taking into account the time value of money. Net cash flows in early years are more valuable than net cash flows in later years. In this case, the Internal Rate of Return is a measure of the average annual return on the investment by the City to acquire the additional customers. This metric is useful in evaluating potential capital investment opportunities. If an investment opportunity has an internal rate of return that exceeds the minimum required return of the cost of capital, then the investment is justified. An appropriate determination of the minimum required return is therefore necessary for the proper use of the internal rate of return in making investment decisions.

4

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Generally, the minimum required return is based on the cost of capital and the cost of capital is a function of the cost of the components of capital. For example, if one purchased an income producing property, the investor may borrow 70 percent of the purchase price and fund the remaining 30 percent from cash on hand. Further assume that the interest rate of the loan was 5 percent and the investor had expectations of earning 10 percent on his equity investment. The cost of capital then, is the weighted average of the cost of each component of capital. In this simplified example, the weighted average cost of capital or minimum required return would be 5.0 percent times 70 percent plus 10 percent times 30 percent or 6.5 percent. However to evaluate this investment, one needs to know the appropriate return for an investment in an electric distribution utility. WHH suggests that data from the large regulated utilities in Florida would be useful. Investor owned utilities are required to establish their cost of capital before the Florida Public Services Commission and rates are determined such that the investor owned utilities do not earn more than their allowed rate of return. Although this process is not directly applicable to the municipal enterprises, the overall allowed return for investor owned utilities can serve as meaningful input to determine an appropriate return for the City. Components of capital generally include debt capital and equity capital. The determination of the cost of equity capital is somewhat subjective. It is the cost that the purchasers of equity (stock) require to make or maintain their investments in an entity. It is a function of the risk of the company, the volatility in returns and the amount of financial leverage used. Currently, the Florida Public Service Commission allows investor owned utilities to set rates based on a 10.5% return on equity capital. Based on the debt –equity ratio of the investor owned utilities, this results in an allowed return on invested capital of about 6.5 percent. For public entities such as Bushnell that do not have investors, the above methodology cannot be used. Certainly one could argue that the return on equity should be less than that of investor owned utilities due to tax considerations and reduced rate setting risk. Additionally since the City does not own any generation assets, the enterprise would be less risky than that of an investor owned utility with generation assets. However, other considerations such as the small size of Bushnell imply greater risks. WHH suggests that these considerations imply an equivalent cost of equity capital to the City of about 9 percent. In other words, the City should strive to earn about 9 percent on the investment of “equity” capital. The cost of debt capital for the City is much more objective. It is the interest rate of the debt issued to purchase the electric distribution system. As noted in the discussion of the financial model inputs, WHH has estimated the interest rate on debt at 4.5 percent. These two considerations bind the estimate of the weighted average cost of capital to the City at between 4.5 percent and 9 percent. Arguably, since initially electric investment will be funded by 100% debt capital, the appropriate weighted average cost of capital would be closer to the cost of debt. However, given the

Since the City does not control the cost of its own generation and power contracts are short, how is it less risk? It’s just the opposite.

Since the City is taking a loan for 100% of the cost, has it done a risk analysis? Did the bond agency indicate what risk rating the bonds will receive? Higher risk = higher interest rate.

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uncertainty of the forecasts, risks associated with the enterprise and other considerations, WHH recommends that the City use a weighted cost of capital of approximately 6.0 percent. This rate should be used as the MINIMUM rate of return or hurdle rate in evaluating the exercise of the purchase option. Therefore, if the forecasted cash flows yield an average rate of return (Internal Rate of Return) of greater than 6.5%, the investment (acquisition of SECO’s customers and a portion of the electric distribution system) is financially feasible. The other metric typically used in the evaluation of investment decisions is the Net Present Value of Investment. This is determined by calculating the present value of all revenues resulting from the proposed investment less the present value of all additional expenditures including the acquisition cost over the twenty-year period of analysis. The Net Present Value is a measure of the value in current dollars to the City if it elects to exercise its option and acquire SECO customers and related assets located within the City limits. WHH has discounted future cash flows in determining the net present value at both the 4.5 percent cost of debt and the recommended required rate of return or hurdle rate of 6.5 percent. Note that both the Internal Rate of Return and the Net Present Value of Investment calculations include a terminal value. Since the term of the financial pro forma is fixed at 20 years, the terminal value is an additional cash flow in year 21 to reflect an estimate of the on-going value of the system in future years. Ignoring terminal value considerations understates the internal rate of return and the net present value of investment since it ignores the value that exists beyond the fixed term of the financial pro forma. Scenario Descriptions and Results. As noted previously, WHH has developed cash flow pro forma’s for three different scenarios. The following provides a description of each scenario and discussion of the results of the model of the cash flow pro forma. Scenario 1. In this scenario, WHH has assumed that the City purchases all customers located within the City boundary and the associated electric distribution facilities. Also, in this scenario, the City extends its current distribution system as necessary to serve the newly acquired customers. This scenario further assumes that the incremental bulk power supply is purchased from the FMPA under the All Requirements Project contract. Lastly this scenario assumes that the City applies its current retail electric rates to the newly acquired customers. The financial pro forma is included as Attachment 1. As indicated in the pro forma, this scenario is financially feasible. The expected internal rate of return is 12.1 percent, considerably above the suggested hurdle rate of 6.5 percent and the net present value is $6.7 million at a discount rate of 4.5 percent and a net present value of $4.1 million at a discount rate of 6.5 percent.

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Although apparently financially feasible, WHH believes that this scenario represents challenges. The first is that the City faces formidable opposition to the purchase from SECO. Although the City’s legal position is strong, WHH believes that the support of the affected customers would be helpful in order to complete the purchase. Currently the City’s average retail electric rates are about 14 percent above the corresponding rates for SECO. The primary reason for this delta is the higher bulk power supply costs from the FMPA ARP. Since bulk power supply costs represent about 70 percent of operating costs, it is very difficult to maintain competitive retail rates when bulk power supply costs are high. Additionally based on forecasts from FMPA, WHH does not project that this difference in rates will diminish in the foreseeable future. As a result, WHH believes that the affected customers will strongly oppose any action by the City that increases their electric rates by about 14 percent. Therefore, WHH concludes that the combined opposition from SECO plus likely customer opposition result in Scenario 1 would be very challenging to implement. Scenario 2. This scenario is identical to Scenario 1 with one exception. In Scenario 2, WHH has assumed that the City adopts the SECO retail rates for all newly acquired customers as opposed to imposing the current City retail rates. This action would negate most if not all of opposition from the affected customers. WHH suggests that the City would propose to these newly acquired customers that their electric rates would be the lower of the City rates or SECO rates. This is not without precedence. In 2005, when the city of Winter Park purchased the electric distribution system from Florida Power Corporation (now Duke Energy Florida), the City committed to maintain rates equal to or lower than Florida Power. Also, WHH believes that SECO has some exposure to increased bulk power supply costs that may alter the current unfavorable rate comparison so that the provision allowing the new customers the lower of SECO or City rates has some value. SECO’s bulk power supplier, Seminole Electric Cooperative has considerable exposure under the recently Clean Power Plan to reduce coal plant generation. In fact, Seminole has the largest exposure to coal of any Florida utility. Note that excepting this change in retail electric rates, all other pro forma inputs in Scenario 2 have remained the same as in Scenario 1. The pro forma for this case is included as Attachment 2. The model results indicated a negative net present value of $3.4 million and an internal rate of return of negative 0.3 percent. Basically, lower revenues resulting from the reduced retail rates (the SECO rates) more than offsets the economies associated with the City’s lower overheads and reduced cost of service. Note upon reviewing the pro forma, annual incremental cash flows from the acquisition is negative for every year of the 20 period of the pro forma. WHH concludes Scenario 2 is not financially viable and based on the underlying assumptions, the acquisition of the subject customers is not recommended. WHH notes that this result is consistent with public statements issued by SECO in their public information campaign.

This is not a true statement since out of 31 FMPA members, the City has some of the highest rates, yet cost of power is the same for everyone. It’s a ref lection of an ineff icient system.

Same logic applies here where City has rates much higher than its peers due to costs other than power supply.

Correct. There was no Winter Park utility at that time and there were no Winter Park rates. All customers were part of F lorida Power Corporation and this argument is inaccurate and without merit.

This is not ref lecting a negative f inancia l impact and all rating agencies give Seminole a stable outlook.

Not true, as SECO projections are ref lecting a stable power cost environment.

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Scenario 3. In this scenario, WHH has assumed that the City acquires its incremental bulk power supply from the market as opposed to purchasing it from the FMPA All Requirements Project (ARP). All other assumptions in Scenario 3 are identical to Scenario 2. The FMPA ARP contract provides that the City can exercise an option included in the contract called Contract Rate of Delivery (CROD), which will allow the City to purchase bulk supply in excess of its current requirement from the open market. Florida has a robust bulk power supply market with many active participants. WHH is currently assisting the city of Vero Beach solicit proposals for the bulk power supply and bid list includes 15 entities, all capable of providing bulk power supply into the Florida market. WHH has forecasted the 2017 bulk power supply cost if acquired from the open market to be approximately $36 per MW-hr. below the FMPA ARP price. The current market price also is substantially below the cost of bulk power supply for SECO. In 2014, SECO paid $81.50 per MW-hr for bulk power supply, substantially above the price in the open market. It is this difference in the cost of bulk power supply that can provide the incremental cash flows sufficient to fund the purchase of the system from SECO. The results of this scenario can best be illustrated by reviewing the difference between the average retail revenue and bulk power costs. Currently SECO’s average retail revenue is about $122 per MW-hr. Their cost of bulk power is about $85 per MW-hr sold. The difference is $37 per MW-hr. This delta represents the revenues available to SECO to operate the transmission and distribution system and provide retail electric service to its customers. In the case of the City, the average retail revenue is about $139 per MW-hr and the cost of bulk power from the FMPA All Requirements Project is forecasted to be about $95. The difference is $44 per MW-hr which represents all the revenues available to the City from the electric enterprise after bulk power supply expenses. Note that this delta is greater for the City than for SECO reflecting the economies of scale that the much larger SECO enjoys. However if the City should acquire its bulk power supply from the market at an estimated cost of about $60.50 per MW-hr, the City would realize significant additional revenues. Recall that in Scenario 3, the City would adopt SECO retail rates. The delta between SECO retail rates and the market price of bulk power supply is about $62 per MW-hr., much larger than the existing spread of $44 per Mw-hr. between the City’s retail rates and the cost of bulk power supply from FMPA. Therefore it is not surprising under this scenario that the financial results are very favorable. The Internal Rate of Return for this Scenario is 21.4 percent and the Net Present Value is almost $12.2 million. These results make the case to exercise the purchase option not only feasible but financially compelling. In fact, WHH believes that under this Scenario 3, the City would be in a position to offer rate reductions to its existing customers.

That is today, but 5 years from now the outlook is much different.

Again, a f lawed result and recommendation.

This requires a 5-year notice which will postpone CROD option until 2021 while exposing the City to uncertainty.

It’s only favorable as a result of artif icia lly lowering acquisition costs and manipulating cost of power assumptions.

Again, not a relevant point since CROD is not available for 5 years.

Today’s market price is low due to short term excess capacity reserves and marginal cost sales. That will change dramatically once the reserves are depleted within 5 years.

This is a short lived assumption at best with plenty of risk after the near term.

A risky and short-lived assumption.

It is actually much less, the real difference is $42 and rates are projected to remain stable.

SECO is a 192,000 customer utility while City is about 1,000. Increasing the City count to 1,500 is not going to reach the same economies.

None of these contracts are long term.

This is unlikely given the City’s f inances and prior history.

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The results of the three scenarios are summarized in the table below.

Scenario Description Internal Rate of Return

Net Present Value 6.0 %

Discount Scenario 1. Purchase SECO System within the City, apply existing COB electric rates, purchase Bulk Power Supply from ARP

12.1% $4.1 Million

Scenario 2. Purchase SECO System within the City, apply existing SECO electric rates, purchase Bulk Power Supply from ARP

-0.3% -$3.4 Million

Scenario 3. Purchase SECO System within the City, apply existing SECO electric rates, purchase Bulk Power Supply in the open market

21.4% $12.2 Million

*Using Herrington’s model, the Net Present Value of the transac on is a loss of $4.3 million.

*

None of these numbers appear to be correct, See SECO’s Exhibit 2.

4%

15%

Does not compute

Negative-$1.45 Million

-$7. 7Million

$5. 5Million

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Conclusion

WHH concludes from the foregoing analysis that exercising the purchase option is a financially viable strategy for the City. Exercising this option is important for the future viability of the Bushnell electric system. WHH believes that the City is facing an existential risk. The City must become more competitive or consider alternatives to divest the electric utility enterprise. The City’s electric enterprise faces several challenges. The first is the small size. The electric utility business has benefits of scale. The Bushnell system is the second smallest system of Florida’s 34 municipal utility systems. Only the Moore Haven electric system is smaller. Additionally, the high bulk power supply costs from the FMPA ARP project have resulted in the Bushnell system being uncompetitive in price. Current (January 2015 through May 2015) residential rates for SECO using 1,000 kW-hrs are $120.70. During the same period the residential rates for Bushnell were $133.85. Lowering bulk power supply costs via CROD will reduce retail rates. Note that exercising the CROD alternative is most beneficial with a step increase in load such as would occur with the purchase of a portion of the SECO system. Acquisition of additional customers is also a cost reduction strategy. Fixed overhead and operational costs can be allocated over greater sales resulting in lower rates. So exercising the purchase option with SECO is a strategy that is consistent with lowering costs and enhancing the future viability of the Bushnell electric enterprise. Additionally, with the predominance of residential load, the City has a very low load factor. The ARP allocates much of the costs of bulk power supply to the demand component of rates. This penalizes low load factor ARP customers such as Bushnell. For example, the current typical demand price in the Florida market is about $7 per MW-month. The current ARP demand price to Bushnell is about $22 per MW-month. The City’s low load factor increases the sensitivity to high demand prices. The combination of small size, high bulk power costs, low load factor and lack of growth all combine to place the City in a challenging position relative to other retail providers of electric service. Exercising the franchise purchase option is an effective response to each of these competitive disadvantages.

5

Overly dramatic and incorrect. The City does not need to take more f inancia l risk but should consider other safer alternatives.

And if it does not work out well, who will carry the f inancia l burden? WHH? Most likely the citizens will have to pay up through higher rates and taxes.

Has that conclusion been tested by a peer group review or at least another professional f irm?

It’s not about to get any bigger and some citizens like it that way.

Not true, as other municipal members of FMPA have much lower rates. This is a bogus conclusion.

Only if it works. A 100% debt f inanced acquisition will backf ire if any load is lost such as commercia l customers leaving town. The rest of the folks will foot the bill.

Cost will increase due to additional service requirements. Will the City guarantee lower rates? Not so.

Not possible for another 5 years.

It is a tremendous risk for the City with weak f inancia ls and no cash in the bank to speak of.

This is contrary to other studies already done by the City. The risk is great and outcome is very uncertain.

Only according to this one study and one opinion.

It will not change that order by adding another 597 customers.

True but 1,000 to 1,500 rise does not accomplish that.

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Therefore the following actions are recommended:

1. Formally notify SECO that the City will not renew the franchise agreement and that the City is exercising its option to purchase the system within the City limits.

2. Commence discussions with FMPA and other ARP participants regarding the exercising of the CROD option in the ARP contract.

3. Continue negotiations with SECO in an attempt to reach some compromise position acceptable to the City which avoids the cost to both parties for arbitration proceedings.

4. Conduct preliminary discussions with potential bulk power suppliers. WHH notes that FMPA, Seminole Electric Cooperative, Duke Energy Florida and Florida Power and Light have all been very competitive in recent bulk power supply solicitations.

5. Select and retain a legal team to assist the City in the enforcement of its franchise rights.

6. Engage the City’s financial advisor to investigate financing options for the purchase of the electric distribution system.

WHH Enterprises is pleased to present this report and remains available to assist the City as necessary.

It expired 4 years ago.

Not possible for another 5 years as FMPA notice is required. CROD has not been implemented by other F lorida municipal utilities yet and FMPA analysis of that option in 2011 is critical of WHH.

This study has many f laws that prohibit any rational negotiation. SECO is a not-for-prof it utility that has an obligation to its members to receive Fair Market Value for its territory.

These are marginal cost, short-term contracts that will be all but gone in 5 years.

A very expensive proposition and if it doesn’t work who will pay? The citizens will.

100% debt f inancing with f inances that are limited at best. Risk prof ile for bond issue does not look favorable. Who will guarantee the bond? They will be guaranteed with revenues of the city and the citizens.

Considering the f laws of this report, the City should think twice.

SECO’ R S E 1

Risks of Open Power Market:Key Obliga ons of Bushnell

• All-Requirements Services – includes purchase and to receive all electric capacity and energy required for the opera on of its municipal electric system

• Provide at least fi ve (5) years prior wri en no ce to FMPA to irrevocably limit the maximum amount of electric capacity and energy that FMPA should provide under the Contract Rate of Delivery (CROD) elec on; date of commencement of the CROD limita on is the January 1st following the fi ve-year no ce period

• All Bushnell municipal system load prior to CROD commencement date is included in All-Requirements Services and aff ects CROD determina on

• Bushnell con nues payments for all CROD capacity and energy and associated transmission service through FMPA (the documents do not provide certainty as to non-CROD transmission costs and other All-Requirements Services that may be provided by FMPA a er implementa on of CROD)

ARPC Risks to Bushnell• CROD limit not determined and reported by FMPA un l December immediately preceding the

January 1st CROD commencement

• FMPA ability to adjust the CROD plus or minus 15% creates uncertainty for CROD obliga on and 3rd party power supply needs

• If Bushnell has not provided CROD no ce to FMPA, earliest CROD commencement would be January 1, 2021

• Ten Year Site Plans forecast of the 2021 Florida wholesale shows the power market has no excess capacity to enable rate proposals as experienced over the past fi ve years

• Non-CROD power supply necessitates Bushnell incurring unpredictable transmission and ancillary services expense

Transmission and Distribu on Losses Impact to CROD - DEF’s current losses • 1.34% for transmission

• 2.34% for distribu on

Transmission service at Distribu on Voltage; Bushnell must pay an addi onal $0.72 per kW-mo.

Sources: Bushnell ARPC dated March 22, 1985 with Exhibit A, Schedule B-1 & B-2, Schedule C, and Exhibit I; Bushnell ARPC Amendment No. 1 dated January 22, 1999; FMPA Le er to Fort Pierce U li es Authority dated March 23, 2011 addressing a WHH assessment of the Fort Pierce ARPC and CROD