alternative funding sources for energy … funding sources...financing term ----- 3 years 10 to 20...

Alternative Funding Sources

for Energy Improvement Projects

MWEA 2014 Energy Workshop

Presented by:

Dave Monette,

Warren Wastewater

Treatment Plant

Warren Facility Overview

• Funding method for previous facility improvements

• Need for adding energy-saving measures

• Best choice to fund energy improvements?

• Energy Performance Contract (EPC) financed with a

capital lease purchase agreement

• Unconventional financial opportunities

• Free on-line tools and resources

• Will an EPC work for you?

• *Questions……?

About Warren

Purchase water from Detroit but treats own

wastewater

Serves 50,000 customers

20 MGD average flow

o 36 MGD design flow

Peaks flows exceed 100 MGD

WWTP 55 Years

Old

Single, large

pumping station &

multiple hearth

incinerator

Capital budget

– $5000K

RAW

SEWAGE

PUMPS

GRIT

REMOVAL

PRIMARY

SEDIMENTATON AERATION

CLARIFIERS

INTERMEDIATE

PUMPS

SAND FILTERS UV DISINFECTION

RED RUN DRAIN

TO CLINTON

RIVER

PRI & WAS

BLENDING GBT

THICKENING

BFP

DEWATERING INCINERATION

ASH

LAGOONS

LANDFILL PRI SLDG

WAS SLDG

AIR IRON

Warren WWTP Needed Improvements

User rate increase for traditional debt retirement

• FEASIBILITY STUDY

• DESIGN

• BID

• BUILD

• FUNDING

• CASH RESERVES

• LOAN / BOND

Warren improvements and funding choices

Recent Facility Improvements and funding plan

• Four phased project to complete WWTP Facility Improvements (2003 to 2006)

o Sand filter rehabilitation and controls upgrade

o Solids handling improvements

o Incineration rehabilitation

o SCADA and Technology improvements

• $23 M funded from Capital Improvement Budged using low interest SRF loans

• Wastewater rate increases used for debt retirement

Pay for activity

Traditional Construction Contract

Warren improvements and funding choices

Project needed to reduce Energy / Chemical costs

• In 2010 identified need to make improvements to reduce energy and chemical costs which had reached $2.1 Million/Year

• Energy and chemical costs represented 22% of the annual operating budget

• Needed to establish funding for treatment process improvements and building/facility improvements that would save energy and chemical costs and modernize the WWTP

Warren – Energy Project funding challenges

Problems with Energy improvements funding plan

• Lack of funding in capital improvement budget

• Lack of personnel and time to design and plan energy projects due to other priorities

• Lack of in-house expertise to implement the energy improvement projects identified

• Lack of “political will” for funding approval – especially if it involves a rate increase to pay off the debt

Energy Improvement Funding

Traditional funding methods will not be approved ?

• Cash – Would create no debt, but if available, reduces liquidity

• Loan – (such as SRF, has low interest rate but still creates new debt)

• Bond

o General obligation –creates new debt

o Revenue – creates new debt

o QECB – creates slightly less debt (because interest rate is federally subsidized) –Many benefits….could work

• Assess or raise taxes or user rates – politically difficult

• Any other options?

Energy Performance Contracting (EPC)

What about Energy Performance Contracting ?

ESCO designs and implements improvements with guaranteed performance to provide guaranteed energy savings

A turnkey contracting method with Energy Service Company (ESCO) to remove energy, operational and maintenance waste from facilities

WHAT

HOW

No up-front capital required. Pay for improvements over time through operation, maintenance and energy cost savings – not capital budgets……..Guaranteed

COST

Requires the ESCO to provide a performance-based guarantee

Pay for results

Energy Performance Contract

What EPC Is NOT:

• Construction Contract

• Engineering Services Contract

• Design-Build Contract

• Architectural Services Contract

• Service Contract

Energy Performance Contracting

An innovative model that provides

• Mechanism to complete large scale projects

• Performance assured for life of the agreement, e.g. up to

20 years

• Measurement and Verification of Results

• Lower operating (utility) costs and stabilize budgets

• Handle deferred maintenance (finally)

• Improve indoor air quality, comfort, and worker productivity

• Avoid the cost of delay

EPC Savings Guarantee

• Long-term partnership

• Agreement on the energy baseline

• Annual savings must exceed annual payments

• ESCO pays in the event of shortfall

o Savings in future years cannot pay shortfall for earlier years

• Guaranteed project cost

• Guaranteed equipment performance

• ESCO warrants the installed equipment for the

payback period of the loan

EPC: Cash Flows - Guaranteed


Customer Savings

energy/operating costs

Paid to debt service for financing


Paid to debt service for financing

New, reduced energy/operating costs achieved from EPC

improvements

31

Assemble project team

Needs assessment

Gather energy use data

Develop and issue

solicitation

Review and rate responses

Select top rated ESCO

Execute Investment

Grade Audit Agreement

Approve completed

audit report

Negotiate and execute EPC

ESCO begins construction

ESCO completes construction, commissions equipment

Owner accepts and approves

project

Guaranteed savings period

On-going project measurement

and verification

Annual energy

EPC Procurement Process

savings report due to Owner

Work Scope with sufficient Savings for Warren’s EPC

ECM’s and FIM’s selected after Energy Audit

No. ECM or FIM

1 Aeration Blower

2 Pumping Improvements

3 Bio. Phosphorous Removal

4 Mechanical Improvements

5 Demand Monitoring & Controls

6 Lighting Improvements

7 Incinerator Improvements

8 Building Envelope Improvements

9 Solar PV

HOW DO WE

FINANCE THE

ENERGY

PERFORMANCE

CONTRACT?

EPC Procurement Process

EPC Process Financial Process Internal Guidance

Meeting Financial RFP

Issue RFP

Realize Savings

ESCO implements

ECMs

Select ESCO

ESCO performs

IGA

Issue Implementation

Contract

Sign loan or lease

agreement

EPC FINANCING ALTERNATIVES

Comparing Financing Options

-----------Purchase-------------------

----

----------------Lease-----------------

* Transaction costs include professional services and staff

time devoted to the transaction Source: adapted from EPA guidance

Evaluation Factor

Cash

Loan

Bond

Operating

Capital

Municipal

Performance

Contract

Down Payment 100% 20 to 25 % 0 0 0 0 0

Transaction Cost ----- Medium High ----- Low Low Medium

Balance Sheet Asset Asset &

Liability

Asset & Liability ----- Asset & Liability ----- -----

Tax Deductions Depreciation Depreciation &

Interest

Depreciation

Lease

Payments

Depreciation

----- -----

Interest Rate ----- Medium Low ----- High Low -----

Financing Term ----- 3 Years 10 to 20 Years ----- 3 to 5 Years Project Life Project Life

Approval Process Internal Bank Referendum Internal Lessor Lessor Internal

Approval Time Short Medium Very Long Short Short Short Long

Flexibility Usually Small

Projects

Limited to

Equipment

Value

Large Projects

Only

Usually

Small

Projects

Equipment Cost +

20 to 40 %

100 % of

Project Cost

100% of Project

Cost

Capital or

Operating Budget

Either Capital Capital

Operating Capital

Operating

Operating


Is leasing a viable financing alternative?

• A lease is essentially a loan in which the lessor (lender) retains legal title to the property being leased

o Operating Lease

Intend to return equipment to lessor at the end of lease term (Rental Agreement)

o Capital Lease

Essentially an Installment Purchase Agreement …it is so similar to a purchase that both financial accounting and tax rules treat it as a purchase


Advantages of a Capital Lease

• Terms can be very flexible

• Typically require little or no down payment

• Amount of paperwork is significantly reduced

• Minimal transaction costs (underwriting, legal opinion, insurance, public referendum preparation)

• Approval time can be very fast (no waiting period)


A Municipal Lease is

• A hybrid tax-exempt structure with features similar to both a loan and a lease

• Like a Loan: Municipality has title to asset during term and gains free & clear ownership of asset at end of term

• Like a Lease: Financing is subject to annual renewal or termination

• Legally not a “Debt” from a constitutional perspective, because no multi-year obligation is created due to the annual appropriation clause

• Treated as a Capital Lease under GAAP accounting • During the lease term, the municipality holds title to the leased equipment

while the lessor retains a security interest


Apparent best choice: Municipal Lease Financing

• Conserves cash on hand • Not classified as debt,

therefore:

– No voter referendum

– Not subject to legal debt limitations

• No encumbrance of tax or other revenues, therefore:

– Revenues are available to secure future debt

– Enhances borrowing flexibility

• More structuring flexibility

– Match financing terms with expected useful life of asset

– Less rigid terms vs. bonds

• Benefits vs. Public Bonds:

– Easier approval process

– Lower transaction costs

– More flexible structures

– Fewer documents

– No ratings / insurance

– Less complicated for lessee

– No ongoing reporting


Placement Agent selected through Financial RFP

• We procured services of Placement Agent Green Campus Partners, LLC (GCP) for Warren’s Energy Project Financing

• Informed GCP of our desire to use a Municipal Lease to finance Warren’s EPC

• After researching the State law in Michigan, GCP learned that a Michigan Home Rule City cannot grant a security interest in the equipment financed….which is a requirement for executing a Municipal Lease

• This limitation makes a municipal lease purchase agreement very unattractive to investors….so not a viable option in Michigan


Warren’s EPC Financing Approved

• With the help of our placement agent GCP, Warren

successfully financed an Energy Performance Contract. • A form of capital lease called an Act 99 Installment Purchase

Agreement (IPA), authorized pursuant to Michigan statutes, was used for financing from JPMorgan Chase Bank.

• The lease term is 15 years with an interest rate of 2.73% • The IPA closed in late November of 2011, after which

implementation of Warren’s EPC began. • The project construction is currently nearing completion

Warren’s Energy Performance Contract Financials

Savings Guarantee – begins after installation completed

EPC Amount Financed: $8,021,303

Financing Structure: Act 99 - Installment Purchase Agreement

Lender: JPMorgan Chase Bank

Term: 15 Years

Interest Rate: 2.73%

Payment Structure: 15 annual payments in arrears

Annual Lease Payment Amount: $553,377

Annual Guaranteed Savings Amount: $580,715

JPMorgan Chase

Lender (Lessor)

Johnson

Controls

(ESCO)

Escrow

Guarantee

Drawdown

Schedule

City of Warren

Owner (Lessee)

Lease Payments

Lease Agreement

Authorization of

Construction Payments

Construction

Payments

Installment Purchase Agreement

Warren EPC -Project Funding Arrangement


Unconventional Opportunities

• Start with the Database of State Incentives for Renewables & Efficiency at: http://www.dsireusa.org

• Utility incentives - Check with local utility to learn what programs are available. (Warren’s project received $71,000 in utility rebates)

• State Assistance- Check with the Michigan Department of Energy, Labor and Economic Growth (DELEG) to see about financial assistance available for energy-efficiency upgrades and to determine eligibility.

• Foundations and nonprofit organizations- Many foundations and

nonprofit organizations sponsor programs that fund energy-efficiency projects.

Do not forget about special programs/financial incentives that may be available for energy improvement projects.

http://www.dsireusa.org/

Free On-line tools and resources for financing EPC

• Guidance Document: “Evaluation of Energy Conservation Measures for Wastewater Treatment Facilities” EPA 832-R-10-005

• http://water.epa.gov/scitech/wastetech/upload/Evaluation-of-Energy-Conservation-Measures-for-Wastewater-Treatment-Facilities.pdf

• National Association of Energy Service Companies (NAESCO) Website:

• http://www.naesco.org

• California Energy Commission (CEC) handbook: “How to hire an Energy Service Company” available online at:

• http://www.energy.ca.gov/reports/efficiency_handbooks/400-00-001D.PDF

http://water.epa.gov/scitech/wastetech/upload/Evaluation-of-Energy-Conservation-Measures-for-Wastewater-Treatment-Facilities.pdf

















http://www.naesco.org/

http://www.energy.ca.gov/reports/efficiency_handbooks/400-00-001D.PDF





• Capital Improvement budget too small?

• Is Energy 2nd or 3rd largest budget item?

• ‘Response Maintenance mode’ = expensive emergencies?

• Comfort issues: persistent and expensive to fix?

• Are maintenance costs rising?

• Are staff training budgets low?

If YES…an EPC may be the answer you seek

Energy Performance Contracting

Thank You !!!

• Questions

• Comments

• Concerns

You too can do energy saving improvements!

There are plenty of funding sources, programs

and options available.

alternative funding sources for energy … funding sources...financing term ----- 3 years 10 to 20...

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