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
EPC: Cash Flows - Guaranteed
Customer Savings
energy/operating costs
Paid to debt service for financing
EPC: Cash Flows - Guaranteed
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
EPC FINANCING ALTERNATIVES
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
EPC FINANCING ALTERNATIVES
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)
EPC FINANCING ALTERNATIVES
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
EPC FINANCING ALTERNATIVES
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
EPC FINANCING ALTERNATIVES
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
EPC FINANCING ALTERNATIVES
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
EPC FINANCING ALTERNATIVES
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.
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
• 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.