Catalyst Financial Group, Inc.

Transcription

1 Financing Energy Efficiency Projects February 23, 2011 Presented by: Neil Zobler President. Independent Financial Services Firm Incorporated 1992 ENERGY STAR Partner Design/Implement Financial Programs Energy & Water Efficiency Traditional & Non-traditional lenders Investment Banking funding for over $1 Billion Consulting & Training Financial Advisor

2 Catalyst Clients Include: Alliant Energy Consolidated Edison Co. of NY Edison Electric Institute Xcel Energy (formally Northern States Power Co.) Inter-American Development Bank National Grid New England Electric Co. and KeySpan Energy Snohomish PUD (WA) Tennessee Valley Authority US Department of Energy (25 cities/counties/states) US EPA ENERGY STAR Advisor in the Public Sector for 10 yrs. Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

3 Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions The Great Recession How is it Affecting E2 Projects?

4 The Great Recession December 2007 June 2009* 4 th Quarter 2009 GDP grew 2.6% Sharp downturn in imports Traditional Financial Institutions Little, if any, earnings Shortage of capital Limited tax appetite (higher rates) Access to cheap Federal Funds Dec 11, 2007 = 4.25% Dec 16, 2008 = 0.0% 0.25% Feb 17, 2011 = 0.15% *Source: US National Bureau of Economic Research The Great Recession Traditional Financial Institutions Stay within footprint More risk adverse = stricter underwriting Tighter credit criteria Lower credit limits Unrated credits hard to fund Small deals hard to fund Tighter covenants Reduced competition Higher rates ESCO exposure may limit approval

5 Shorter terms Project Structure Over 15 years difficult for public sector (prefer 12) Over 7 years difficult for private sector (prefer 5) Syndication is tougher Regulators Tell lenders to lend more, however, Stricter rules regarding performing loans Debt to Income Ratio Community Banks playing larger role Unfamiliar with the business DEBT is a four letter word Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

6 Presentation Challenges Market Sectors Residential (Consumer) Commercial and Industrial (Taxable) Municipal (Tax Exempt) MUSH Federal Cancellation for Convenience Presentation Challenges Energy Efficiency Projects Energy Performance Contracting Loans and Leases Energy Service Agreements Renewable Energy Projects Power Purchase Agreements Project financing

7 Taxable vs. Tax Exempt Public Sector can issue tax exempt Eminent Domain Taxing Powers Police Powers Private Sector must go through Conduit Agency to issue tax exempt Tax exempt = lower interest Public sector doesn t pay taxes Don t care about tax strategies/incentives Financing Methods (Taxable C&I) (by Equipment Type)

8 Financing Methods (Taxable C&I) (by Size of Firm) Financial Product Positioning Micro Ticket (<$15k) Quick and Easy Small Ticket ($15 - $500K) Ease and Convenience Process Oriented Speed Less Rate Sensitive Middle Market ($500K - $15M) Convenience Terms and Structuring Competitive Rate Large Ticket ($15M+) Very Rate Sensitive Terms and Structuring

9 Accounting 101 Capital Budget (Debt) What is the approval process? Board/Council Referendum Ceiling on capital expenses? Restructure capital expense budget? Operating Budget (Expense) Already in utility payments Easier approval process Energy efficiency projects may provide access to captive funds for other needs Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

10 What s an Energy Performance Contract? EPC is a turnkey service, sometimes compared to design/build ild construction ti contracting which provides customers with a comprehensive set of energy efficiency, renewable energy and distributed generation measures and often is accompanied with guarantees that the savings produced by a project will be sufficient to finance the full cost of the project. A typical EPC project is delivered by an Energy Service Company (ESCO). Source: ENERGY STAR - Introduction to Energy Performance Contracting

11 What is an ESCO? a business that develops, installs, and arranges financing for projects designed to improve the energy efficiency and maintenance costs for facilities over a seven to twenty year time period. ESCOs generally act as project developers for a wide range of tasks and assume the technical and performance risk associated with the project.services are bundled into the project's cost and are repaid through the dollar savings generated. ESCO Business Model Specialized construction business Deliver large, comprehensive projects 10+ year paybacks Design/build delivery Public sector is more than 80% of business Building improvements a major driver Guaranteed savings About 20% of projects use utility incentives Compliments of

12 ESCO Industry History $40B in projects since 1990 $50B savings guaranteed and verified 330,000 person-years of direct employment $25 billion of infrastructure improvements 420 million tons of CO 2 savings at no additional cost Compliments of LBNL Studies of ESCO Industry Database of ESCO projects maintained by Lawrence Berkeley National Laboratory Currently 3,500 projects Continually updated Latest report (June 2010) available at Not included are engineering and architectural firms, HVAC, lighting, windows or insulation contractors, and consultants that offer energy efficiency services without entering into long term contracts. Also not included are companies that only provide onsite generation or renewable energy systems. 24 Compliments of

13 ESCO Industry Growth Compliments of ESCO Market Segments Compliments of

14 ESCO Contracting Arrangements Compliments of Technology/Project Types Compliments of

15 Introduction to ESPC How Does ESPC Work? ESPC Project Services ESPC Project Measures Compliments of What is ESPC? Energy Savings Performance Contracting Type of Design/Build Project Turnkey service Audit + engineering + construction + financing + commissioning + O&M + long-term M&V Delivers all EE, RE and DG/CHP technologies Self-financing projects (paid from savings) Capital from third parties Compliments of

16 How Does ESPC Work? ESCO identifies energy saving opportunities. ESCO implements improvements paid from savings. ESCO arranges financing from all available sources. ESCO guarantees that savings will meet or exceed annual debt service payments to cover project costs. ESCO pays any savings shortfalls. Compliments of How Does ESPC Work? Compliments of

17 ESPC Project Services Preliminary Audit or Project Scoping Investment t Grade Audit Engineering Design Arrange Project Financing Construction Management Commissioning Monitoring and Verification (M&V) Operations & Maintenance (optional) Compliments of What Makes ESPC Different? One company delivers all services ESCO assumes project technical risk Project costs paid from savings Project savings guaranteed by ESCO Compliments of

18 Typical ESPC Measures Lighting Heating Ventilation & Air Conditioning (HVAC) Energy Management Systems Motors and Variable Speed Drives Building Envelope Measures Water Conservation Measures Compliments of Advanced ESPC Measures Renewables solar, wind and biomass Distributed Generation or CHP Demand Response Water metering Street and traffic lighting Building sustainability Compliments of

19 Clarifying EPCs Negotiated agreements No two are exactly the same Contain language dealing with: Project Development Energy Services Financing Two Most Common Types of EPCs finance agreement finance agreement Less Common Most Common

20 Value of Performance Guarantees Benefit accrues to the customer not lender Tied to financial strength of guarantor Often required Public Sector thru legislation Project finance (large projects) Common misperception Help overcome credit quality issues Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

21 Loan Primer Common Features Long or Short Term Interest Rates Vary Term Type Size Risk Secured or Unsecured Bank Loans Often: Require Compensating Balances Have Restrictive Covenants

22 Loan Primer Common Restrictive Covenants (bank) Ongoing Accurate Financial Records Performance Standards on Financial Ratios Limits on Total Debt Blanket Lien on all Assets Additional Capital Expenditures Sale of Fixed Assets Tax and Insurance Payments Dividends & Other Payments to Owners

23 Leasing: Creative Financing Municipal Lease Tax Lease Tax Exempt Lease Purchase Commercial vs. Municipal Commercial Leases (tax strategy) Long-term rental agreement w/ Purchase Option Capital vs. Operating (FASB 13) True (Tax) Municipal Leases (budget strategy) Conditional Sales Agreement Tax Exempt Rates (lower) Conditional Sales Agreements Renews yearly Not considered Debt in most states Non-Appropriation or Abatement Language

24 Why do Commercial Customers Lease? Effective Tax Strategy Avoid Depreciation Effective Financing Strategy May Avoid Debt Issues Allows structuring Skip Payments Step Payments Arrears or Advance Payment Flexible! Commercial Leasing - Creative Financing Capital Leases - on balance sheet AKA Finance Lease Lease-Purchase Agreement First Amendment Lease Purchase or renew Operating Lease - off balance sheet Synthetic Operating Lease True Lease (Tax Lease) Master Lease Not a lease classification

25 Operating Lease Defined FASB 13 Requirements Comply with 4 Specific Financial i Tests Term Purchase Option Ownership NPV of Payments Rule of Thumb Sum of Rental Payments < Purchase Price Who Takes Residual Risk? Is an Operating Lease Invisible??? New Rules

26 Benefits of Tax-Exempt Lease-Purchase Agreements Title to the Equipment Rests with Lessee Access to Low Cost, Tax-Exempt Funds Payments may be Subject to Annual Appropriation of Funds by Lessee Accommodates Construction Financing Payments in arrears Clients probably leasing something now Fast and Easy!!! Leasing and Leverage Project Size:$ 7M Recipient of $3.5M in ARRA funds Net Project Cost $3.5 Financed with Tax Exempt Lease Purchase Agreement Benefits ARRA funds leveraged 1:1 Included d non-energy improvements not tin capital budget Energy savings covered more than 100% debt service of balance Contribute to General Fund Use for other projects

27 Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

28 Money Center Banks Definition: a large bank operating nationally and globally Examples: this includes large lenders like Bank of America, Wells Fargo, Citibank, JP Morgan-Chase, Deutsche Bank, Royal Bank of Scotland, etc. Pros: have the ability to fund large projects for qualifying credits Cons: in general, looking for projects over $1 million with invest grade credits. Regional Banks Definition: a bank that operates in one region of the country - can be large to medium size Examples: includes large lenders like Key Bank, TD Bank, Regions Bank, Capital One Bank, etc. Pros: have the ability to fund large projects for qualifying credits. Will consider middle-market and small ticket credits. Cons: in general, large banks look for large projects. Smaller Banks will do smaller projects. Prefer to stay in their footprint (where they have branch offices)

29 Community and Local Banks (including Savings and Loans) Definition: locally owned and operated banking institutions. These banks offer all of the standard banking services including loans and mortgages for both consumers and business customers. Examples: too many to include in this report Pros: lending decisions are made locally by people who understand the unique challenges and financial needs of the business people and residents who live and work in the community that the bank serves. May participate in SBA loan programs Cons: may not be familiar with financing energy efficiency projects Independent Commercial Equipment Leasing and Finance Companies Definition: a company not owned by a bank. Examples: this includes large lenders like ATEL Capital Group, GE Capital Corporate Finance, Financial Pacific Leasing, LLC, Financial Pacific Leasing, LLC, Vision Financial Group, Inc., Marlin Leasing Corp., United Leasing, Inc., etc. Pros: credit underwriting is strict; however these lenders have slightly more flexibility than bank owned leasing companies because they are not subject to the same regulations Cons: many are looking for larger transactions and relationships with the vendors. Will consider one-off transactions for existing customers

30 Bank Owned Leasing Companies Definition: equipment leasing company owned by a bank Examples: includes large lenders like Fifth Third Leasing Company, Key Equipment Finance, M&T Bank Corp., PNC Equipment Finance, LLC, SunTrust Equipment Finance & Leasing Corp. TD Equipment Finance, Inc., U.S. Bancorp Equipment Finance, Wells Fargo Equipment Finance, Inc., First Litchfield Leasing, etc. Pros: Have ability to fund large projects for qualifying credits Cons: In general, looking for larger projects. Are subject to the same regulatory limitations as their parent companies. Prefer to stay in their footprint (where they have branch offices) Captive Financing Companies Definition: a company (usually a wholly owned subsidiary of the manufacturer or distributor) whose primary function is to provide financing to the parent company s clients Examples: this includes large lenders like Caterpillar Financial Services Corporation, Graybar Financial Services, Siemens Financial Services, Inc. etc. Pros: because they support the sale of their company s products, may have more flexibility when evaluating credit and extending terms Cons: generally only finance their own equipment, which limits the selection of the equipment to be installed

31 Specialty EE Finance Companies Definition: a finance company with an expertise in a particular field or product, i.e., financing energy efficiency performance contracts. Examples: Abundant Power, Hannon Armstrong,, etc. Pros: understand the product being installed and can structure transactions to meet the needs of the project and customer. Also, they can provide technical expertise if needed Cons: interested only in their field of expertise CT State Specific Programs Definition: a low interest loan fund run by a state or utility. Examples: CHIF - Energy Conservation Loan, CCEF - CT Solar Lease, Small Business Energy Advantage Program Pros: low interest rates Cons: not available to all types of customers, subject to Davis-Bacon Act if ARRA funded, terms often shorter than useful life, etc

32 Specialty EE Finance Companies Definition: a finance company with an expertise in a particular field or product, i.e., financing energy efficiency performance contracts. Examples: Abundant Power, Hannon Armstrong, Catalyst Financial Group, Inc., etc. Pros: understand the product being installed and can structure transactions to meet the needs of the project and customer. Also, they can provide technical expertise if needed Cons: interested only in their field of expertise Other Non-Traditional Lenders Local or Regional Community Development Corporations Economic Development Corporations Non-Profit Revolving Loan Funds Pros: may offer more flexible terms and conditions Cons: usually not available to government agencies, must meet qualifying small business standards and job creation or retention goals, etc

33 Recognize this Symbol? Overview The Details The Great Recession and EE Understanding the Basics Simplifying Energy Performance Contracting Financing Options for EE Projects Where to Find the Money ENERGY STAR Tools & Resources EPAct and Tax Incentives Questions

34 What is ENERGY STAR? Voluntary climate protection partnership with EPA Strategic approach to energy management, promoting energy efficient products and practices Helps organizations save money and protect the environment Influential brand recognized by over 75 percent of Americans We are paying for energy efficiency projects whether or not we do the projects!

35 Financial Value Tools Building Upgrade Value Calculator Developed with BOMA for Commercial Buildings Financial impact on office properties Financial Value Calculator Public Companies Key Financial Metrics (profit margins, earnings per share & shareholder value) Cash Flow Opportunity Calculator Cost of Delay all sectors All Sectors Financial Value Tools Building Upgrade Value Calculator Developed with BOMA for Commercial Buildings Financial impact on office properties Financial Value Calculator Public Companies Key Financial Metrics (profit margins, earnings per share & shareholder value) Cash Flow Opportunity Calculator Cost of Delay all sectors All Sectors

36 Financial Value Tools Building Upgrade Value Calculator Developed with BOMA for Commercial Buildings Financial impact on office properties Financial Value Calculator Public Companies Key Financial Metrics (profit margins, earnings per share & shareholder value) Cash Flow Opportunity Calculator Cost of Delay all sectors All Sectors What is the CFO Calculator? An energy efficiency financial decision- making tool, built on Microsoft Excel Instructions Four analysis spread sheets A summary report Helps quantifies the costs of delay

37 What Does it Do? Addresses three critical questions about installing energy efficiency projects: 1. How much new energy efficiency equipment can be purchased from the anticipated savings? 2. Should this equipment purchase be financed now or is it better to wait and use cash from a future budget? (avoid paying interest) 3. Is money being lost by waiting for a lower interest rate? Energy Efficiency: A Cash Flow Opportunity

38 Data Entry Tab Investment Values Tab

39 Cash Flow Tab Interest Rate Tab

40 Reminder An investment grade audit performed by a qualified engineering company will be required to determine the actual size of your savings opportunity. Cash Flow Opportunity Calculator

41 Cash Flow Opportunity Calculator Scroll down to Or, go directly to: Catalyst Contact Neil Zobler, President 152 Deer Hill Ave., Suite 208 Danbury, CT