Public Private Partnerships Financing Perspective

Transcription

1 Public Private Partnerships Financing Perspective

2 BOSTONIA INTRODUCTION Founded in 1998, Bostonia Partners is a full-service investment bank with primary market focus in energy and real estate, and additional services in structured finance and advisory Bostonia Global Securities, the broker/dealer affiliate, provides direct access to investors and daily participation in the capital markets Bostonia ranked 7th for domestic private placements in Bostonia s team includes industry experts with direct finance and sales experience that bring capabilities in finance, structuring, and asset ownership for energy projects Private Placement Market, League Table, Summary Domestic Traditionals $M Issuer Count Market Share 1 BAML 16, % 2 JPM 11, % 3 Citi 4, % 4 Wells Fargo 3, % 5 US Bank 2, % 6 RBS 1, % 7 Bostonia 1, % 8 Deutsche Bank 1, % 9 Goldman Sachs 1, % 10 KeyBanc 1, % 11 Direct 1, % 12 Mitsubishi 1, % 13 BNPP 1, % 14 Barclays 1, % 15 SunTrust % 2

3 BOSTONIA INTRODUCTION Over $8 billion of financing origination and placements in the real estate, contract financing, and energy sectors; $1.5 billion in energy savings performance contracts since 1995 Bostonia s industry knowledge, network, and market position create unique ability to execute transactions in both challenging and favorable market conditions Bostonia focuses on complex transactions that require customized and innovative solutions 3

4 P3 IS NOT PRIVATIZATION P3 establishes a business relationship between a public agency and a private entity Contractual arrangements bundle investment expenditures with life-cycle operation costs-not a selling off of assets. Development, management, and finance of project is often delegated to private firms Debt does not have to be public borrowing and often is not Government/not-for profit can retain/obtain ownership after expiration of contracts A successful P3: allocates risk among the parties best suited to bear the risk shares revenues or cost savings with government/not-for profit contains Incentives for the private sector to maximize performance Source: The Canadian Council for Public Private Partnerships 4

5 DRIVERS FOR DEVELOPING THE FINANCING PLAN Project: Type, Risks and Available Revenues Public Entity s Objectives and Constraints Political Legislative Economic Programmatic Policy Private Sector s Appetite Not all project types have the same appeal Don t let the Financing tools drive the process as this approach will not optimize the business model for the public benefit 5

6 OPPORTUNITY CONSIDERATIONS=$ Non core revenues to support institutional mission activities Deferred maintenance costs for infrastructure projects Historically low interest rates Tax advantaged structures Programmatic benefits Risk transfer Leasing opportunities Capital budget benefits 6

7 FINANCING TOOLS: THE BASIC BUILDING BLOCKS Public Sector Transaction Public-Private Partnership Tax-Exempt Debt Taxable Debt Tax Equity Project Equity Tax-Exempt Debt (with limitations) 7

8 TAX-EXEMPT AND TAXABLE DEBT Tax Exempt Public Sector Transaction Retail investor driven investment product Requires traditional credit/revenue streams Generally must obtain a published credit rating Fundamentals allow for 100% leverage and/or public entity can contribute cash equity Public ownership is preferred/necessary Debt Capacity is not an issue Public Offering costs of issuance Constrained by IRS Code Section 103(c) - Potential change in law Taxable Debt Private Sector Transaction Multiple institutional investor types/classes to access Accommodates more diverse credit/revenue streams A published credit rating not required Maximum leverage is credit/structure driven Private ownership is typical Private Placement/Loan costs of issuance Municipal vs. Corporate Taxable Markets 8

9 TAX EQUITY AND PROJECT EQUITY Tax Equity Private Sector Transaction Cash contributions in exchange for tax benefits/portion of project cash flows Return is based on after-tax basis, which incorporates tax savings it receives from ITC/PTC/depreciation benefits Limited investor universe (15-20 active participants) Approximately $3.6 billion of tax equity capacity in 2012, with a demand that exceeded $9 billion only best projects considered Various structures available, such as lease pass-through and partnership-flips, based upon different return and ownership requirements Project Equity Private Sector Transaction Investor equity return requirements Equity from developer/sponsor, venture, private sources Money can be left in the deal to act as equity (e.g., deferred development fee) Passive or active investor 9

10 Expected Rate of Return COST OF FUNDS Public Sector Transaction Private Sector Transaction Public-Private Risk Sharing Spread Tax- Exempt Debt Taxable Debt Tax Equity Project Equity 100% Recourse to Government Risk to Investor 10

11 3P FINANCING STRUCTURE-Energy Project Services provided Performance Guaranty University Service Contract A ESCO Assignment of Payments EPC and O&M Payments Financier Debt Service Payments Upgrade or New Generation Utility service/savings payments Energy and Water ECMs Funding Proceeds Debt Service/Equity Returns University Renewable Energy Project University Energy & Water Savings Projects Special Purpose Entity Capital Proceeds Debt Debt Service Capital Proceeds Tax Equity Equity Return 11

12 TRADITIONAL MUNICIPAL VS. P3 P3s have higher costs of capital as a general rule P3 debt is typically taxable while interest on municipal bonds is tax exempt Private Sector pays taxes on revenues and certain assets Private Equity investors with ownership in P3 Projects, share in the profits, and expect to earn higher rates of return for the risk they undertake Certain private sector efficiencies can meaningfully offset P3s apparent capital cost disadvantages see NCPPP White Paper Testing Tradition: Assessing the Added- Value of Public- Private Partnerships lower design and construction costs, and efficiencies in revenue generation efficiency in operations and maintenance (O&M) activities Tax advantaged transactions narrow the capital cost benefits of public sector transactions 12

13 Cost of Electricity/Sludge Processing COST OF CAPITAL Based on a $50 Million Renewable Biogas-to-Energy Cogeneration and Thermal Drying Wastewater Treatment Facility (20 Year Term) Muni Tax-Exempt A rated 100% leveraged Tax-Advantaged NAIC-1, taxable private placement (35% tax rate) NAIC-1, taxable private placement (35% tax rate) Project Equity 20% yield 5% Project Equity 20% yield 30% Debt 3.2% yield 100% Tax Equity 30% ITC Monetization 13% yield Debt 3.8% Yield 25% 70% Debt 3.8% Yield 70% 1.0x DSCR Public Ownership 8.5 cents / KWh 3% escalation 1.35x DSCR Private Ownership 8.5 cents / KWh 3% escalation 1.6x DSCR Private Ownership 9.2 cents / KWh 3% escalation NOTE: Example presents a capital cost comparison only and does not attempt to assign values to efficiencies, savings, and retained or transferred risks, which would be part of a complete cost benefit analysis. 13

14 P3-ACCOUNTING ISSUES & CONSIDERATIONS Certain P3 structures meet off-balance sheet criteria Contract securitization structures with non-recourse debt Ownership structures that do not require accounting consolidation Consideration of new proposed Financing Accounting Standards Board/ International Accounting Standards Board requirements for lease accounting Model to compare taxable and tax-exempt structures Tax exempt = debt on balance sheet and shifts ownership risks to University 14

15 CASE STUDY I CITIZENS ENERGY 9 MW Solar Portfolio Massachusetts Off-takers include: Town of Agawam/Franklin County and local/municipally owned utilities Net Metering energy credits sold at a price 15% below the prevailing power rate for a term of 20 years Citizens Energy is a 501(c)3 non-profit Taxable transaction created additional source of capital by monetizing tax benefits EPC provider assumed SREC risk 15

16 CASE STUDY 2 CENTRAL UTILITY PLANT FOR HOSPITAL 600 kw CUP Plant, Maryland Through 20 year energy services agreement, deliver electricity, chilled and hot water for the hospital s facilities. Two tiered payment structure; capacity and consumption charges Taxable debt structure; third party ownership necessary for project to meet off-balance sheet tests 16

17 OBSERVATIONS AND CONCLUSIONS P3 is not always the most efficient or economical financing structure Certain types of energy projects allow tax advantaged structures that result in comparable cost Infrastructure projects should consider tangible and perceived/forecasted future opportunity costs P3 solutions can be very effective to deliver programmatic value P3 alternatives will maintain existing bond ratings P3 alternatives will preserve capital for mission critical uses P3 allocation of risks and reward enhance project transparency 17

18 Contact Information Mark S. White Managing Director Direct Main