Experience with Traditional and Emerging ESCO Models Peter White peter.z.white@jci.com 503-351-0900
Traditional: Performance Contracting A proven procurement model for building retrofits and key enabler for financing An Energy Services Company (ESCO) brings its technical know-how to provide a comprehensive bundle of energy efficiency, water efficiency, operational efficiency, renewable and distributed energy generation measures ESCO provides turn-key responsibility including: site audits, detailed design and engineering, business case analysis, installation, commissioning, and measurement and verification (M&V) in accordance with international standards. ESCO assumes performance risk for project in form of a long-term performance guarantee to ensure volumetric savings materialize and preserved over time. Performance guarantee allows owners to secure financing at attractive rates and terms from 3 rd -party financial institutions to result in cash flow positive project impact PC Process Preliminary Audit Customer Commitment Detailed Investment Grade Audit Establish PC with Perf. Guarantee Arrange Financing Perform Improvements O&M, M&V Savings
The Benefits From a customer perspective, performance contracting means the investment can be cash flow positive from day one. Utility Bill Payment for Efficiency Upgrades Customer Savings 3 Before Contract During Contract After Contract
Bundles of Measures Performance contracting allows energy-saving measures to be bundled together for deeper energy efficiency High-Return Efficiency Improvements Lighting Equipment Controls Payback (years) Longer Payback Measures Renewable energy projects Chiller plant retrofits Building envelope improvements 4
Energy Solutions Financing Structures Capital Lease / Installment Purchase Agreement Installation, 2 O&M, M&V, & Performance Guarantee Agreement Customer 3 Installation, O&M, M&V Fees 1Principal Principal and Interest Shortfall Payment 5 4 Lender / Bondholders Description Steps: 1. Customer borrows money from lender or issues bonds 2. Customer purchases assets from JCI. 3. JCI enters into O&M, M&V & performance guaranty agreements with Customer. 4. Customer repays obligations over time 5. JCI pays Customer if verified savings fall short of savings guarantee Assets: Title secured by lender but automatically transfers to customer at end of term ESCO Accounting treatment: Capital lease so On balance sheet for customer Can be used for any type of project 5
Efficiency Service Agreements Purchasing Efficiency as a Service
Efficiency Services Agreement (ESA) The ESA turns efficiency into a resource by removing all first-cost barriers and charging only for realized energy savings Building Owner Project Installation Johnson Controls engineers, designs, and installs projects and provides long-term maintenance services Efficiency Services Agreement ESA Provider funds 100% of project costs. Customer makes payments based on realized energy savings Efficiency Services Performance Contract ESA Provider executes contract with Johnson Controls to design, install, and maintain EE projects Efficiency Services Agreement Provider (Finance Co)
Advantages of the ESA Approach Avoids need for upfront capital expenditure Guaranteed positive cash flow payments based on measured and verified energy savings ESA fees, like other utility bills, can be passed thru to tenants under triple net lease; Yet guaranteed cash flow positive impact to tenants Execution partner with a track record of successful delivery of guaranteed energy savings Off-balance sheet accounting accomplished in past projects Pay as you go: Allows amendment of ESA contract for future energy efficiency capital improvement measures
Test A) Does fulfillment of the arrangement depend on providing a specified asset or assets? AND (not OR) 1 2 Test B) Does the arrangement convey the right to control the use of a specified asset for an agreed period of time? 1a 1b 2a 2b 2c 2d Does the contract involve Property, Plant, or Equipment (PPE)? Is the PPE implicitly specified or explicitly identified in the contract? Does fulfillment of the contract depend on the use of specified PPE? Does the entity have the ability or right to operate the PPE or direct others to operate the PPE in a manner that it determines while obtaining or controlling more than an insignificant amount of the output or other utility of the PPE? Does the entity have the ability or right to control physical access to the underlying PPE while obtaining or controlling more than an insignificant amount of the output or other utility of the PPE? Will the entity obtain all but an insignificant amount or the output or other utility of the PPE during the contract term? Is the price that the entity will pay for the output neither contractually fixed per unit of output nor equal to the current market price per unit of output at the time of delivery? The contract contains a lease. The contract does not contain a lease. Tests A & B are based on Definition of a Lease section within Appendix B of FASB/IASB (2010 August) Topic 840 Exposure Draft: Lease Accounting citing EITF Issue Number 01-8, which provides guidance interpreting FASB Statement. 13, Accounting for Leases.