Qualified Energy Conservation Bonds

Part 1: Overview of Tennessee Program and Best Practices

Pete Westerholm, Program Manager Katie Southworth, Program ManagerTDEC Office of Energy Programs

“You have no control over how much you pay for energy.

The only thing you can control is how much energy you use.”

-Mark Samuels, Maintenance DirectorWilliamson County School District

Part 1: Overview of Tennessee Program

and Best Practices

• What are Qualified Energy Conservation Bonds (QECB)?

• How can they be used to finance energy conservation projects and meet sustainability goals?

• What opportunities exist in Tennessee under the Tennessee QECB program?

Bond Finance Basics:What is a Bond?

Bonds are debt instruments issued by a government or business to raise money. Similar to loan or IOU.

• Lender is holder of the bond (creditor)

• Issuer of the bond is the borrower (debtor)

• Coupon is the interest paid on the principal

• Principal is the amount that interest is charged against (the amount “loaned”)

• Maturity is the date by which the nominal amount must be repaid (also referred to as the “tenor”)

What are Qualified Energy Conservation Bonds (QECB)?

• Low interest bonds that can be issued by states, territories, large local governments, and tribal governments to finance renewable energy and energy efficiency projects.

• Attractive borrowing rates: 1%-5% effective interest rate.70% of interest rate is subsidized. Issuer typically gets 3%-4% subsidy from Treasury, lowering borrowing costs 15 to 22-year term

• Created in 2008; greatly expanded by Recovery Act in 2009.

• Total national allocation is $3.2 billion; Tennessee allocation is $64,676,000

• Issued for qualified energy efficiency, renewable energy, and energy conservation capital expenditures; qualified projects are broadly defined.

QECB Qualified Projects

Capital expenditures incurred for purposes of:

• Reducing energy consumption in publicly-owned buildings by at least 20%

• Implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs)

• Rural development involving electricity produced from renewable energy resources

• Energy-related research facilities and research grants

• Mass commuting facilities

• Demonstration projects (for energy-related processes)

In Tennessee, bonds can only be issued if physical asset development or improvement is critical component of project

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QECB Criteria

1. 100% of the available project proceeds from issuance must be used for one or more qualified conservation purposes, used within 3 years of issuance

2. Bond is issued by a state or local government, and

3. Issuer designates such bond for the eligible purposes

Also:

• Up to 30% of Tennessee’s QECB allocation may be used for private activity

• Federal Davis-Bacon (prevailing) wage and benefit requirements apply to projects funded with QECBs. Other ARRA requirements, such as Buy American, monitoring and audits, may apply

• Issued as revenue bonds or general obligation bonds

QECB Case Study:

Multifamily Energy Efficiency – Boulder, CO

Context:The City of Boulder’s Housing Authority, Boulder Housing Partnership (BHP) faced the following challenges:• Limited ability to finance projects, weak rental economy

beginning 4th qtr 2008• Uncertainty about status of federal funding to support O&M• Increasing utility needs, rising costs to tenants• Need to continue providing services to low income families• Aging or outdated technologies, equipment, and facilities

Challenge:Provide safe and adequate housing to a growing number of low-income residents while managing operating costs and delivering quality services.

QECB Case Study:

Multifamily Energy Efficiency – Boulder, COProcess:DEVELOPED SUSTAINABILITY PLAN/ GOALS• Early 2009- BHP Energy Conservation & Sustainability Plan. RECOGNIZED OPPORTUNITY TO PERFORM BETTER, SPEND LESS • Set goal to be first housing net-zero energy housing authority.PARTNERED WITH AN ESCO (ENERGY SERVICES COMPANY), USED PERFORMANCE CONTRACT• April-May 2009- Identified energy services company (ESCO) to complete energy

performance contract work. DETERMINED BASELINE: AN AUDIT IS A SNAPSHOT OF ENERGY PICTURE• Summer 2009- ESCO performed energy audits on eight BHP properties to

determine the most cost-effective improvements. PRIORITIZE PROJECTS BASED ON NEED, ROI• Consulted with maintenance department about planned changes, because the

staff would be unfamiliar with the new equipment• March 2010 - Board and HUD approval, final Energy Services Agreement (ESA)

documenting the work to be completed (including staff training) and the guaranteed energy savings was executed

IDENTIFY FINANCING STRATEGY• Nov 2009 - Applied to State for QECB allocation. Received $1.5 million Feb 2010.• May 2010- Request for Proposals for bond counsel. • August 25, 2010- Issued $1.44 million of 16-year QECBs to finance improvements

as well as issuance and bond counsel costs associated with the offering.

Projects:

Multifamily Energy Efficiency – Boulder, CO

QECB Case Study:

Multifamily Energy Efficiency – Boulder, CO

Results:

• Guaranteed savings via performance contract• The energy savings realized, combined with HUD subsidy,

cover the interest and principal payments on the bonds.• Energy Conservation & Sustainability Plan goals met• Will reduce its carbon footprint by over

450 mt/year.• 45% Water consumption savings • 28% Electric consumption savings• 29% Natural gas consumption savings

QECB Case Study:

Multifamily Energy Efficiency – Boulder, CO

Funding:

• City of Boulder to Boulder Housing Partners (BHP) as conduit issuance

• Amount: $1.44 million QECB for energy efficiency improvements to public housing sites (combined with small amount of BABs for water efficiency improvements)

• Net interest cost: 2.79%• Maturity: 16 years• Lender: Bank of America

BHP estimated that traditional financing would have cost at least 2 percentage points more than was achieved with this offering.

How QECBs Work: An Overview

U.S. Treasury allocates QECB bond volume to states

States allocate QECB issuance capacity to Qualified Issuers, who then sell taxable QECBs to investors

Proceeds from bond issuance are used to fund a Qualified Energy Conservation Project

Issuer pays a taxable coupon semi-annually to the investor and repays principal at the end of term

U.S. Treasury pays issuer the lesser of the taxable coupon rate or 70% of the tax credit rate

How QECBs Work: An Overview

U.S. Treasury pays the QECB issuer the lesser of

(a) the taxable interest rate of the bonds or

(b) 70% of the qualified tax credit rate (QTCR) as of the bond sale date. That Direct Payment is paid directly to issuers contemporaneously with the scheduled debt service payments to the bondholders if the issuer properly files for the Direct Payment. The Direct Payment reduces the NET interest rate that issuers pay to the investors.

www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm.

How QECBs Work: An Overview

Net interest cost example - 8/19/2013• 5.00% = Taxable coupon rate • 5.33% = Tax credit rate (from Treasury Direct)• 70% = Subsidy on tax credit rate• (5.33 x .70) = 3.731% = Direct subsidy• 21 years = Maturity (can choose up to this term length)

The Taxable Rate minus the Direct Subsidy equals the Net Interest Rate.

5.00% - 3.731% = 1.269%

In this example, the net interest cost would be 1.269%.

How QECBs Work: An Overview

From DOE QECB and CREB Finance Primer

Tennessee Program:

Allocation, Re-allocation, Sub-allocation

• Tennessee Legislation/ Authority

• TDEC OEP and Tennessee Local Development Authority roles.

Step 1- Allocation to Large Local Jurisdictions (LLJs)

Step 2- Re-allocation to State QECB program

Step 3- Competitive Sub-allocation to eligible issuers for qualifying projects

Tennessee Program:

Large Local Jurisdictions Allocations

June 2012 Large Local Jurisdictions (LLJs) in TN received a share of the $64.7 million based on their percentage of the population

• Cities with populations of 100,000 or more

• Counties with populations of 100,000 or more, not including any cities within the county that are large local governments

15 entities in TN received allocations, totaling $35.9 million.

Blount County, Chattanooga, Clarksville, Hamilton County, Knox County, Knoxville, Memphis, Metro Nashville, Rutherford County, Shelby County, Sullivan County,

Sumner County, Washington County, Williamson County, Wilson County

“Allocation designees” may:• Authorize an eligible public entity such as a Development Authority to issue

QECBs• Allocate all or a portion to an unrelated political subdivision within its

jurisdiction (such as a city in a county – conduit issuer relationship)• Reallocate to the State

Next Steps:

Re-allocation and Sub-allocation

• OEP requested that all 15 Large Local Jurisdictions (LLJs) determine usage of QECB allocation by June 30, 2013.

• Allocations not utilized by LLJs and reallocated to the State were combined with state government allocation.

• Total allocation will be available to all qualified local governments and public universities through a competitive sub-allocation process.

• OEP is currently evaluating the level of funding to be dedicated to the competitive round of sub-allocations; anticipated total is $46,542,400

Davis-Bacon, Reporting: An Overview

Any project financed with proceeds of a QECB is subject to the Federal Davis-Bacon Act prevailing wage and benefit laws, including any private activity project financed with proceeds of a QECB

Prevailing wage requirements do not apply to issuer employees but do apply to contracts entered into for construction, repair, or alteration

Other ARRA requirements, such as Buy American, monitoring and audits, may apply

Issuers of QECBs must file a Form 8038 with the IRS upon issuance of the QECBs

Reporting on project impact to OEP will be required

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QECBs in Action

Best Practices

How do issuers determine which projects to pursue?What steps are taken to ensure success?

Projects

What types of projects have QECBs funded?Examples of how energy, and money, is being saved

Next Steps

How can QECBs be used in Tennessee?How can I learn whether QECBs are a good fit for me?

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Best Practices: Difference-Making Project Criteria

• Project Feasibility

– Viability of project, technology, budget, compliance

• Project Impact

– Jobs, energy savings, return on investment, environmental benefits

• Project Strategy

– Align with local sustainability strategy, support, part of vision

• Project Readiness

– Timeframe in place for bond issuance, shovel-readiness

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Best Practices: Performance Based Contracting

Performance-based contracting - payment is conditional on achieving contractually specified energy savings

Uses energy and utility dollars saved to pay for

the project costs

Also called Guaranteed Energy Savings

Contracts with energy service companies (ESCOs)

Contract for the evaluation, recommendation, or

implementation of energy conservation measures

Payments made over time

Energy savings guaranteed to exceed costs

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QECB Case Study:

Foley, AL

Context:

Limited ability to finance projects, aversion to debt

Increasing utility needs, rising costs

Lack of precise, reliable data for facilities, utilities

Need to continue providing services

Aging or outdated technologies, equipment, and facilities, combined with rapid growth

Challenge:

Manage operating costs while delivering quality services to a growing number of residents

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QECB Case Study:

Foley, AL

Process:

Recognize opportunity to perform better, spend lessPartnered with an ESCO (energy services company), used performance contractDetermine baseline: an audit is a snapshot of energy picturePrioritize projects based on need, ROIIdentify financing strategy

Projects:

Citywide energy management system, communication network HVAC, LED lighting, solar panels, rainwater harvesting, and irrigation control on 18 sites

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QECB Case Study:

Foley, AL

Funding:

$2.8 M from QECB, effective interest rate of 1.3% for 20-year term$350,000 from state loan

Results:

Reduced utility costs by 33%Guaranteed savings via performance contract:$4.2 M over 20 yearsEquivalent of removing 1,663 cars from the roads

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QECB Utilization:

Examples in TN

Nashville

$6,440,000 allocation used on energy efficiency upgrades for downtown Arena, issued August 2012

• Category: reducing energy consumption in publicly-owned buildings by at least 20%

• Obtained certifications from construction engineers, anticipated savings approximately 30%

• Resolution adopted by Metro Council granting issuing authority, general obligation bonds

• Issued at 3.367% interest rate, interest paid semi-annually

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QECB Utilization:

Examples in TN

Clarksville

$1,240,000 allocation being used on energy efficiency upgrades for LED street light conversion

• Category: reducing energy consumption in publicly-owned buildings by at least 20%

• Currently has over 10,000 street lights in the city; largely high pressure sodium street light fixtures

• QECBs funding first phase of comprehensive replacement of all street lights with LED Light Fixtures

• Both 250 Watt and 1000 Watt fixtures will be replaced with radio- controlled comparable illumination LED fixtures

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QECB Utilization:

Examples in TN

Memphis

$7,000,000 allocation being primarily used on energy efficiency upgrades for upgrades to wastewater treatment plant

• Category: reducing energy consumption in publicly-owned buildings by at least 20%

• New Blower System at treatment plant to replace four obsolete single‐stage, centrifugal blowers

• Modern system will have greater operational flexibility, lower maintenance costs

• Project expected to provide an annual return on investment of $1 million based on the energy saved

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Bellingham, WA: Challenges and Opportunities

Population: 81,000

The Issues:

Growing maintenance needs across the city; maintenance often reactive (short fixes, putting out fires)

Challenging properties: federal building, city hall, aquatic center

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Bellingham, WA: QECBs as a Part of Overall Energy Strategy

The Strategy:

Consistent with efforts to implement the city’s Municipal Facility Energy Conservation Strategy

Reduces long term operating costs, greenhouse gas emissions, essential capital maintenance replacement while stimulating local economy

Projects identified: lighting, HVAC, aquatic center renovations, controls of systems

Performance Contracting with ESCO; budget neutral

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Bellingham, WA: Financed Various Projects

QECB Bond (GO Taxable) $6,500,000

Interest & Debt Service $285,000

Administration $100,000

Facilities Repairs, Engineering $3,570,000

Machinery, Equipment $2,545,000

20% savings for 22 City-owned assets; net interest rate: 1.68%; 15-year term

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Bellingham, WA: Results Exceed Expectations

Variety of measurement and

Verification strategies used

Guaranteed energy savings

of $163,000

Trouble-shooting until

performance achieved,

improved comfort

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Next Steps: Utilization and Competitive Sub-Allocation

OEP requested that all 15 Large Local Jurisdictions determine usage of QECB allocation by June 30, 2013

Allocations not utilized by LLJs and reallocated to the State were combined with state government allocation

Total allocation will be available to all qualified local governments and public universities through a competitive sub-allocation process

OEP is currently evaluating the level of funding to be dedicated to the competitive round of sub-allocations; anticipated total is $46,542,400

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Next Steps (continued): Utilization and Competitive Sub-Allocation

OEP will evaluate requests for QECB allocations through a competitive process; guidelines in development

Information on how to apply will be released in Fall 2013

Competitive sub-allocation process will still require adherence to appropriate regulations and conditions of original allocation

End result: more places across TN saving money!

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Next Steps: Application Workshops to Assist Eligible Entities

Workshops will be held showcasing QECBs:

– September 3: NashvilleEllington Ag Center

– September 6: Knoxville UT Conference Center

– September 11: Jackson Energy Authority Training Center

– September 12: ChattanoogaGreen Spaces

All workshops will be from 10:30-1:30 local time. Locations and registration is available at http://tnenergy.org/events/

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Next Steps: Application Workshops to Assist Eligible Entities

Each workshop will feature an overview of QECBs, industry expert testimony, detailed case studies, and opportunities to have questions and concerns answered

Information will also be provided regarding the upcoming application process, and how eligible entities can prepare proposals this Fall

Finance Directors, Facilities Directors, and other Officials are encouraged to attend

Attendees will leave being able to make an informed decision whether QECBs are a good fit for their energy conservation needs

Thank You

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OEP Energy Hotline: 615-741-2994

TDEC OEP Website http://www.tn.gov/environment/energy/qualified-energy-conservation-bonds.shtml

Pete WesterholmProgram Manager TDEC Office of Energy Programs

Katie SouthworthProgram Manager TDEC Office of Energy Programs