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Phone: 215-230-9871 Fax: 215-340-3972 Email: [email protected]
ENERGY PERFORMANCE SERVICES
EPS
Fundamentals of Financing Fundamentals of Financing Performance Contracting Performance Contracting
ProjectsProjects
Thomas Dreessen
Chief Executive Officer,EPS Capital Corp.
October 31, 2001
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ENERGY PERFORMANCE SERVICES
EPS
Energy Services Company (“ESCO”)
• A Performance Contracting Company that:– develops and implements energy efficiency
projects “EEPs” on a turn-key basis– risks its payments on the performance of
equipment and services implemented
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ENERGY PERFORMANCE SERVICES
EPS
“ESCO” GUARANTEE
• Customer’s current operating costs will be reduced by an amount at least equal to the debt service required to repay the turnkey Construction Price for ESCO to implement and finance EEPs.
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ENERGY PERFORMANCE SERVICES
EPS
ESCO Must Manage Risks
• Development
• Construction
• Technology
• Cost Overruns
• Operations & Maintenance
• Performance (Savings)
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ENERGY PERFORMANCE SERVICES
EPS
Development Risk
• ESCO provides the working capital to develop a “paid from savings” project. If no such project exists, no cost to customer.
• ESCO must provide/arrange appropriate long term project financing.
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ENERGY PERFORMANCE SERVICES
EPS
Development Barriers
• Identify “Qualified” Customers
- GOVERNMENT: Stable Financials; Significant Procurement Barriers and No Incentive
- INDUSTRY: Limited Procurement Barriers and Good Incentive; Less Stable Financials
• Obtain “VIABLE” Project Financing
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ENERGY PERFORMANCE SERVICES
EPS
Project Financing Risk
• Identify Project Finance Strategy
• Create Viable Project Finance Strategy
• Obtain Commitment from Financing Sources
• Finance from Savings of EEPs
• Close Contracts with Financing Sources
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ENERGY PERFORMANCE SERVICES
EPS
Implementation Risk
• Achieve Turnkey Price
• Adhere to Design Specifications
• Meet Completion Deadlines
• Meet Commissioning Requirements
• Comply With Regulatory and Legal Issues
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ENERGY PERFORMANCE SERVICES
EPS
Operating Risk
• Savings Guarantee to Customer that the “turnkey” costs of implementing and financing the EEPs will be paid-from-savings.
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ENERGY PERFORMANCE SERVICES
EPS
Two Primary Structures
• Guaranteed Savings - 90%
• Shared Savings - 10%
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CUSTOMER
ESCO Lender/Investor
Savings
Guarantee
Fixed Repayment Schedule
“Performance Risk” “Credit Risk”
“Market Risk”
ENERGY PERFORMANCE SERVICES
EPSGuaranteed Savings
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ENERGY PERFORMANCE SERVICES
EPS
Loss Covered by ESCO End of Contract with ESCO
Capital & Interest Revenues ESCO Revenues Customer
Guaranteed Savings Illustration
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EPS
Customer
“ESCO”Performance &
Credit Risk
Project ServicesSavings Guarantee
Lender/Investor100% Funding
ENERGY PERFORMANCE SERVICES
Shared Savings
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ENERGY PERFORMANCE SERVICES
EPS
Industrial Customer Case Study
• Paper Manufacturer in Asia
• Locally owned and operated
• Sells “Specialty Paper” products
• No significant exports
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ENERGY PERFORMANCE SERVICES
EPS
Project Summary
• Seven (7) Energy Efficiency Projects (EEPs)
• Construction Price US$ 5,000,000Annual Benefits:
• Annual Savings US$ 1,765,000• Annual Debt Service US$ 1,145,000• Net Annual Cash Flow US$ 620,000
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ENERGY PERFORMANCE SERVICES
EPS
Summary of EEPs
DESCRIPTION Construction Savings Simple Payback Price Years
#1 Pocket Ventilation Pre-Heat US$ 100,000 US$ 45,000 2.2#2 Vacuum Pumps Power Reduction 696,000 253,000 2.8#3 Refining Power Reduction 882,000 267,000 3.3#4 Wastewater Aeration Power Reduction 110,000 33,000 3.3#5 Pumping Power Reduction 196,000 65,000 3.0#6 PM Steam/Condensate Optimization 696,000 312,000 2.2#7 On-site Power Generation Upgrade 2,320,000 790,000 2.9
Total $ 5,000,000 $ 1,765,0002.8 Yrs.
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INDUSTRIAL CASE STUDY ENERGY PROJECT7 YEAR CASH FLOW
31-Oct-01(IN US$)
PROJECT FINANCING: INFLATION ASSUMPTIONSEnter "1" if no Depreciation/Taxes 1 Energy 3.0%Total Construction Price 5,000,000$ Operations & Maintenance 5.0%Construction Interest 14.0% 350,000 Finance Fees 1.0% 54,040 Total Funding Required 5,404,040$ Construction Period - Months 12Long Term Debt Terms:
Interest Rate: 12.0%Years: 7.0
CASH FLOW: YEAR > 0 1 2 3 4 5 6 7 Total
PROJECT SAVINGS:Energy -$ 1,500,000$ 1,545,000$ 1,591,350$ 1,639,091$ 1,688,263$ 1,738,911$ 1,791,078$ 11,493,693$ Operations & Maintenance - 265,000 278,250 292,163 306,771 322,109 338,215 355,125 2,157,632
TOTAL GROSS SAVINGS - 1,765,000 1,823,250 1,883,513 1,945,861 2,010,372 2,077,126 2,146,204 13,651,326
DEBT SERVICE (Principal+Interest) - (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (1,144,753) (8,013,271) -
ESCO Share of Savings at: 50% (310,124) (339,249) (369,380) (400,554) (432,810) (466,186) (500,725) (2,819,027)
OWNER CASH - ANNUAL - 310,124 339,249 369,380 400,554 432,810 466,186 500,725 2,819,027 -
OWNER CASH - CUMULATIVE - 310,124 649,372 1,018,752 1,419,306 1,852,116 2,318,302 2,819,027
ENERGY P ERFORMANCE SERVICES
EPS
Project 7 Year Cash Flow
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ENERGY PERFORMANCE SERVICES
EPS
Financing is Key ESCO Ingredient
• ESCO is a Service Company not a Bank
• ESCO cannot invest its Working Capital to Develop & Implement EEPs unless “Reliable” and “Commercially Viable” Long-term Project Financing is Available
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ENERGY PERFORMANCE SERVICES
EPS
Project Financing Barriers
• Traditional Local Bank Lending not applicable:– Corporate Lending– Rates too high – Repayment Term too Short
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ENERGY PERFORMANCE SERVICES
EPS
Project Financing Barriers
• International “MDB” Lending not applicable:– Size of EEPs is Too Small– Due Diligence too Cumbersome– Require Hard Currency Repayment
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ENERGY PERFORMANCE SERVICES
EPS
Major Causes of Financing Barriers
• Not Due to Lack of Available Funding
• Inability of EEPs to Access Funding
• “Disconnect” with Traditional Methods:– Traditional is Asset-Based Lending– EEP is Project Cashflow-Based Lending
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ENERGY PERFORMANCE SERVICES
EPS
Major Causes of Financing Barriers
• No Lending Infrastructure for Complex EEPs
• No immediate Solution because Energy Efficiency Market is Not Developed Enough to Motivate Local Banks to Invest in Setting up EEP Lending Infrastructure.
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ENERGY PERFORMANCE SERVICES
EPSInternational Energy Efficiency “Project” Financing Protocol
• “IEEPFP” is a Protocol that Becomes the Guideline used by Local Banks in International Markets to Finance Energy Efficiency Projects “EEPs”.
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ENERGY PERFORMANCE SERVICES
EPS
“IEEPFP” Content
• Customer Lending Criteria & Analysis• Customer Credit Information Needed• Credit Review and Loan Approval
Procedures• Standard Loan and Security Agreements• Standard ESCO & Construction
Agreements
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ENERGY PERFORMANCE SERVICES
EPS
“IEEPFP” Content
• Training Manuals for Loan Officers
• Training Workshops with EEP Case Studies
• Procedures for Evaluating EEPs
• Risk Assessment Guidelines for EEPs
• Investment Criteria for EEPs
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ENERGY PERFORMANCE SERVICES
EPS
Investment Criteria for EEPs
• Creditworthy Customer
• Enforceable & “Balanced” Contracts
• Proper Licenses & Permits
• Experienced ESCO/Contractor
• Proven Commercial Technologies
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ENERGY PERFORMANCE SERVICES
EPS
Investment Criteria for EEPs
• Acceptable Project Economics (Risk Profile)
• Adequate Return to Lender & ESCO• Compliance with Environmental
Regulations• Must follow International Measurement
and Verification Protocol “IEMVP”.
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ENERGY PERFORMANCE SERVICES
EPS
Create an EEP Fund
• Funding from Ratepayer Fees:– U.S. “System Benefit Charge” – Brazil through 1% ANEEL Fund– Thailand through the ECF ($ 250 Million)– India through Energy Conservation Act
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ENERGY PERFORMANCE SERVICES
EPS
EEP Fund Profile
• Utilize ESCO “Guaranteed Savings” Structure versus old “Shared Savings”– Creates a Growth Model for the ESCO and
Energy Efficiency Industry– Simplifies Requirements of Local Banks
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ENERGY PERFORMANCE SERVICES
EPS
EEP Fund Profile
• Utilize Funds to “Buy-Down” Interest Rate to Below Market Rates
• Utilize Funds to Guarantee a Portion of the Loan Losses to the Local Banks
• Have 10-Year Repayment Terms from Local Banks Including One-Year Moratorium
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ENERGY PERFORMANCE SERVICES
EPS
EEP Fund Profile
• Repay in Local Currency• Managed by individuals who have previous
private sector project financing experience• Provide Fast Loan Approval - “IEEPFP”• No Government intervention and
procedures• Require use of IEMVP
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ENERGY PERFORMANCE SERVICES
EPS
Benefits of IEEPFP & Fund
• Establish Commercial Mechanism for the Financing of EEPs in International Markets
• Create Local In-Country Banking Staff Trained in Project Financing of EEPs
• Eliminate Currency Devaluation Risks
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ENERGY PERFORMANCE SERVICES
EPS
Benefits of IEEPFP & Fund
• Provide Incentive to Implement EEPs
• Deliver Long Term Savings thru IEMVP
• Create Commercial Lending Sector for EEPs
• Provide a Conducive ESCO Environment
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ENERGY PERFORMANCE SERVICES
EPS
Benefits of IEEPFP & Fund
• Provides a Method to Aggregate EEPs
• Provide a Reliable CO2 Reduction Progam
• Create a Fund that Will Sustain over Time