0
Qualified Energy
Conservation Bonds
Part 2: Bond Financing and Eligible Projects
Moderator:
Katie Southworth, Program Mana...
ORNL’s 3rd
Annual Southeast
Sustainability Summit
August 21, 2013
Qualified Energy Conservation Bonds
Public Finance Persp...
What are qualified energy
conservation bonds (QECBs)?
 QECBs are
− taxable bonds
− issued by a state or local governmenta...
How does the federal subsidy for
QECBs work?
 Historically, federal government has used three approaches to
subsidizing s...
How does the federal subsidy for
QECBs work? (continued)
 Tax-exemption – relevant to QECBs because most
projects that qu...
How does the federal subsidy for
QECBs work? (continued)
 Tax-credit mechanics
− holders of QECBs receive annual tax cred...
How does the federal subsidy for
QECBs work? (continued)
What requirements apply to QECBs at
issuance?
 State or local government issuer
 Issuer reasonably expects to:
− enter i...
What requirements apply to QECBs at
issuance? (continued)
 Issuer formally designates bonds as QECBs
 Issuer formally el...
What requirements apply to QECBs at
issuance? (continued)
 Qualified conservation purposes include:
− capital expenditure...
What requirements apply to QECBs at
issuance? (continued)
 QECB allocation process
− nationwide: $3.2 billion of capacity...
What requirements apply to QECB
during life of bonds?
 Davis Bacon prevailing wage rules apply
 Spending requirements
− ...
What requirements apply to QECB
during life of bonds? (continued)
 Arbitrage requirements
− For tax-exempt bonds, Interna...
What special rules apply to QECBs
that are “private activity bonds?”
 “Private activity bonds” = more than 10% of the
pro...
Summary
• QECBs benefit from significant federal
subsidy
• Detailed requirements to be met
̶ at issuance
̶ during life of ...
National View of QECBs
Elizabeth Bellis, Energy Programs Consortium
SE Sustainability Conference
Draft: 8/8/13
August 21, ...
Disclaimers
Circular 230: This presentation was not intended or written
to be used, and it cannot be used by any taxpayer,...
QECB Review
• QECBs are effectively a federal interest rate buydown program
for state and local bonds.
• Interest is taxab...
QECB Uses
• Reduction of energy consumption in publicly owned
buildings by at least 20%
• Implementing green community pro...
QECBs by Use
QECBs for School Projects
Who got the allocations?
QECB Regional Allocation
How much is left?
• Up to 75% of the original $3.2b may be available.
• State utilization rates range from complete lack o...
QECB Utilization
Nationally
QECB Issuances by
Region
QECB Utilization by Region
QECB Utilization by State
Volume of known issuances
Known Utilization
Rate
Southeastern Region
• Of $776,381,000 in QECBs available to the region, only
$58,859,000 (7.6%) has been issued.
• All of ...
Barriers to Use
• Initial legal uncertainty
• Notice 2012-44 clarified many of the FAQs regarding
“green community program...
Reasons for Success
• Issuing QECBs as part of larger bond issuance
• Proactive, persistent outreach
• Engaging with facil...
QECB News
• Sequester cuts in place through September. No known
current proposals on the table to continue the cuts after
...
Where can I find more
information?
• The current version of the EPC QECB paper is available at
http://www.energyprograms.o...
Questions?
Please keep in touch.
Elizabeth Bellis
Director, QECB & WHEEL Programs, EPC
Email: ebellis@energyprograms.org
Sequestration Review
• “Sequestration” -- government-wide budget cuts mandated by the
Budget Control Act of 2011.
• The se...
Where did 8.7% come
from?
• Originally OMB released a report in 2012 stating the subsidy payments for
the federal fiscal y...
What Does It Mean?
• Existing issuers have faced higher net interest payments.
• Future issuers may consider tax credit QE...
40 eere.energy.gov
The Parker Ranch installation in Hawaii
Qualified Energy Conservation
Bonds In Action
Glenn Barnes Augu...
41 eere.energy.gov
UNC Environmental Finance Center
Dedicated to enhancing
the ability of
governments and
organizations to...
42 eere.energy.gov
Choosing Projects
43 eere.energy.gov
$9.3 million QECB for energy efficiency improvements to
County Jail and Regional Center, annual positiv...
44 eere.energy.gov
$1.95 million in total avoided energy costs (2009-2012) for
Manchester School District with ARAMARK as ...
45 eere.energy.gov
Many local governments using QECBs for street
light improvements including San Diego &
Richmond CA, Las...
46 eere.energy.gov
ESCO McKinstry guaranteed 25% annual dollar savings on
energy & water ($280,000), higher than bond paym...
47 eere.energy.gov
Energy is one of the largest controllable expenses
of water and wastewater treatment
•Deerfield, IL has...
48 eere.energy.gov
1 MW solar photovoltaic (PV) project to supply power to
both a jail and juvenile center
•Finance was a ...
49 eere.energy.gov
• QECBs used to fund an energy performance contract
(about 1% interest)
• $3 million Phase 1 includes c...
50 eere.energy.gov
St. Louis uses QECBs to fund residential energy
efficiency loan program, with goal of retrofitting 1400...
51 eere.energy.gov
5 total private activity bonds to this point, with three in
Massachusetts, for renewable generation pro...
52 eere.energy.gov
• Glenn Barnes
• 919.962.2789
• glennbarnes@sog.unc.edu
Technical Assistance Contact
Information
Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center
Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center
Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center
Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center
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Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center

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  • Signed energy services guarantee, which included audit Source: Allegheny County QECB Case Study, for Applied Solutions webinar, available here: http://www.appliedsolutions.org/content/low-interest-financing-clean-energy-projects-qecbs
  • Source here: http://www.cleanair-coolplanet.org/les2012/documents/Presentations/LES%202012%20T2,%20S3%20O%27Maley.pdf Numerous targeted improvements including lighting, controls ventilation optimization, etc.
  • Key for Foothills was that ESCO performance guarantee savings were more than bond payment obligation over lifespan of the bond (15 years)
  • Key for Foothills was that ESCO performance guarantee savings were more than bond payment obligation over lifespan of the bond (15 years)
  • http://eetd.lbl.gov/ea/emp/reports/ee-policybrief_062011.pdf Cheap cost of capital at .7%, 2% of QECB could be used for issuance costs (almost covered issuance cost) Can repay annual bond payments with interest payments from residential homeowners
  • Transcript of "Bond Financing & Eligible QECB Projects - UNC School of Government Environmental Finance Center"

    1. 1. Qualified Energy Conservation Bonds Part 2: Bond Financing and Eligible Projects Moderator: Katie Southworth, Program Manager TDEC Office of Energy Programs
    2. 2. ORNL’s 3rd Annual Southeast Sustainability Summit August 21, 2013 Qualified Energy Conservation Bonds Public Finance Perspective George Masterson 615-742-6263 gmasterson@bassberry.com
    3. 3. What are qualified energy conservation bonds (QECBs)?  QECBs are − taxable bonds − issued by a state or local governmental entity or instrumentality − partially subsidized by U.S. government if: • proceeds finance specified types of energy conservation projects and • issuer meets other detailed Internal Revenue Code requirements at time of issuance and during life of bonds
    4. 4. How does the federal subsidy for QECBs work?  Historically, federal government has used three approaches to subsidizing state and local bonds ̶ Tax-exemption – bond investors accept a lower rate of interest because interest is exempt from gross income for federal income tax purposes ̶ Tax credits – bond investors accept a lower (or, in some cases, zero) taxable rate of interest because ownership of bond carries tax credits that can be applied against any federal tax liability ̶ Direct payments – bond investors receive a market, taxable rate of interest and U.S. Treasury makes regular subsidy payments directly to the issuer of the bonds on each interest payment date
    5. 5. How does the federal subsidy for QECBs work? (continued)  Tax-exemption – relevant to QECBs because most projects that qualify for QECB financing also qualify for financing with traditional tax-exempt bonds  Tax credits – default subsidy method for QECBs  Direct payments – may be elected by a QECB issuer in lieu of tax credits
    6. 6. How does the federal subsidy for QECBs work? (continued)  Tax-credit mechanics − holders of QECBs receive annual tax credits equal to: 70% of “applicable tax rate” times principal amount of bond − “applicable tax rate” • U.S. Treasury’s estimate of credit rate that will permit the issuer to sell bonds at zero interest and no discount • announced periodically by the U.S. Treasury at https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm • determined on the date issuer sells the bonds
    7. 7. How does the federal subsidy for QECBs work? (continued)
    8. 8. What requirements apply to QECBs at issuance?  State or local government issuer  Issuer reasonably expects to: − enter into a binding commitment with a third party to spend 10% of proceeds within six months of issue date − spend proceeds on “qualified conservation purposes” within three years  Issuer has allocation of a portion of the nationwide $3.2 billion cap on the amount of QECBs that may be issued  Maturity does not exceed the maximum term for QECBs announced by the Treasury Department at time of issuance
    9. 9. What requirements apply to QECBs at issuance? (continued)  Issuer formally designates bonds as QECBs  Issuer formally elects direct payment treatment as opposed to tax credit (if desired)  No more than a de minimis amount of original issue premium  No more than 2% of proceeds used to pay costs of issuance  No prohibited conflicts of interest
    10. 10. What requirements apply to QECBs at issuance? (continued)  Qualified conservation purposes include: − capital expenditures that: • reduce energy consumption in publicly-owned buildings by at least 20% • implement green community programs • rural development including the production of electricity from renewable energy sources • renewable energy facilities − mass commuting facilities − demonstration projects and public education campaigns − research facilities or grants relating to energy reduction and efficiency and production of non-fossil fuels
    11. 11. What requirements apply to QECBs at issuance? (continued)  QECB allocation process − nationwide: $3.2 billion of capacity − Internal Revenue Code mandates allocation among states and “large local governments” (i.e, cities and counties with populations greater than 100,000) − states and large local governments may re-allocate their cap to other issuers
    12. 12. What requirements apply to QECB during life of bonds?  Davis Bacon prevailing wage rules apply  Spending requirements − three-year spending requirement • basic requirement: o 100% of “available project proceeds” spent on qualified conservation purposes within three years OR o unspent available project proceeds used to redeem corresponding portion of bonds • limits on reimbursement of prior expenditures and refunding of other obligations
    13. 13. What requirements apply to QECB during life of bonds? (continued)  Arbitrage requirements − For tax-exempt bonds, Internal Revenue Code prohibits, with many exceptions, investment of bond proceeds at a yield that is greater than yield on bonds − For QECBs, tax-exempt bond arbitrage rules apply, with the following exceptions: • yield is net of direct payments received • issuer permitted to establish a level-funded “sinking fund” invested at yield no greater than a target yield announced by U.S. Treasury immediately prior to issue date
    14. 14. What special rules apply to QECBs that are “private activity bonds?”  “Private activity bonds” = more than 10% of the proceeds are used for private rather than governmental projects AND more than 10% of the debt service of which is from payments related to the private use  QECBs may be “private activity bonds” as long as − all “qualified conservation purpose” expenditures are capital expenditures − no more than 30% of the volume cap allocation of any state or large local government consists of private activity bonds, with green community bonds NOT treated as private activity bonds
    15. 15. Summary • QECBs benefit from significant federal subsidy • Detailed requirements to be met ̶ at issuance ̶ during life of QECBs
    16. 16. National View of QECBs Elizabeth Bellis, Energy Programs Consortium SE Sustainability Conference Draft: 8/8/13 August 21, 2013
    17. 17. Disclaimers Circular 230: This presentation was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. Federal tax law. This presentation is intended to serve as a general introduction to the use of qualified energy conservation bonds to finance renewable energy projects. Nothing contained in this presentation should be construed or relied upon as legal advice.
    18. 18. QECB Review • QECBs are effectively a federal interest rate buydown program for state and local bonds. • Interest is taxable. • Issuer elects: Cash payments to the issuer OR tax credits to the bondholder. • Cash payments = 100% of the interest OR, if lower, 70% of the “qualified tax credit rate” set periodically and available at Treasury Direct’s website. • These payments are subject to sequestration (discussed below). • Maturities are also set periodically and have ranged from 12 to 22 years (see Treasury Direct website)
    19. 19. QECB Uses • Reduction of energy consumption in publicly owned buildings by at least 20% • Implementing green community programs (PACE financing, LED streetlights, etc.) • Rural Development • Renewable energy facilities (wind, solar, biomass, geothermal, landfill gas, trash to energy, hydropower facilities) • Certain mass commuting projects
    20. 20. QECBs by Use
    21. 21. QECBs for School Projects
    22. 22. Who got the allocations? QECB Regional Allocation
    23. 23. How much is left? • Up to 75% of the original $3.2b may be available. • State utilization rates range from complete lack of known utilization (22 states) to complete exhaustion of allocation (Kansas). • A number of states are approaching exhaustion of funds, including Colorado, Kentucky, and Montana. • On the other hand, a few states, including Hawaii, Mississippi, and Florida are not known to have authorized QECBs at this time.
    24. 24. QECB Utilization Nationally
    25. 25. QECB Issuances by Region
    26. 26. QECB Utilization by Region
    27. 27. QECB Utilization by State Volume of known issuances Known Utilization Rate
    28. 28. Southeastern Region • Of $776,381,000 in QECBs available to the region, only $58,859,000 (7.6%) has been issued. • All of these issuances have been for EE retrofits in municipal buildings and schools. • In the southeastern region, Arkansas, Florida, Louisiana, Mississippi, North Carolina, and South Carolina have had no known issuances. • Kentucky leads the way with 3 issuances, followed by Tennessee, Georgia and Alabama with 1 issuance each. • Kentucky’s 3 issuances account for 93% of available funds, making it among the states with the highest utilization rates nationwide. • Louisiana’s 1 issuance (of $30M) accounts for 66% of the states allocation.
    29. 29. Barriers to Use • Initial legal uncertainty • Notice 2012-44 clarified many of the FAQs regarding “green community programs” and proper measurement of energy savings • Sequester • Admin Costs • Lack of familiarity • Debt capacity/debt aversion • Pooling issues
    30. 30. Reasons for Success • Issuing QECBs as part of larger bond issuance • Proactive, persistent outreach • Engaging with facilities managers at schools, prisons, and public housing who may have projects • Engaging with private developers where there are debt issues or insufficient public pipeline • Working with local bonding authorities (where applicable) to expedite process • Experienced bond counsel
    31. 31. QECB News • Sequester cuts in place through September. No known current proposals on the table to continue the cuts after September. • Congress is conducting an intensive reviewing of the tax code, including energy provisions. However, the end effect on QECBs is not yet known. • Some have proposed renewing and expanding the 179D credit, which may be available for certain QECB- financed projects to sweeten the deal (for certain energy efficiency improvements to qualifying commercial and government buildings).
    32. 32. Where can I find more information? • The current version of the EPC QECB paper is available at http://www.energyprograms.org/wp- content/uploads/2013/06/QECB_Memo_June13.pdf. Updates will be posted periodically on our Publications page. • The NASEO website has a variety of resources, including documents other states have used and the EPC QECB memo which contains information about all known issuances. • http://www.naseo.org/resources/financing/qecb/index.html • DSIRE has a QECB page with links to relevant statutory provisions and IRS guidance. • http://www.dsireusa.org/incentives/incentive.cfm? Incentive_Code=US51F&re=1&ee=1 • The Department of Energy’s website has resources including a QECB Primer and webinars. • http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/m/qecb.ht ml
    33. 33. Questions? Please keep in touch. Elizabeth Bellis Director, QECB & WHEEL Programs, EPC Email: ebellis@energyprograms.org
    34. 34. Sequestration Review • “Sequestration” -- government-wide budget cuts mandated by the Budget Control Act of 2011. • The sequester reduction is applied to section 6431 amounts claimed by an issuer on any Form 8038-CP filed with the Service which results in a payment to such issuer on or after March 1, 2013. • As determined by the Office of Management and Budget, payments to issuers from the budget accounts associated to these qualified bonds are subject to a reduction of 8.7% of the amount budgeted for such payments. • The sequestration reduction rate will be applied until the end of the fiscal year (September 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change. • It is unclear whether the sequester reduction applies to tax credit QECB issuances that did not opt for direct payments and file Form 8038-TC rather than 8038-CP, as the IRS statement does not mention these issuances. EPC is looking into this.
    35. 35. Where did 8.7% come from? • Originally OMB released a report in 2012 stating the subsidy payments for the federal fiscal year ending September 30, 2013, may be cut by 7.6%. • OMB has now indicated in a report to Congress dated March 1, 2013, that the current percentage reduction will be 5.3%. • The 5.3% is the overall reduction in the program's total FY 2013 level. • Since the beginning of FY 2013 last October 1 some issuers have received payments that were not reduced. In order to achieve the overall annual savings of 5.3 percent, the remaining payments will have to be cut by a larger percentage. • The Tax Exempt Bond office ("TEB") of the Internal Revenue Service has now advised that subsidy payments to issuers through September 30, 2013, will be reduced 8.7%.
    36. 36. What Does It Mean? • Existing issuers have faced higher net interest payments. • Future issuers may consider tax credit QECBs in lieu of direct pay QECBs if they are exempt from sequestration. • All issuers and purchasers may now “discount” the value of the subsidy going forward due to uncertainty about the amount and continuity of its provision. • Many issuers have the right to repurchase their QECBs in the event of a subsidy reduction. • Such issuers may weigh alternative capital sources that could be drawn upon to fund a repurchase, and the costs thereof (including transaction costs) relative to the increase in interest payments on QECBs.
    37. 37. 40 eere.energy.gov The Parker Ranch installation in Hawaii Qualified Energy Conservation Bonds In Action Glenn Barnes August 21, 2013 Environmental Finance Center University of North Carolina at Chapel Hill www.efc.unc.edu
    38. 38. 41 eere.energy.gov UNC Environmental Finance Center Dedicated to enhancing the ability of governments and organizations to provide environmental programs and services in fair, effective and financially sustainable ways
    39. 39. 42 eere.energy.gov Choosing Projects
    40. 40. 43 eere.energy.gov $9.3 million QECB for energy efficiency improvements to County Jail and Regional Center, annual positive cash flow of $1.56 million •Upgrades included: Lighting & HVAC upgrades, new waste disposal system and domestic water pumping upgrades for the jail, and water upgrades & new high efficiency boilers for the regional center Allegheny County, PA: Municipal Building Efficiency Improvements Initial guaranteed energy savings agreement project (both buildings) $14,186,509 EECBG (Energy Efficiency and Conservation Block Grant) $4,848,602 QECB $9,337,907 1st year annual guaranteed energy savings (Starting 2012) $2,107,866 1st year payment (Starting 2012) ($523,994) Measurement and verification service payment ($24,219) 1st year annual positive cash flow $1,559,653
    41. 41. 44 eere.energy.gov $1.95 million in total avoided energy costs (2009-2012) for Manchester School District with ARAMARK as performance contractor Manchester, NH: Improving Efficiency in Schools Fund Source Amount ARRA – EECBG $406,391 QECBs $1,130,000 State Energy Loan Fund $400,000 Utility rebate “bank” $358,374 Public Service of New Hampshire Utility Smart-Start $210,071 Total $2,551,673 1st Year Cost Savings $450,893 Source: Clean Air - Cool Planet (2012)
    42. 42. 45 eere.energy.gov Many local governments using QECBs for street light improvements including San Diego & Richmond CA, Las Vegas NV, & Surprise AZ •Surprise, AZ is a city with about 117,000 people •Issued a 15-year QECB bond of $723,803 in 2012 with a retirement date of July, 2027 •Principally for replacing street and baseball field lights •Energy savings expected to more than cover planned Principal & Interest payments (which average ~$50,000) Street Lights in Surprise, AZ Source: Surprise, AZ 2013 Recommended Budget http://www.surpriseaz.gov/index.aspx?NID=223
    43. 43. 46 eere.energy.gov ESCO McKinstry guaranteed 25% annual dollar savings on energy & water ($280,000), higher than bond payments •Located in Littleton, CO, and received $1 million QECB allocation from State •Bond issuance cost ~3% with Dept. of Treasury subsidy, max payment of $278,000 per year •Energy efficiency HVACs, lighting, toilets, and ice machines for hockey arena (among other improvements) •Also, 100kw Solar PV system on the EDGE (Ice rink/arena) Foothills Park & Rec Dept, CO Source: Foothiils Board Meeting, March 2010 (http://www.ifoothills.org/page_includes/board/2010/Minute s_03_09_2010.pdf) Image: Denver Post.com
    44. 44. 47 eere.energy.gov Energy is one of the largest controllable expenses of water and wastewater treatment •Deerfield, IL has a population of 18,225 and an MHI of about $107,000 •Issued an 18-year QECB bond of $12.5 million with an effective interest rate of 1.12% (AAA bond rating) – General Obligation bond—no voter approval required in IL •Funded equipment replacement that is expected to realize a 21-22 percent energy savings •Part of a larger bond issuance Wastewater Treatment in Deerfield, IL
    45. 45. 48 eere.energy.gov 1 MW solar photovoltaic (PV) project to supply power to both a jail and juvenile center •Finance was a mix of new CREBs, QECBs, a California Energy Commission (CEC) loan, a Pacific Gas and Electric (PG&E) rebate, and a Tax Exempt Lease Program (TELP) loan •3.9 percent interest rate with a 15 year tenor for QECBs •Yolo is anticipating that it will have a net positive cash flow of $100,000 per year starting in year 1 and $600,000 per year starting in year 16 in utility expenditures Yolo County, CA Source: NREL (https://financere.nrel.gov/finance/content/first-known-use- qecbs-will-save-yolo-county-least-87-million-over-next-25- years) Image: NREL
    46. 46. 49 eere.energy.gov • QECBs used to fund an energy performance contract (about 1% interest) • $3 million Phase 1 includes campus irrigation controls retrofit and domestic water conservation; HVAC exhaust energy recovery; and partial campus lighting retrofit • First year project savings guaranteed at over $307,000, providing a simple payback of 9.1 years • 2,600 metric tons of greenhouse gas emissions avoided every year Colorado School of the Mines Source: McKinstry Web Site http://www.mckinstry.com/projects/ 220/Colorado-School-of-Mines
    47. 47. 50 eere.energy.gov St. Louis uses QECBs to fund residential energy efficiency loan program, with goal of retrofitting 1400+ homes across several years Green Community Example: Saint Louis County Source: Berkeley Labs QECB Case Study, http://eetd.lbl.gov/ea/emp/reports/ee-policybrief_062011.pdf
    48. 48. 51 eere.energy.gov 5 total private activity bonds to this point, with three in Massachusetts, for renewable generation projects including the Lawrence dam project Private Activity QECB: Lawrence, KS Dam Project Source: SternBrothers & Co., May 2012. http://www.gscwest.com/Presentations/Session2ResourceMgmtDennisCiocca.pdf Elizabeth Bellis, Energy Programs Consortium (2012) http://www.nga.org/files/live/sites/NGA/files/pdf/1206PolicyInstituteBellis.pdf
    49. 49. 52 eere.energy.gov • Glenn Barnes • 919.962.2789 • glennbarnes@sog.unc.edu Technical Assistance Contact Information
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