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Targeting and Winning with Qualified Energy Conservation Bonds Targeting and Winning with Qualified Energy Conservation Bonds ARRA Sales Training January.

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Presentation on theme: "Targeting and Winning with Qualified Energy Conservation Bonds Targeting and Winning with Qualified Energy Conservation Bonds ARRA Sales Training January."— Presentation transcript:

1 Targeting and Winning with Qualified Energy Conservation Bonds Targeting and Winning with Qualified Energy Conservation Bonds ARRA Sales Training January 4, 2010

2 Johnson Controls2 Qualified Energy Conservation Bonds – Overview Why Drive QECBs Selling Features – QECBs How are QECBs allocated States allocations (Top 25) Targeting Example – Virginia focus Highlights: Rates & Terms, Security & Structure Sales Strategy Energy Conservation Projects Green Community Program QECB Challenges Genesee County – Voice of the Customer Successful Implementation – Abundant Power Solutions Questions & Wrap Up What Well Cover Today

3 Qualified Energy Conservation Bonds – Overview The Energy Improvement and Extension Act of 2008: Authorized the issuance of Qualified Energy Conservation Bonds (QECBs)- initial limit $800 million The American Recovery and Reinvestment Act of 2009: Expanded the allowable bond volume to $3.2 billion H.R (2010): Introduced an option to recoup part of the interest issuers pay on QECBs through a direct subsidy (like that for Build America Bonds) from the Department of Treasury rather than a tax credit QECB Background Qualified Energy Conservation Bonds (QECBs) may be issued by state, local and tribal governments to finance qualified energy conservation projects. A minimum of 70% of a states allocation must be used for governmental purposes, and the remainder may be used to finance private activity projects. Qualified projects are defined broadly. Examples of qualified projects include energy efficiency capital expenditures in public buildings, green communities, renewable energy production, various research and development, efficiency/energy reduction measures for mass transit, and energy efficiency education campaigns.

4 Why Drive QECB They represent an incredibly cheap form of borrowing. QECBs reduce the issuers borrowing cost near state, local, and travel governments. They allow state, local, and travel governments to issue bonds and then to fund qualified energy conservation projects. QECB issuer pays an investor a taxable coupon to borrow money and then receives a direct cash rebate from the US Treasury. The Recovery Act expanded the allowable bond volume to 3.2 billion - and then the real game-changer was that HR 2847 in 2010 introduced an option to recoup part of the interest issuers pay on QECBs through a direct cash subsidy. Like the Build America Bonds, QECB are effectively the same mechanism. This is a game-changer in the sense that it allows QECB government issuers to take advantage of the much larger taxable bond market. Issued as a revenue bonds, the bond would be supported by specific revenue streams (energy efficiency program). The repayments on that loan program would actually provide security to the bond investor

5 How are QECB Allocated The U.S. Treasury allocated $3.2 billion of QECB issuance capacity to State Treasurers based on population Each State was required to allocate issuance capacity to municipalities with populations >100,000 based on the municipalitys percentage of total state population –Example: If a municipality has 150,000 residents and the state has 1.5 million residents, the State must allocate 10% of its QECB issuance capacity to the municipality –If the municipality does not intend to issue QECBs, it may reallocate its issuance capacity back to the State Processes for notifying State authorities of intention to issue QECBs (and deadlines for doing so) vary

6 QECB Allocations State or Territory QECB AllocationState or Territory QECB AllocationState or Territory QECB Allocation Alabama$48,364,000Kentucky$44,291,000Ohio$119,160,000 Alaska$7,120,000Louisiana$45,759,000Oklahoma$37,787,000 American Samoa$673,000Maine$13,657,000Oregon$39,320,000 Arizona$67,436,000Maryland$58,445,000Pennsylvania$129,144,000 Arkansas$29,623,000Massachusetts$67,413,000Puerto Rico$41,021,000 California$381,329,000Michigan$103,780,000Rhode Island$10,901,000 Colorado$51,244,000Minnesota$54,159,000South Carolina$46,475,000 Connecticut$36,323,000Mississippi$30,486,000South Dakota$8,343,000 Delaware$9,058,000Missouri$61,329,000Tennessee$64,476,000 District of Columbia$6,140,000Montana$10,037,000Texas$252,378,000 Florida$190,146,000Nebraska$18,502,000US Virgin Islands$1,140,000 Georgia$100,484,000Nevada$26,975,000Utah$28,389,000 Guam$1,826,000New Hampshire$13,651,000Vermont$6,445,000 Hawaii$13,364,000New Jersey$90,078,000Virginia$80,600,000 Idaho$15,809,000New Mexico$20,587,000Washington$67,944,000 Illinois$133,846,000New York$202,200,000West Virginia$18,824,000 Indiana$66,155,000North Carolina$95,677,000Wisconsin$58,387,000 Iowa$31,150,000North Dakota$6,655,000Wyoming$5,526,000 Kansas$29,070,000Northern Marianas$899,000 Total Allocation$3,200,000,000 Top 25 Allocations

7 QECB Allocations - Virginia Municipality NameAllocation SMIS Loaded Opportunity Status Business Assignment General Background Sales Assignment Comments QECB Fairfax County$10,512,656No Virginia Beach City$4,554,143YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Prince William County$3,764,598No Chesterfield County$3,130,521YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Henrico County$3,030,414Yes Loudoun County$2,903,590No Norfolk City$2,470,542YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Chesapeake City$2,290,975YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Arlington County$2,134,764No Richmond City$2,093,745YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Newport News City$1,892,936YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Hampton City$1,533,382YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Alexandria City$1,464,096No Stafford County$1,262,805No Spotsylvania County$1,244,652No Portsmouth City$1,067,136YesActiveSolutionsJoint selling with APSTom Scheduling combined meeting to demonstrate leveraged funds approach Commonwealth Sub allocation is$35,249,046Tracking Johnson Controls 7 Example

8 QECB Rates & Terms Interest Rates U.S. Treasury pays QECB issuer the lesser of: The taxable rate of the bonds 70% of the Qualified Tax Credit Rate (QTCR) as of the Bond Sale datecurrently 5.00% The QTCR is set daily by the U.S. Treasury and can be found here: »https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm Example: Net Interest Cost 5.50%----Taxable interest rate paid to investor 3.50%----Minus Direct Subsidy (5.00% QTCR x 70% subsidy ) 2.00%----Net Interest Cost (Taxable Rate-Direct Subsidy) Maturity Currently 18 years-Set monthly by the U.S. Treasury**

9 QECB Security & Structure Bond Security Revenues General Obligation Collateral (equipment, property, etc) Structures Bullet -All principal is paid back at maturity Serial -A portion of the bonds matures at regular intervals Term bond with sinking fund

10 QECB – An Example U.S. Treasury pays issuer the lesser of the taxable coupon rate or 70% of the tax credit rat e The issuer pays a taxable coupon semi-annually to the investor and repays principal at the end of 17 years Bond proceeds are used to fund a Qualified Energy Conservation Project Qualified Issuers sell taxable QECBs as a 17 year bullet to investors State Treasurers allocate QECB issuance capacity to Qualified Issuers U.S. Treasury allocates QECB bond volume to State Treasurers

11 Qualified projects are defined broadly: Examples of qualified projects include: Energy efficiency capital expenditures in public buildings – at least 20% energy consumption reduction Renewable energy production Various energy-related research and development Efficiency/energy reduction measures for mass transit Energy efficiency education campaigns Green communities programs Qualified projects are defined broadly: Examples of qualified projects include: Energy efficiency capital expenditures in public buildings – at least 20% energy consumption reduction Renewable energy production Various energy-related research and development Efficiency/energy reduction measures for mass transit Energy efficiency education campaigns Green communities programs Conference Report to the American Recovery and Reinvestment Act of 2009 includes the following statement regarding Congressional intent about the broad intended scope of this term: "Also, the provision clarifies that capital expenditures to implement green community programs includes grants, loans, and other repayment mechanisms to implement such programs. For example, this expansion will enable States to issue these tax credit bonds to finance retrofits of existing private buildings through loans and/or grants to individual homeowners or businesses, or through other repayment mechanisms….Retrofits can include heating, cooling, lighting, water-saving, storm water- reducing, or other efficiency measures. Example: Unsecured Commercial EE Loan Program Rules A maximum of 30% of QECB allocations may b e used for private activity purposes All bond proceeds must be spent within 3 years or used to redeem bonds at the end of that 3 year period Issuers must have a binding commitment with a 3rdparty to spend at least 10% of the bond proceeds within 6 months of the issuance date Only 2% of the bond proceeds can be used towards cost of issuance Conference Report to the American Recovery and Reinvestment Act of 2009 includes the following statement regarding Congressional intent about the broad intended scope of this term: "Also, the provision clarifies that capital expenditures to implement green community programs includes grants, loans, and other repayment mechanisms to implement such programs. For example, this expansion will enable States to issue these tax credit bonds to finance retrofits of existing private buildings through loans and/or grants to individual homeowners or businesses, or through other repayment mechanisms….Retrofits can include heating, cooling, lighting, water-saving, storm water- reducing, or other efficiency measures. Example: Unsecured Commercial EE Loan Program Rules A maximum of 30% of QECB allocations may b e used for private activity purposes All bond proceeds must be spent within 3 years or used to redeem bonds at the end of that 3 year period Issuers must have a binding commitment with a 3rdparty to spend at least 10% of the bond proceeds within 6 months of the issuance date Only 2% of the bond proceeds can be used towards cost of issuance Sales Strategy Energy Conservation Projects Green Community Projects QECB.pdf

12 QECB Challenges Low QECB volume allocations QECB volume allocations often do not have sufficient size to wet investor appetite Issuers might want to consider a pooled issuance Investor unfamiliarity Taxable investors are not as familiar with municipal credits Build America Bonds have helped familiarize the taxable investor base with municipal credits A bond issuance takes several months to structure, market, price and close QECBs might strain bond issuance limits for some issuers

13 Johnson Controls13 QECB Considerations

14 Johnson Controls14 Account: Genesee County, Michigan George Martini Finance Director Voice of the Customer JCI Account Leadership: Daniel Mack Energy Solutions Account Executive

15 Customer needs What was driving the customer Create Jobs Cost Efficiency Finance Needed Capital Would the customer have done this without ARRA In the customers words Why did the customer implement with QECB Customers perspective on the QECB

16 Overview of the funding source Customers perspective on the QECB Type of fund or funds Customers perspective on the QECB How was the money distributed Customers approach to accessing and issuance Application process As defined Restrictions on the fund Any unique restrictions of use requirements Customers response to the fund availability

17 Customer Solution Amount of ARRA funds, interest rate $9.4M in Self Funded Improvements QECB $7,815,784 at 5.59% interest rate (1.91% Net…Total amount saved using QECB over Tax Exempt Bonds - $1.5M $1.6M Energy Efficiency & Conservation Block Grant Improvements Building Automation ControlsSolar PV & Thermal Lighting/Lighting ControlsIT (1200 VOIP Phones & Network Upgrade) New RTUs/BoilersWindows/Doors Roofs (Repair and New) Retro-commissioningFire Panel Replacement Critical Services (Mechanical, Controls, M&V) Internal Resources 4m vs Systems (Including NIS, F&S), Service and Energy Solutions Unique qualities of the job Fully funded by ARRA, Extensive IT Improvements, Solar w/Kiosk, 100 Local Jobs

18 Johnson Controls18 Abundant Power Charlotte, North Carolina Larry Ostema Managing Partner Successful Implementation

19 Successful Implementation – Abundant Power Solutions Current: Market:$171 million through 9/2010 over 15 issuances Geography:12 of 15 issuances west of Mississippi Placement:90% privately placed to bond purchaser(s) Security:50% general obligations bonds; remainder revenue, including COP Johnson Controls19 Opportunity: Challenges: Local government bond issuance; secured by series of junior lien credits Solution: Corporate conduit (i.e., state) issuance for local government green community program, potentially linked with side car for government owned facilities Potential purchasers: IOUs, manufacturers, foundations, other synergistic

20 Optimal Structure – Abundant Power Solutions Johnson Controls20

21 Market Strategy – Abundant Power Solutions Johnson Controls21

22 Johnson Controls22 Questions & Wrap Up


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