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What We’ll Cover Today Qualified Energy Conservation Bonds – Overview

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Presentation on theme: "What We’ll Cover Today Qualified Energy Conservation Bonds – Overview"— Presentation transcript:

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

2 What We’ll Cover Today Qualified Energy Conservation Bonds – Overview
Why Drive QECB’s Selling Features – QECB’s How are QECB’s allocated State’s 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 Johnson Controls

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

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

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 date—currently 5.00% The QTCR is set daily by the U.S. Treasury and can be found here: » 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 rate 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 Sales Strategy Green Community Projects Energy Conservation Projects
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 be 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 Energy Conservation Projects Green Community Projects QECB.pdf

12 QECB Challenges Low QECB volume allocations Investor unfamiliarity
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 QECB Considerations Who owns the QECB program for the state?
What is the deadline for communicating the municipalities intention for the allocation? What is done with unused or unallocated funds? How to determine how much QECB has been utilized in their state? What actions should they take if there is an underutilization of QECB in their state? Johnson Controls

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

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 Customer’s perspective on the QECB

16 Overview of the funding source
Customer’s perspective on the QECB Type of fund or funds How was the money distributed Customer’s 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 Controls Solar PV & Thermal Lighting/Lighting Controls IT (1200 VOIP Phones & Network Upgrade) New RTU’s/Boilers Windows/Doors Roofs (Repair and New) Retro-commissioning Fire 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 Successful Implementation
Abundant Power Charlotte, North Carolina Larry Ostema Managing Partner Johnson Controls

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 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 Johnson Controls

20 Optimal Structure – Abundant Power Solutions
Johnson Controls

21 Market Strategy – Abundant Power Solutions
Johnson Controls

22 Questions & Wrap Up Johnson Controls

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