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HomeMy WebLinkAbout08-20-2013 c8 funding for water reclamation facility energy eff proj FROM: Carrie Mattingly, Utilities Director Wayne Padilla, Finance and Information Technology Director Prepared By: David Hix, Wastewater Division Manager SUBJECT: WATER RECLAMATION FACILITY ENERGY EFFICIENCY PROJECT - FINANCING RECOMMENDATION 1. Adopt a resolution authorizing staff to submit a financing application to the California Infrastructure and Economic Development Bank (I-Bank) in the amount of $7,479,000 for the Water Reclamation Facility Energy Efficiency Project. 2. Authorize use of working capital to pay the $61,100 I-Bank origination fee. DISCUSSION Background On May 7, 2013, Council approved the Water Reclamation Facility (WRF) Energy Efficiency Project, a public/private partnership with PG&E, for a total project cost of $9,478,948. Annual savings from the project will be approximately $325,000 through energy efficiency savings and the reduction of operations and maintenance costs with an annual carbon offset exceeding one million pounds of carbon dioxide per year. Council also authorized staff to pursue $7,186,258 in project financing and directed staff to return for approval of the appropriate financing documents. Project design completion should coincide with final debt financing approval. Funding to complete project design, in the amount of $517,000, was approved by Council on July 16, 2013. The project schedule indicates that project construction will begin in late fall or early winter of this year. Financing As reported during Council’s May 7, 2013 meeting, prior to obtaining Council authorization to pursue project financing, staff submitted a preliminary application to I-Bank to ascertain whether or not this project would meet I-Bank’s eligibility criteria for funding. On May 3, 2013, I-Bank extended an invitation to apply for financing based on the City’s preliminary application. The request before City Council is to adopt a resolution that will allow staff to submit a formal application to the I-Bank for debt financing of the WRF Energy Efficiency Project. The City has previously used the I-Bank to fund several projects, such as the Tank Farm Gravity Sewer, Lift Station, and Force Main Project and the Marsh Street Parking Garage. Based on staff’s research, the I-Bank offers the best interest rates and terms for financing this project. The amount of the loan application will be $7,479,000 for a 15-year term at a projected interest rate of 2.66%. On May 7, 2013, Council adopted a resolution of intention to issue tax exempt bonds to finance the project in the event that an alternative form of financing proved to be more economical than the I- Meeting Date Item Number August 20, 2013 C8 C8 - 1 WRF Energy Efficiency Project – Financing Page 2 ________________________________________________________________ Bank proposal. Even though staff is making the recommendation to submit the application to the I- Bank at this time, private placement financing is still being reviewed for consideration. Once the final terms have been negotiated between the I-Bank, private banks and the City, staff will return with a final recommendation on the project’s financing. Environmental Review Pursuant to section 15302 of the Public Resources Code, the project is exempt from the California Environmental Quality Act (CEQA). The project involves replacing, optimizing and retrofitting inefficient equipment and pumps; replacement of inefficient lighting; upgrading computerized control technology; and conversion of methane gas (which is currently wasted) back into electricity on site to off-set current electrical consumption. These improvements qualify for exemption from CEQA under Section 15302 Class 2 because they entail replacement or reconstruction of existing structures and facilities on the same site with the same purpose and capacity as the structures being replaced. In addition, the project will result in beneficial environmental effects since the annual carbon offset is estimated to exceed one million pounds of carbon dioxide per year. FISCAL IMPACT The WRF Energy Efficiency project will cost $9,540,100. The majority of the funding for the Energy Efficiency Project will come from two sources; $7,479,000 from the I-Bank loan and $2,061,100 from the sewer fund. Initially the City included $293,000 as funding PG&E would provide as one-time incentives prior to financing. Further discussion with PG&E disclosed that the incentives could not be funded until after project completion. This has resulted in the initial and approved request on May 7, 2013, for financing of $7,186,258 to increase to the current request of $7,479,000. PG&E is confident that this project will qualify for the incentives. There is an origination fee for the loan of $61,100 which will be paid from Sewer Fund working capital. The resolution, approving submittal of the loan application to the I-Bank, includes a commitment to the I-Bank for the City (applicant) to have available and commit an amount not to exceed $2,061,100. Currently the City has dedicated $517,000 for the completion of the design portion of the project. Table 1 shows the projects costs and funding sources. Table 1. Project Costs and Funding Sources City I-Bank Loan Total Design $517,000 $517,000 Construction $1,483,000 $7,479,000* $8,669,000 Loan Origination Fee $61,100 $61,100 Total $2,061,100 $7,479,000 $9,540,100 *Includes $293,000 in anticipated incentives Funding for this project was identified in the 2013-14 Sewer Fund analysis and adequate funding for the City’s $2,061,100 is available in working capital. Current adopted sewer rates have incorporated this project’s costs. C8 - 2 WRF Energy Efficiency Project – Financing Page 3 ________________________________________________________________ ATTACHMENTS 1. SLO I-Bank Resolution 8-20-13.doc 2. CAR-WRF Final Design Approval 3. CAR-WRF Energy Efficiency Project T:\Council Agenda Reports\2013\2013-08-20\Funding for Water Reclamation Facility Energy Prog (Mattingly-Hix) C8 - 3 Attachment 1 R ______ RESOLUTION NO. (2013 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO AUTHORIZING THE SUBMISSION OF THE APPLICATION TO THE CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK FOR FINANCING OF WATER RECLAMATION FACILITY ENERGY EFFICIENCY PROJECT, FINDING OF EXEMPTION FROM CEQA UNDER SECTION 15302 CLASS 2, DECLARATION OF OFFICIAL INTENT TO REIMBURSE CERTAIN EXPENDITURES FROM PROCEEDS OF OBLIGATION, AND APPROVING CERTAIN OTHER MATTERS IN CONNECTION THEREWITH WHEREAS, the California Infrastructure and Economic Development Bank (“I-Bank”) administers a financing program to assist local governments with the financing of Public Development Facilities as described in Section 63000 et seq. of the California Government Code (the “Act”); and WHEREAS, the I-Bank has instituted an application process for financing under its Infrastructure State Revolving Fund Program (“ISRF Program”); and WHEREAS, the City of San Luis Obispo (“Applicant”) desires to submit an application (“Financing Application”) to the I-Bank from the ISRF Program for the financing of the Water Reclamation Energy Efficiency Project (“Project”) in an amount not to exceed $7,479,000; and WHEREAS, the Act requires the Applicant to certify by resolution certain findings prior to a Project being selected for financing by the I-Bank. WHEREAS, the Applicant expects to pay certain expenditures (the “Reimbursement Expenditures”) in connection with the Project prior to incurring indebtedness for the purpose of financing costs associated with the Project on a long-term basis; and WHEREAS, the Applicant reasonably expects that a financing arrangement (“Obligation”) in an amount not expected to exceed $7,479,000 will be entered into and that certain of the proceeds of such Obligation will be used to reimburse the Reimbursement Expenditures; and WHEREAS, the ISRF Program requires funding sources, other than the I-Bank financing, be identified and approved prior to Project financing approval by the I-Bank Board; and WHEREAS, the project is exempt from environmental review under Section 15302, Class 2 of CEQA because the project involves replacing, optimizing and retrofitting inefficient equipment and pumps; replacement of inefficient lighting; upgrading computerized control technology; and conversion of methane gas (which is currently wasted) back into electricity on site to off-set current electrical consumption. These improvements qualify for exemption from CEQA under Section 15302 Class 2 because they entail replacement or reconstruction of existing structures and facilities on the same site with the same purpose and capacity as the structures being replaced. In addition, the project will result in beneficial environmental effects since the annual carbon offset is estimated to exceed one million pounds of carbon dioxide per year. C8 - 4 Resolution No. _______________ (2013 Series) Attachment 1 Page 2 NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows: SECTION 1. The City of San Luis Obispo hereby approves the filing of an ISRF Program Financing Application with the I-Bank for the Project; and in connection therewith certifies: a. that the Project is consistent with the General Plan of both the City of San Luis Obispo and the County of San Luis Obispo; b. the proposed financing is appropriate for the Project; c. the Project facilitates effective and efficient use of existing and future public resources so as to promote both economic development and conservation of natural resources; d. the Project develops and enhances public infrastructure in a manner that will attract, create, and sustain long-term employment opportunities; and e. the Project is consistent with the I-Bank’s Criteria, Priorities and Guidelines for the ISRF Program. f. the Project is exempt from CEQA under Section 15302, Class 2, of the Public Resources Code. SECTION 2. The Applicant hereby declares its official intent to use proceeds of the Obligation to reimburse itself for Reimbursement Expenditures. This declaration is made solely for purposes of establishing compliance with the requirements of Section 1.150-2 of the Treasury Regulations. This declaration does not bind the Applicant to make any expenditure, incur any indebtedness, or proceed with the Project. SECTION 3. All of the Reimbursement Expenditures were made no earlier than 60 days prior to the date of this Declaration. The Applicant will allocate proceeds of the Obligation to pay Reimbursement Expenditures within eighteen (18) months of the later of the date the original expenditure is paid or the date the Project is placed in service or abandoned, but in no event more than three (3) years after the original expenditure is paid. SECTION 4. The total estimated project cost is $9,540,100 and the Applicant commits to funding the remaining $2,061,100 in project costs with other funds. SECTION 5. David C. Hix, Deputy Director of Utilities-Wastewater is hereby authorized and directed to act on behalf of the City of San Luis Obispo in all matters pertaining to this application. C8 - 5 Resolution No. _______________ (2013 Series) Attachment 1 Page 3 SECTION 6. If the application is approved, Carrie Mattingly, Utilities Director is authorized to enter into and sign the financing documents and any amendments thereto with the I-Bank for the purposes of this financing. SECTION 7. This resolution shall become effective immediately upon adoption. Upon motion of _______________________, seconded by _______________________, and on the following vote: AYES: NOES: ABSENT: The foregoing resolution was adopted this _____ day of _____________________ 2013. ____________________________________ Mayor Jan Marx ATTEST: ____________________________________ Sheryll Schroeder Interim City Clerk APPROVED AS TO FORM: _____________________________________ J. Christine Dietrick City Attorney C8 - 6 Attachment 2 FROM: Carrie Mattingly, Utilities Director Prepared By: David Hix, Wastewater Division Manager SUBJECT: WATER RECLAMATION FACILITY ENERGY EFFICIENCY PROJECT - COMPLETION OF DESIGN RECOMMENDATION 1. Approve the completion of the design for the Water Reclamation Facility Energy Efficiency Project at a cost of $517,000; 2. Authorize the City Manager to execute a Work Order to complete the project design, subject to contract review and approval as to form by the City Attorney; and 3. Approve the transfer of $517,000.000 into the design phase of the Water Reclamation Facility energy efficiency project account from the sewer fund working capital. DISCUSSION On May 7, 2013, Council approved the Water Reclamation Facility (WRF) energy efficiency project, a public/private partnership with PG&E. Total project cost is $9,478,948. $7,478,948 will be debt financed and the remainder ($2 million) will come from sewer fund working capital. Staff is requesting authorization to use $517,000 of the $2 million from sewer fund working capital to complete project design. The design is currently at 50 percent. Approving staff’s recommendation will allow for the project design to proceed concurrently with the pursuit of project financing. Approval of this request does not obligate the City to move forward with project construction. Construction requires Council’s approval of the debt financing. It is anticipated staff will return to Council for approval of the appropriate project financing documents in August 2013. Should Council choose to not approve the project debt financing at that time, having a completed design is a valuable asset to the City as it can be utilized when appropriate debt financing is obtained. FISCAL IMPACT Completion of the design phase of the WRF Energy Efficiency Project the will cost $517,000. Funding for this project was identified in the 2012-13 Sewer Fund analysis and adequate funding for the design phase has been identified and is available in the sewer fund’s working capital. Staff recommends transferring funding from sewer fund working capital to the design phase of the project account. Meeting Date Item Number July 16, 2013 C8 - 7 Attachment 2 Water Reclamation Facility Energy Efficiency Project - Completion of Design Page 2 ALTERNATIVE Do not authorize the completion of design for the WRF energy efficiency project at this time. Council should only take this action if it desires project design to commence after its approval of debt financing (linear as opposed to concurrent action). This action would delay implementation of the project and the associated triple-bottom line benefits to the community. ATTACHMENTS 1. Budget Amendment Request 2. WRF Energy Efficiency Project C8 - 8 Attachment 3 FROM: Carrie Mattingly, Utilities Director Prepared By: David Hix, Wastewater Division Manager Aaron Floyd, Environmental Programs Manager Howard Brewen, Water Reclamation Facility Supervisor Ron Munds, Utilities Conservation Manager SUBJECT: WATER RECLAMATION FACILITY ENERGY EFFICIENCY PROJECT RECOMMENDATION 1. Approve the Energy Efficiency Project at a cost of $9,478,948. 2. Authorize the City Manager to execute a Work Order, upon approval of the City Attorney as to form, to enter into agreement with PG&E to proceed with the project, contingent on approval of financing. 3. Authorize staff to pursue $7,186,258 in financing for the project, which includes an I-Bank loan or issuance of bonds, and direct staff to return to Council for approval of appropriate financing documents. 4. Adopt a resolution of intention to issue tax exempt bonds in financing the project and to reimburse from the proceeds costs incurred prior to their issuance. REPORT-IN-BRIEF The Water Reclamation Facility (WRF) treats over four million gallons of wastewater per day at an average cost of $450,000 per year for electricity. Consistent with Council’s commitment to climate protection and its General Plan policies, Climate Action Plan, and with electricity costs continuously on the rise, staff began exploring the potential for achieving greater energy efficiency at the WRF back in 2010. A strong driver was the desire to create a sustainable wastewater treatment facility aligned with the Utilities Department’s Strategic Plan goal of being effective stewards of natural and fiscal resources. The WRF Energy Efficiency Project involves a unique public/private partnership with PG&E’s Sustainable Solutions Turnkey Program; an approach that allows for a streamlined solution to implementing energy and infrastructure replacement projects. The program is divided into four phases. WRF Energy Efficiency Project Phases Complete 1 Feasibility Discussion √ 2 Preliminary Energy Assessment √ 3 Investment Grade Analysis √ 4 Finance and Implementation Meeting Date Item Number May 7, 2013 C8 - 9 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 2 In January of 2012, Council unanimously voted to complete Phase 3 of the project. Of the 18 Conservation Measures originally identified in the Preliminary Energy Assessment (Phase 2), nine have met the requirements for inclusion in the final design and build project. The proposed project will cost $9,478,948 with approximately $7,200,000 being financed over 15 years. Savings from the WRF Energy Efficiency Project have been calculated at approximately $325,000 per year through energy efficiency savings and a reduction of operation and maintenance costs. The proposed project includes onsite cogeneration of energy, solids management, upgrading and optimizing aging infrastructure, efficient lighting, and process system control. The cumulative effects of this bundled project will have significant environmental, economic, and social benefits to the community. Documents and policies that support the City’s participation in the Sustainable Solutions Turnkey Program include the City Goal on climate protection, the Climate Action Plan, the Conservation and Open Space element of the City’s General Plan, and the Utilities Department Strategic Plan. DISCUSSION Background Energy costs related to the treatment of over 1.7 billion gallons of wastewater each year are a significant part of the operating costs at the City’s Water Reclamation Facility (WRF). Consistent with Council’s commitment to climate protection and its General Plan policies, and with electricity costs continuously on the rise, staff began pursuing the potential for achieving greater energy efficiency at the WRF back in 2010. An additional underlying driver was (and continues to be) the desire to create a sustainable wastewater treatment facility aligned with the Utilities Department’s Strategic Plan goal of being effective stewards of natural and fiscal resources and its commitment to the triple bottom line concept, which considers social, economic, and environmental factors. In January 2011, Utilities staff contacted Pacific Gas & Electric Company (PG&E) to inquire about available funds or incentives for energy efficiency projects. PG&E representatives stated there was an opportunity to participate in its Sustainable Solutions Turnkey program which had previously only been available to federal facilities. PG&E Sustainable Solutions Turnkey (SST) Program The Sustainable Solutions Turnkey (SST) Program involves a unique public/private partnership approach that allows for a streamlined solution to implementing energy conservation projects. The goal of the SST Program is to implement energy saving projects at facilities and use the money saved from reduced energy consumption and operational maintenance costs to help pay the debt service for the design and construction of the project. The SST Program has the flexibility to allow participants to finance the entire project by this method or to pay for part of it out of existing funds and/or finance the remainder, or pay cash. The program is divided into four phases. After each phase, participants determine if the program meets the organization’s objectives and a decision is made whether to continue to the next phase. The first two phases of the program were provided at no cost to the City. C8 - 10 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 3 A Review of the City’s Participation to Date In January of 2011, City staff initiated Phase 1 by meeting with PG&E and the project team to discuss the feasibility of partnering on an energy project. Based on the feasibility discussion, the City, PG&E, and its contracted engineering firm, AECOM, began Phase 2 by developing a Preliminary Energy Assessment (PEA). The product of the PEA was the identification of 18 individual components, called Conservation Measures, that had the potential to be the most economical and viable projects for the City to undertake. On January 17, 2012, the City Council unanimously approved the continued participation in the program (Phase 3) and authorized the City Manager to execute a Work Order with PG&E to complete the Investment Grade Analysis for an amount not to exceed $400,000 (Attachment 1). For the past year, staff has worked with PG&E and AECOM to further refine the list of Conservation Measures identified during the Preliminary Energy Assessment and determine costs and payback period to implement the project. Completion of Phase 3: Investment Grade Analysis Phase 3, the Investment Grade Analysis (IGA), is now complete and provides an in-depth study of the implementation costs of the project, including utility rebates and incentives, and potential energy savings. This phase of the program delivers a set of design/build plans and a final project implementation proposal. This phase was greatly strengthened through the active participation of City staff. Using their expertise and in-depth knowledge of the WRF’s specific operation and processes allowed for a wider range of options to be explored. To be considered as a viable option, a potential Conservation Measure was required to meet several criteria: (1) the Conservation Measure must adhere to the triple bottom line concepts of being environmentally, socially, and fiscally sustainable; (2) where feasible, the team investigated replacing aging infrastructure identified in the WRF Master Plan with more energy efficient options; (3) projects were evaluated in context of their impact on the entire treatment process, as Feasibility Discussion •City and PG&E team discuss program •City expresses interest, shares previous energy audits •PG&E prepares feasibility audit based on energy use and metrics •Review feasibility Preliminary Energy Assessment •PG&E prepares PEA based on site investigation at no cost to City •PEA lists potential Conservation Measures (CM) •PEA identifies potential energy savings and cost to implement Investment Grade Analysis •PG&E and City enter into agreement •IGA lists CMs, energy savings, preliminary engineering of measures, costs to implement , and payback •IGA identifies utility rebates and incentives Finance & Implementation •Agreements put in place •PG&E provides engineering and design for CMs •PG&E provides assistance for 3rd party financing if needed •Contractor builds CMs PHASE COMPLETE PHASE COMPLETE PHASE COMPLETE C8 - 11 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 4 opposed to being studied individually, so that maximum efficiencies could be realized; and (4) any Conservation Measure needed to be independent of any potential upcoming regulatory decisions that would affect treatment requirements. Of the 18 Conservation Measures originally identified in the Preliminary Energy Assessment, nine have met the requirements for inclusion in the final design and build project. Project Components Using the criteria previously discussed, the project has been broken down into functional groupings with one or more Conservation Measure(s) associated with each element. A detailed description of each, listed by its identifier (WRF 1, WRF 2, etc.), can be found in the Investment Grade Analysis. Cogeneration Methane gas is a byproduct of the anaerobic process used at the WRF for the treatment of solids. The project would include a cogeneration system (WRF 1) that would allow for the gas, which is currently wasted, to be converted back into electricity to offset current electrical consumption. Solids Management The proposed project replaces inefficient headworks (WRF 2) and dewatering equipment (WRF 3), and selected pumps used to move solids throughout the WRF (WRF 4). Optimizing Existing Infrastructure In reviewing current infrastructure it was determined that in some instances the retrofitting of existing facilities and equipment would be preferable to building new items. Examples include optimizing some existing pumps (WRF 5) and retrofitting the current filter tower structures (WRF 6). The modification of the aeration tank control program (WRF 7) was also identified as an energy Environmentally, Socially, and Fiscally Sustainable Aging Infrastructure Replacement Synergy with Treatment Process Regulation Independent WRF Energy Project Conservation Measure C8 - 12 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 5 Social (People) Economic (Prosperity) Environment (Planet) saving measure in the IGA. The WRF 7 Measure has already been completed using the skills of in- house WRF operations staff. Associated energy savings are already being realized. Lighting Similar to the Street Light Energy Efficiency Project currently being implemented throughout the City, this Conservation Measure will replace existing lighting with longer lasting, more energy efficient, and brighter outside LED lighting (WRF 8). Process System Control Upgrading to modern computerized control technology (WRF 9) will result in greater integration of treatment processes. Project costs are shown in (Table 1) based upon the Functional Group. Detailed descriptions of the individual Conservation Measures can be found in the Investment Grade Analysis. Table 1. Project Components Functional Group Conservation Measures Cost Cogeneration WRF 1 1,695,000 Solids Management WRF 2, 3, 4 4,502,000 Optimizing WRF 5, 6, 7 1,715,000 Lighting WRF 8 270,000 SCADA WRF 9 1,297,000 Total $9,479,000 Project Benefits The triple bottom line principles can be incorporated as a tool to view the potential benefits gained through the implementation of this energy efficiency project. Using this concept, the project benefits are listed below under their respective headings of Economic, Environmental, and Social. Economic The WRF Energy Efficiency Project has been calculated to save approximately $325,000 per year, increasing by 2.5% assumed energy rate increases, for a total of $11.1 million total over the 25 year equipment life through energy efficiency savings and a reduction in operation and maintenance costs. Additionally, with the installation of a modern control system, treatment operators will be able to more efficiently track and operate various treatment processes. This provides significant energy cost savings by taking advantage of off-peak time of use rates and to ensure the electrical usage stays under the threshold for higher rates whenever possible. Environmental This project will have an annual carbon offset exceeding one million pounds of carbon dioxide per year. C8 - 13 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 6 This is an annual equivalent to removing 96 cars from the road, powering 69 homes, or the addition of 378 acres of forestland. The proposed project also utilizes, to the extent possible, existing structures. Decreasing the need for new construction materials decreases the generation of construction and demolition debris and the associated air pollution and landfill disposal needs. Greater efficiency in solids removal and the separation of liquids will result in lower volumes of grit and biosolids needing to be hauled to offsite locations. This decrease in trips to haul the materials also leads to reduced carbon dioxide emissions. Social This energy efficiency project significantly advances the mission of changing the traditional “yuck factor” perception of a wastewater treatment facility to one of a water recycling center and community asset. The facility’s Conservation Measures will be routinely displayed to the numerous tours given annually to both students and community groups. In addition to tours, improvements will allow for enhanced opportunities for the on-site research and testing process currently conducted by Cal Poly University. A decrease in odor control issues is anticipated with the proposed modifications in solids handling and storage. As a good neighbor, WRF staff is concerned about any impacts to surrounding establishments and desires to be a good reflection of the City. Lastly, this project has benefited immensely through the public/private partnership model that has allowed for a high level of collaboration among the energy and wastewater engineering team and City staff; all of whom brought their specific expertise to the table to create an outstanding project. Financial Summary By implementing this energy efficiency project, the City will realize annual energy cost savings of approximately $157,000 and annual operational and maintenance savings of $168,000 (Table 2). Table 2. Annual Energy and Operational Savings Electric $131,000 Natural Gas $26,000 Operational $168,000 Total $325,000 An estimated $2.5 million in future capital costs planned for the City’s WRF upgrade will be avoided. Additionally, the City is eligible to receive one-time incentives which total $293,000 from PG&E’s Non-Residential Retrofit program and the Self Generation Incentive Program administered by Southern California Gas Company. Advantages of Design/Build Contracting The City’s Charter, Article IX, Section 907 and California Government Code Section 4217 allows the City to forgo its standard low-bid public procurement processes to implement turn-key energy services projects when the City finds this procurement method in its best interest.. This procurement model was approved by Council in January of 2012 and ensures that PG&E will implement the C8 - 14 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 7 project for a fixed price with no change orders, complete the project on-time, and ensure that the systems are performing as specified in the design-build contract. C8 - 15 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 8 The design build construction process provides the City with the following benefits: • Fixed Price Contract (with no Change Orders) – PG&E & the City have worked together over the past year through the Investment Grade Assessment (IGA) process to define the project’s scope of work, develop engineering documentation and specifications, and engage subcontractors and equipment vendors to verify project constructability and pricing. • Collaborative Project Development Process – The IGA process enabled the City to define project goals, participate in the project’s design process, and select the subcontractors and equipment vendors that provide the best value solution. • Faster Project Delivery – Since the design build procurement method integrates the project design and pricing/bidding process, this enabled the City to significantly reduce the time it takes to move from design to construction. • Fewer Construction Issues & Cost Impact – Since the project team (City, PG&E, & Subcontractors) has worked together for over a year to develop this project, they have identified many of the probable construction issues and potential project pitfalls. This collaborative approach would not be possible as part of a normal design, bid, and build project. Supporting Policies and Documents The City has guiding policies and documents that set the course for the Utilities Department in terms of energy efficiency and conservation. The proposed energy efficiency project is supported by several of these guiding documents. City Goal : Climate Protection: Implement greenhouse gas reduction and Climate Action Plan. Conduct energy audits of all city facilities, increase energy conservation, invest in infrastructure which will save energy and funds in the future. Conservation and Open Space Element: COSE 4.3.1: The City will employ the best available practices in energy conservation, procurement, use and production, and will encourage individuals, organizations and other agencies to do likewise. COSE 4.3.2: City Buildings and facilities will be operated in the most energy-efficient manner without endangering public health and safety and without reducing public safety or service levels. COSE 4.3.3: The City will continue to identify energy efficiency improvement measures to their greatest extent possible, undertake all necessary steps to seek funding for their implementation and, upon securing availability of funds, implement the measures in a timely manner. COSE 4.6.11: The City will actively seek all available sources of funding for implementing energy efficiency improvement and utilities infrastructure renewal projects, including federal and state budget appropriations, federal, state and private sector grant opportunities, utilities and other unique public/private sector financing arrangements. C8 - 16 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 9 C8 - 17 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 10 Climate Action Plan: On July 17, 2012, the Council adopted a Climate Action Plan in response to AB 32: the Global Warming Solutions Act. The Climate Action Plan contains a strategy directing energy efficient improvements be made to the City’s wastewater infrastructure. In addition to this work effort, the City is also implementing new Title 24 Energy Efficient Standards and CALGreen Building Standard. This involves making upgrades to City facilities, such as the Water Reclamation Facility, and participating with the Local Government Commission to develop strategies to adapt to climate change in the future. Utilities Department Strategic Plan – Outcome Oriented Goals: Infrastructure Goal: The Department will have a clear understanding of its long-range infrastructure requirements and a plan to address them. Objective: Increase planning efforts that identify and address infrastructure improvements considering impacts to economic, environmental, and long term factors. (e.g. inflow &infiltration; Capital Project planning; Master Planning for water, wastewater, water recycling; energy efficiency). Stewardship Goal: The Department will be recognized by regulators, the public, and all stakeholders as an effective steward of natural and fiscal resources. Objective: Expand the identification and implementation of practices that increase the conservation of all natural resources. Image Goal: Our customers will have a better understanding of the Utilities Department’s role, and will value the services that we provide to the community. Objective: Expand our community engagement and public education activities. Next Steps If Council approves the proposed project, the City will enter into an agreement to proceed with PG&E to do the energy efficiency project. A CEQA determination will be completed utilizing the finalized project description. A recommendation to comply with CEQA will be concurrent with Council’s action to award make final decision on project financing. The associated Work Order would be executed by the City Manager after review by the City Attorney. Staff will return to the City Council with recommended project financing for its consideration, as discussed more fully below. Upon approval by the Council, financing would be secured and subcontractors would be hired on a bid for proposal basis and construction of the project would commence. CONCURRENCES The City’s Public Works and Community Development Departments, and PG&E concur with the recommendations made in this report. C8 - 18 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 11 FISCAL IMPACT The majority of funding for the $9,478,948 project will be debt financed with $2,000,000 coming from the Sewer Fund’s working capital. Financing of approximately $7.2 million, will need to be obtained to move the project forward. Staff has been working with the California Infrastructure and Economic Development Bank (I-Bank) and has submitted a preliminary application for a low interest I-Bank loan. I-Bank staff has been very supportive of the City’s project; however the City has not yet received formal I-Bank pre-approval. In the event that the I-Bank loan is pre-approved, staff will return to the Council with the necessary documents and seek its final approval to secure this funding. Should the City ultimately not receive approval from the I-Bank, alternative financing will need to be obtained. City staff has been working with the City’s financial advisor, Fieldman Rolapp and Jones Hall, the City’s bond counsel, to discuss selling bonds for the needed financing. Staff will return to Council with the appropriate bond documents for financing the remainder of the project, should the I-Bank application not be approved. Adopting a resolution of intent at this time simply preserves the City’s option of including any costs related to the project that might be incurred prior to its issuance in the subsequent bond issue. The final cost of borrowing will depend on which mechanism is ultimately used. Current I-Bank interest rates are around 2% and private placements are around 3.5%. Based on borrowing $7.2 million for a 15-year term (a term shorter than the 25-year equipment life), annual repayments at 3.5% interest would be $625,000. At 2% interest, the annual payment would be $560,400. Because this project includes both energy efficiency and infrastructure replacements, the savings generated will help pay the annual debt service, but will not fully cover the annual debt costs. One consideration of the Sewer Fund’s financial health is the debt coverage ratio. This provides a measure of the fund’s ability for revenues to provide enough money to pay the debt service expenses. It is common for the City’s bond covenants to stipulate that the City will set rates in order to maintain a debt coverage ratio of 125%, that is, annual operating revenues are at least 125% more than total debt service costs. Rating agencies have indicated that they prefer to see debt coverage ratios closer to 200%. The Sewer Fund currently has very low debt service costs, with only the debt for the Tank Farm Lift Station and the fund’s share of the Dispatch Center and Radio Upgrade project. Currently, without the financing for this project, the Sewer Fund has a debt coverage ratio of about 905%. With the anticipated financing of this project, the ratio will be reduced to 513%, still well above the minimum levels that investors and rating agencies consider acceptable. This debt coverage ratio helps this financing to achieve the highest bond rating which in turn will help lower the cost of borrowing. This continues to position the Sewer Fund for the financing that will be required for the major Water Reclamation Facility upgrade in the future. The cost of this project has been incorporated into the Sewer Fund’s financial analysis and therefore this project will not change projected sewer rates. Sewer rates are calculated based on a long-term fund analysis and take into consideration capital and operating needs. This project is in support of, and compliant with, the City’s incremental approach to raising rates and preparing the fund for large future capital needs. As identified on page 75 of the Investment Grade Analysis, this project will result in annual operating savings of approximately $325,000 and will also result in saving over C8 - 19 Attachment 3 Water Reclamation Facility Energy Efficiency Project Page 12 $2.5 million in capital costs that will not need to be incurred in the future. For example, based on the planning amounts provided by Brown and Caldwell in the Water Reclamation Facility’s 2009 master plan, implementing this project will mean that an additional filter tower will not be built, thus eliminating this $1,250,000 project from the future major upgrade project. In addition, staff has identified other long-term capital costs that will not be avoided, but will likely cost less or will be incurred now instead of in the future. For example, upgrades to the facility’s Supervisory Control and Data Acquisition (SCADA) system are needed and have been incorporated into the Sewer Fund’s long term capital needs. Upgrading the SCADA system now provides many benefits to the facility and although the cost will not be avoided, it will be incurred now with the energy efficiency project rather than incurring it in the future. While this action results in changes in the capital project expenses planned for any individual fiscal year, the overall picture isn’t changed. The cost of this, and future anticipated capital projects, is included in the long-term fund analysis and therefore the rates approved by the Council, and those currently projected, support this project. Section 6 of the IGA estimates the return on investment for this project at 14%. While this is a useful and important analysis for valuing investments in energy projects, it is important to note that this project also includes significant replacement of aging infrastructure. Typically, cities do not calculate return on investment of infrastructure projects because it is either difficult to quantify, such as the return on investment of paving streets, or there is no expectation of return on investment, such as investing in infrastructure that supports public safety. In this case, while the overall project will result in a positive return on the City’s investment, the other important considerations outlined in the report make this project important to complete. ALTERNATIVE Do not authorize the final Finance and Implementation Phase of the Sustainable Solutions Turnkey Program. Council should only select this alternative if, after reviewing the Investment Grade Analysis, it feels this public/private partnership is not in the best interest of the community. Should this be Council direction, the project components would be brought back to Council as individual capital improvement projects or as part of the larger future WRF upgrade project. ATTACHMENT Attachment Reimbursement Resolution.doc AVAILABLE FOR REVIEW IN THE COUNCIL OFFICE Investment Grade Analysis docT:\Council Agenda Reports\2013\2013-05-07\WRF Energy Efficiency Project (Mattingly-Hix) C8 - 20 'OWAI council mEmoaandum August 20, 2013 AGENDA CORRESPONDENCE Datee-2D -13 Item# TO: Mayor and City Council RECEIVED AUG 2 0 2013 VIA: Katie Lichtig, City Manager } �'� SLO_ CITY ,, ARK FROM: Carrie Mattingly, Utilities Director Wayne Padilla, Finance and Information Technology Director SUBJECT: Continuation of Item C8. — Water Reclamation Facility Energy Efficiency Project Financing Staff is requesting Council continue agenda item C8. — Water Reclamation Facility Energy Efficiency Project Financing due to new information we have received from our financial advisor regarding another financing opportunity. Based on preliminary analysis of the data provided by the financial advisor it appears this alternative financing may be a better way for the City to go, but further analysis is required to be sure. Staff will bring the Water Reclamation Facility Energy Efficiency Project Financing recommendation back to Council as soon as possible to maintain project financing and construction timelines. Thank you for your understanding. 1.30020 Wawv Reclamation Facility E 3ic� � 1 1fi rnc} f'Yr' ct Fillancilig.docx