HomeMy WebLinkAbout0015_4_Purchase Sale Agreement -Exhibit C Cash Flow
December 16, 2016
Memorandum
To: City of Lake Elsinore
cc: Tyler Masters
Western Riverside Council of Governments
From: Laura Franke
Topher Lancaster
Public Financial Management, Inc.
Re: Streetlight Project Cash Flow Updates
PFM Financial Advisors, LLC (“PFM”) submits this memorandum on behalf of the Western Riverside
Council of Governments (“WRCOG”) to the City of Lake Elsinore (“City”) in order to provide an update
regarding developments on the cash flow analysis for the City’s potential streetlight acquisition and
retrofit.
Background
October 2015, WRCOG initiated the Regional Streetlight Program to identify the feasibility of streetlight
acquisition (from Southern California Edison) and subsequent LED retrofit support. This program began
working to facilitate the development of a multi-city project that would utilize economies of scale to
provide a more cost-effective and energy efficient municipal streetlight solution. A regional approach
allows for greater savings, fewer engagement efforts, and less duplicative documentation and fees. Over
the past year, PFM has worked alongside WRCOG, Southern Contracting and Muni-Fed Energy to
determine acquisition and retrofit costs, assess technology and equipment requirements, and model
project savings.
As participants’ needs are fleshed out, assumptions are refined and new utility policies implemented, the
cash flow analysis for this project has undergone multiple iterations. In the interest of maintaining positive
momentum on a project with so many moving pieces, it is important to keep City officials informed of the
latest developments and the impact they have on potential economic outcomes. In the sections below we
will summarize the latest projected savings for your City, the major factors that have impacted the analysis
and the variables still under consideration as we continue working through this process.
WRCOG Regional Streetlight Program
December 16, 2016
Page 2
Latest Project Economics
Our last cash flow analysis for Lake Elsinore was completed in August 2016. Due to the factors outlined
below, expected net savings over 20 years have increased.
Although small adjustments have been made in terms of modeling assumptions and calculation
methodologies, two major factors have most affected the cash flow analysis of this project:
SCE Utility Tariff Rates:
At the outset of this project, cash flow calculations were still based on SCE’s October 2015 tariff rates.
Since then our models have been updated to take into account the latest SCE utility tariff rates that went
into effect as of June 1, 2016, and were further modified effective October 1, 2016. Based on our standard
financing assumptions of a 15-year term and a 4.65% taxable interest rate, the new tariff rates negatively
impacted most cities’ savings. The new tariff rate schedule lowered rates for most lamp types meaning
the potential savings of transitioning to city-owned Light-Emitting Diode (LED) streetlights was reduced.
SCE Incentive Structure:
SCE incentives were originally based on a tiered incentive structure that calculated rebates according to
the number of kWh’s saved for all city-owned streetlights retrofitted with an LED lamp. Since
implementing a new tariff rate schedule, SCE has also initiated a new incentive structure aimed at
simplifying the rebate calculation by establishing a flat per-unit incentive payment for all High-Pressure
Sodium (HPS)-type lamps. Depending on each jurisdiction’s specific lamp-type distribution, this has
resulted in many cities qualifying for significantly larger project rebates. This improvement, however, has
been tempered by additional incentive structure changes implemented by SCE that both lower the base
incentive rate under the new express solution and reduce bonus incentives awarded based on each city’s
designated partnership incentive tier. However, the City’s incentive still increased from $211,592 to
$363,682. Because the City’s lamp distribution is dominated by HPS-type lamps, incentive reductions were
minimized compared to most other program participants and the improvement in eligible incentives
improved the overall cash flow and expected net savings of the project.
Including City-owned LS3 Lamps:
The latest cash flow analysis includes the retrofit of LS3 streetlights (lights currently owned and operated
by the City) with LED lights. The updated analysis includes 75 traffic intersections where these LS3 lamps
are located. Our models assume 4 lamps per intersection (for a total of 300 LS3 lights) assuming a
conversion from a 250W HPS (most common) lamp to a 150W LED. The inclusion of these additional lamps
for retrofit also helps offset the negative impact of the new SCE tariff updates.
Purchase and Retrofit
Savings
Financing
Payments (2)
Relamp
Reserve (3)
Net
Savings
Previous Savings 20 Year Total:8,967,676 (5,263,197) (1,257,206) 2,447,274
Latest Savings (1)20 Year Total:8,931,384 (4,963,234) (1,210,570) 2,757,580
Difference 20 Year Total:(36,292) 299,962 46,636 310,306
(1) Includes LS3 lamps in retrofit
(2) Financing, net of incentives
(3) includes earnings on reserves
WRCOG Regional Streetlight Program
December 16, 2016
Page 3
Pending Issues
Structuring Reserves and O&M Services:
We are in continuing discussions with the lending partner to determine how to organize and structure
reserve funds and Operations and Maintenance (O&M) expenses on a program-wide basis. Our goal will
be for each individual participating city to make a single payment that will cover debt service payments,
re-lamp reserve fund, a credit-enhancing reserve fund and O&M services. As financial structuring details
are solidified, revisions will be made to the cash flow analysis to fully incorporate these changes.
Throughout this process, we have deliberately used conservative assumptions. This maintains flexibility
in light of a changing rate environment, requires a higher threshold to demonstrate economic feasibility
and gives all Program participants reasonable expectations as we work through this process. That said,
there are a number of areas that have the potential to further impact cash flows:
LED Efficiency:
Pending the final results of the LED Streetlight Testbed currently in progress, there could be lower than
expected post-retrofit energy costs. Based on what we are experiencing so far at the demonstration area
in Hemet, there is potential that projects will be able to utilize lower replacement lamp wattages than
those currently assumed in our financial modeling. Final analysis will allow for the selection of equipment
and technologies that maximize functionality as well as savings for the City.
Lower Product Costs:
Based on economies of scale in purchasing large quantities of equipment for a region-wide program as
well as the continuing downward trend in manufacturer pricing, retrofit project costs could improve
between now and closing, thus reducing the total amount borrowed and debt service payments made by
program participants.
Incentive Structure Updates:
SCE has communicated its intention to expand the new Express Solution for calculating retrofit incentives
to include LPS lamps. Based on each city’s lamp-type distribution, this could significantly improve rebates.
As we have seen over the last six months, however, SCE policies have the potential to change significantly
for better and for worse so we will continue to monitor new developments and update financial
projections accordingly.
City of Lake Elsinore LS-1 Streetlight System Valuation Assumptions
Poles Available for Purchase:3,186 Total Poles Transferred 3,186
RCNLD $2,103,870 City-owned Lamps for retrofit 300
Ad Hoc Replacements $159,598 Cost Per Pole
Additional Asset Components $57,835 LED Retrofit Cost per Pole (one time)$408.22
Tax Neutral Subtotal $2,321,303 O&M HPS/LPS (per pole - just in time install)$4.96
O&M LED only (per pole per month)$1.26
Tax/Other Adjustments $98,369
Transition Cost ($30/pole)$95,580 Financial Model Assumptions
Acquisition Price $2,515,252 Lease Interest Rate (taxable)4.65%
Poles Available for Retrofit: 3,486 O&M Inflation/Escalation Rate 3.00%
Gross Retrofit Cost $1,300,590 Admin Fee Inflation/ Escalation Rate 3.00%
Costs of Issuance $65,000 Annual Escalation Rate for Energy Costs 4.00%
SCE Incentives (received in Year 2)($363,682)Average Useful Life 15 yrs
Total Amount Financed $3,517,161 Relamp Reserve Earnings Rate 1.30%
*Streetlight count subject to final reconciliaton with SCE
Ownership Retrofit Ownership+Retrofit Total
Project Amount Financed 2,580,252 936,909 3,517,161
20-Year Outcome (Purchase Only)20-Year Outcome (Purchase + Retrofit)
Savings Net of Admin Costs 6,843,165 10,337,333
Operation & Maintenance (5,075,350) (1,405,950)
Costs (Financing & Reserve)(3,641,118) (6,173,804)
Post Financing Net Savings (1,873,303) 2,757,580
City of Lake Elsinore - Cash Flows based on June 2016 Tariff Schedule
Purchase and Retrofit
Year Savings O&M Costs
Financing
Payments(1)
Relamp
Reserve (2)
Net
Savings
Cumulative
Net Savings
1 309,365 (46,561) - - 262,805 262,805
2 363,062 (54,123) (330,882) - (21,943) 240,862
3 377,512 (55,746) (330,882) - (9,116) 231,745
4 392,538 (57,419) (330,882) - 4,238 235,983
5 408,164 (59,141) (330,882) - 18,140 254,123
6 424,411 (60,915) (330,882) - 32,614 286,737
7 441,307 (62,743) (330,882) - 47,682 334,418
8 458,876 (64,625) (330,882) - 63,368 397,787
9 477,145 (66,564) (330,882) (121,057) (41,358) 356,428
10 496,142 (68,561) (330,882) (121,057) (24,358) 332,070
11 515,896 (70,618) (330,882) (121,057) (6,661) 325,409
12 536,438 (72,736) (330,882) (121,057) 11,763 337,172
13 557,799 (74,918) (330,882) (121,057) 30,941 368,114
14 580,011 (77,166) (330,882) (121,057) 50,906 419,020
15 603,109 (79,481) (330,882) (121,057) 71,689 490,709
16 627,128 (81,865) (330,882) (121,057) 93,323 584,032
17 652,104 (84,321) - (121,057) 446,726 1,030,758
18 678,076 (86,851) - (121,057) 470,168 1,500,925
19 705,083 (89,456) - - 615,627 2,116,552
20 733,167 (92,140) - - 641,027 2,757,580
20 Year Total:10,337,333 (1,405,950) (4,963,234) (1,210,570) 2,757,580
(1) Financing, net of incentives
(2) Includes earnings on reserves
City of Lake Elsinore
Purchase + Retrofit: Net savings & Incentives
October 2015 Tariff*June 2016 Tariff (with 10/1/16 update)+LS3 Lamps Combined Savings Net Difference
Incentive Amount 211,592 305,053 58,629 363,682 $152,090
20 Year Savings 2,447,274 1,966,160 791,420 2,757,580 $310,306
*Reduced for incentive adjustment