Agenda Item AGENDA STAFF REPORT ASR Control 05-002217
MEETING DATE:	11/08/05
legal entity taking action:	Board of Supervisors
board of supervisors district(s):	1
SUBMITTING Agency/Department:	County Executive Office (Approved)
Department contact person(s):	Tom Beckett (714) 834-5969
	Bob Wilson (714) 834-2830

Subject: Approval in Concept of Cogeneration Financing

ceo Concur	County Counsel Review		Clerk of the Board
Concur	N/A		Discussion
			3 Votes Board Majority
Budgeted: Yes		Current Year Cost: N/A		Annual Cost: Approximately $2.29 million for a 20-year term
Staffing Impact: No		# of Positions:		Sole Source: N/A
Current Fiscal Year Revenue: N/A
Funding Source: GF (040)
Prior Board Action: Minute Order dated February 11, 2003; Minuted Order dated December 9, 2003; Minute Order dated February 24, 2004; Minute Order dated June 7, 2005

RECOMMENDED ACTION(S)

Approve in concept the tax-exempt financing of the cogeneration conversion project in the Civic Center and installation of a photovoltaic system on selected County parking structures.

SUMMARY:

The County Executive Office requests the Board of Supervisors (the “Board”) approve in concept the tax-exempt financing of the cogeneration conversion project in the Civic Center and installation of a photovoltaic (PV) system on selected County parking structures (the Projects).

BACKGROUND INFORMATION:

On February 11, 2003, the Board of Supervisors (the Board) ratified the PFAC selection of Sperry Capital, Inc. (Sperry) as Financial Advisor in connection with the feasibility analysis and potential bond financing and Orrick, Herrington & Sutcliffe LLP (Orrick) as Bond Counsel for the Projects. The Board also ratified the PFAC (1) direction to Staff to prepare a feasibility analysis to explore financing options, (2) adoption of a Resolution authorizing reimbursement of expenditures from proceeds of a potential financing for the Projects, and (3) direction to Staff to conduct a proposal process of the qualified underwriting firms on the existing panel and return to the PFAC and the Board with a recommended selection if the analysis determined that a financing is feasible.

The Board deferred approval of the agreements until a specific design for the project was determined and approved the agreements with Orrick and Sperry on June 7, 2005. On that date the Board also amended the reimbursement resolution to include alternate sites for the photovoltaic (PV) system.

The Projects:

RDMD is responsible for procuring and providing utility service for most government facilities located in the Civic Center. This is accomplished through the production of steam heat and chilled water by the Central Utility Facility (CUF) and the purchase of electricity from Southern California Edison Company (SCE). The annual cost for electricity and natural gas purchases for Civic Center clients is approximately $7 million, with the vast bulk representing electricity purchases for direct use by County departments and other governmental agencies.

A long term goal identified in the County’s Strategic Energy Plan is the investigation and implementation of alternative energy sources. Accordingly, RDMD has been researching options for providing reliable electrical power at a reasonable cost through non-utility sources for several County locations. One of the more viable and cost effective options studied is a proposal to use the established technology of cogeneration to generate electricity at the CUF to replace electricity purchased from SCE. Another is to install a system of photovoltaic cells at the County Data Center to generate electricity from solar power. An alternate project for photovoltaic cell installation has since been identified as described below. A summary of these options follows:

Cogeneration at the CUF:

Cogeneration is the simultaneous generation and use of heat and power. It encompasses a range of technologies, but always includes an electricity generator and a heat recovery system. Cogeneration is also known or referred to as Combined Heat and Power (CHP). On average, conventional power generation is only 35 percent efficient. Thus, up to 65 percent of the energy potential is released as waste heat. Cogeneration reduces this loss by using the waste heat productively for heating and cooling, achieving an efficiency of up to 80 percent. In the case of the CUF, after electricity is generated on site, the waste heat would be further utilized to produce steam and chilled water. The on-site electricity generator allows power to be generated at a lower cost than power purchased from an outside utility. The County would gain a reliable source of power and independence from supply reductions occasioned by power shortages.

Preliminary feasibility and engineering studies have demonstrated the proof of concept of cogeneration at the CUF. The concept has been presented and accepted by PFAC and the CEO and approved for further study by the Board on February 11, 2003. The simple payback period for the cogeneration project is estimated to be seven years based on facility size as well as projections for the cost of natural gas and SCE-supplied electricity, and the increased demand for power. The payback period appears reasonable as similar cogeneration projects reported in the literature have simple payback periods of five to six years.

Steam and chilled water currently produced at the CUF are distributed throughout the Civic Center via a network of pipelines. Independently of the Cogeneration project, this network was originally scheduled for refurbishment and upgrade as part of on-going maintenance activities. Additions to this network are required for the cogeneration project. The A/E design team has recommended that the maintenance, upgrade and additions be designed and constructed at the same time. Combining these projects along with the installation of electrical distribution lines, which is also part of the cogeneration project, will result in reduced overall construction costs.

Photovoltaic Electricity Generation:

Photovoltaic (solar energy) is a viable source of renewable electrical energy. RDMD/IS Facilities Operations proposes to develop a pilot project using solar cells. Staff has surveyed the roofs of large County owned buildings in an effort to locate satisfactory sites that could make maximum use of a photovoltaic installation. However, most County buildings have some structure on the roof that would limit the gathering of the solar energy during major parts of the day. Currently the structures that lend themselves to the installation of photovoltaic systems are parking structures.

PV systems offer a number of advantages:

· High Reliability - PV cells originally were developed for use in space, where repair is

extremely expensive, if not impossible. PV still powers nearly every satellite because PV

operates reliably for long periods of time with virtually no maintenance.

· Low Operating Costs - since PV cells use the energy from sunlight to produce electricity, the

fuel is free. With no moving parts, the cells require little upkeep.

· Reduced Environmental Impacts - PV systems are clean and silent because they burn no fuel

and have no moving parts. Electricity produced from PV systems has a far smaller impact

on the environment than traditional methods of electrical generation.

Photovoltaic Pilot Project:

The original PV pilot project under consideration would have installed panels comprised of PV cells on the roof of the County Data Center. However, in the time since this concept was originally envisioned, a project to provide energy efficient power to the Data Center through the microturbine installation at the Grand Avenue, Santa Ana location has been completed, alleviating the need and benefits of implementing solar power at this site. Alternate sites that had been identified as suitable PV locations included the upper floor of the parking structure at Hutton Towers and the Parking Structures #1 and # 2 at the Lamoreaux Justice Center. RDMD also proposes that projects at other locations be studied for financing feasibility to maximize the potential of PV.

A pilot project would install a PV system over the space above the parking structure at the Lamoreaux Justice Center Parking Structures #1 and #2. A skeletal metal framework would be erected above the parking stalls and the PV generating cells would be installed on top of the framework. This plan would provide electrical energy to adjacent County buildings. As an ancillary benefit the solar cells on the framework would provide shade to cars parked on the top deck.

Solar generating cells placed on the Hutton Towers structure would generate up to 302 kilowatts of power to be used in the Osborne and Gates buildings. The same system erected at the Lamoreaux Justice Center Parking structures #1 and #2 would generate up to 750 kilowatts of power to be used at the Manchester Office Building and at Juvenile Hall

An additional advantage to PV is that rebates from the California Energy Commission through SCE remain available at this time. The rebate is up to 50% of the project cost not to exceed $4.50 per watt.

Project Status:

The Board awarded an Architect/Engineer (A/E) design contract for the cogeneration project to the Syska Hennessy Group on May 25, 2004 and approved Amendment #1 to the contract on September 27, 2005. The total amount is $2,873,600, and includes steam line distribution design costs. These design costs can be reimbursed from bond proceeds if and when bonds are issued pursuant to a Resolution dated February 11, 2003 and an amending Resolution dated June 7, 2005.

The initial phase of the design contract required the A/E to validate the feasibility and cost/benefit of the cogeneration project. This phase is complete and the result confirmed both the viability of the project, the economic benefits and the conceptual design. The detailed design will be completed in the fall of 2005, followed by development of the construction documents. Bidding and award of equipment and construction contracts would occur in late 2005 through mid-2006. Detailed design and construction planning now includes the upgrade and installation of the steam distribution line network for Civic Center, which has added to the construction cost estimate.

After the first phase of the A/E design contract was completed, the CEO and RDMD initiated an analysis with Sperry to determine if a tax-exempt financing is the best option for financing this project. Conclusions from the study will be used to finalize the construction project budget request for FY 2005-06. If it is determined later that bond counsel services will include a proceeding before the Public Utilities Commission or negotiations with SCE, there will be an additional fee to be subsequently agreed upon by the County and approved by the Board.

In regards to the PV projects, tax-exempt funding eligibility for PV projects at the parking structures were explored as part of the financial feasibility analysis and are included as an option in financing.

Financing Feasibility Analysis:

Sperry and Staff have conducted a thorough analysis of the options for financing the Projects and concluded that the best option for the County would be to take advantage of the historically low cost tax–exempt financing rates and finance the Projects through lease revenue bonds using an asset transfer and master lease financing structure with a strong investment grade rating. The analysis included a review of opportunities for internal funding directly through the general fund or indirectly through the County investment pool.

Cogeneration project costs have increased since the completion of the feasibility analysis due to necessary adjustments for certain detail design issues and the inclusion of the steam distribution line network upgrade. The project cost is estimated at $26.4 million, including design costs, most of which can be financed or is eligible for reimbursement. This is the construction cost without the steam line replacement which would add another estimated $2.2 Million, bringing the total cost to $28.6 million. The PV project is estimated to cost $1.8 million. However, since 40% - 50% of the project costs are expected to be reimbursed by federal/state grants, the recommendation is to finance 50% - 60% (the analysis estimates 60% at about $1.1 million) and fund the remainder with County funds. The obligations will be amortized over 20 years for the Cogeneration project and 15 years for the PV project, which is less than but consistent with the expected useful life of the Projects.

The following are financing alternatives reviewed in the analysis:

Standalone or Combined lease revenue bond financings: The standalone strategy is the most expensive option due to the higher costs of two separate bond financings. Combining the two projects into one bond issue would save the County in underwriter costs and other costs of issuance. In addition, the rating agencies generally rate lease revenue bonds that finance the type of equipment included in the Projects one notch lower than essential purpose capital projects that involve capital equipment with a longer useful life, application at another site or salvage value. The lower credit ratings would represent a higher cost for this strategy.

Master Lease Financing: A master lease financing structure involves the creation of a trust indenture that permits a succession of multiple series of lease financings for similar projects that qualify for financing under the master lease structure and are individually approved by the Board. The security provisions of

each issue would be consistent with the indenture, reducing the legal documentation required for each new financing. This structure would reduce the costs of issuance and underwriter costs. The analysis considered the following master lease structures:

Lease Revenue Bond Financing Through a Non-Rated Master Lease Structure: The non-rated master lease structure could combine the Projects or finance them separately. The indenture and lending provisions would be negotiated with a municipal leasing company and the terms of the financing would be negotiated in a private placement negotiation between the lessor and the County. This structure while reducing the costs of issuance,

would result in a higher interest rate for each financing than a financing rated for public offering.

Lease Revenue Bond Financing Through an Asset Transfer and Rated Master Lease Structure: This structure would involve the transfer of an existing asset to the financing entity and the leasing of that asset to the County. The bonds would be secured by the payment obligation of the County and the asset. As necessary, additional bonds would be issued to finance specific County projects and certain existing County assets could be transferred into the trust subject to the Master Lease to secure those additional obligations. This structure would provide security provisions for the issuance of high credit quality, rated bonds that would result in lower interest rates than the non-rated structure. Another advantage of the asset transfer structure is that since the pledged asset is a completed improvement, the debt can be amortized prior to the completion of the Projects and the County can avoid paying capitalized interest.

Two Separate Master Lease Structures, One Rated and One Non-Rated: The County can initiate two separate master lease financing programs, one non-rated for small financings with short amortization periods, and one rated for larger financings with longer amortization periods.

General Fund Cash Financing: The Projects can be funded using a pay-as-you-go or upfront cash funding from the General Fund however this would not be the most financially prudent option for the County. It would result in the use of funds that could be used for other strategic priorities that cannot

be funded through tax-exempt financing. In addition, using the General Fund to finance the Projects would make those funds unavailable for investment in the County Investment Pool. The long-term average investment return of the County Investment Pool over the past seven years is approximately 5%. It is likely that any of the tax-exempt financing strategies discussed above would result in financing costs of less than 5%.

Purchase of Obligations by the County Treasurer through the County Investment Pool (the Pool): The State code and County Investment Policy have credit quality and maturity restrictions. The Treasurer would be able to purchase obligations issued by the County to finance the Projects as long as the Board authorized the purchases to the extent the State code and/or County Investment Policy do not permit such investments. However, since the investment earnings of the Pool are not taxed, the Pool invests in higher interest rate taxable securities in order to maximize returns. Tax-exempt securities, which will provide lower cost financing for the Projects, would generally be considered an inappropriate investment for the Pool.

Conclusion:

Based on the analysis Staff recommends a tax-exempt asset transfer and rated master lease structure combining both projects. This will allow the County to finance the Projects effectively over their useful life, taking advantage of historically low tax-exempt interest rates while preserving the flexibility to use general funds for other strategic priorities. It will also decrease the costs of issuance and annual debt service payments. Establishing a new master lease program will allow the Projects to be financed together and will also facilitate future equipment related financings. An advantage of the asset transfer structure is the County can avoid financing all or a portion of capitalized interest.

The estimated cost of financing the Projects using this strategy is $2.29 million annually at a rate of 4.5% for a 20 year term. Costs of issuance are estimated not to exceed $350,000. The attached analysis contains tables with a breakdown of the costs for each of the master lease strategies. Note that the costs have increased since this analysis was completed. As the tables illustrate, the most cost effective option is the combined financing of the Projects using the asset transfer lease revenue bonds and a master lease structure. The analysis assumes a two-year capitalized interest period for comparison purposes which provides the County with a projected present value savings of $650,000 over a conventional lease financing of the equipment. The County, however, will determine how much, if any, capitalized interest to finance depending upon County cash requirements.

The next steps will be to conduct a proposal process that will select a qualified underwriting firm from our existing panel per the Board’s direction and return with a recommended selection. Staff will also determine the most appropriate asset(s) to be pledged for the purpose of the financing and will return to the Board with documents for your approval as the financing structure is finalized.

Note: This item was included on the October 20th PFAC Agenda, however the Committee adjourned taking no action on this item. See attached memo.

FINANCIAL IMPACT:

N/A

STAFFING IMPACT:

N/A

REVIEWING AGENCIES:

RDMD

EXHIBIT(S):

Financing Feasibility Analysis, Memo to the Board of Supervisors