Energy Efficiency Deal Powers Up

Sustainable Energy Utility Inc. is planning to sell its inaugural issue of energy-efficiency revenue bonds in the primary market Monday to raise capital directed at conserving energy at state and local government agencies.

The SEU is a nonprofit corporation created by Delaware in 2007. Proceeds of the deal will be used to design, construct, and install conservation measures at state and local government agencies.

The measures include better insulation, lighting and heating systems, and control system upgrades. These are installed under a “guaranteed energy performance contract” designed to save the agencies money over the coming years and decades; the SEU is paid back by an unconditional pledge over time from the savings.

The inaugural issue is for $70.2 million of bonds offered in serial form from 2013 to 2034, according to the preliminary official statement published July 18. It boasts stable ratings of AA-plus from Standard & Poor’s and Aa2 from Moody’s Investors Service.

Citi, hired in early 2008 to serve as SEU’s sole underwriter, estimated the current savings of this transaction alone at $25 million — greater than all costs required to retire the debt. That should have broad appeal outside of Delaware, according to Trenton Allen, a director in the municipal securities division at Citi in Philadelphia.

“Providing this type of vehicle allows you economies of scale,” Allen said. “That can be beneficial not to just Delaware but as a model to cities and states around the country as they look into these kind of investments.”

“The benefit here isn’t an interest rate play,” he added. “It’s being able to take buildings that are less efficient, make some improvements, and give them the ability to utilize the savings to justify the investment that these agencies are making. That’s what we’re looking at and it’s the reason why state agencies were comfortable participating.”

State agencies that have contracted energy service companies to implement the measures include the Department of Correction, the Department of Services for Children, Youth and Their Families, the Office of Management and Budget, Delaware State University, and Delaware Technical Community College.

“This transaction actually involves just a small number of state agencies and it’s only a small part of the building inventory of the state,” said John Byrne, co-chairman of the SEU and director of the Center for Energy and Environmental Policy at the University of Delaware. “There is ample opportunity to do this kind of transaction several times over.”

Delaware aims for a 30% reduction in energy sales from projected consumption for 2020, Byrne added.

The economic incentive for agencies to participate became compelling thanks to broad support from state officials, who passed legislation saying agency appropriations cannot be reduced when an agency conserves energy and ends up with more cash on its books as a result.

“We got a great deal of cooperation from the state and Gov. [Jack] Markell is very supportive of this particular issue,” Byrne said. “Sen. [Harris] McDowell, my co-chair for the SEU, really worked hard to get the agencies to go down a path for this financing.”

Byrne calls McDowell, a Democrat from Wilmington North, “the dean of energy policy in the state,” noting he has written all the major energy legislation including the bills that created the SEU — the first of its kind in the United States.

The biggest energy conservation investment in Delaware to date is the $20 million it received, spread over two and a half years, from the American Recovery and Reinvestment Act in 2008.

Monday’s transaction alone will more than triple that investment.

Bruce Schlein, vice president in corporate sustainability at Citi in New York, said one aim of the SEU is to harmonize the market dynamics of energy-efficiency finance, which he called “hugely fragmented.”

“There really is no silver-bullet solution,” Schlein said. “I think we all recognize that solving efficiency at this scale across many different market segments and different geographies will require models like the SEU and others.”

Citi allied with the White House Better Buildings Initiative last month to propel these kinds of projects. Announced by President Obama in February, the initiative aims to double the share of electricity from clean energy by 2035 and make commercial buildings 20% more energy efficient by 2020.

“It’s serving as a catalyst and using the bully pulpit of the White House to champion the effort,” Schlein said of the initiative. “It includes policy initiatives that are under development, sharing of data and best practices, and builds on existing ARRA-supported efforts in cities around the country.”

Delaware boasts triple-A ratings from all three rating agencies, and last week Moody’s maintained Delaware’s stable outlook even as the U.S. sovereign credit received a warning that it could be downgraded if resolution isn’t found on the debt ceiling.

The SEU revenue bonds don’t have a full faith and credit pledge behind them and aren’t backed by a taxing authority. Standard & Poor’s justified its high rating — one notch below AAA — based on strong contractual provisions and its view that this is appropriation-backed debt, to which the state has a “demonstrated commitment.”

Moody’s similarly noted a strong legal structure that says Delaware agencies have made an absolute pledge to make annual payments to the SEU, which in turn assigns them to the trustee.

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