Financing Energy Performance Contracts

May 30, 2010

Pennsylvania: Guaranteed Energy Savings Act

A.   Basics:

  • 73 P.S. 1646.1 through 1646.7
  • Applies, among others, to Commonwealth Agencies
  • GESA pays for all associated project costs over the life of the contract
  • ESCO means Energy Services Company
  • Department of General Services is the centralized coordinating agency
  • There are currently around eleven participating Commonwealth agencies
  • May finance with purchase or installment purchase or lease purchase, or bonds or traditional loans
  • Once ESCO is selected, agency and ESCO enter into Technical Energy Audit (TEA) agreement
  • Based on TEA result, parties may enter into GESA, which covers the costs of conducting the TEA – if no GESA is entered into, the agency is responsible for paying the TEA before engagement ends

B.   Legal Issues to Review:

  • Contract term may not exceed 15 years
  • Non-energy improvements may be financed that are not causally connected to an ECM if: (a) the total value of the improvement does not exceed 15% of the total contract; and (b) the improvement is necessary to conform to a law, rule, ordinance or an analysis of the contract demonstrates there is an economic advantage to implementing the improvement and such improvement can be demonstrated.
  • Ensure contracts involves “allowable costs” for “energy conservation measures” (ECMs)
  • Ensure provider is a “qualified provider” and is selected based on proper request for proposal process
  • Savings in any year must be guaranteed to extent necessary to make payments under the contract
  • Must include the written guarantee that savings will meet or exceed the costs of the project
  • Must permit for termination of contract by agency in the event of a nonappropriation
  • Savings guarantee must be made by the performance contractor
  • Commonwealth must obtain bonds from contractors in connection with the project
  • If guaranteed savings do not occur, ESCO must be contractually required to reimburse the agency for the difference between actual savings and the guaranteed savings
  • Commonwealth executive agencies are required to use a certain form of Installment Purchase Agreement

Colorado: Energy Performance Contracts

See http://www.colorado.gov/cs/Satellite/GovEnergyOffice/CBON/1251599983018

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Resale of Securities Basics

May 28, 2010

Statutory Framework:

  • Securities Act of 1933
    • Requires registration of offerings or an exemption therefrom
    • Imposes liability for fraud, sales in violation, etc.
  • Securities Exchange Act of 1934
    • Creates the SEC
    • Requires registration of public companies and periodic reporting
    • Regulates securities industry (intermediaries, exchanges, etc.)
    • Prohibits certain practices
    • Regulates proxy voting, insider trading, etc.
  • Colorado Securities Act, Section 11-51-101 et seq., C.R.S.

Federal and state securities laws are implicated whenever someone sells or offers securities.  Sale/sell is defined as a sale/disposition for value.  See Section 2(a)(3) Securities Act

Registration and prospectus delivery requirements be complied with in connection with any offer (to buy or sell) or sale of a security in interstate commerce or through the use of the mails.  Exceptions apply to exempt securities and offerings qualifying as exempt transactions.  See Section 5 Securities Act.  C.R.S. 11-51-301 works the same way for offers and sales in Colorado. See Section 11-51-102 (scope), C.R.S.

Step-by-Step Analysis:

  1. Is it a security?
    1. If no, federal and state securities laws do not apply
    2. If yes, is it a sale or offer?
      1. If no, registration requirements are inapplicable
      2. If yes, registration requirements apply. Do you qualify for an exemption?
        1. If no, must file registration statement with the SEC and the state
        2. If yes, exemption is either (a) Exempt Security or (b) Exempt Transaction such as a private placement. Done

Registered Offerings:

Sections 7 and 10 of the Securities Act and Section 11-51-302 through 304, C.R.S., regulate the information that must be included in a prospectus/registration statement.  The registration statement is designed to provide investors with the information necessary to make an informed investment decision.  Under federal law, the amount and type of information about the issuer that must be included is based upon the SEC’s different registration forms.  The registration process is extremely time consuming and expensive.

Exemptions from Registration:

Securities Act and the Colorado Statutes provide exemptions from their registration requirements based on (a) the nature of the security (exemption stays with the security – no need to register future resales) and (b) the nature of the transaction (exemption applies only to the specific transaction – each future resale must be registered or conducted under an exemption).

Section 4(1) of the Securities Act exempts transactions by any person other than an issuer, underwriter or dealer. These terms are broad. “Underwriter” is defined in Section 2(a)(11) of the Securities Act and includes, among other things, a person who purchased securities from an issuer or a control person of the issuer with a view to distribute the securities.  “Distribution” is not defined but understood to mean “any offer or sale to public investors.”  There are three main categories of underwriters: (1) Persons acting as agents of the issuer in a distribution; (2) Persons who previously purchased restricted securities from the issuer (with a view to distribute – hinges on “investment intent” and whether the investments have “come to rest” – analysis appears to focus on whether the reseller is in a better informational position based on relationship with the issuer than the buyer); and (3) Persons in control positions with the issuer.

There is a Rule 144 Securities Act safe harbor for the status as an “underwriter.”  A person satisfying this safe harbor is not deemed to engage in a distribution and therefore is not an underwriter. The purchaser in a Rule 144 transaction receives securities that are no longer restricted securities.  Rule 144 not available for the resale of securities initially issued by shell companies unless certain requirements apply.  Rule 144 has certain holding period, current public information, volume limitation, manner of sale limitation and form filing requirements.  Holding periods are between 6 months and 1 year.


Weighted Average Maturity (I.R.C. 147(b))

May 12, 2010

General Discussion

IRS Form 8038 (and certain other information returns for other types of issues) requires the identification of the “weighted average maturity” of the bonds.  Form 8038 defines weighted average maturity as follows:

[…] the weighted average maturity is the sum of the products of the issue price of each maturity and the number of years to maturity (determined separately for each maturity and by taking into account mandatory redemptions), divided by the issue price of the entire issue […]

See also the definition of “weighted average maturity” in Treas. Reg. 1.1273-1(e)(3).

Certain Issues Concerning Weighted Average Maturity

It is clear that mandatory redemptions identified for the bonds in the bond documents must be considered.  It is not clear whether mandatory redemptions required only by bank documents (for example, in continuing covenant agreements or reimbursement agreements) should be taken into account for calculation purposes.  Mandatory redemptions in bank documents frequently state that such redemptions are to be effected by the issuer pursuant to the optional redemption provisions contained in the bond documents. If the redemptions in such documents are required of the borrower and not the issuer (such as is often the case in continuing covenant agreements), and such redemptions are not required by the bonds themselves, then the redemptions should not typically be included in the weighted average maturity calculations.

In a transaction with bonds and registered coupons, how are the registered coupons treated for purposes of the WAM calculation? Some bond counsel will include the full “par” maturity value on the principal payment date on which the coupon is paid, which translates to an issue price taking into account the applicable sale price.  Other bond counsel may have a different approach to otherwise try to distinguish between the actual principal component of the payment on the maturity date versus the interest payment amount.  Those counsel may, for instance, show only the issue date amount of the coupon in the principal column, the differential between issue price and maturity value in the interest column, and a price of 100%.  It’s not clear what method is correct.  It may be least incorrect to use the latter method where the amount in the principal column and the interest column equal the maturity value of the coupon.