CHICAGO:Energy Services Agreement for a Municipal Building Retrofit

Municipal Building Retrofit in Chicago via Energy Services Agreement (ESA)

The Municipal Building Retrofit in Chicago is an example of a financing entirely based on cost savings, or “NegaRevenue.” The Chicago Infrastructure Trust (CIT) was created by the City of Chicago in 2012 as a nonprofit organization to pursue projects that leverage private resources for public benefit through alternative procurement arrangements. In that year, the city faced a $635.7 million budget deficit, and needed to find innovative ways to improve infrastructure without increasing debt.

In its first project, the CIT was able to finance energy efficiency improvements, including lighting, heat, and air conditioning, and building automation services, to 60 city buildings, including police stations, libraries, and health care facilities. The deal required no up-front investment by the City or the CIT. The capital and implementation costs were financed entirely based on the anticipated cost savings from the improvements.

The transaction was based on two agreements: an Energy Services Agreement (ESA) between the CIT and the city (the end user of the buildings) and a Guaranteed Energy Performance Contract (GEPC) between the CIT and three Energy Service Companies (ESCOs).

Under the GEPC, the ESCOs commit to procure and install improvements, such as LED lighting and more efficient heating and cooling technology in municipal buildings. In the GEPC, the ESCOs guarantee a specific level of annual energy savings. In general, the savings are not guaranteed per individual project, but for the entire group of projects handled by each ESCOs. This diversifies the risk for each ESCo, since they may be able to offset any savings they do not realize on one project with additional savings on another.

The CIT financed the entire group of improvements via a tax-exempt private placement financing, based on the ESA between it and the city (the end user of the buildings). The ESA gives the CIT the rights to the energy savings from specific projects. The agency will use these savings to repay the investors. If the savings are less than the agreed amount, the ESCOs pay the difference to the CIT, under the GEPC. If the savings are greater than the agreed amount, the city and the CIT will share the upside. $12.2 million of 15-year, tax-exempt debt was placed with Bank of America at a rate of 4.95%. Like a revenue bond, the debt is “non-recourse” — the creditors only have a claim against the savings included in the ESA, not any other source of revenue.

The CIT selected the ESA model partially because the arrangement was considered “off balance sheet” under accounting rules, and also is not generally regarded as a fixed payment obligation by rating agencies. This will preserve the City’s limited bonding capacity for projects that don’t have this option. Retrofits for the buildings were completed in 2015, and the ESCos reached their guaranteed savings target for the first partial year of operation.

Deal structure for the Chicago Infrastructure Trust’s Municipal Building Retrofit project.