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Cost-Effective and On-Time Finance Solutions

Explore different finance sources such as bond financing, bank financing, and lease financing to overcome financial, operational, and political challenges in utility management. Maximize shareholder value while preserving cash and realizing savings early. Comparison of finance sources and benefits of lease financing.

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Cost-Effective and On-Time Finance Solutions

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  1. Cost-Effective and On-Time Finance Solutions Randy Meinke,Vice President Kerry Linda Martin,Account Manager

  2. Overview • Utility Management Challenges • Finance Source Comparison • Leasing - A Closer Look

  3. Financial Challenges • Tight Government Budgets • Many Projects Compete for Same Dollar • Payback Period Requirements are High • Demand on Capital Severe • Covenants Dictate Sources/Structures Available • IOU Strives to Maximize Shareholder Value • City Seeks Alternatives to Raising Rates and Taxes

  4. Operational Challenges • Budget Cycles and Delays • Need Solution Immediately… Waiting for Next Round of Bond Financing • Payoff or Return on Investment Is Multi-Year • Project Cost Are Up-Front and Significant • Cost Justification With Large Up-Front Investment Is Easier

  5. Political and Other Challenges • Grants Not Readily Available • AMR Projects May Not Be Voter or High-Level-Board Friendly • Difficult to Raise Rates, Taxes, or Issue Bonds • Weak Economy Leads to Lower Revenues, Higher Expenses, and Lower Profit Margins • Each Project Needs to Financially Justify Itself

  6. Problem Summary Which Came First… Chicken or the Egg

  7. Solutions to Challenges Through Financing Which Came First…. Investment in Meters or Revenues/Savings

  8. Why Financing? • Overcomes • Financial • Operating • Political Challenges

  9. Why Financing? • Get What You Need Now • Realize Savings Early • Install Full Projects • Match Revenue to Returns/Savings • Better Capital Use and Leverage • Preserve Cash for Emergencies

  10. Overcoming Challenges • Political Seek Approval For Monthly Payment Rather Than Lump Sum Do Not Raise Taxes Financial Improve Project ROI Preserve Capital for Competing Projects Operating Roll-out Faster, See Early Savings Pay Project Expenses From Operating Budgets

  11. Comparison of Finance Sources • Bond Financing • Long Term --Large Scale • Multi-Project or Multi-Asset-based • Bank Financing • Short Term Working Capital Orientation • Covenants-Controls-Cost-Complacency • Lease Financing • Short to Mid-range Terms • Single Asset-Based

  12. Bond Financing • BOND:A long-term certificate of indebtedness for a specified amount of interest, with the debt repaid at maturity. Documentation: Multiple agreements - multiple parties Legal Approval: Frequently requires voter or board approval Parties: Issuer, Trustee, Investor, Consultant, Rating Agency, Insurance, etc., and Legal Counsel Investors: Many; primarily pension funds and insurers Timing: 6-9 Months+ Expect Delays Term: 5-10-20 years or longer

  13. Bond Financing Rates: Low. Current Coupon Average in CA is 4.129% for Tax Exempt Bonds Fees: 2-4% of Bond - Underwriting, Consulting, Legal, Marketing, etc. Credit Enhancement Costs Collateral: Based on all assets or on revenues pledge. Credit Enhancements: Rating Insurance, % of Revenues Additional Funding: Apply for new bond, same process with new underwriting expenses

  14. Parties to a BOND

  15. Bank Financing • BANK LINE: Bank’s annual commitment to make loans to the borrower up to a specified amount during a specific period, usually one year typically used for working capital. Documentation: Agreement contains various covenants, such as compensating balances, revenue/income, net worth, capital expenditures, leverage/operating ratios Parties: Bank, Borrower, and Legal Counsel Investors: Bank Timing: Days to months, based on negotiation time. Term: Multiple years, annual review/renegotiation

  16. Bank Financing Rates: Variable, based on spread over Prime (currently 4%) or LIBOR Fees: Non-utilization, administrative, out of covenant Collateral: Blanket Lien on business assets, including revenues, goodwill, etc. Credit Enhancements: None; terms of bank line may be suspended or adjusted if change in performance Additional Funding: Request extension of more credit; typically granted based on relationship with bank; equipment/related fundings may decrease availability of line.

  17. Lease Financing • LEASE: Contract granting use of equipment or property for a specified time in exchange for rental payment; frequently includes a purchase option Documentation: Lease Agreement, Schedule, Exhibits Parties: Lessor, Lessee (Borrower), and Legal Counsel Investors: Lessor Timing: Days to weeks, depending on negotiation time Term: 2 - 10 years most common

  18. Lease Financing Rates: Fixed, based on Treasury (currently 1.918% 3 years) Fees: None - Rental Payments include interest cost Collateral: Equipment/Project only Credit Enhancements: Not common; poor credit condition may require additional enhancement Additional Funding: Additional Lease Schedule which defines next round of funding. Lessor will consider current financial condition of Lessee

  19. Parties to a Lease

  20. Benefits of Lease Financing Cash: • Supplement Bank Line and Cash Surplus For Other Projects • Working Capital- Cash Not Tied up in Meters or Software • Immediate Positive Cash Flow--Monthly Payments Based Only On Amount of Meters/System Installed

  21. Benefits of Lease Financing BUDGET: • Shorten Long-term Roll Out With Same Budget Dollars, and See More Immediate Benefits • Alternative for When Project Exceeds Budget • Incorporate More Wish List Projects Into Same Budget • Move Project From Capital Budget to Operating Expense Budget

  22. Benefits of Lease Financing BUDGET: • Operating - Day to Day Expenses Including Labor, Supplies, Maintenance, Leases, and Expendables • Capital - Equipment APPROVALS: • Operating - Usually Department Managers • Capital - Senior Finance Staff/CFO Level

  23. Benefits of Lease Financing PROJECT: • Improve Project ROI - See Quicker Payback • Eliminates Performance Bond Requirement; Lower Overall Project Cost • Receive Discounts From Vendors With More Timely Payments From Lease Partner

  24. Benefits of Lease Financing Rates: Fixed, Based on Treasury (Currently 1.918% 3 Years) Fees: None - Rental Payments Include Interest Cost Collateral: Equipment/project Only Credit Enhancements: Not Common; Poor Credit Condition May Require Additional Enhancement Additional Funding: Master Lease Agreements for Follow on Funding for Upgrades and Other Projects Are Common. Lessor Reviews Lessee Credit Situation.

  25. What Do Utilities Lease? • Meters and AMR Systems • Consulting Costs • Software--Billing, CRM and Other • Office Equipment • Field/Operations Equipment • Land, Buildings, Facilities • Production Facilities

  26. Comparing Cost of Lease vs Bonds Leasing Bonds Documentation: Easy Complicated Timing: 7-30 Days 6-9 Months Rates: Fixed, Low Fixed, Low Fees: None Many Credit Enhancements: Infrequent Common Parties: 3 Many, >7 Investors: Lessor Many Additional Funding: Easy Schedule New Issue/None

  27. Comparing Lease vs Bonds Lease Is 2-3 Page Agreement Vs. Bond Indenture Agreement in 100’s

  28. Lease vs. Bond • Project: $1,000,000 AMR Project • Year 1 investment with Bond • 2% Fee $20,000 • 4% Annual Interest Payment $40,000 • Total 10 year Bond Investment $1,420,000.00 • Year 1 Lease with 4% Interest $160,201.55 • Total 7 year Lease Investment $1,121.410.85

  29. Budget Required with Financing Options

  30. Leasing Matches Savings • Labor Reductions over AMR Life = Term of Lease • Operating Cost Reductions are Roughly Equal to Lease Payments

  31. Save as You Go • Save as You Go • Pay as you Go • Easy to Justify in Budget • Match Expense to Income/Savings • Politically Viable

  32. Cash Flow--AMR Savings • Examples: • Shrinkage/Theft Reduction • Collections Improvement • Off Timing Cycle Meter Reads • Billing and Accounting Error Reduction All Small Incremental Savings Similar to Lease Payments

  33. Conclusion - Technology Projects Fit Typical Lease Terms • Project Size(s) • Savings Match Lease Terms • Useful life of Technology • Flexibility of Structure To Match Payback • Simplicity--Availability

  34. Conclusion • Financing Keeps Cash Funds and Budget Dollars Available for Other Projects or Unforeseen Events • Financing Improves the Project Economic Impact • Bond Financing Fits Long Term, Large Scale Projects

  35. Contact Utility Finance Group Contact: Mr. Randy Meinke, Vice President CalFirst Leasing Corporation Telephone: 800-496-4640 x 659 E-mail:rmeinke@CalFirstLease.com Contact: Ms. Kerry Linda Martin, Vendor Relations Manager Utility Finance Group Telephone: 800-496-4640 x 677 E-mail:kmartin@CalFirstUtility.com Call or Visit Us at Booth #402 For More Information

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