2. Qualified Energy
Conservation Bonds
Part 2: Bond Financing and Eligible Projects
Moderator:
Katie Southworth, Program Manager
TDEC Office of Energy Programs

3. ORNL’s 3rd
Annual Southeast
Sustainability Summit
August 21, 2013
Qualified Energy Conservation Bonds
Public Finance Perspective
George Masterson
615-742-6263
gmasterson@bassberry.com

4. What are qualified energy
conservation bonds (QECBs)?
 QECBs are
− taxable bonds
− issued by a state or local governmental entity or
instrumentality
− partially subsidized by U.S. government if:
• proceeds finance specified types of energy conservation
projects and
• issuer meets other detailed Internal Revenue Code
requirements at time of issuance and during life of bonds

5. How does the federal subsidy for
QECBs work?
 Historically, federal government has used three approaches to
subsidizing state and local bonds
̶ Tax-exemption – bond investors accept a lower rate of interest
because interest is exempt from gross income for federal income
tax purposes
̶ Tax credits – bond investors accept a lower (or, in some cases,
zero) taxable rate of interest because ownership of bond carries tax
credits that can be applied against any federal tax liability
̶ Direct payments – bond investors receive a market, taxable rate of
interest and U.S. Treasury makes regular subsidy payments directly
to the issuer of the bonds on each interest payment date

6. How does the federal subsidy for
QECBs work? (continued)
 Tax-exemption – relevant to QECBs because most
projects that qualify for QECB financing also qualify
for financing with traditional tax-exempt bonds
 Tax credits – default subsidy method for QECBs
 Direct payments – may be elected by a QECB issuer
in lieu of tax credits

7. How does the federal subsidy for
QECBs work? (continued)
 Tax-credit mechanics
− holders of QECBs receive annual tax credits equal
to: 70% of “applicable tax rate” times principal
amount of bond
− “applicable tax rate”
• U.S. Treasury’s estimate of credit rate that will permit the
issuer to sell bonds at zero interest and no discount
• announced periodically by the U.S. Treasury at
https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm
• determined on the date issuer sells the bonds

8. How does the federal subsidy for
QECBs work? (continued)

9. What requirements apply to QECBs at
issuance?
 State or local government issuer
 Issuer reasonably expects to:
− enter into a binding commitment with a third party to spend 10% of
proceeds within six months of issue date
− spend proceeds on “qualified conservation purposes” within three
years
 Issuer has allocation of a portion of the nationwide $3.2 billion
cap on the amount of QECBs that may be issued
 Maturity does not exceed the maximum term for QECBs
announced by the Treasury Department at time of issuance

10. What requirements apply to QECBs at
issuance? (continued)
 Issuer formally designates bonds as QECBs
 Issuer formally elects direct payment treatment as opposed to tax credit
(if desired)
 No more than a de minimis amount of original issue premium
 No more than 2% of proceeds used to pay costs of issuance
 No prohibited conflicts of interest

11. What requirements apply to QECBs at
issuance? (continued)
 Qualified conservation purposes include:
− capital expenditures that:
• reduce energy consumption in publicly-owned buildings
by at least 20%
• implement green community programs
• rural development including the production of electricity
from renewable energy sources
• renewable energy facilities
− mass commuting facilities
− demonstration projects and public education campaigns
− research facilities or grants relating to energy reduction and
efficiency and production of non-fossil fuels

12. What requirements apply to QECBs at
issuance? (continued)
 QECB allocation process
− nationwide: $3.2 billion of capacity
− Internal Revenue Code mandates allocation among
states and “large local governments” (i.e, cities and
counties with populations greater than 100,000)
− states and large local governments may re-allocate
their cap to other issuers

13. What requirements apply to QECB
during life of bonds?
 Davis Bacon prevailing wage rules apply
 Spending requirements
− three-year spending requirement
• basic requirement:
o 100% of “available project proceeds” spent on
qualified conservation purposes within three years OR
o unspent available project proceeds used to redeem
corresponding portion of bonds
• limits on reimbursement of prior expenditures and
refunding of other obligations

14. What requirements apply to QECB
during life of bonds? (continued)
 Arbitrage requirements
− For tax-exempt bonds, Internal Revenue Code prohibits, with
many exceptions, investment of bond proceeds at a yield that
is greater than yield on bonds
− For QECBs, tax-exempt bond arbitrage rules apply, with the
following exceptions:
• yield is net of direct payments received
• issuer permitted to establish a level-funded “sinking fund”
invested at yield no greater than a target yield announced
by U.S. Treasury immediately prior to issue date

15. What special rules apply to QECBs
that are “private activity bonds?”
 “Private activity bonds” = more than 10% of the
proceeds are used for private rather than
governmental projects AND more than 10% of the
debt service of which is from payments related to the
private use
 QECBs may be “private activity bonds” as long as
− all “qualified conservation purpose” expenditures are capital
expenditures
− no more than 30% of the volume cap allocation of any state or
large local government consists of private activity bonds, with
green community bonds NOT treated as private activity bonds

16. Summary
• QECBs benefit from significant federal
subsidy
• Detailed requirements to be met
̶ at issuance
̶ during life of QECBs

18. National View of QECBs
Elizabeth Bellis, Energy Programs Consortium
SE Sustainability Conference
Draft: 8/8/13
August 21, 2013

19. Disclaimers
Circular 230: This presentation was not intended or written
to be used, and it cannot be used by any taxpayer, for the
purpose of avoiding penalties that may be imposed on the
taxpayer under U.S. Federal tax law.
This presentation is intended to serve as a general
introduction to the use of qualified energy conservation
bonds to finance renewable energy projects. Nothing
contained in this presentation should be construed or relied
upon as legal advice.

20. QECB Review
• QECBs are effectively a federal interest rate buydown program
for state and local bonds.
• Interest is taxable.
• Issuer elects: Cash payments to the issuer OR tax credits to the
bondholder.
• Cash payments = 100% of the interest OR, if lower, 70% of the
“qualified tax credit rate” set periodically and available at
Treasury Direct’s website.
• These payments are subject to sequestration (discussed below).
• Maturities are also set periodically and have ranged from 12 to
22 years (see Treasury Direct website)

21. QECB Uses
• Reduction of energy consumption in publicly owned
buildings by at least 20%
• Implementing green community programs (PACE
financing, LED streetlights, etc.)
• Rural Development
• Renewable energy facilities (wind, solar, biomass,
geothermal, landfill gas, trash to energy, hydropower
facilities)
• Certain mass commuting projects

22. QECBs by Use

23. QECBs for School Projects

24. Who got the allocations?
QECB Regional Allocation

25. How much is left?
• Up to 75% of the original $3.2b may be available.
• State utilization rates range from complete lack of known
utilization (22 states) to complete exhaustion of
allocation (Kansas).
• A number of states are approaching exhaustion of funds,
including Colorado, Kentucky, and Montana.
• On the other hand, a few states, including Hawaii,
Mississippi, and Florida are not known to have authorized
QECBs at this time.

26. QECB Utilization
Nationally

27. QECB Issuances by
Region

28. QECB Utilization by Region

29. QECB Utilization by State
Volume of known issuances
Known Utilization
Rate

30. Southeastern Region
• Of $776,381,000 in QECBs available to the region, only
$58,859,000 (7.6%) has been issued.
• All of these issuances have been for EE retrofits in municipal
buildings and schools.
• In the southeastern region, Arkansas, Florida, Louisiana,
Mississippi, North Carolina, and South Carolina have had no
known issuances.
• Kentucky leads the way with 3 issuances, followed by
Tennessee, Georgia and Alabama with 1 issuance each.
• Kentucky’s 3 issuances account for 93% of available funds,
making it among the states with the highest utilization rates
nationwide.
• Louisiana’s 1 issuance (of $30M) accounts for 66% of the
states allocation.

31. Barriers to Use
• Initial legal uncertainty
• Notice 2012-44 clarified many of the FAQs regarding
“green community programs” and proper measurement of
energy savings
• Sequester
• Admin Costs
• Lack of familiarity
• Debt capacity/debt aversion
• Pooling issues

32. Reasons for Success
• Issuing QECBs as part of larger bond issuance
• Proactive, persistent outreach
• Engaging with facilities managers at schools, prisons, and
public housing who may have projects
• Engaging with private developers where there are debt
issues or insufficient public pipeline
• Working with local bonding authorities (where
applicable) to expedite process
• Experienced bond counsel

33. QECB News
• Sequester cuts in place through September. No known
current proposals on the table to continue the cuts after
September.
• Congress is conducting an intensive reviewing of the tax
code, including energy provisions. However, the end
effect on QECBs is not yet known.
• Some have proposed renewing and expanding the 179D
credit, which may be available for certain QECB-
financed projects to sweeten the deal (for certain energy
efficiency improvements to qualifying commercial and
government buildings).

34. Where can I find more
information?
• The current version of the EPC QECB paper is available at
http://www.energyprograms.org/wp-
content/uploads/2013/06/QECB_Memo_June13.pdf. Updates will be
posted periodically on our Publications page.
• The NASEO website has a variety of resources, including documents
other states have used and the EPC QECB memo which contains
information about all known issuances.
• http://www.naseo.org/resources/financing/qecb/index.html
• DSIRE has a QECB page with links to relevant statutory provisions and
IRS guidance.
• http://www.dsireusa.org/incentives/incentive.cfm?
Incentive_Code=US51F&re=1&ee=1
• The Department of Energy’s website has resources including a QECB
Primer and webinars.
• http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/m/qecb.ht
ml

35. Questions?
Please keep in touch.
Elizabeth Bellis
Director, QECB & WHEEL Programs, EPC
Email: ebellis@energyprograms.org

36. Sequestration Review
• “Sequestration” -- government-wide budget cuts mandated by the
Budget Control Act of 2011.
• The sequester reduction is applied to section 6431 amounts claimed
by an issuer on any Form 8038-CP filed with the Service which
results in a payment to such issuer on or after March 1, 2013.
• As determined by the Office of Management and Budget, payments
to issuers from the budget accounts associated to these qualified
bonds are subject to a reduction of 8.7% of the amount budgeted for
such payments.
• The sequestration reduction rate will be applied until the end of the
fiscal year (September 30, 2013) or intervening Congressional
action, at which time the sequestration rate is subject to change.
• It is unclear whether the sequester reduction applies to tax credit
QECB issuances that did not opt for direct payments and file Form
8038-TC rather than 8038-CP, as the IRS statement does not mention
these issuances. EPC is looking into this.

37. Where did 8.7% come
from?
• Originally OMB released a report in 2012 stating the subsidy payments for
the federal fiscal year ending September 30, 2013, may be cut by 7.6%.
• OMB has now indicated in a report to Congress dated March 1, 2013, that
the current percentage reduction will be 5.3%.
• The 5.3% is the overall reduction in the program's total FY 2013 level.
• Since the beginning of FY 2013 last October 1 some issuers have received
payments that were not reduced. In order to achieve the overall annual
savings of 5.3 percent, the remaining payments will have to be cut by a
larger percentage.
• The Tax Exempt Bond office ("TEB") of the Internal Revenue Service has
now advised that subsidy payments to issuers through September 30, 2013,
will be reduced 8.7%.

38. What Does It Mean?
• Existing issuers have faced higher net interest payments.
• Future issuers may consider tax credit QECBs in lieu of direct
pay QECBs if they are exempt from sequestration.
• All issuers and purchasers may now “discount” the value of
the subsidy going forward due to uncertainty about the amount
and continuity of its provision.
• Many issuers have the right to repurchase their QECBs in the
event of a subsidy reduction.
• Such issuers may weigh alternative capital sources that could be
drawn upon to fund a repurchase, and the costs thereof (including
transaction costs) relative to the increase in interest payments on
QECBs.

40. 40 eere.energy.gov
The Parker Ranch installation in Hawaii
Qualified Energy Conservation
Bonds In Action
Glenn Barnes August 21, 2013
Environmental Finance Center
University of North Carolina at Chapel Hill
www.efc.unc.edu

41. 41 eere.energy.gov
UNC Environmental Finance Center
Dedicated to enhancing
the ability of
governments and
organizations to provide
environmental programs
and services in fair,
effective and financially
sustainable ways

42. 42 eere.energy.gov
Choosing Projects

43. 43 eere.energy.gov
$9.3 million QECB for energy efficiency improvements to
County Jail and Regional Center, annual positive cash flow
of $1.56 million
•Upgrades included: Lighting & HVAC upgrades, new waste disposal
system and domestic water pumping upgrades for the jail, and water
upgrades & new high efficiency boilers for the regional center
Allegheny County, PA: Municipal
Building Efficiency Improvements
Initial guaranteed energy savings agreement project
(both buildings)
$14,186,509
EECBG (Energy Efficiency and Conservation Block Grant) $4,848,602
QECB $9,337,907
1st
year annual guaranteed energy savings (Starting 2012) $2,107,866
1st
year payment (Starting 2012) ($523,994)
Measurement and verification service payment ($24,219)
1st
year annual positive cash flow $1,559,653

44. 44 eere.energy.gov
$1.95 million in total avoided energy costs (2009-2012) for
Manchester School District with ARAMARK as performance
contractor
Manchester, NH: Improving
Efficiency in Schools
Fund Source Amount
ARRA – EECBG $406,391
QECBs $1,130,000
State Energy Loan Fund $400,000
Utility rebate “bank” $358,374
Public Service of New
Hampshire Utility Smart-Start
$210,071
Total $2,551,673
1st
Year Cost Savings
$450,893
Source: Clean Air - Cool Planet (2012)

45. 45 eere.energy.gov
Many local governments using QECBs for street
light improvements including San Diego &
Richmond CA, Las Vegas NV, & Surprise AZ
•Surprise, AZ is a city with about 117,000 people
•Issued a 15-year QECB bond of $723,803 in 2012 with a
retirement date of July, 2027
•Principally for replacing street and baseball field lights
•Energy savings expected to more than cover planned
Principal & Interest payments (which average ~$50,000)
Street Lights in Surprise, AZ
Source: Surprise, AZ 2013 Recommended Budget
http://www.surpriseaz.gov/index.aspx?NID=223

46. 46 eere.energy.gov
ESCO McKinstry guaranteed 25% annual dollar savings on
energy & water ($280,000), higher than bond payments
•Located in Littleton, CO, and received $1 million QECB allocation from
State
•Bond issuance cost ~3% with Dept. of Treasury subsidy, max payment
of $278,000 per year
•Energy efficiency HVACs, lighting, toilets, and ice machines for hockey
arena (among other improvements)
•Also, 100kw Solar PV system on the
EDGE (Ice rink/arena)
Foothills Park & Rec Dept, CO
Source: Foothiils Board Meeting, March 2010
(http://www.ifoothills.org/page_includes/board/2010/Minute
s_03_09_2010.pdf)
Image: Denver Post.com

47. 47 eere.energy.gov
Energy is one of the largest controllable expenses
of water and wastewater treatment
•Deerfield, IL has a population of 18,225 and an MHI of
about $107,000
•Issued an 18-year QECB bond of $12.5 million with an
effective interest rate of 1.12% (AAA bond rating)
– General Obligation bond—no voter approval required in IL
•Funded equipment replacement that is expected to realize
a 21-22 percent energy savings
•Part of a larger bond issuance
Wastewater Treatment in Deerfield,
IL

48. 48 eere.energy.gov
1 MW solar photovoltaic (PV) project to supply power to
both a jail and juvenile center
•Finance was a mix of new CREBs, QECBs, a California Energy
Commission (CEC) loan, a Pacific Gas and Electric (PG&E) rebate,
and a Tax Exempt Lease Program (TELP) loan
•3.9 percent interest rate with a 15 year tenor for QECBs
•Yolo is anticipating that it will have a net positive cash flow of $100,000
per year starting in year 1 and $600,000 per year starting in year 16 in
utility expenditures
Yolo County, CA
Source: NREL
(https://financere.nrel.gov/finance/content/first-known-use-
qecbs-will-save-yolo-county-least-87-million-over-next-25-
years) Image: NREL

49. 49 eere.energy.gov
• QECBs used to fund an energy performance contract
(about 1% interest)
• $3 million Phase 1 includes campus irrigation controls
retrofit and domestic water conservation; HVAC exhaust
energy recovery; and partial campus lighting retrofit
• First year project savings guaranteed at over $307,000,
providing a simple payback of 9.1 years
• 2,600 metric tons of greenhouse
gas emissions avoided every year
Colorado School of the Mines
Source: McKinstry Web Site
http://www.mckinstry.com/projects/
220/Colorado-School-of-Mines

50. 50 eere.energy.gov
St. Louis uses QECBs to fund residential energy
efficiency loan program, with goal of retrofitting 1400+
homes across several years
Green Community Example: Saint
Louis County
Source: Berkeley Labs QECB Case Study,
http://eetd.lbl.gov/ea/emp/reports/ee-policybrief_062011.pdf

51. 51 eere.energy.gov
5 total private activity bonds to this point, with three in
Massachusetts, for renewable generation projects including
the Lawrence dam project
Private Activity QECB:
Lawrence, KS Dam Project
Source: SternBrothers & Co., May 2012.
http://www.gscwest.com/Presentations/Session2ResourceMgmtDennisCiocca.pdf
Elizabeth Bellis, Energy Programs Consortium (2012)
http://www.nga.org/files/live/sites/NGA/files/pdf/1206PolicyInstituteBellis.pdf

52. 52 eere.energy.gov
• Glenn Barnes
• 919.962.2789
• glennbarnes@sog.unc.edu
Technical Assistance Contact
Information