Energy Project Financing : Resources and Strategies for Success

Financing Energy Management Projects 9

and the contractor is also responsible for ensuring that the delivery fee
is less than what PizzaCo would have spent. For the PizzaCo example,
the arrangement would be designed under the conditions below:

• The delivery company is responsible for all operations related to
  delivering the pizzas.


• The monthly fee is related to the number of pizzas delivered.
  This is the performance aspect of the contract; if PizzaCo doesn’t
  sell many pizzas, the fee is reduced. A minimum amount of pizzas
  may be required by the delivery company (performance contractor) to
  cover costs. Thus, the delivery company assumes these risks:
  
  
  1. PizzaCo will remain solvent, and
  
  
  2. PizzaCo will sell enough pizzas to cover costs, and
  
  
  3. The new truck will operate as expected and will actually
     reduce expenses per pizza, and
  
  
  4. The external financial risk, such as inflation and interest rate
     changes, are acceptable.
  
  
  
  


• The delivery company is an expert in delivery; it has specially
  skilled personnel and uses efficient equipment. Thus, the delivery
  company can deliver the pizzas at a lower cost (even after adding
  a profit) than PizzaCo.

Figure 2-5 shows the net cash flows according to PizzaCo. Since
the delivery company simply reduces PizzaCo’s operational expenses,
there is only a net savings. There are no negative financing cash flows.

Figure 2-5. PizzaCo’s Cash Flows for a Performance Contract.