Nashville wants to sell its downtown energy system to a private buyer for $60M
Yihyun Jeong- Metro is in final negotiations with Engie Development, LLC to sell its energy system for $60 million.
- The city subsidized the system with about $2.2 million in fiscal year 2018.
- Metro's DES heats and cools more than 40 buildings in downtown, including the Tennessee state Capitol.
Nashville wants to sell its energy system that heats and cools more than 40 buildings downtown — including the Tennessee state Capitol — for $60 million.
Metro's District Energy System uses electricity and natural gas to produce steam and chilled water that is distributed through 91,100 feet of underground pipes to its downtown customers.
But city officials say its no longer financially viable for Nashville and are in final negotiations with Engie Development, LLC to sell the system.
"After engaging a leading consulting firm in the district energy business to help evaluate future growth options for its (DES), Metro issued a request for proposals last year from firms that could deliver a cost effective and efficient district energy service for all DES customers," Thomas Mulgrew, a spokesperson for Mayor David Briley, told The Tennessean.
"Metro is now in contract negotiations with the winning vendor, and is therefore unable to comment in detail at this time," he said.
The $48.3 million facility — located off Korean Veterans Boulevard and Crockett Street — has been operational since December 2003 after a fire destroyed the city's thermal plant in May 2002. Nashville previously burned waste for energy near the current site of Ascend Amphitheater.
A final sale to Engie, a French multinational utility company, is contingent on getting consent from DES customers and approval by the Metro Council. Though a timeline is not set, the contract is expected to be finalized in the next coming weeks, pending ongoing talks with customers.
"The state is aware of this potential sale and we’ve been in discussions with Metro about it," said David Roberson, a spokesperson for the Tennessee Department of General Services. "At this point we have not taken a position for or against the sale."
Among members of Metro's DES advisory board are representatives the state, the Nashville Symphony, the Renaissance hotel, city Finance Director Talia Lomax-O'dneal and council member Freddie O'Connell, whose district includes downtown. The group meets quarterly and have not yet been presented with the results of the city's solicitation.
Though talks on the future of the energy plant have gone on for at least two years, conversations have taken place largely under the public radar.
The city subsidized the system with about $2.2 million in fiscal year 2018, when expenses came in at about $19.3 million and revenue just over $17 million. The net debt for DES as of the end of fiscal year 2017 was $51.6 million, according to the most recent available data.
"Metro no longer wishes to provide the financial resources necessary to maintain or grow the DES nor does Metro wish to continue providing the financial subsidies currently required for the operation of the DES," Metro posted to its website in January.
"Additionally, Metro does not have the subject matter expertise to operate a best-in-class DES, where technology and best practices will continue to rapidly evolve. Entering into an operations agreement or selling the DES presents Metro with the best opportunity to achieve its goals."
Move to sell in response to 2017 report
Nashville's move to sell is a direct response to a 2017 report the city commissioned to assess the economic viability of DES.
The market value for recent district energy systems sales across the country range between $39.7 million and $55.6 million, according to the report. Metro's DES book value as of the end of fiscal year 2017 is $63 million.
The report offered several scenarios for Metro including:
- Keep "business as usual," resulting in inadequate capital expenditures funding, require subsidization through FY 2021 and a decrease of sales value over time.
- Two "promising growth options" that would require substantial upfront capital investment: $52.7 million to expand energy generation facility or $38.5 million to expand thermal energy storage.
- Internal management and operation: Possible costs savings and operational efficiencies that would yield a 19 percent reduction in annual operation and maintenance costs.
- A sale of DES that would likely repay all existing debt obligations.
Metro issued its initial request for proposals in November for companies wanting to take over as management partners or to purchase DES.
The short list of companies was asked to make a financial offer by Feb. 22.
Metro notified Engie of its intent to award the sale to the company on March 22. It beat out four other groups that made it onto the city's short list, including from Constellation New Energy Inc., the company that currently operates the facility for the city.
Engie was the only group to make an offer to buy the facility. The others made management offers that ranged from $3.5 million to $4.5 million.
While downtown has continued to grow its energy footprint, Metro's DES is not getting as many customers as expected, according to O'Connell. The reasons: Metro lacks an effective marketing scheme and is at capacity.
"We can do the status quo, look for more management, or we can sell the system," he said. "“I’m inclined to do something better than the status quo. If this is realistically our only option, I’m going to seriously consider it.”
O'Connell said he hope the Metro advisory board will get a chance to review the procurement process and ask key questions, including about whether Metro is getting a fair deal in a sale.
Deal could make for 'turbulent' conversations
O'Connell said he recognizes the sale of DES could be a "turbulent" conversation that could draw a lot of scrutiny during a time that is further complicated by "Metro's financial horizon" and when there is little public appetite for privatization.
The Briley administration is currently looking to secure a deal to outsource its public parking. The city is issuing an intent to award to a group on Tuesday to take over its on-street parking operations for $30 million up front. The hope is that will help fill gaps in the city budget.
"It's difficult to figure out if the DES sale is for legitimate reasons or for a one-time budget hole," Metro Council member Bob Mendes said.
Any large asset sales lined up when the city is working on its budget "automatically come with suspicions," he said.
"Metro government is planning on selling a $60 million asset and the public is entitled to understand why it's being sold and what the process has been to shop the asset to the market."
Engie to invest $250M
Engie told the Tennessean on Tuesday that the group plans to invest nearly $250 million into DES.
"Once we complete the contractual process and if we are approved by Council, we have a plan to invest nearly $250 million dollars to upgrade and grow the system, with two key objectives of creating cost-savings for customers and expanding capacity to meet the needs of downtown Nashville’s exponential growth," said Andre Cangucu, the chief development officer for Engie's operation in North America.
Their plan to upgrade the system includes:
- No change in costs for customers at transfer of the contracts.
- Immediate implementation of ENGIE best practices to meet their standards of reliability, performance, and customer service.
- Decrease in costs within 2 to 3 years due to value-accretive investments and optimization of energy production and distribution system.
- DES expansion funded by ENGIE within 5 to 7 years to meet Nashville’s growth needs.
"At the appropriate time, we look forward to meeting with all stakeholders, especially customers and members of Metro Council, to tell them more about our experience and how our immediate and long-term investments should increase the quality and efficiency of DES service, save customers money, and position Nashville for the future," Cangucu said in a statement.
Yihyun Jeong covers politics in Nashville for USA TODAY Network - Tennessee. Reach her at yjeong@tennessean.com and follow her on Twitter @yihyun_jeong.