Energy Financing Glossary of Terms (Abbreviated) These terms are commonly used within the leasing and financing industry. Please note that care in interpreting these terms should be taken, as they may have been simplified for purposes of this glossary.  A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Accounts Receivable Money due from customers carried as "open book" accounts. Carried in the current-assets section of the firm's balance sheet.  Amortization 1. The process of liquidating a debt through installment payments. 2. Prorating expenditures over time in order to write them off.  Angel A private investor who often has non-monetary motives for investing as well as the usual financial ones.  Asset Based Financing Financing an enterprise by using its hard assets for collateral to acquire a loan of sufficient size with which to finance operations. Widely used in leveraged buyouts (LBOs). Authority or Agency A state or local unit of government created to perform a single activity or a limited group of functions and authorized by the state legislature to issue bonded debt. Average Life The average length of time an issue of serial bonds and/or term bonds with mandatory sinking funds and/or estimated prepayments is expected to be outstanding. It also can be the average maturity of a bond portfolio.  Balance Sheet An accounting statement showing the financial condition of a company at a point in time; present assets, liabilities and net worth. Basic equations: assets = liabilities + net worth. Bargain Purchase Option A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised. Basis Point One one-hundredth of a percent (.01%). Used when quoting interest. Boiler Plate Legal clauses routinely included in all contracts that, while important, have little to do with the actual substance of the contract.  Bridge Loan Short-term, temporary financing used until permanent financing can be secured.  Capital A term commonly used as a synonym for cash. Goods: material assets, equipment, machinery or tools. Funds: cash assets.  Capital Expenditure Money spent for the purchase or expansion of plant or equipment.  Capital Lease Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, provided it meets any one of the following criteria; (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75% or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor. (Also see Finance Lease.) Cash Flow Describes the amount of dollars in and out of a business or project during a stated period of time. From a credit perspective, cash flow is a critical indicator how well a company can meet its immediate payment obligations. Cash flow can be negative or positive. Certificates of Participation (COPs) A form of lease revenue bond that permits the investor to participate in a stream of lease payments, installment payments or loan payments relating to the acquisition or construction of specific equipment, land or facilities. In theory the certificate holder could foreclose on the equipment or facility financed in the event of default, but so far no investor has ended up owning a piece of a school house or a storm drainage system. A very popular financing device because COP issuance does not require voter approval. COPs are not viewed legally as "debt" because payment is tied to an annual appropriation by the government body. As a result, COPs are seen by investors as providing weaker security and often carry ratings that are a notch or two below an agency's general obligation rating. Closed-End Lease Commonly found in auto leasing, this is a true lease in which the lessor assumes the depreciation risk. The lessee bears no obligation at the end of the lease. This term is used to distinguish the lease from an open-end lease. Closely Held Corporation A corporation owned by a few individuals, who also own all the stock. No stock in the corporation is publicly traded. State regulations administer the establishment of corporations. Collateral The asset(s), such as real property or an automobile, which is offered as security for a loan.  Commercial Loan A formal agreement in which a lender provides a borrower with funds for a stated purpose, and which is backed by the full faith and credit of the borrower. Loans may be secured by the particular asset being purchased, and/or with additional assets of the company (i.e., accounts receivables, property, other tangible assets, etc.). Company Sponsored Foundation (Corporate Foundation) These are private foundations whose assets come from contributions of a for-profit business. They are independent organizations with its own endowment and is subject to the same rules and regulations as other private foundations, in spite of close ties with its parent company, it. See also private foundation. Conditional Sales Agreement An agreement for the purchase of an asset in which the borrower is treated as the owner of the asset for federal income tax purposes (thereby being entitled to the tax benefits of ownership, such as depreciation), but does not become the legal owner of the asset until the terms and conditions of the agreement have been satisfied. Also known as a security agreement. Convertible Bonds Bonds that may be exchanged for other securities of the corporation, usually common stock. The buyer of a convertible bond or preferred stock has the security of the promised interest or preferred dividend yet can enjoy profits from the rise in price of the stock into which the convertible security can be converted once that stock's price exceeds the stipulated conversion price. Covenant A legally binding commitment by the issuer of municipal bonds to the bondholder. An impairment of a covenant can lead to a Technical Default. Current Assets  Cash or property that can be converted to cash in a short period of time; usually accounts receivable, inventory and short-term notes receivable. Debenture A company's long term IOU (bond) backed by the general credit of the firm, rather than by a lien on any specific asset.  Debt Service The money needed to pay the amount due on a loan.  Debt Service Reserve Fund  A bank trustee account established by the trust indenture and used as a backup security for an issuer's obligations. It usually amounts to one year's debt service, and can be drawn on by the Trustee in the event of an impairment of the Trust indenture.  Demand Deposit Money placed with a financial institution that must be returned upon demand by its owner; checking account is the most common form.  Denomination The face or par amount - nominally $1000 or $5000 but can be $100,000 or more in the case of a note - that the issuer promises to pay at a specific bond or note maturity.  Depreciation The process of allocating the actual cost of a tangible fixed asset, less salvage value, over its estimated useful life in a rational and systematic manner. Land cannot be depreciated. ESPC (Energy Service Performance Contracts) An agreement with a private energy service company (ESCO). The ESCO will identify and evaluate energy-saving opportunities and then recommend a package of improvements to be paid for through savings. ESPCs come in many variations. In general, performance contracts contain three component parts: (a) a project development agreement, (b) an energy services agreement, and (c) a financing agreement. Performance contracts come in many varieties and may differ greatly in their content and coverage. Equity Total assets minus total liabilities equals equity or net worth. Raising equity capital implies ownership.  Escrow Placing money in a special and separate account under the control of another party, usually a financial institution, to be held until the completion of conditions set forth in an agreement. Evergreen Lease This is a lease that automatically renews itself each year unless the lessee gives notice of its termination within a specified period of time. Factor Financial institution that buys accounts receivables from a firm and bills customers directly, in contrast to a bank that only lends on accounts receivable.  Factoring (1) the selling of accounts receivable; (2) selling invoices at a discount.  FASB 13 Statement issued by the Financial Accounting Standards Board establishing financial accounting standards for reporting leases for both lessees and lessors. Fair Market Value Purchase Option An option to purchase leased property at the end of the lease term at its then fair market value. The lessor does not have the ability to retain title to the equipment if the lessee chooses to exercise the purchase option. Finance Lease (Lease/purchase) A rental agreement backed by the full faith and credit of the lessee ("borrower"). Typically, a finance lease is a full-payout, non-cancelable agreement, and the lessee is responsible for maintenance, taxes, and insurance. Finance leases are easily recognized by their "bargain purchase options" (typically $1.00) which may be exercised by the lessee at the end of the lease term. Financial Accounting Standards Board (FASB) A seven-member organization which was established by the accounting profession to establish accounting principles which represent generally accepted reporting practices. Financial Advisor Generally an investment-banking company, independent consulting firm or bank that advises the issuer on all financial matters pertaining to a proposed issue and is not part of the underwriting syndicate.  Financial Statements Periodic accounting reports of a company's activities. Usually includes balance sheet, income statement, accountant's cover letter, changes in cash flow and notes.  Fixed Asset Property with relatively long life, such as land, buildings and equipment.  Full Payout Lease A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease, plus an acceptable rate of return, without any reliance on the leased equipment's future residual value.  (see Capital Lease) Government Accounting Standards Board (GASB) GASB was organized in 1984 by the Financial Accounting Foundation (FAF) to establish standards of financial accounting and reporting for state and local governmental entities. GASB standards guide the preparation of external financial reports of those entities. General Obligation Bonds A bond secured by a pledge of the issuer's taxing powers (limited or unlimited). More commonly the general obligation bonds of local governments are paid from ad valorem property taxes and other general revenues. Considered the most secure of all municipal debt. Goodwill  The difference between the market value of a firm and the market value of its net tangible assets.  Guaranteed Savings Agreement This agreement combines the lower rates usually found with conventional financing agreements backed by the full faith and credit of the borrower (i.e., a lease or loan) with equipment performance guarantees. The guarantees may be provided by either the installing company and/or an insurance policy may be issued by an insurance company. This may be a cost effective alternative to true Shared Savings Agreements, and is available for larger transactions. Hard Assets Assets with liquidating value, such as equipment and machinery.  "Hell or High Water" Clause Phrase common within the lending industry used to underscore the unconditional repayments of any financing agreement by the borrower, regardless of outside influences, acts of God, performance of equipment, etc. Holding Company A corporation that owns either a controlling interest in another company or all of its shares. The accounts of a wholly-owned subsidiary may be consolidated with those of the parent company. Normally a company whose main assets are securities in other companies. Income Statement A financial statement that shows the amount of income earned by a business over a specific accounting period. All costs (expenses) are subtracted from the gross revenues (sales) to determine net income, which outlines the profit-and-loss financial statement (P & L).  Incremental Borrowing Rate  Is the interest rate that, at the inception of the lease, the lessee would have incurred to borrow the funds necessary to purchase the leased asset over a similar term. Used when determining whether a lease qualifies as an operating or capital lease. Internal Rate of Return The discount rate that equates the net present value of cash inflows and outflows to zero. Initial Public Offering (IPO) A company's first registration and sale of stock to the public. The reasons for an IPO are to: 1) provide an opportunity for existing investors to turn a profit, since for the first time their shares will be given a market value reflecting the expectations for the company's future growth, and, 2) potentially raise significant amounts of capital to fuel the planned and/or continued growth of the privately held company.  Interest  Is the cost of using money expressed as a rate over a period of time. Care should be taken when comparing rates, as there are many different types of interest including simple, compounded, discounted, implicit, stream (running rate), etc. Internal Rate of Return The average annual yield earned by investment during the period held.  It is the rate that adjusts the value of future energy savings generated by the equipment (“cash inflow”) is equal to the original installed equipment cost (“cash outflow”). This is commonly used as a decision making tool when prioritizing competing investments. Investment Banker Serves as a middleman between the supplies of capital and the users of capital; also known as an underwriter.  Issuer A state or local unit of government that borrows money through the sale of bonds and/or notes.  Investment Grade  Bond issues that the three major bond rating agencies, Moody's, Standard & Poor's, and Fitch rate BBB or Baa or better. Many fiduciaries, trustees, some mutual fund managers can only invest in securities with an investment grade rating. See "Ratings." Junk Bonds Bonds of a speculative grade which represent a higher risk to investors but offer the opportunity for higher interest. Looked upon as undervalued assets and used as money source in takeover attempts.  LBO-Leveraged Buyout The purchase of a company financed by borrowing on its assets. Lease A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate. Leasehold Improvement An improvement to leased property, considered an intangible asset to the lessee, that becomes the property of the lessor at the end of the lease.  Lease Financing Financing the acquisition of plant or equipment by leasing it rather than buying it. Lease-Rental Bond Bonds whose principal and interest are payable exclusively from rental payments from a lessee. Rental payments are often derived from earnings of an enterprise that may be operated by the lessee or the lessor. Rental payments may also be derived from taxes levied by the lessee. Also see Certificates of Participation.  Lease Rate Factor The percentage of the equipment cost that will be paid every period (monthly, quarterly, etc.) during the base term of the lease. Letter of Credit A bank's written guarantee of funds available of drafts written on it.  Leverage An activity that borrows funds at a specified interest rate with the expectation of using these funds to earn a higher rate of return for the benefit of the enterprise. LIBOR LIBOR is an abbreviation for "London Interbank Offered Rate," and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments. Line of Credit Short-term financing usually granted by a bank up to a predetermined limit; debtor borrows as needed up to the limit of credit without need to renegotiate the loan.  Legal Opinion A written opinion from counsel that an issue of bonds and/or leases was duly authorized and issued. The opinion usually includes the statement, "interest received thereon is exempt from federal taxes and, in certain circumstances, from state and local taxes."  Leveraged Lease A lease agreement that involves at lest three parties: a lessor, a lessee and a funding source.  The lessor (owner) purchases the equipment by making an equity investment and then finances the remaining balance by issuing non-recourse note(s) to the lender(s).  Limited Partnership Form of partnership composed of both a general partner(s) and a limited partner(s); the limited partners have no control in the management of the company and are usually financially liable only to the extent of their investment in the partnership.  Master Lease A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract. Master Leases can include operating, capital, true or tax exempt municipal leases. Merchant Wholesaler Wholesaler who takes title to goods he/she buys for resale to institutions that intend to either resell the goods as they are or process them in some way for resale.  Mortgage A loan secured by a conveyance of an interest in real property as security for the repayment of money borrowed. A second mortgage holder is more at risk than a first mortgage holder because, should the borrower default on the loan, the second mortgage holder must buy out the first mortgage holder or forfeit their secured position. Municipal Bonds Debt obligations of states, cities, counties or statutory authorities. Often called "tax exempts" because they are free from federal income tax and usually free from state income taxes in the state where issued. Municipal Lease A conditional sales contract in the form of a lease and available only to municipalities, states, counties and certain special authorities. Because the interest earnings are tax exempt to the lessor, rates on Municipal Leases are lower than conventional commercial lease rates. This lease structure can direct operating funds into capital purchases and is an excellent financing alternative to floating a bond issue to pay for a particular project. Unlike a conventional lease (which is non-cancelable for the lease term), a Municipal Lease typically allows the Municipality to return the leased asset to the lessor without penalty prior to the end of the lease term should funding become unavailable (non-appropriations clause). Municipal Futures  A municipal index futures contract that has been traded at the Chicago Board of Trade since June 11, 1985. The futures contract is based on an index, known as The Bond Buyer Municipal Bond Index, composed of 40 bonds which are priced at the close of trading each day. This is no market for amateur speculators; it is used primarily by professional money managers to hedge their municipal portfolios.  Net Present Value The value in current (today’s) dollars of future cash flows. In order to make this calculation, an interest rate must be identified. Usually, this interest rate is the organization’s opportunity cost; in other words, the expected return if these funds could be invested in an alternative project or investment. Net Lease A lease in which all costs in connection with the use of the equipment, such as maintenance, insurance and property taxes, are paid for separately by the lessee and not included in the lease rental paid to the lessor. Open-End Lease (See also Closed-End Lease.) A lease which provides the provision for extending the lease on predetermined terms after a set period of time. Operating Lease Any lease which is not a capital lease. From a financial reporting perspective, it is a lease that has the characteristics of a rental agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee. The term is also used to refer to leases in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. Operating Foundation A 501(c)(3) organization classified by the IRS as a private foundation whose primary purpose is to conduct research, social welfare, or other programs as determined by its charter or governing body. Most of the foundation funds are used for the foundation's own programs. Operating foundations may award grants, however the amount of the grants is generally small.   Original Issue Discount Some maturities of a new bond issue that have an offering price substantially below par; the appreciation from the original price to par over the life of the bonds is treated as tax-exempt income and is not subject to capital gains tax. Partnership Business association of two or more people. There are two types of partnerships, the general and the limited partnership.  Par Value The face value or principal amount of a bond, usually $5,000 due the holder at maturity. It has no relation to the market value. For pricing purposes it is considered 100.  Payments in Arrears A payment stream in which each payment is due at the end of each period during a lease or loan period. Performance Contracts (See shared savings agreements). Personal Financial Statements Individual's balance sheet and tax returns for three years. (Sometimes required by prospective investors/lenders of the founders/managers of the start-up or closely held businesses.)  Positive Cash Flow Cash flow is the total money received and paid out by a company during a specific period of time. A company's cash flow is positive when the money received (deposited or saved) exceeds the money paid out or expensed. Preferred Stock A corporate security that has preference over common stock in receiving dividends and as to assets. Its dividend is usually stated as a fixed percentage of par value or as a stipulated sum each year, but the company has no legal liability to pay it if the company has not earned the money to pay it. Cumulative: if the dividend is not paid when due, it accumulates as a backlog that must be paid before common stockholders receive dividends. Noncumulative: if the dividend is missed, it is not required to be paid at a later time. Participating: can enjoy additional dividends after the common stockholders are paid a stated amount. Nonparticipating: cannot receive any dividends other than the fixed amount offered. Voting: has voting privileges.  Prime Rate The interest rate that banks lend to their best customers. This rate is determined by the banks themselves and is published in financial periodicals. Private foundation These are nongovernmental, nonprofit organizations with funds usually provided by a single source (such as an individual, family, or corporation).  Their programs are managed by its own trustees or directors. Private foundations  maintain or aid social, educational, religious, or other charitable activities serving the common welfare, primarily through the making of grants.   Privately Held Describes a corporation which does not offer shares to the public. It does not have to publish an annual report or comply with SEC regulations. (There are some exceptions.)    Public Charity These are nonprofit organizations that qualifies for tax-exempt status under section 501(c)(3) of the IRS code and are the recipients of most foundation and corporate grants. Some public charities also make grants. Purchase Option A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated as a specific dollar amount or at fair market value. Ratings Various alphabetical and numerical designations used by institutional investors, Wall Street underwriters, and commercial rating companies to give relative indications of bond and note creditworthiness. Standard & Poor's and Fitch Investors Service Inc. use the same system, starting with their highest rating of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D for default. Moody's Investors Services uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D . Each of the services use + or - or +1 to indicate half steps in between. The top four grades are considered Investment Grade Ratings.  Residual Value The value of an asset at the conclusion of a lease. Return on Investment ("ROI") The return per dollar of investment used to measure the efficiency with which capital resources are employed. Revenue Bonds Revenue bonds are issued to finance a specific revenue generating project. Revenue bonds may be backed by an insurer but are typically secured solely by the revenue generated through the project for which they are issued. For instance, a bond could be issued to retrofit an old building with new energy saving technologies such as windows, lights, or heating systems. Energy cost savings would then be used to pay back the bond issue. However, if the bond was not insured and energy savings were not realized the bond would default. Revolving Line of Credit ("Revolvers") A loan in which the amount of the money borrowed is constantly changing due to the repayment and re-borrowing of the monies. A working capital credit line or credit card are examples of revolving loans. While "revolvers" are normally open for one year, they are demand loans and may be "called" at any time during the loan period by giving the borrower notice. RFP An acronym for Request for Proposal. RFPs is part of a common bidding process in the public sector and for large projects. They normally list the project specifications and procedures, and are issued to agencies or organizations that might be qualified to participate.   Sale and Leaseback An arrangement where equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner and leases it back to the original owner, who continues to use the equipment. Share of Stock  A unit of ownership in a corporation, which can be held privately or publicly.  Short-term Debt  Loans that are to be repaid within one year.  Shared Savings Agreement The installing company/finance source installs the equipment and receives payments from the end-user/host company based on the energy savings produced by the equipment. There are two types of agreements, "fixed" and ."true" shared savings contracts. "Fixed" shared savings contracts define the savings based on engineering studies or one-time verifications of savings at the time of project completion and the savings-based payment is not subject to change following project acceptance by the customer. "True" shared savings contracts require the savings be verified periodically and the saving-based payment is subject to change. Shared Savings Agreements are considered by many to be "off balance sheet financing". Simple Payback The time required to recover the capital investment out of the savings of the installed energy efficiency equipment.  It does not take into consideration any savings beyond the payback period; therefore it tends to penalize long life projects and favor projects that offer high savings over a short time.  It is commonly used when funds are limited. Sinking Fund Money set aside on a periodic basis to retire term bonds at or prior to maturity.  Sole Proprietorship A business firm owned by only one person and operated for his/her profit.  Stipulated Savings Energy savings values which are stipulated based on engineering calculations using typical equipment characteristics and operating schedules developed for particular applications, without on-site testing or metering. This may be a cost effective approach  for lighting efficiency and controls projects. Also know as "deemed savings."  Stream Rate (Interest) A stream rate, also known as the running rate of interest, may be quoted on leasing transactions.  It reflects only the payment stream and excludes the cost of the purchase option at term-end, so it will usually be lower than the APR. This is not an incorrect rate, but it may be misleading when comparing it with an APR.  Subordinated Debt Debt whose claims on assets are somehow inferior to the claims of another class of debt. The superior debt has first claim to the assets used as collateral for the debt, e.g., a second mortgage on a home gets nothing until the first mortgage has been fully satisfied in case of default.  Super ESPC To streamline the procurement process, the U. S. Department of Energy's Federal Energy Management Program (FEMP) awarded indefinite-delivery, indefinite-quantity (IDIQ) contracts — the Super ESPCs — to a number of energy service companies (ESCOs). These competitive awards were made in compliance with all applicable Federal Acquisition Regulations (FAR) requirements. There are two types of Super ESPCs: Regional, "all-purpose" Super ESPCs and Technology-Specific Super ESPCs. Regional Super ESPCs are intended for implementing a wide range of technologies. And the Technology-Specific ESPCs give Federal agencies access to new or emerging technologies that are not yet fully established in the marketplace but have outstanding potential for saving energy and money at Federal sites."  Synthetic Operating Lease A lease agreement that qualifies as a leasing transaction for purposes of financial reporting and as a secured financing for purposes of income tax reporting. These leases are structured to pass FASB 13 tests for operating leases and are sometimes used for equipment which might not normally hold a high residual value necessary for traditional FASB 13 operating leases (e.g., lighting, HVAC, etc.). Tax Exempt Energy Service Agreement Similar to the Energy Service Agreement above (see Performance Contracts section), this fixed payment shared savings agreement can combine the rate benefits of a tax exempt financing vehicle with the marketing advantages of a shared savings agreement, and may be popular with schools. Tax Lease /  True Lease A lease where the lessor can claim tax incentives of ownership and the lessee can claim rental payments as tax deductions. Because the final decision to purchase the leased equipment is deferred until the end of the lease contract (at its then "fair market value"), monthly rental payments are usually expensed for tax purposes. Term Loan A loan which is repaid over a predetermined period of time longer than one year. Rates may be floating or fixed. Time Value of Money  All money commands interest, either imputed or explicit.  Interest costs are a function of the interest rate and the time for which the money is being "rented" (used).  Thus, time costs money.  TRAC Lease This is a tax-oriented lease of titled motor vehicles or trailers that contains a terminal rental adjustment clause (fixed purchase amount) and otherwise complies with the requirements of a true lease. Undercapitalization  Starting a new enterprise with too little money to carry it through the beginning stages of development.  Trustee A bank designated as the custodian of funds and official representative of bondholders or lessor. Trustees are appointed to insure compliance with the trust indenture and represents bondholders or lessors to enforce their contract with the issuer.  Unsecured Bonds Debt bonds issued on the general credit of a company. Unsecured Loan Loan granted solely on the strength of the maker's signature.  Venture Capitalist An investor who provides early financing to new ventures--often technology-based--with an innovative product and the prospect of rapid and profitable growth.  Warrant An option to buy a certain amount of stock for a stipulated price that is transferable--it can be traded.  Working Capital The amount of funds available to pay short-term expenses. Seen as a cushion to meet unexpected or out-of-the-ordinary expenses. It is determined by subtracting current liabilities from current assets.  Yield The interest rate earned by the lessor or equity party in a lease.