In a typical office building, utility costs make up about one-fifth of total operational costs. Energy costs in commercial buildings and industrial facilities are consistently rising due to increasing global energy demand, while federal, state and local agencies are mandating increased energy efficiency in new and existing buildings.
Smart Business spoke with Moh Heidari, director of the Energy Solutions Group with Alfa Tech, about how organizations can benefit from investing in energy efficiency in their facilities.
Why don’t companies invest more aggressively in energy efficiency?
It depends on multiple factors like project management methodologies, budget structures and decision-making practices. For example, value engineering is first cost-oriented versus life-cycle cost analysis. There is little incentive for an energy-efficiency feature to be embraced by a value engineering process if it results in a higher first cost. That is why we need to go beyond value engineering.
Another reason is that budgets for construction and operations often come from two different groups. Therefore, there is a tendency for construction to take a ‘not my problem’ perspective on an energy-savings measure if it would increase the construction cost. This also happens for existing facilities where the maintenance budget is separate from operating cost. So, when the maintenance team reduces utility costs by implementing energy-savings measures, they may not directly get credit for it since the savings will be captured under the operating budget.
Another reason might be that energy costs are lower than costs like employees’ salaries. However, cutting energy costs directly contributes to increasing net profit.
What are the indicators of a good investment in energy systems?
While a retro-commissioning action and energy audit identifies energy-saving measures with a simple payback period (SPP) of less than two years, SPP is not sufficient to decide whether a project should be implemented or not. An additional decision-making factor is return on investment (ROI). For example, a three-year simple payback period has about 33 percent ROI and a five-year payback has about 20 percent ROI, which are attractive ROIs. In addition, considering the investment security of energy-efficiency projects makes them even more attractive investments. Energy-efficiency engineers use cost-benefit analysis and life-cycle cost analysis to identify the profitability and to show other advantages like reduction of business vulnerability to energy price fluctuations and increasing productivity.
Who is an energy-efficiency engineer and why might an organization want one?
Energy is complex. Everyone thinks they have solutions, but how do you know if a solution is the right one? Companies may benefit from an independent consultant who does not have a conflict of interest and who has the specialized training required to fully assess system interaction and integration issues and the overall energy benefit associated with a proposed energy-efficiency project. For example, a condensing boiler must operate at condensing temperatures to deliver the highest efficiency. If a condensing boiler is installed in a system that cannot operate at condensing temperatures or installed in a system that could but that does not have the right control sequence to achieve condensing temperatures, then the intended savings will not be realized.
Because of these complexities, energy solutions for different types of facilities need multiple specialties. Energy engineering is an interdisciplinary field with selected expertise in mechanical, electrical, control, chemical and environmental engineering, as well as economics and energy market.
What is retro-commissioning?
Existing building commissioning (EBCx), also known as retro-commissioning (RCx), is a detailed tune up using a systematic assessment process to evaluate buildings’ systems functionality, energy performance and energy cost-savings opportunities to match the building operations to the owners’ and occupants’ current needs, reducing energy waste and obtaining cost savings. Energy audits, RCx and monitoring based continual commissioning (MBCCx) are the best tools to capture actions that can result in up to 30 percent and even sometimes higher energy cost reduction through retrofits. In energy savings, persistence is key. Without it, a system becomes out of tune and you just keep saving the same energy every couple of years instead of steadily raising the bar. Monitoring-based continual commissioning ensures that energy savings persist and grow over time. In this method, we continuously monitor the critical points of systems, measure their efficiency and address the problems that cause decreases in efficiency.
How do building owners and facility personnel benefit from investing in energy-efficiency retrofits and upgrades?
First, they should realize the difference between saving energy and saving money. If you implement an energy savings measure but energy costs escalate, you save energy but may not save as much money. Uninformed owners or tenants may be disappointed in the results of a project unless they realize where the energy costs would be if they had not implemented the project. It also means that energy-savings projects that were not viable may become viable when energy becomes expensive enough.
In addition, as the relative value of energy shifts, the viability of some strategies may need to be re-evaluated. For instance, a strategy that recovered energy via heat pump may not look as good as it once did if electric prices go up while gas prices fall.
Finally, persistent energy savings can pave the way for making renewable energy projects viable. The viability of a solar photovoltaic project may hinge on making the load served as efficient as possible. Increasing efficiency of HVAC systems reduce the first cost of an expensive renewable energy technology.
Moh Heidari is director of the Energy Solutions Group with Alfa Tech. Reach him at (415) 403-3091 or firstname.lastname@example.org.
Ron Calhoun was planning to discuss plans for his company’s 100th birthday back in 2006 when the discussion with the board of directors took on a more serious note. After the birthday plans were nailed down, it was time to talk about the future ownership of the wholesale distributor of residential building supplies and HVAC equipment.
The second generations of three families owned the company that was founded in 1907, but no third generation descendants had an active role in the business.
“We were looking to dilute the stock down to the third generation,” says Calhoun, president and COO of Palmer-Donavin Manufacturing Co.
That was not the best scenario for continuation of the company — it made it too likely that the company would dissolve.
Palmer-Donavin was doing well enough. Revenue for 2011 was $163 million, down a bit from a high of $174 million previously, and better than 2010’s $147 million. About 230 are employed company-wide.
Calhoun got to thinking and remarked on how much his predecessor, Bob Woodward Sr., put an employee focus on the company during his 60 years with the company.
“The culture of our company is very much an employee-oriented culture that he developed through his policies and compassion for the business and people,” he says.
“We talked about where a company goes. Do you go to a private equity firm? Do you go to a strategic buyer, and then what happens to the company, what happens to the management and the people?
“I think from our ownership and board perspective, they wanted to maintain the integrity of the company and the people, and felt an obligation to management and the people to see that the company could go forward.”
The proposal that was the best fit was an employee stock ownership plan. It would be a way to give back to the people who helped build the company. After talking to a number of people in the industry who had taken their companies in an ESOP direction, it was time to decide.
The leadership settled on the ESOP as a succession plan for Palmer-Donavin. The company was sold in 2007 to the ESOP and went from being 100 percent shareholder-owned to 100 percent ESOP-owned private company.
“It’s been interesting along the way, and because of our past, I think we transitioned into it very well, and we got everyone’s goals aligned,” Calhoun says. “We have been very successful since.”
But just because the papers had been signed doesn’t mean the work is over. Here’s how Calhoun faced the challenges ahead of him.
Make the ESOP fit
From the perspective of a company’s vendors and customers, the transition to an ESOP is virtually invisible. But from the board of directors and managerial areas, it is quite a bit different.
ESOPs are rarely used to rescue a company in financial trouble but are most often used to provide a market for the shares of departing owners of companies, to reward and motivate employees or to take advantage of loan incentives to acquire new assets in pretax dollars. ESOPs, in nearly every case, are a contribution to the employee, not an employee purchase.
In preparation for the transition, company owners usually will need to hire an attorney and an investment banker to appraise the company, set a value on its shares, put together a share allocation schedule and arrange financing if needed.
Once the Palmer-Donavin board of directors voted to go the ESOP route, one of the next steps was to hire a trustee who would represent the employee-owners when voting.
“She represents the ESOP employee owners,” Calhoun says. “She votes their stock and is completely independent of the board, so she provides a true independence in the association of the employee owners of the company.”
When selecting a trustee, it is a matter of hiring a pro. Through the process of interviewing, you should be able to find a professional trustee to meet your needs. Then take him or her through a meet-and-greet process.
“You should go around with your trustee and your chairman of the board to employee meetings to tell them about the changes that are coming — and that the decision was made to sell the company,” Calhoun says.
An administrative committee should be formed that is responsible for the management of the ESOP and the shares. They will work closely with the trustee and keep the trustee informed of business concerns. They work together as far as share redemptions and things of that nature and any reporting that is necessary.
Most important of all, the trustee votes for the shareholders and attends the annual meeting of the board of trustees. This is one of the major points employees will need to know.
“The trustee votes on matters on behalf of the employees; for instance, the trustee would vote for the election of directors representing the employees,” Calhoun says. “The trustee votes if there is a decision to sell a majority of the assets of the company or a major event.”
The Department of Labor and the Internal Revenue Service require an annual valuation of the shares and the trustee hires a third-party evaluation team to perform this duty.
The most common method to allocate the shares to employees is in proportion to their compensation, although different formulas may be used, such as years of service or a combination of the two.
Another question to be answered is when the employee becomes vested in his or her shares.
“What we did — that the trustee and our attorney said we should not do but we felt that going through this transition we should — is that we gave pre-ESOP vesting to all employees so the vesting period on the ESOP is six years,” Calhoun says. “They recommended that we take that and have every employee start over at the time we implemented the ESOP, and we just didn’t feel good about that, and we allowed them their previous time with company to vest. So if they were with us six or more years, their ESOP shares vested at 100 percent when they received them.”
The company leadership wanted to continue the tradition of being an employee-friendly organization.
“The culture of our company has been an employee-oriented one,” he says. “Bob Woodard had what we called an appreciation plan. If the company was profitable, all of a sudden all of the employees would get an extra week’s pay or a bonus would show up in their paycheck, and they didn’t know when it was coming. It was just kind of random.
“Now with the ESOP contribution, shares get distributed every year. It is really kind of based on the same thing — shared distribution is based on each individual’s income level but done on a regular basis.”
Educate the employees
One of the largest benefits of an ESOP is the ownership culture and the pride that the employees take in being employee-owners. While some employees will feel the honor right away or early in the transition process, others may be doubtful of the benefits and will need time and attention to work it all out.
“The challenge for the company is how you educate the employees to understand what the ESOP is,” Calhoun says. “It is a very difficult concept for everyone to grasp, so we spent a lot of time on it.”
One useful tool is a communications committee that will take on the assignment to tell employees on a regular basis what is happening with the company and the ESOP.
“We publish what we call The Owners’ Manual every quarter,” Calhoun says. “It talks about the different aspects of the business and different educational pieces that we put in there to help the employees understand better what’s going on with the company, what’s going on with their investment in the ESOP and the business strategy.”
The first message to be communicated is that the biggest advantage of an ESOP is that it will offer employees the chance to create the ownership culture of everyone in the organization.
A communication tool that Calhoun found helpful was to set up a company intranet site to encourage questions from employees about the ESOP. These are posted on the site with a response, usually from the human resources department or someone else in the organization that has more expertise in an area.
“I think there were a lot of people who were very nervous about it, that were skeptical. But I think hopefully those concerns have been satisfied over time,” Calhoun says.
“It’s a learning process. As far as each year when we have to go through like the redemption of stocks for people leaving, those types of things get a little cumbersome and you want to make sure that you do that through the right process. It’s very regulated.”
When employees leave the company, they receive their stock, which the company has to buy back from them at its fair market value.
Efforts to spread the word about the ESOP should be frequent and creative.
“You can do different things such as lunch with the CFO, to small individual meetings, to having an ESOP committee, which is made up of employees from all the different areas and sections of the business,” Calhoun says. “They meet at least on a quarterly basis. They are charged with doing some things to bring an awareness, and ownership awareness among the employees. They have come up with some different types of games and things that can be used at company picnics or all-employee meetings that help communicate the message.”
Increase your company value
For a company going through a recession, having an ESOP adds a whole new dimension and a new tool to operate the business.
“Our business went down from a high of $174 million before the downturn to $147 million, and during that time we had 320 employees; we are down today to 233,” Calhoun says. “Many of those changes were just through attrition, but we did have everyone look at their departments and evaluate what are the tasks that we need to do, and what can we do to improve ourselves and where we have redundancies to try to cut out that duplication.
“I think through managing through that type of a downturn in our business — everybody focused extremely well in that and agreed to take on more than their share to keep the ship going forward. It was a pretty seamless transition through that, and we were able to maintain our profitability through those times.”
In the long term, ESOPs provide a convenient way to which bonuses can be tied. A rewards-for-profit plan focused on return on assets encourages employees to meet goals and rewards them when the goal is achieved.
“A rewards-for-profit plan replaces the typical profit-sharing plan,” Calhoun says. “Initially, employees had been able to see the company value grow because of debt repayments. Now it’s just like when you own a house, you build up equity by paying off the mortgage. Well, our mortgage is paid off, so we now have to increase the value of the house. We’ve got to see how we can grow our top line revenue and our bottom line profits in a sustainable way that will increase our value.”
How it works is an ROA or a profit objective is set by the board, based on abilities. It runs on a continuous 12-month basis and is paid quarterly to the employees.
“Then based on a formula, whether you are at 100 percent of the goal or 125 percent of the goal, the employee gets one week’s pay. If you are at 90 percent, it’s 90 percent of one week’s pay. If you are at 150 percent, it’s 150 percent of one week’s pay. It’s been very effective.”
How to reach: Palmer-Donavin Manufacturing Co., (614) 486-9657 or www.palmerdonavin.com
president and COO
Palmer-Donavin Manufacturing Co.
The Calhoun file
Born: West Lafayette, Ohio, just east of Coshocton
Education: Ohio University. I got a bachelor’s degree in business administration from the College of Business.
What was your first job?
For my very first job out of college, I was a bartender at Maumee River Yacht Club. I was able to network that into a sales representative position for the National Gypsum Co., selling drywall in the Columbus market.
What was the most important business advice you ever received?
My mentor and former company president Bob Woodward kept saying it’s the people who make the company and the company is nothing without the people. I think that’s so true. Also, without integrity and honesty, you have nothing. You have to have integrity and character in everything you do.
Who do you admire in business?
Outside of Bob Woodward, I think one person I admire most is probably John McConnell of Worthington Industries. Actually, my father retired from Worthington Industries. He had always been an hourly factory worker all his life and went through working on union organizations and went through strikes and closing of facilities. He got a job later in life with Worthington and retired there. He always respected Mr. McConnell. The policies and programs the company had for all their employees created quite a loyalty among the employees and allowed my father to retire. He is 85 today and is and doing well — I think it’s the culture that is built within an organization. I recently was fortunate enough to talk to one of the board members and get some insight as to how they did some things.
What is your definition of business success?
Business success is creating a vision that people can trust and fulfilling that vision where everyone prospers.