Developing a path to Energy Independence

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Developing a path to Energy Independence

• The Financial Implications of Green Energy
  Technologies for Health and Education Providers

Presented by Daryl Applebury, Chief
Financial Officer Jeff Rich, Executive
Director Efficiency Improvement
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A brief introduction to Gundersen
LutheranHealth System
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Our Mission

• Mission Statement Our WorkWe distinguish
  ourselves through excellence in patient care,
  education, research and improved health in the
  communities we serve.
• Vision Our PlanWe will be a Health System of
  excellence, nationally recognized for improving
  the health and well-being of our patients and
  their communities.
• Values Our Priorities
• Integrity
• Excellence
• Respect
• Innovation
• Compassion

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• Physician-led Integrated Delivery System
• Headquartered in La Crosse, WI
• Approximately 6,500 Total Employees
• 475 employed physicians
• 300 employed mid-level
• 325-bed Tertiary Medical Center
• Level II Trauma Center
• 41 Clinic locations
• Gundersen Lutheran Medical Foundation
• Residency and Medical Education Programs
• Clinical Research Program
• Gundersen Lutheran Health Plan
• Provider owned and operated health insurance
  company
• And a variety of affiliate organizations
  including EMS ambulance service, rural hospitals,
  nursing homes, hospice, etc.

Western Campus of the University of Wisconsin
Medical Nursing School
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Our Service Area
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National Recognition

• System-Wide Recognition
• Top 100 Hospitals Five Year Performance
  Improvement Leader Thomson Reuters
• Top 100 Hospital Thomson Reuters
• Top 100 Integrated Healthcare Network Verispan
• HealthGrades Distinguished Hospital Award for
  Clinical Excellence
• Places Gundersen Lutheran in the top 5 of
  hospitals in the nation
• Service-Line Recognition
• HealthGrades Joint Replacement Excellence Award
• 2 years in a row placing Gundersen Lutheran in
  the top 10 nationally
• Top 100 Cardiac Care Thomson Reuters
• National Heart Care Specialty Center designation
  by BCBS
• Norma J. Vinger Center for Breast Care has
  secured every breast-care related accreditation
  offered by the American College of Radiology
  one of only two in the country to do so
• Bariatric Center of Excellence Designation by
  American Society
  for
  Bariatric Surgery
• Certified Primary Stroke Center by AHA/ASA

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Our ENERGY Initiativesand RATIONALE
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National Recognition An Energy Focus

• Practice Green Health Environmental Leadership
  Award
• Federal Department of Energys Hospital Alliance
  Steering Committee
• National Governors Association Building Energy
  Retrofit Program

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Why Should a Healthcare System Think About
Energy / Environment?

• Pollutants from the burning of fossil fuels cause
  cancer, liver disease, kidney disease, and
  reproductive issues.
• According to the D.O.E., hospitals are 2.5 times
  more energy intensive than other commercial
  buildings.
• This is inconsistent with our missionwe are
  responsible for contributing to disease through
  our wasteful consumption.
• Energy costs continue to escalate, making it more
  difficult to provide affordable care.
• Reducing waste results in an improved bottom line.

Source http//www.energy.gov/news2009/7363.htm
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The Cost of Energy
gt350,000 Increase Annually for Gundersen Lutheran
The need for affordable healthcare compels us to
address this trend
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Our Promise

• Gundersen Lutheran is committed to environmental
  stewardship and energy management programs that
  promote a healthy environment for our patients,
  their families, our employees, and the
  communities we serve. We are dedicated to
  solutions that make environmental and economic
  sense, creating a healthier environment and
  lowering healthcare costs.

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Objectives

• Reduce energy consumption and create enough
  renewable energy to provide 100 of the energy
  for our system by 2014.
• Distinguish Gundersen Lutheran and our community
  as a national leader in the development of
  renewable energy sources and energy efficiency
  programs for hospitals and clinics.

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Our Envision Program

• Energy Management
• Energy Efficiency
• 30 reduction vs. 2007 baseline by December 2010
• Renewable Energy
• Plan for 100 renewable production has been
  developed
• Recycling
• Waste Management and Control
• Sustainable Design of New Facilities

Gundersen Lutherans Vision for Energy and
Environmental Stewardship
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Energy Conservation

• Best leverage of resources
• Many conservation measures have paybacks lt 2
  years
• Immediate benefits to gain momentum
• Reduces the amount spent for renewable energy
  supply
• Stewardship gains credibility with stakeholders

20 30 energy reduction can be achieved through
conservation measures
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Metrics Baselines
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Audits Project Lists
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Retrocommissioning
Retrocommissioning examines heating and cooling
systems, lighting systems and employee behavior
to identify opportunities to reduce energy
demand. Low-cost or no-cost Energy Control
Measures (ECMs) are then implemented to improve
efficiency.
Use only the energy you need, when you need it,
where you need itno more.
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Why Do We Need Retrocommissioning?

• Many buildings are never originally commissioned
• Typically a 1 add to project cost
• Life cycle costs of building not well understood
  by owners
• Architect / Engineering firms seek to limit
  project scope
• Minimize complexity and maximize margin for
  engineering time
• Meet customers capital budget and schedule
• Conservative / redundant systems reduce
  engineers risk liability
• Typically there is no customer energy intensity
  goal to meet
• Energy expense reduction is not stated as a
  requirement by owners
• Space use changes with time

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The Value of Commissioning
Several of our newest buildings were our worst
performers
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Project Classification

• Low Cost / No Cost Projects that dont require
  large capital and are truly quick paybacks (lt 1
  or 2 years). An audit will yield many of these
  energy conservation measuresmost will have a
  small impact individually but are substantial as
  a whole (i.e. scheduling of systems). (1st year
  impact was 42 of energy savings)
• Competitive Capital - Large energy conservation
  measures that require substantial capital and are
  justified against other projects in the capital
  budget (i.e. re-lamping, steam trap replacement,
  etc.). (1st year impact was 43 of energy
  savings)
• Opportunistic Infrastructure Replacement -
  Infrastructure replacement projects that are
  completed for other reasons such as a building
  renovation or end-of-life equipment replacement.
  Incremental payback must justify the additional
  investment. These opportunities may offer
  significant energy efficiency benefits if better
  systems are specified (i.e. chiller, boiler,
  system controls, data center upgrade, etc.) (1st
  year impact was 15 of energy savings)

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Validating Results
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Validating Results
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Renewable Energy Supply

• Proven technologies exist today
• Investment mentality
• Expect 5 -15 year paybacks for many projects
• Hedge against inflation
• Highly variable depending upon project specific
  parameters
• Feasibility studies recommended
• Significant tax incentives exist for those who
  qualify
• Renewable Energy Credits add financial value
• Great opportunity to form mutually beneficial
  partnerships

Biomass
Biogas
Wind
Solar
Hydro
We will always need to consume some energy to
fulfill our mission. Clean, renewable sources of
energy can offset this consumption.
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Renewable Energy Project Partnerships (Value
delivered gained)

• Value Gained

• Value Delivered

• Capital Investment
• Technical expertise
• Renewable energy resource
• Tax appetite
• Debt service
• OM staff
• Experience
• Access to external funding
• Project management
• Legal guidance
• Job creation

• Energy revenue
• Renewable Energy Credits (RECs)
• Renewable production tax credits
• Depreciation expense tax benefit
• Grants, loans, incentives
• Lease arrangements for resource
• Operating agreements
• Maintenance agreements
• Renewable fuel payments
• Public relations / marketing
• Technical training access
• Reduced risk / liability

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Power Sale Considerations

• Direct Use
• Utilize electricity or gas directly to support
  operations
• Sell to a partner for their direct use
• Distributed Generation (DG)
• Tariffs established by WI Public Service
  Commission
• Regulated utilities required to pay for energy at
  established rates
• Applicable only to specified technologies and
  sizes
• Non-specified projects can negotiate rates with
  utilities
• Base-load capacity projects have price
  advantage
• Rates change based on ownership of RECs
• Midwest Independent System Operator (MISO)
• Manages Upper Midwest grid
• Arranges for sale of electricity at real-time
  market rate
• Risk and benefits associated with market changes
• Owner retains Renewable Energy Credits

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Energy Neutral(Renewable Supply gt Energy Use
GL Health System Annual Energy Bill 5M
375,000 MMBTU
Natural Gas 2M 220,000 MMBTU
Electricity 3M 155,000 MMBTU
Renewable Supply
Renewable Supply
Biogas 1 2 40,000 MMBTU
Biomass Boiler 150,000 MMBTU
Wind Turbine Sites 1 2 51,180 MMBTU
Conservation
Wind Turbine Sites 3 4 51,180 MMBTU
Retrocommissioning 110,356 MMBTU
High Efficiency Chiller 2,730 MMBTU
City Brewery CHP project 10,236 MMBTU
Blue Complete
Green Underway
Red Not Started
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2009 Status

• Implemented Energy Benefit
• 25 offset through conservation achieved by
  12/31/09
• 10,000,000 kWh
• 40,000,000 cu. ft.
• 1,250,000 annualized benefit

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Grants and Incentives to Help

• Wisconsins Focus on Energy (FOE)
• Prescriptive and custom grants
• May cover 10 - 25 of capital cost based on
  energy savings up to 350K
• American Recovery Reinvestment Act (ARRA)
• Multiple loan and grant programs to assist with
  projects
• 30 U.S. Treasury grant in lieu of tax credit for
  specified projects
• Energy Efficiency Conservation Block Grants
  (EECBG)
• Municipality must be the lead on an application
• WI Office of Energy Independence
• State Energy Program (SEP)
• Low interest clean energy loan program (WI Dept.
  of Commerce)

Blue Gundersen Lutheran experience
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The Financial Case for RENEWABLE Energy
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Quick Financial Facts

• Systems Net Revenue of 790 million
• Operating Expenses of 765 million
• Energy component approx 5 million
• (0.7 of total expenses)
• Operating Margin of 3
• Annual Capital spend 50 to 70 million

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Lowering the Cost of Healthcare

• Everyone is focused on efficiency improvements
  like
• Staffing Patterns FTE management
• Pay raise pools
• Benefit cost curtailments
• Supply cost reductions
• Discretionary spending reductions

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Why the focus on such a minor expense item?

• To offset the 5 million of Energy Costs today
  requires the generation of an additional 167
  million of Net Revenues _at_ 3 Operating Margin
• Energy inflation trends could take the 5 million
  Energy Cost to 10 million cost in just 7 or 8
  years.
• That will require 334 million in new Net Revenue
  at a time when reimbursement trends will be going
  lower not higher.
• Alternatively, an investment now in renewable
  energy sources can be an effective hedge against
  this future escalating operating cost, as well as
  offset the current cost and improve the bottom
  line.

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Our Financial Objectives with Energy

• Produce an amount of renewable energy equal to
  our energy consumption, and offset all of our
  energy costs
• Permanently eliminate 100 of an on going expense
  
• Create an effective hedge against the potential
  for exponential energy inflation

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We are a unique Investor in Energy

• Investors typically fall within one of three
  general groups
• Short-term Developers who build sell, or
  receive a development fee
• Short to Mid-term Investors who are motivated by
  tax benefits ( Accelerated Depreciation,
  Investment Tax Credits, PTCs)
• Long-term Investors who have substantial capital
  and long range ROI expectations (i.e. utility
  companies)
• Gundersen Lutheran does not fit within any of
  these definitions

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Our Situation and Approach

• Situation
• 501(c)(3) tax exempt entity (i.e. minimal tax
  appetite)
• Long-term investor (25 - 30 years minimum)
• Limit on Investment Capital available
• Diversification of Investment Risk by engaging in
  multiple types of renewable projects in multiple
  locations
• Approach
• Find appropriate partners for each project to
  maximize financial benefits
• Utilize a series of LLC entities to provide the
  appropriate corporate structure to meet the
  regulatory requirements

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Challenges for a Non-Profit Organization

• Many government incentives are in the form of tax
  credits which not-for-profits cannot participate
  in
• Cannot enjoy depreciation expense tax benefits on
  capital investments
• Many federal stimulus grants (ARRA) exclude
  not-for-profit organizations
• Hospitals and Universities consume a great deal
  of heat energy which is not incented as strongly
  as electricity projects
• Some competitive grants are focused on large
  scale projects beyond the capacity of smaller
  organizations

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Federal Incentives for Energy

• New Opportunity from ARRA
• Current 30 Treasury Grant
• Shovel ready and started in 2010
• Advantage is immediate cash flow upon completion
  of project
• Restrictions on entities that can qualify
• May be extended or a modified version post 2010
• Previous IRS Tax Code
• Investment Tax Credit (requires substantial long
  term tax appetite)
• Production Tax Credit (requires high production
  facilities tax appetite)

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Corporate Structureto become eligible for
Treasury Grant

• BLOCKER CORPORATION
• GLHS sole shareholder.
• For profit corporation.
• Management of all energy needs for GL.
• Provide legal liability barrier to Health System
• To allow access for Stimulus Grants not available
  to 501(C)(3) organizations.

Partners a) Gundersen Lutheran b) For-profit c)
Educational Institution
Partners a) Gundersen Lutheran b) For-profit

• Potential Partners
• Landfills
• Dairy Farmers
• Paper Mill

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Revenue Stream from Energy

• Selling your Renewable Energy through Power
  Purchase Agreements
• Typical Investor /Developer
• Long term fixed PPA rate that locks in ROI
• Gundersen Lutheran
• Desire adjustable or escalator method to achieve
  perfect hedge with our consumption costs
• Sell on open spot market (MISO)

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Cost of Energy Projects

• Significant Capital Investment
• To achieve our goal of offsetting the 5 million
  in annual energy operating costs, we will need to
  invest on average 5 million per year for 5-8
  years (25 40 million total)
• The capital investment will be recovered over 4-8
  years and provide positive cash flow for the next
  20 years
• There are relatively low ongoing Operating Costs
  once in production

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Competition for Capital

• Medical Technology
• Information System Technology
• Bricks and Mortar
• Versus
• Renewable Energy Capital

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Capital vs. Investment

• We have viewed renewable energy projects as an
  investment in our future sustainability.
• In doing so, we have compared the return on
  renewable energy projects to other investments in
  our portfolio.
• We have a 100 payback expectation for energy
  project ranging within 4 to 8 years (i.e.12
  25 returns)

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In summary

• Energy initiatives can be good for the bottom
  line, as well as being good for the environment.
• We encourage everyone to start with conservation
• (i.e. retrocommissioning you will be amazed at
  the low cost opportunities)
• Regarding Renewable Energy
• Utilize the knowledge resources now available to
  determine if you go beyond just conservation
• Search for the right partners and the right
  projects it will be key to your success.

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• Questions?

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Some Helpful References

• Wisconsin Office of Energy Independence
• http//www.energyindependence.wi.gov
• Wisconsin Focus on Energy
• http//www.focusonenergy.com
• U.S. Department of Energy - Energy Star
• http//www.energystar.gov
• Environmental Protection Agency
• http//www.epa.gov/cleanenergy

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Daryl Applebury, CPA Chief Financial
Officer Gundersen Lutheran Health System E-mail
deappleb_at_gundluth.org Phone [phone]
Daryl Applebury has served as Gundersen Lutheran
Health Systems Chief Financial Officer since
April 2008. He began his career at Gundersen
Lutheran in 1986 as the organizations
Controller, and in 2004 became the Executive
Director of Finance. During his 24 years with
Gundersen Lutheran , Daryl has been involved in
the creation of the Gundersen Lutheran Health
Plan, several corporate restructurings including
the merger of Gundersen Clinic, Ltd., and
Gundersen Lutheran Medical Center and the merger
that resulted in Gundersen Lutheran Medical
Foundation. Prior to joining Gundersen Lutheran
in 1986, Daryl held the position of a manager
with a regional Wisconsin certified public
accounting firm. He graduated from the University
of WisconsinEau Claire in 1980 with a Bachelor
of Arts degree in Accounting, and attained his
certified public accounting license in 1983. He
is currently a member of the American Institute
of Certified Public Accountants, Wisconsin
Institute of Certified Public Accountants,
Medical Group Management Association, Healthcare
Financial Management Association . Daryl
currently is member of the Board of Directors of
the Boys Girls Club of Greater La Crosse ,
serving as Treasurer.
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Jeff Rich Executive Director Major Projects and
Efficiency Improvement Gundersen Lutheran Health
System E-mail jjrich_at_gundluth.org Phone (608)
775-6970 Executive assistant Jean Hougom, (608)
775-6329
Jeff Rich joined Gundersen Lutheran Health System
in October 2006 to lead the department of Major
Projects and Efficiency Improvement. As the
executive director, his major responsibilities
include project identification, project delivery
and coaching of project leaders on process
improvement. Jeff facilitates project reviews and
helps manage the project portfolio to achieve
Gundersen Lutherans strategic and operational
goals. In this work, Jeff utilizes Lean-Six Sigma
tools and partners with other leaders to direct
change. Jeff was previously employed as the
director of Customer Satisfaction and Six Sigma
for Tranes Global Marketing Division. During his
10-year career with Trane, he also held a variety
of quality engineering, Lean-Six Sigma
and engineering management positions. Jeff was
also employed for six years with the John Deere
Waterloo Works Drive Train Division as an
industrial engineer and quality engineer. Jeff
holds a Bachelor of Science in Mechanical
Engineering and is a certified Lean-Six Sigma
black belt and master black belt. He is also a
senior member of the American Society for Quality
(ASQ) and an ASQ-certified quality engineer.