Friday, October 18, 2013

Was McKinstry deal a financial bargain?

District claims energy savings will continue for 25 years

Express Staff Writer

    With a settlement now in place between the Blaine County School District and its energy contractor McKinstry Essention, the district is asserting that it received $20 million in facility improvements for only $5 million.
    The $20 million doesn’t include some $2.3 million in legal expenses incurred by the district, but district officials claim that even that amount will be offset by future work that McKinstry has agreed to do without charge and by reduced operation and maintenance costs for the new heating, cooling and ventilating systems installed under the McKinstry contract.
    The settlement, ending litigation between the parties that started in May 2012, was announced by the district and McKinstry in a joint press release Tuesday. The major provisions of the agreement were that McKinstry dropped a claim for $7 million against the district and the district dropped a counterclaim of at least $18.6 million in damages against McKinstry.
    The original contract between the parties was entered into in spring 2010. The contract, priced at $15.16 million, provided for development of geothermal resources and replacement of HVAC systems at eight district schools and facilities.
    Later that year, the district approved change orders worth $3.5 million, bringing the total authorized contract price to just over $18.6 million. The change orders were mainly non-energy related but the district decided it would be cheaper to do them while ceilings and other facility structures were torn apart for the HVAC work.
    The change orders included work for new lighting and fire suppression sprinkler systems, drop ceilings, occupancy sensors, catwalks and kitchen additions or upgrades. The improvements varied from facility to facility.
    The district incurred another $700,000 in expenses when it paid local subcontractors who had been hired by McKinstry but had gone without payment when the dispute between the district and McKinstry started in late 2011. District officials had earlier hoped for repayment of that money by McKinstry, but repayment was not included in the settlement agreement.
    The final expense, bringing the final cost to about $20 million, was a provision of the settlement agreement for a district payment to McKinstry of $665,612. In an interview this week, district Business Manager Mike Chatterton said the payment was for “justifiable” billings for McKinstry work performed in excess of the district authorized amount.
    Of the $20 million worth of facility improvements, $5 million was paid by a grant from the U.S. Department of Energy. In addition, the district anticipates receiving a total of $500,000 in incentive rebates from Idaho Power.
    The remaining $9.5 million value of the contract comes from guaranteed energy savings from the new systems installed under the McKinstry contract, although some of the savings won’t be realized for another 25 years. The guaranteed energy savings, a provision of the settlement agreement, provides that if projected energy savings, calculated every five years, are not met, then McKinstry will pay the district the difference.
    School Trustee Kathryn Graves summed up the district position on the McKinstry settlement in a press release the district issued on Tuesday.
    “This is an excellent outcome for the citizens of Blaine County,” Graves stated. “At the end of the day, we spent approximately $5 million and received approximately $20 million worth of improvements.”
    The new systems at the eight district schools and facilities rely on “heat pump technology,” wherein heat energy taken from groundwater is used for heating, cooling and ventilating.
    “The district had several schools with old, aging heating systems that had to be replaced,” district Vice Chair Shawn Bennion stated in the press release. “They now have been replaced with green technology for a fraction of the cost.”
Legal Expenses
    Chatterton said this week that the district has spent thus far about $2.3 million in legal fees in the McKinstry litigation and that there may be additional attorney expenses while legal matters are wrapped up in the lawsuit.
    Some of that expense will be offset by $800,000 that McKinstry agreed to pay the district as part of the settlement. Chatterton explained that additional offsets for legal expenses, totaling $1,938,000, will be realized in work that McKinstry has agreed to do without charge and in reduced operations and maintenance costs.
    He said McKinstry has agreed to finish installing “knowledge response centers,” complete with educational kiosks, that will be used by students to understand how the geothermal technology is working and to provide real-time information on energy savings with the new systems compared to the old. Chatterton said the value of that work, which was contracted for but not finished after the dispute erupted with McKinstry, is $525,000.
    McKinstry has also agreed to have one of its engineers review the new systems and make sure they are functioning properly. Chatterton said the value of that review is $5,000.
    He said the district will realize $1,167,000 from “measurement and verification costs” that McKinstry has agreed to do over the next 25 years.
    The final savings that Chatterton said will offset legal expenses is an estimated savings of $241,000 from operations and maintenance of the new systems over the next 25 years.
Terry Smith:

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