Request for Decision

Biosolids Project

Presented To: City Council

Presented: Tuesday, Nov 20, 2012

Report Date Thursday, Nov 15, 2012

Type: Presentations

Recommendation That Council authorize the General Manager of InfrastructureServices to enter into an agreement with N-VIRO SYSTEMSCANADA LP (“N-Viro”) or a corporate entity owned or controlledby N-Viro for the Design, Build, Finance, Operation andMaintenance (“DBFOM”) for the Biosolids Management Facilitysuch authority being subject to the following conditions which areto be met to the satisfaction of the City and within appropriatetimelines as set by the City:

1)N-Viro providing evidence of fully committed financing and anupdated financing plan for the project; and, 2)N-Viro executingthe Project Agreement in substantially the same form ascurrently finalized and for the amounts submitted.

Finance Implications The 2013 wastewater budget includes an allocation of $2.2 million for the Biosolids Facility. As forecastedin the WWW Financial Plan, a further budget increase was anticipated to support the operations andmaintenance of the facility. Based on the proposed price and factoring in 25% funding from PPP Canada, awastewater budget increase of $4 million is required to fund the annual debt repayments and operatingcosts. Staff will be recommending that this increase be phased in from 2013 to 2015 during the 2013 WWWbudget deliberations.

Background

For the past 30 years, the City has disposed of its activated sludge in the Vale tailings ponds in Lively. Thispractice has resulted in odour issues in recent years. Both the Ministry of Environment and Vale haveadvised the City that this disposal practice is no longer acceptable. The City commenced a Biosolids Master Plan in 2008 and the report was finalized in February of 2009. Thereport recommended the construction of a Biosolids Management Facility at the Sudbury WastewaterTreatment Plant that would receive and process activated sludge from the nine City owned and operated

Signed By

Report Prepared ByAkli Ben-Anteur, P.Eng.Project Engineer Digitally Signed Nov 15, 12

Recommended by the DepartmentTony Cecutti, P.Eng., FECGeneral Manager of InfrastructureServices Digitally Signed Nov 15, 12

Recommended by the C.A.O.Doug Nadorozny Chief Administrative Officer Digitally Signed Nov 15, 12

wastewater treatment plants. This environmentally friendly facility would convert the sludge to a beneficialend use product. The City’s Biosolids Master Plan was presented to Council on February 18, 2009. As part of the Plan’sdevelopment, the City undertook an extensive public consultation process. The City completed a Request for Statement of Interest and an Expression of Interest (EOI) in 2010. Theevaluation of the EOI resulted in four consortia being qualified and approved to participate in the Requestfor Proposal process:

·        Graham Design Builders; LystekTM·        Kenaidan Contracting Ltd/CH2M Hill; BiosetTM·        Maple Reinders/Veolia Water Solutions and Technologies; BioconTM·        N-Viro Systems Canada LP; N-ViroTM

In January 2011, Council adopted a design, build, finance, operate and maintain P3 project delivery model,whereby the selected consortium would finance the entire project cost during construction and provide aportion of the long-term (20 year) project financing. The consortium would also be responsible for theoperation and maintenance of the biosolids facility over a 20 year period. This project represents the firstP3 biosolids management project in Canada and one of the early P3 projects in the Canadian municipalsector. On March 14, 2011, a Request for Proposal for a City of Greater Sudbury Biosolids Facility was issued tothe four consortia listed above. The process was overseen by a Fairness Monitor from Knowles Consulting. Proposals were received on January 27, 2012 from the following Proponents: N-Viro and Veolia (withPlenary Group who had joined their consortium).   Both proponents submitted strong technical proposals butprocurement irregularities resulted in a determination by the City that both proposals were non-compliant.

With the proposals submitted in January of 2012, it became evident that the project costs were higherthan previous estimates. Resulting analysis of these increased costs can be explained by:

• Original estimates were based on very preliminary design criteria at the Statement of Interest phase.

• Difficulty of estimating costs when proprietary technologies are involved;

• Site specific construction constraints;

• Odour control costs were not included in original estimates;

• Costs escalation due to elapsed time.

In order to maximize the time and effort spent on the Request for Proposal and prior processes, Councildirected staff to enter into negotiations with both parties to arrive at the best solution for the City. Theobjectives of the negotiation process were to review the scope of the project, to resolve contract terms andconditions and to reduce the capital and operating costs for the project. Following a period of negotiations,final submissions were received on October 9, 2012 from N-Viro and Veolia/Plenary Group.

Biosolids Project Team

The Project Sponsors were the CAO, CFO/Treasurer and General Manager of Infrastructure Services.

The Biosolids Project Team was comprised of Akli Ben-Anteur (Project Manager), Paddy Buchanan andEric Labelle from the City. Staff was assisted by industry experts from RV Anderson Associates Limited(RVA), KPMG and Blake, Cassels & Graydon LLP. Evaluation Teams Independent evaluation teams undertook the evaluation of the final negotiations submissions. The teamswere comprised of the following individuals: Financial Evaluation Team:

•        Paddy Buchanan (Lead) (City) •        Ed Stankiewicz (City)•        Paul Lan (KPMG)

Technical Evaluation Team:

•        Akli Ben-Anteur(Lead) (City)•        Kevin Shaw (City)•        Nick Benkovich (City)•        Shawn Scott (RVA)•        Chris George (RVA)

Risk Management Team

•        Eric Labelle (Lead)(City)•        Akli Ben-Anteur (City)•        Paddy Buchanan (City)

Evaluation Criteria Submission requirements and evaluation criteria were developed to assess and evaluate the finalnegotiations submissions. The criteria are divided into three categories: technical, financial and riskallocation and e ach of these categories were further broken down into detailed evaluation criteria. Theweighting assigned to the criteria was heavily weighted towards price because both parties had alreadydemonstrated strong technical abilities to meet the City’s requirements for the project in previoussubmissions. The following Table 1 summarizes the evaluation criteria and total points allocated. Table 1: Evaluation Criteria

Criteria Maximum PointsTechnical solution andadherence to OutputSpecifications andOperating &Maintenancerequirements

800

Acceptance of risk sharing asspecified in the ProjectAgreement

300

Financial Plan 400Financial Offer (Based on NetPresent Value)

2500

Total Score 4000

Results In relation to the objectives stated above the negotiation process has resulted in some minor scopereductions, resolution of outstanding contract terms and conditions and a reduction in both the capital andoperating costs from the original submission. Based on the evaluation matrix (Table 1), N-Viro is the highest scoring consortium with 3468.4 points. N-Viro’s submission has the lowest price. N-Viro has submitted a strong technical proposal that effectivelymeets the City’s requirements. N-Viro is a Canadian owned company that has designed, constructed and/or operated biosolids processingfacilities in Sarnia, Leamington and Niagara Region in Ontario; as well as in Halifax and Summerside, PEI. N-Viro has a proven biosolids management technology that produces a beneficial end use product. To undertake this project, N-Viro has put together the following team:

·        N-Viro Systems Canada, LP is the lead company coordinating the project and thetechnology provider for the Biosolids Facility.·        PMX Inc. will assist with overall project management.·        A joint venture of Tribury Matheson Group and W.S. Nichols is the constructor of theBiosolids Facility.·        Cole Engineering Group is the engineering firm for the project. Cole will be assisted byRWDI Air Inc. to complete the air and noise project requirements.

N-Viro’s proposal provides committed financing for 60% of the lump sum construction price. N-Viro alsohas a letter of interest from a major funding institution to provide the remaining construction financing andthe long term financing. Committed financing means that the lenders and equity financiers have conductedengineering and financial due diligence, as well as a review of the terms and conditions of the draft ProjectAgreement and have entered into term sheets to finance the project. This work still needs to be completedfor the lenders who are not yet committed to N-Viro. Although the City indicated its preference for fullycommitted financing in its submission requirements, it was not a mandatory requirement. Before final Project Agreement execution, N-Viro will be required to convert the letter of interest intocommitted construction financing and long term financing, submit an updated financing plan that issatisfactory to the City and agree to enter into the Project Agreement in substantially the same form asestablished through the negotiations process. Project Agreement The City and Contractor will enter into a project agreement that sets out the responsibilities of all partiesduring the construction period and for the 20 year concession period of the project. Important parts of thisProject Agreement are the terms that provide for an acceptable allocation of risks between the City andContractor. The following sets out some of the key risks that have been transferred to the Contractor.

The Contractor bears the risk of any construction costs above the Project Agreement price.

The Contractor does not receive any payment until completion of construction and commissioning hasbeen achieved. At that point, the Contractor receives 75% of its capital costs and the remaining 25%is repaid over 20 years. Should the Contractor default during the operating period the City will retain25% of the remaining capital outstanding. Hence, capital is at risk by the Contractor throughout theterm of the Project Agreement.

The Contractor agrees to have the Biosolids Facility and related improvements to the existing Cityinfrastructure available within 24 months following execution of the Project Agreement or receivereduced payments and be responsible for the disposal of sludge from that date. The Contractor hasto manage the construction schedule to meet this date.

The Contractor is responsible for obtaining and complying with the Environmental ComplianceApproval (Sewage / Air &Noise) for the Biosolids Facility. The Contractor is assuming any schedulerisks of not being able to obtain the necessary permits, licenses and approvals on time which arerequired for the performance of the Project Agreement.

For the period between submission of final negotiations submissions and signing the ProjectAgreement, the City is sharing the risk of changes in base borrowing rates with the Contractor. TheContractor is to arrange for partial financing for the whole term of the Project Agreement and is solelyresponsible for the impact of the financing arrangements. No matter how much interest rates increaseduring the term of the Project Agreement, the increase in financing costs is the responsibility of theContractor.

The Contractor is paid monthly for the operation of the Biosolids Facility based on a pre-definedpayment for the quantity of sludge processed, therefore the Contractor absorbs any increasedoperating and maintenance costs above the contract price.

The Contractor is responsible for producing Class A Biosolids and will receive reducedoperating payments if not achieved as a result of their processes.

·        The Contractor is responsible for maintaining pre-defined odour limits from the Biosolids Facilityand will receive reduced operating payments if these limits are not achieved. ·        The Contractor is responsible during the term of the contract to maintain the facility andequipment in accordance with industry standards. The Contractor is required to submit to the City anannual Maintenance and Asset Management Plan as well as monthly and annual Operations andMaintenance Reports. The Project Agreement has provisions to withhold payments if the Contractordoes not maintain the facility and building in accordance to these plans and industry standards. ·        The Contractor is required to hand back the Biosolids Facility in good operating order andmeeting the asset condition requirements set out in the project agreement and the third party willbe engaged four years prior to the end of the operating term to inspect to the Biosolids Facility. Ifthe third party inspection determines that there are deficiencies in the Biosolids Facility,the Contractor is required to provide a Handover Holdback to the City in an amount equal to theestimated cost to remedy those deficiencies. Finance Implications

As previously disclosed to Council, the Biosolids Facility capital costs will be funded by a contribution fromPPP Canada, and the balance will be debt financed by the City and the Contractor.

PPP Canada, and the balance will be debt financed by the City and the Contractor. Construction Payment The lump sum construction price for the Biosolids Facility and the required improvements to the existinginfrastructure is $61,954,014 excluding HST. Construction financing is provided by the contractor to theend of construction. In addition, the contractor will finance 25% of the lump sum price over the 20 yearconcession period. The City will externally debt finance 75% of the lump sum price (less PPP Canada’scontribution). A recommendation to Council with details of City external debt financing will beforthcoming. Operating Payment The operating payment in year one of the contract is projected to be $2,801,200 (the actual payment will bebased on the amount of sludge processed) and each year thereafter will be adjusted for inflation and theactual quantity of sludge processed in accordance with the Project Agreement. Budget Impact

The proposed price requires debt repayment and estimated operating costs totaling approximately $6.2million per annum. In prior budget deliberations, Council approved an allocation of $2.2 million from thewastewater capital envelope to fund the annual debt repayments. As forecasted in the WWW FinancialPlan, a further budget increase was anticipated to support the operations and maintenance of the facility. Based on the proposed price and 25% funding from PPP Canada, a wastewater budget increase ofapproximately $4 million is required to fund the annual debt repayments and operating costs. Staff will berecommending during the 2013 WWW budget deliberations that this increase be phased in from 2013 to2015.

PPP Canada Funding

PPP Canada has committed funding of $11 million and staff continues to negotiate with PPP Canada tosecure full funding of 25% of the final construction costs. PPP Canada funding is subject to demonstratingthat the public/private partnership (P3) model for the project has value for money and the N-Viro submissionpresents value for money of approximately $16 million over the 20 year term.

Conclusion

It is therefore recommended:

That Council authorize the General Manager of Infrastructure Services to enter into an agreement withN-VIRO SYSTEMS CANADA LP (“N-Viro”) or a corporate entity owned or controlled by N-Viro for theDesign, Build, Finance, Operation and Maintenance (“DBFOM”) for the Biosolids Management Facility suchauthority being subject to the following conditions which are to be met to the satisfaction of the City andwithin appropriate timelines as set by the City:

1)      N-Viro providing evidence of fully committed financing and an updated financing plan for theproject; and,2) N-Viro executing the Project Agreement in substantially the same form as currently finalized andfor the amounts submitted.

Next Steps

Upon approval of this recommendation, staff will inform N-Viro of items that must be resolved before ProjectAgreement execution scheduled for early in the New Year. Once the Project Agreement is executedconstruction is expected to be completed within 24 months.