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Alternative Financing: Will your lender buy in to alternative fuel?

Posted: February 2, 2018 by Eric Berard

Lenders will likely want more details if you’re investing in alternative-fueled vehicles. (Emterra image)

MONTREAL, QC — Trucks that run on alternative fuels promise to be easier on the environment, but the equipment itself can be tougher on a capital budget. Consider natural gas. It’s historically cheaper than diesel, but the trucks that use it can cost an extra $50,000 to $100,000 over the price of their conventionally fueled counterparts, depending on the spec’s.

Some provinces have come forward with financial incentives to offset the differences, of course. Quebec offers up to $30,000, and Ontario will cover up to 30% of incremental equipment costs. But the difference needs to be made up somewhere, and those who offer the financing tend to demand a thorough business case before giving their OK to a deal.

Such business plans can require information on fuel economy, the availability of fuel along traveled routes, and the access to the people and facilities that service all the related equipment. Essentially, lenders want to be assured there will be enough money left over to make the payments.

Nicolas Lessard, regional sales leader for Eastern Canada at Wells Fargo Equipment Finance, recommends sharing other data such as comparable operating costs, such as the savings that can be realized without needing to maintain Diesel Particulate Filters or other aftertreatment systems included with a diesel engine. So, too, do fleets need to carefully consider the costs of training and licensing maintenance staff, or adapting service bays.

Drew Cullen, Penske Truck Leasing’s senior vice president – fuels and facility services, advocates full-service leases when switching to alternative-fueled vehicles. “Anytime there are significant changes in a vehicle, there is a learning curve regarding maintenance, residual values, and diagnostics,” he warns.

Do your homework

Vedder Transportation has invested in LNG.

Fred Zweep, president of Abbotsford, B.C.-based Vedder Transportation Group, prepared an in-depth presentation for HSBC and Canadian Western Bank when financing the 66 Liquefied Natural Gas (LNG) tractors that account for almost 20% of the fleet’s power units.

“Because we have a solid balance sheet and business plan, we had no issue securing financing with our traditional financial institutions,” Zweep says.

Part of the business plan involved showing how the fleet could help a customer improve the tonnage per mile while also reducing the size of its carbon footprint.

“The added value that we were able to bring to our customer was greater payload. We’ve taken eight of those tractors and we modified them from a tandem-axle tractor into a tri-drive tractor. We determined that we would be able to offer them a 4.5-metric tonne increase in payload per load,” he says.

Vedder even gave lenders a comparative study showing the gap between diesel and natural gas prices over a 40-year period.

There are consultants who specialize in preparing such business plans, says Bruce Winchester, executive director of the Canadian Natural Gas Vehicle Alliance. And he stresses that there is a business case to be made.

“It’s a calculated risk, but it’s also a risk that could generate a significant return for [lenders] if they understand the technologies and the markets correctly, and create and put together financial products that work well for potential borrowers,” he says.

Government support has its own role to play. “Regulatory certainty and knowledge can be an important factor in raising capital for any company,” Winchester says.

Paulina Leung, vice president – corporate strategy and business development at Emterra — a waste management fleet that powers 35% of its 550 trucks with Compressed Natural Gas — believes fleets have a responsibility to educate lenders about the advantages.

“It’s our job to educate our financiers. It’s kind of our responsibility to help the banks understand what the risks are and what the business is gonna do to mitigate that risk,” she says.

Ultimately, Wells Fargo’s Lessard believes a higher volume of alternative-fueled vehicles will make it easier to finance the equipment. If we have a higher demand, it will drive higher data and a wider open market for reselling of these trucks,” he says.

Ian Loveless, vice president – Daimler Truck Financial Canada, agrees that small volumes can be a head scratcher. “Understanding the long-term demand and impact on the secondary market is key to developing a comfort level with financing these newer, emerging products.”

EBI of Berthierville, Quebec, developed its own leasing program for Compressed Natural Gas trucks to establish customers for the natural gas generated at its landfill site.

The company’s “try it for free, then lease it if you’re convinced” initiative proved to be a good fit for select customers in that province. Now Olivier Sylvestre, manager of natural gas transportation development, is eyeing Ontario markets supported through the provincial Green Commercial Vehicle Program for natural gas equipment.

Depreciation

One of the biggest challenges in financing alternative-fueled equipment comes in determining depreciation. Canada Revenue Agency applies the same depreciation calculation on natural gas and diesel trucks, through the 40% Capital Cost Allowance, the regulators told Today’s Trucking. The market interest in used versions of the trucks is another question altogether.

Zweep remains optimistic about the residual value of his trucks that run on LNG.

“I actually do see an opportunity for demand on the secondary market, particularly at the port of Vancouver,” he says, adding that Vedder has a “Plan B” thanks to its used truck division. “People may not want to operate them as natural gas pieces of equipment, and we’re Ok with that. If you don’t want to, we’ll drop a used diesel engine in it for you at a cost of X, dollars and then we’ll be able to turn around and sell that vehicle off,” he explains.

Ports could increasingly be an option for alternative-fueled vehicles, says Carl Crechiolo, vice president – credit and collections at RCAP Leasing, a subsidiary of RBC. “Trucks sitting idle at a port for most of the day waiting to load or unload thus causing too much harmful emissions are frowned upon.”

As for energy distributors anxious to sign long-term supply agreements for the fuel? It might be worth asking if they are willing to guarantee a residual value for the equipment when it comes time to sign a deal.

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BYD

Financing electric avenues

Emerging suppliers of electric vehicles say they’re ready with financing options for their equipment.

BYD’s Andy Swanton, vice president of sales — electric trucks, says his company offers a range of purchase options, from upfront purchase agreements to full-service leases, with leases covering all or part of the equipment value.

“Depending on the credit rating of the customer, the size of the prospective order, and the complexity of the agreement, BYD will either finance the agreement directly or work with one of our financing partners,” explains Swanton. He won’t disclose who those partners are, but stresses they “have a particular focus on the clean transportation sector.”

Nikola Motor, meanwhile, has established a partner with Ryder System to help with the financing model.

“With over 800 locations, it made sense to work with just one dealer rather than hundreds of dealers across the country,” says founder and Chief Executive Officer Trevor Milton. He expects most of his customers to lease instead of buy, mainly for tax reasons, and says Canadians are among his financing partners.

“It is hard to get financing for new trucks until truck values are determined. This is why Nikola has gone the leasing route. It allowed us to guarantee a value at the end for financing companies,” he says. “It will take time, but we have a few banks already lined up for financing them according to our business model.”

Milton believes a guaranteed price of hydrogen – the fuel used to power electric motors in Nikola trucks – should reassure lenders, “knowing that fleets and customers will be able to make more money and are more likely to pay their bill.”

Tesla declined to comment on financing options that will be available for its recently unveiled Tesla Semi.

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