Upgrade your operation through performance contracting.

Foundries are slowly discovering how performance contracting can help them install cost-saving equipment at little or no expense.

It happens all the time. Because finances are tight, management is leery about investing in newer equipment or technologies. Or maybe a large investment in non-production-related equipment such as a sand reclamation unit is seen as "non-essential." Whatever the reason, the trend is to maintain the status quo. If it's not broken don't fix it, right? Well, according to some foundries and industry suppliers, this mindset could end up as a drain on your balance sheet. In some cases, newer equipment can provide substantial savings - money you would never see with inefficient systems. So how can you balance immediate expenditures against future savings? Take a look at performance contracting, in which your foundry can install modern equipment while someone else picks up the capital investment.

The idea behind performance contracting is a simple one: installing new, efficient equipment will generate savings, and those savings can be used to pay for the procurement and installation of the equipment. A foundry interested in pursuing a performance contract either has to find a supplier willing to provide the equipment or an energy service company (ESCO) willing to make the initial investment. Once a foundry begins to see savings from the new equipment, a percentage of that savings is used to repay the investment. Each contract is tailored to a foundry's specific needs and may cover installation of a machine, maintenance, training and cost-saving guarantees. Thermal sand reclamation units, advanced mixers, heat-treating ovens, scrap preheaters and other equipment that has the potential for increased efficiency and cost savings can be performance contracted.

The Idea in Action

The performance-contracting concept took off in the 1970s as a means for institutions such as hospitals and universities to install environmental and energy systems without incurring debt. Even though the idea goes back 20 years, foundry management and suppliers are just beginning to realize its potential.

Within the past two years, a number of companies such as Minergy Corp., Union Energy and GMD Services, Inc., have started to offer performance contracting for foundry-related equipment. Thus far, businesses have focused on thermal sand reclamation units because they offer the best opportunity for big savings.

"The biggest reason to go with performance contracting is that a foundry can avoid costs for maintenance or expertise that they may not have in-house," said Bill Jahnke, manager of engineering at Minergy Corp., Milwaukee, a division of Wisconsin Energy. Minergy's first foray into performance contracting was at Mid-City Foundry Co., Milwaukee, in March of 1996. Mid-City is a 100-employee plant that produces gray and ductile iron castings in chemically bonded molds. Minergy installed a Gudgeon Brothers unit for thermal sand reclamation at the plant, as well as sand transportation and handling equipment. The sand reclamation unit processes from 8000-9000 tons of sand per year. Minergy engineered the entire processing system and maintains the equipment as part of a 10-year contract with Mid-City [ILLUSTRATION FOR FIGURE 1 OMITTED]. At the conclusion of the contract, the foundry has an opportunity to renegotiate, opting either to buy the machine or continue the service portion of the deal.

Under the agreement, Mid-City provides Minergy with its spent sand to be processed. Minergy then becomes a sand supplier of sorts, selling the processed sand back to Mid-City at a reduced price. Even though Mid-City does not maintain the unit, management has the opportunity to monitor the entire process, including tonnage used and sand transportation efficiency throughout the foundry, from a central computer. (See Sand Management Systems sidebar.)

"You're buying a product and you're getting a very good price," said Mid-City plant manager Scott Heatwole. "You're also not paying disposal and transportation costs. It makes good economic sense."

Heatwole said that his foundry decided to contract the equipment because his workers didn't have the expertise to maintain it themselves. He added that it would be more expensive to train and keep workers specifically for the reclamation system than it is to outsource the operation. It's also a "big plus" to have set prices for sand and guaranteed savings, he said.

Minergy recently installed a thermal reclamation unit at another Milwaukee-area foundry, and Jahnke said that he thinks other foundries will follow suit.

Marketing the Concept

Union Energy, a company launched by Westcoast Energy, Inc., began marketing the idea of performance contracting to Canadian foundries about a year and a half ago. "The word is out in Canada, but we just started marketing in the U.S.," Union Energy Program Leader Darryl Stewart said, stressing that because Canada is a smaller market, it was a good place for his company to get its "feet wet."

"It's been a bit of a struggle at first trying to get people to understand why we do this," D. Stewart said, adding that many foundries are skeptical when first presented with the concept. "We've been more successful with corporate foundries which understand finance," he said. "A contract more than offsets the cost of waste or inefficiency."

Last November, Union installed a thermal reclamation unit at Integra Castings, a 115-employee plant in Winkler, Manitoba, Canada, that produces gray and ductile iron castings in chemically bonded molds. The Vulcan/Richards Engineering unit can process 15,000 tons per year. As part of the 10-year agreement, Integra has the option to purchase the machine outright at any time.

For the first 6000 tons of reclaimed sand per year, Union charges about 60% of what Integra was paying for its new sand, including transportation and disposal costs. For each additional ton, Integra pays about 15% of what it used to pay.

The arrangement also has cut costs by providing a significant benefit in the cleaning room, according to Integra Vice President Rick Bell. He said that the pre-expanded silica sand eliminates burn-in and, because the molten metal does not penetrate between the sand grains, Integra has been producing better-quality castings.

Union's second project involved the installation of a Gudgeon Brothers thermal reclamation unit at GL&V Process Equipment Group, Orillia, Ontario, Canada, in March. GL&V has 280 employees and produces gray and ductile iron castings with chemically bonded and green sand molds. The Gudgeon unit can process 9000 tons per year.

In addition, A.G. Anderson Ltd., a plant in Ontario, Canada, which produces gray and ductile iron castings in chemically bonded molds, has signed a letter of intent with Union, and a number of other contracts are in the works.

"I'm surprised it hasn't been more widely accepted," Jahnke said. He surmised that one reason for the luke-warm response could be that smaller foundries tend to "shy away" from the longer-term contracts associated with performance contracting. "And larger foundries can upgrade systems on their own," he said.

Michael S. Didion, president of Didion International, St. Peters, Missouri, said that his company has offered performance contracting for its rotary sand reclamation units and rotary media drums since 1988. However, upon cost investigations, foundry managers have opted to purchase the equipment, and the firm is yet to be taken up on its performance-contracting options.

Companies that offer performance contracting must be willing to negotiate a deal that is attractive to foundry management, according to Didion. "We're willing to split the savings because they are so lucrative," he said. "I think that it's a great concept, but it has to work for both parties."

Scott Turner, sales manager for GMD Services, Inc., Ft. Worth, Texas, said that his company pursued the concept one year ago but as of yet it has not gotten any foundries to take advantage of the idea either.

"There is a big potential for savings," Turner said. "In the past, all of the foundries thought sand reclamation was a good idea, but many couldn't find the budget for it."

In negotiating a contract, Turner's company approaches the deal by looking at GMD's own projected cost rather than a foundry's potential savings. Turner said that he feels once foundries see that they get to keep more of the savings themselves, they will be more comfortable with the arrangement.

Typical Contract

Foundries can look at performance contracting as "one stop shopping," according to Gerdi Stewart, Pursuit Communications, a consultant for Union Energy. A foundry deals only with the ESCO, which is responsible for procuring the equipment, contracting with sub-trades and managing the overall project. "This is seen as a great financing option," G. Stewart said. "But the entity of performance contracting is much more than financing - it's a complete package."

Even though many items are open to negotiation, G. Stewart said the "typical" contract involves the following stages:

1. Preliminary Analysis: The process begins with an initial inspection of a facility to identify any cost-saving opportunities. This analysis is usually completed without any obligation by either party.

2. Intent to Proceed: The ESCO recommends modifications and estimates savings and project costs. At this point, the facility may choose to proceed with a more detailed analysis or to cease all negotiations without incurring any costs.

3. Detailed Analysis and Execution of Contract: Upon agreement to proceed, the ESCO completes a more thorough analysis and prepares the final calculations to be included in the service contract. Once again, the facility has the option to accept the contract or to cease all negotiations and pay a preset fee for the detailed analysis.

4. Installation and Commissioning of Equipment: Signing of the contract is followed by the procurement and installation of all necessary equipment by the ESCO. Everything from arranging the delivery of the equipment and hiring contractors to the final commissioning of the system is managed by the ESCO.

5. Training of Operating Personnel: Once the equipment is installed, the ESCO trains key operating personnel on its proper use and daily maintenance. This is meant to ensure that the equipment will operate at maximum efficiency and will produce the anticipated savings.

6. Technical Support and System Monitoring: Throughout the term of the contract the ESCO provides technical support and, depending on the contract, may be responsible for any troubleshooting or repairs. In addition, the ESCO monitors the equipment to ensure it is operating as efficiently as possible [ILLUSTRATION FOR FIGURES 2 AND 3 OMITTED].

Financing

The ESCO can arrange for financing or an external lender can provide money for the investment. Foundries also must decide how to pay off the contract, deciding the best way to use the savings. The ESCO may receive all of the savings (until project costs are paid) or a monthly fee for service. Foundry management may decide to extend a contract because it profits more from the maintenance agreement than it would in actually owning the equipment and operating it themselves.

An advantage to performance contracting a piece of equipment is that it is not as dependent on a healthy economy. Foundries that invest their own capital in new machines rely on increasing customer demand to help recoup their investments. If the bottom drops out on the casting market, they could be hard pressed to justify the outlay. On the other hand, foundries that contract their equipment would just buy less sand. They don't have to depend as heavily on demand.

In addition, borrowing capacity can be a sensitive issue for those foundries who pursue performance contracting. Naturally, if a foundry has the available capital to modernize on its own, management would opt to make the investment and keep all of the savings. Performance contracts are meant to help those businesses that can't afford to upgrade and those companies that would rather outsource these types of services. Foundry management may opt to list the project as an off-balance sheet arrangement on financial statements so that the contract is not seen as a "debt."

Longer-term performance contracts are easier to place off balance sheet, according to D. Stewart. "Foundries are capital-intensive - management has to be aware of how to sign a contract," he said. "They have to make sure that it's set up in a way that doesn't affect the foundry's ability to borrow."

Picking an ESCO

Probably the most important element of a performance contract is the ESCO itself, according to D. Stewart. Because the ESCO assumes responsibility for the performance of the equipment and is paid according to the guaranteed savings, the ESCO must be able to fulfill its promises. ESCOs must have a lot of technical expertise to be able to find the best possible technology for your foundry, calculate savings and operate the equipment at peak efficiency.

You should consider financial stability, qualifications of key personnel and overall track record of a firm, G. Stewart said, stressing that you should check references and familiarize yourself with the equipment a contractor recommends.

"The key ingredient is to have a good partner - they have to have the same sense of urgency to provide the product in a timely manner," Heatwole said, adding that is important to contract with someone who understands priorities.

RELATED ARTICLE: SAND MANAGEMENT SYSTEMS

Even though a foundry does not maintain or operate a performance-contracted sand reclamation system, it is still important for management to have an accurate method of tracking the foundry's sand use and supply. Minergy and Union Energy have developed sand management systems that automatically monitor the movement and storage of sand.

Minergy's system taps into the controls of the foundry's sand transporters and calculates the amount of sand that is transported. The system then reports on the amount of sand used in various processes in the past hour, week and month [ILLUSTRATION OMITTED].

The system also uses continuous sand level probes in silos and hoppers to monitor stored sand. The levels are tracked and plotted on time-based charts, which enable management to determine when to order sand, when to shift personnel and how efficiently operations are running.

The Minergy system also monitor dust collector readings throughout the foundry. The system automatically takes readings on a preset timed basis and can determine if the dust collectors are operating.

Union Energy's system measures to within 0.2% the amount of sand re-claimed by weighing each "blow" of sand with a load cell arrangement. The system, developed with Gudgeon Brothers, also displays the status of the reclamation unit and the levels in the silos. The foundry can designate preset levels in the silos to automatically turn the system off.

The system includes an interface at the reclamation unit and a remote graphic panel that displays both the tonnage reclaimed and energy usage. In addition, the monitoring system records baghouse parameters and combustion temperatures.

Union monitors the utility use in the entire plant to determine the total energy demand of the thermal reclamation unit. The system can be programmed to shut off if it approaches peak demand.