Practical Information Beyond the Basics onDOE’s July 29, 2009 Loan Guarantee Solicitations

Julia EnglishAhren Tryon

Cathy McCarthy (moderator)

August 13, 2009

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Introduction: DOE Loan Guarantees

Department of Energy (DOE) issued two Loan Guarantee solicitations on July 29, 2009 (6th and 7th solicitations to date)

– Solicitation for Projects that Employ Energy Efficiency, Renewable Energy and Advanced Transmission and Distribution Technologies – the “Innovative Technology”

– Solicitation for Electric Power Transmission Infrastructure Investment – the “Transmission Infrastructure”

Additional solicitations planned

Could future solicitations be affected by H.R. 3435 — enacted August 7 — which shifts $2B in energy loan appropriations to clunker cash (a real effect of $8-20B+)?

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Fundamentals:

Title XVII of the Energy Policy Act of 2005 – Section 1703

– “avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases”

– “employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued”

DOE Loan Guarantee Regulations (issued October 23, 2007)

– 10 CFR Part 609 – basis for current solicitations

Original Section 1703 solicitations

– First in 2006 but no projects selected to proceed until March 2009

– Applicants faced with high costs of loans (credit subsidies) and draconian lien and security requirements

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Section 1705: “Rapid Deployment”

The American Recovery and Reinvestment Act of 2009 (ARRA) adds Section 1705 to Title XVII of EPAct 2005

– Expands loan guarantee program to spur “Rapid Deployment” of qualifying energy projects that can commence construction by September 30, 2011

No “new or significantly improved” technology requirement

ARRA appropriates $5.965B to cover credit subsidy costs• Now $3.965B ($750M allocated to Transmission Infrastructure

Solicitation; $2.5B billion allocated to Innovative Technology Solicitation; leaving $715M). New appropriation?

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Section 1705 (cont’d)

Section 1705 qualifying projects:

– renewable energy systems, including those that generate electricity or thermal energy — or manufacture components of such systems

– leading-edge biofuel projects (up to $500M per project) likely to become commercial technologies, producing transportation fuels with substantial reduction in GHG emissions

– electric power transmission facilities, including upgrades and reconductoring, taking into consideration:

• the viability of the project without guarantees (very important)

• the availability of other federal and state incentives

• the importance of the project in meeting reliability needs

• the effect of the project in meeting a state or region’s environment (including climate change) and energy goals

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Key Financing Considerations

DOE claims to approach its potential commitment like a commercial lender. No. 1 question: Can you repay?

– “reasonable prospect of repayment of the principal and interest on the obligation by the borrower”

How much guaranteed debt can you get?– Up to 80% of project cost;

– If guarantee is for full 100% of the loan it must be issued by Federal Financing Bank; if less than 100% loan can be made by any “Eligible Lender”

Term? – Earlier of 30 years or 90% of project’s useful life

Interest rate? – Must “not exceed a level that the DOE determines is appropriate

taking into account interest rates charged by the private sector for similar loans and risks”

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Financing Considerations (cont’d)

First lien requirement

– Section 1702 of Title XVII requires that the DOE's guaranteed obligation "not be subordinate to other financing"

– Previously, DOE interpreted this to require government to have first lien on all project assets and control over collateral in event of default

– Effectively forced applicants into project finance structure, hampered co-tenancies and utilities with outstanding first mortgage bonds

The fix? DOE’s Notice of Proposed Rulemaking

– New DOE interpretation of statutory requirement

• DOE now proposes that first lien on all project assets should be one element Secretary may consider for a project, but not required for all projects. But DOE would ensure that guaranteed obligation is not subordinate to other financing (other holders/lenders on equal footing)

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Financing Considerations (cont’d)

What stake must you have in the project?

– Cash equity commitment

– No bright-line level, but “significant”

Credit assessment – central application component

– If corporate financed, use most recent corporate credit rating

– If project financed (and project costs exceed $25M), project must get separate rating from nationally recognized agency

Know your costs:

– Application, facility, and maintenance fees

– Engineering and environmental reports; credit rating

– Credit subsidy – Section 1703 (you pay) vs. Section 1705

• What is this?

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Innovative Technology Solicitation

$30B in loan guarantees from Section 1703 and 1705 appropriations/authorizations. Note the Solicitation’s mixing of requirements of both categories.

Eligibility – Is this a Section 1703 or 1705 project?

– Section 1703 “new or significantly improved” will apply to all

– Verify whether project will fall under Section 1705 or is Section 1703 only. Note 1703 fallback option

– Section 1705 project eligible technology commence construction by Sept. 30, 2011 credit subsidy costs covered by DOE

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Transmission Infrastructure Solicitation

Funding: no established limit; $750M for credit subsidies

Eligibility considerations – threading the needle

– Is the project big enough, commercial enough, and ready to be built? Jobs?

• What is commencement of construction?

– Are you able to receive private financing on standard commercial terms? Solicitation excludes you.

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Application Process

Application Cycle

– Rolling due dates

– Part I: Summary level descriptions of applicant, project, financing

– Part II: Actual studies, contracts, etc.

Application Requirements

– Prudent planning and time use

National Environmental Policy Act

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Additional Considerations

ARRA obligations

– Do you have to meet these requirements and what must you do?

Past performance (and past promises) are not indicative of future results

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DOE Loan Guarantees

Julia English Cathy McCarthy Ahren Tryon

jenglish@dl.com cmccarthy@dl.com atryon@dl.com

(202) 346-7911 (202) 346-8753 (202) 346-8059