Alternative Energy Update

DOE Announces Financial Institution Partnership Program and Issues Loan Guarantee Solicitation for Commercial Technology Renewable Energy Projects

The Department of Energy (“DOE”) issued a loan guarantee solicitation on October 7, 2009 (the “Solicitation”) under Section 1705 of the Energy Policy Act of 2005, as amended (the “EPAct”). The Solicitation invites applications from eligible lenders for loan guarantees for conventional renewable energy generation projects and is the first solicitation to be issued under DOE’s new Financial Institution Partnership Program (“FIPP”). DOE is making up to $750 million available to pay the “credit subsidy costs”1 of the loan guarantees to be issued under the Solicitation. According to DOE, such loan guarantees could support as much as $4 billion to $8 billion in lending to eligible projects.

Eligible Projects

Section 1705, which was added to the EPAct by the American Recovery and Reinvestment Act of 2009, authorizes DOE to provide loan guarantees for certain renewable energy projects and related manufacturing facilities, electric transmission systems and leading edge biofuel projects. The current Solicitation is limited to renewable energy systems, including incremental hydropower, that generate electricity or thermal energy by using “commercial technology”. For purposes of the Solicitation, “commercial technology” is defined as technology that has been installed and is being used in three or more commercial projects similar to the proposed project and has been in operation in each case for a period of at least two years. The Solicitation does not cover commercial renewable manufacturing projects eligible under Section 1705 of the EPAct, for which DOE expects to issue a separate FIPP solicitation in the future.

In addition, in order to be eligible under the Solicitation, a project must (i) be reasonably likely to “commence construction”2 no later than September 30, 2011, (ii) meet all other applicable requirements of Title XVII of the EPAct, including the Davis Bacon and Buy American requirements, and (iii) be expected to have, whether structured on a project finance or a corporate finance basis, a credit rating from a nationally recognized rating agency at least equivalent to BB from S&P or Ba2 from Moody’s, as evaluated without the benefit of any DOE guarantee or any other credit support that would not be available to DOE. Projects that have completed construction or have already been fully financed are not eligible. The Solicitation includes the following non-exclusive list of eligible projects: wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash-to-energy facilities, hydropower facilities, including incremental hydropower and solar facilities.

FIPP; Lender Participation

FIPP was designed by DOE to leverage private sector expertise and capital for the efficient and prudent funding of eligible projects. Potential borrowers and sponsors may not apply directly to DOE under the Solicitation and FIPP. A loan guarantee application can only be submitted by an eligible financial institution that satisfies the requirements set forth in the Solicitation. Among other required qualifications, the lender-applicant in respect of a particular project must demonstrate or have access to experience in originating and servicing loans for commercial projects similar in size and scope, and must demonstrate capability or experience as lead lender or underwriter by presenting evidence of its participation in large commercial projects or energy-related projects. When a guarantee is issued at closing, the lender-applicant becomes the lead lender under the guaranteed facility. As stated in the Solicitation, DOE expects that the lead lender’s commitment under the proposed loan agreement will represent a substantial portion of the guaranteed obligations. The lead lender will also act as administrative agent for all the lenders.

The lender-applicant will have the lead role in developing the overall financial structure of the proposed project and the specific terms of the guaranteed obligations. Each other participating financial institution must also meet certain requirements set forth in the Solicitation, including being able to demonstrate, or having access to, experience participating in loans for projects similar in size and scope to the project under consideration. One of FIPP’s objectives, according to the Solicitation, is to ensure that guaranteed facilities will be underwritten by, or placed in a primary syndication with, eligible holders having a “buy and hold” intention that is co-aligned with DOE’s long-term risk under the guaranteed obligations. After closing, assignments by the lead lender and other eligible holders will generally require DOE’s prior written consent, and a lender’s rights under the guarantee may not be transferred disproportionately from its rights under the Loan Agreement such that DOE’s loan guarantee would apply to a greater percentage of the transferee’s interest in the loan than the guaranteed percentage applicable to the loans overall. However, lenders will be free to separate and convey indirect interests in the guaranteed and unguaranteed portions of the debt by transferring economic or beneficial interests, but not legal title, including through participations or the issuance of covered notes.

Certain Financing Terms

Loan guarantees issued under the Solicitation will not cover more than 80% of the maximum aggregate principal amount of, and interest on, the guaranteed facility (and not more than 80% of any tranche of loans under the facility). The face value of the debt guaranteed by DOE must not exceed 80% of total project costs. The term of the facility may not exceed the lesser of 30 years and 90% of the projected useful life of the project’s major physical assets. The non-guaranteed portion of the debt must be repaid on a pro rata basis, and may not be repaid on a shorter amortization schedule than the guaranteed portion. The borrower and other principals involved in the project must make a significant cash equity investment in the project in connection with the issuance of a loan guarantee.

The guaranteed facility must be secured on a first priority basis by all assets comprising or otherwise necessary for the construction and completion of the project. Any other project-related debt must be subject to usual and customary subordination agreements. The Solicitation provides that claims of the lenders and DOE will be pari passu with one another, and subject to limited exceptions, distributions will be made on a pro rata basis, including with respect to principal and interest to the extent DOE becomes subrogated to the lenders’ rights by reason of payment under the loan guarantee.

Subject to limited exceptions set forth in the Solicitation, DOE will have the exclusive right to exercise all voting and control rights usually provided to lenders in similar project finance transactions, including the right to grant amendments and waivers, and to accelerate the guaranteed obligations and exercise remedies in a default. A loan guarantee will automatically terminate if commencement of construction has not occurred in respect of the relevant project on or before September 30, 2011.

As stated in the Solicitation, DOE expects that the guaranteed obligations will constitute “traditional” secured debt, structured in accordance with customary market terms applicable to high quality, limited or non-recourse, long-term, energy project finance transactions and not modified to accommodate tax-oriented investment structures. The Solicitation provides that applications that contemplate second-lien financing will be disfavored.

Application Process

The application is divided into two parts. A Part I submission may be filed at any time prior to the filing of a Part II submission. Part I submissions will be reviewed by DOE on a rolling basis so there is a preference for earlier applications. DOE will provide an initial assessment of each Part I submission to assist the relevant lender-applicant in deciding whether to proceed with the cost and effort of completing a more comprehensive Part II submission. DOE will hold ten rounds of review for Part II submissions. The first due date for Part II submissions is November 23, 2009 and the final one is January 6, 2011. After the due date for a round of Part II submissions, DOE may approve an application and offer the lender-applicant a term sheet, which, if accepted and agreed by DOE and the lender-applicant, will represent a conditional commitment of DOE. The Secretary of Energy will retain the right to terminate a conditional commitment for any reason at any time prior to the closing of the relevant Loan Guarantee Agreement.

At or prior to closing, DOE will pay the credit subsidy cost, while the lender-applicant and borrower will pay the fees detailed below. The Office of Management and Budget, the Department of the Treasury and DOE must each review the calculation of the credit subsidy cost.

Fees

The Solicitation requires the payment of three fees: (i) the application fee, (ii) the facility fee, and (iii) the maintenance fee. The application fee is $50,000, 25% of which is due on submission of Part I of the application, while the remaining 75% is due on submission of Part II. The facility fee will be equal to ½ of one percent of the guaranteed debt. The lender-applicant must pay 20% of the facility fee upon execution of the term sheet, and the remaining 80% at or prior to the financial closing under the Loan Guarantee Agreement. Lastly, the maintenance fee is expected to be between $10,000 and $25,000 per year, payable each year in advance by the borrower, commencing upon the closing date.

Links to the DOE’s press release, the Solicitation, and sample Loan Guarantee Agreements for fixed rate and floating rate obligations are set forth below:

http://www.lgprogram.energy.gov/press/100709.pdf

http://www.lgprogram.energy.gov/2009-ren-energy-sol.pdf

http://www.lgprogram.energy.gov/LGA-Fixed.pdf

http://www.lgprogram.energy.gov/LGA-Floating.pdf

1 The “credit subsidy cost” of any guarantee is the net present value of the estimated long-term cost to the U.S. government of the guaranteed loan, as calculated in accordance with the applicable provisions of the Federal Credit Reform Act of 1990, as amended.

2 Under the Solicitation, “commencement of construction” means that (i) the borrower has completed all pre-construction engineering and design, has received all necessary licenses, permits and local and national environmental clearances, has engaged all contractors and has ordered all essential equipment and supplies as, in each case, can be considered reasonably necessary so that physical construction of the project may begin (or, if previously interrupted or suspended, resume) and proceed to completion without foreseeable interruption of material duration and (ii) such physical construction (including, at a minimum, excavation for foundations or the installation or erection of improvements) at the primary site of the project has begun or resumed.