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Publication

March 10, 2009Client Alert

Changes to U.S. Department of Energy Loan Guarantee Program Could Benefit Bioenergy Companies

In the summer of 2005, Congress passed the Energy Policy Act of 2005 with great fanfare. One of the key provisions of this legislation was Title XVII (Innovative Technology Loan Guarantee Program), which provided federal support for clean-tech and renewable energy technologies by way of a federal guarantee. Although no guarantees have been awarded yet, recent developments mean that a significant amount of money is likely to be available soon under this loan guarantee program.

Innovative Technology Loan Guarantee Program

The Innovative Technology Loan Guarantee Program authorized the U.S. Department of Energy (“DOE”) to issue loan guarantees for projects that "avoid, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued." Categories of projects that are eligible for the loan guarantee program include: renewable energy systems; advanced fossil energy technology (including certain coal gasification technologies); carbon capture and sequestration practices and technologies, including agricultural and forestry practices that store and sequester carbon; efficient electrical generation, transmission and distribution technologies; production facilities for the manufacture of fuel efficient vehicles or parts of those vehicles, including electric drive vehicles and advanced diesel vehicles; pollution control equipment; and refineries.

Key attributes of the Innovative Technology Loan Guarantee Program include:

  • The face value of the debt guaranteed by the DOE shall be no more than 80% of the total project costs (although 100% of such debt may be guaranteed by the DOE).
  • The borrower and other principals involved in the project have made or will make a significant equity investment in the project.
  • The borrower is obligated to make full repayment of the underlying loan and other project debt over a period of up to the lesser of 30 years or 90% of the projected useful life of the projects major physical assets.
  • The DOE takes a first lien position on all project assets and other collateral pledged as security for the underlying loan (although where the DOE only guarantees a portion of the loan, the DOE may share proceeds from the disposition of the project assets on the non-guaranteed portion on a pari passu basis).
  • All administrative costs and credit subsidy costs (discussed in more detail below) must be paid by the borrower prior to receiving the loan guarantee.
  • The loan guarantee does not finance, directly or indirectly tax-exempt debt obligations.

In 2006, the DOE solicited pre-applications for certain subcategories of projects. In October 2007, 16 companies were selected to submit full applications for loan guarantees. In June 2008, the DOE solicited applications for up to $10 billion in loan guarantees for projects employing energy efficiency, renewable energy and advanced transmission and distribution technologies that constitute new or significantly improved technologies. These applications were due on February 26, 2009. To date, no awards have been made under the Innovative Technology Loan Guarantee Program.

Recent Developments

In the last month, two significant changes were announced that are likely to significantly accelerate the award of guarantees by the DOE. The first change comes with the enactment of The American Recovery and Reinvestment Act of 2009 (H.R. 1) (“The Act”), which was signed into law on February 17, 2009. The second change is the announcement by DOE Secretary Steven Chu that the DOE will streamline its process for reviewing and issuing guarantees under the Innovative Technology Loan Guarantee Program.

Temporary Loan Guarantee Program

Section 406 of The Act added a new section to the Energy Policy Act of 2005 that modified the Innovative Technology Loan Guarantee Program in several significant respects. Most importantly, the DOE may make loan guarantees for commercial projects rather than projects only for “innovative technologies,” dramatically increasing the scope of projects that are available for the loan guarantee program.

The DOE has wide discretion to make additional guarantees for projects that are broader than the “innovative technologies” test in the original Innovative Technology Loan Guarantee Program in the following areas:

  • Renewable energy systems that generate electricity or thermal energy and facilities that manufacture related components.
  • Electric power transmission systems, including upgrading and reconductoring projects.
  • Leading edge biofuels projects that will use technologies performing at the pilot or demonstration scale that the DOE determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels.

Pursuant to The Act, Congress has appropriated $6 billion to cover the credit subsidy costs for loan guarantees with respect to eligible projects. The credit subsidy cost is the net present value, at the time the loan guarantee is executed, of the expected payments by the U.S. government to cover defaults, delinquencies, interested subsidies, fees and other payments. The amount of loan guarantees that this amount of credit subsidy costs is impossible to determine as the DOE has not issued any loans yet, but by way of example, if the average credit subsidy cost per project is 10% of the total guarantee, then the additional amounts appropriated under The Act would support an additional $60 billion in loan guarantees.

Other key components of the Temporary Loan Guarantee Program include:

  • Of the $6 billion in congressional funding, a maximum of $500 million may be used for leading edge biofuels projects.
  • Each recipient of a loan guarantee shall provide reasonable assurance that all laborers and mechanics employed in the performance of the project receive prevailing wages under the Davis-Bacon Act.
  • The DOE’s authority to enter into loan guarantees under the Temporary Loan Guarantee Program expires on September 30, 2011.

It is anticipated that the DOE will issue draft rules under the Temporary Loan Guarantee Program within weeks.

DOE Streamlined Process

The other major factor affecting the Innovative Technology Loan Guarantee Program is a pledge by the DOE to streamline the application and funding process. In one of the first announcements by Secretary Chu, he said he intends to make the following modifications of the program:

  • Rolling appraisals of applications – instead of delaying the consideration of an application until a far off deadline, DOE will review them when they are submitted so that decisions can be made more quickly;
  • Streamlining and simplifying loan application forms and other paperwork;
  • Accelerated loan underwriting by using outside partners;
  • In cases where up front fees may deter companies from applying, DOE will offer applicants the opportunity to pay the fees as part of the loan at closing;
  • Further reduction of up front costs by restructuring credit subsidies so they are paid over the life of the loan;
  • Working with the industry to attract good projects into the loan guarantee program and helping them navigate the process; and
  • A website that will provide increased transparency in both process and results, as well as information to help applicants through the process.

Secretary Chu indicated that he hoped that these measures would allow the DOE to make the first loan guarantees under the existing Innovative Technology Loan Guarantee Program in late April or May, 2009.

We will issue additional client alerts when there are material developments with the Innovative Technology Loan Guarantee Program or the Temporary Loan Guarantee Program.

This client alert is one of a series designed to provide summaries of the American Recovery and Reinvestment Act of 2009 ("The Act") and information and guidance regarding opportunities and relief made available through The Act. All of The Act client alerts are available on Michael Best's Stimulus and Economic Recovery Team publications page. For additional information on this topic, please feel free to contact one of the authors of this alert or your Michael Best attorney.

If you are interested in learning about other provisions included in The Act, the Michael Best Stimulus and Economic Recovery Team is prepared to assist you in understanding the implications and in developing and implementing a strategy to secure the benefits of this unprecedented legislation. Specifically, we will assist you to identify opportunities, prepare appropriate proposals and make targeted contacts to secure funds. We will also work with you to ensure that your applications are tailored to meet your needs and that your funded projects proceed in compliance with award requirements and applicable laws.

 

For more information, please contact:

Gregory J. Lynch
Direct Dial: 608.283.2240
Email: gjlynch@michaelbest.com

Geoffrey R. Morgan
Direct Dial: 414.225.2752
Email: grmorgan@michaelbest.com

Porter J. Martin
Direct Dial: 608.283.0116
Email: pjmartin@michaelbest.com

Director of Government Affairs
Laura L. Riske
Direct Dial: 608.283.2265
Email: llriske@michaelbest.com

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