Opportunities Under DOE's Financial Institutions Partnership Program

This new program, in which commercial lenders play a central role, is known as the Financial Institutions Partnership Program (FIPP).  FIPP provides significant flexibility to lenders and should assist borrowers in obtaining long-term financing for commercial wind, solar and other renewable energy generation projects.

Review of DOE's Loan Guarantee Programs

Title XVII of the Energy Policy Act of 2005 established DOE's innovative technologies loan guarantee program (the Section 1703 Program), which was designed to support projects that are unable to obtain conventional private sector financing due to technology risks.  Only projects in the U.S. that reduce greenhouse gases and employ new or significantly improved technology are eligible for the Section 1703 Program.

The Recovery Act broadened the section 1703 program by adding Section 1705 (the Section 1705 Program) to the Energy Policy Act, creating a temporary loan guarantee program for renewable energy, transmission and advanced biofuels projects in the U.S. that commence construction by September 30, 2011.  The Section 1705 Program is intended to support projects that are unable to obtain private loans due to the credit crisis, including projects that do not employ innovative technology.

One of the most significant features of the Section 1705 Program is that the so-called “Credit Subsidy Cost” is funded by the government.  The Credit Subsidy Cost is the amount that DOE is required to hold on reserve to cover estimated potential losses in accordance with the Federal Credit Reform Act of 1990, which is a percentage of the guarantee that is calculated by DOE on a project-by-project basis.  In the case of loan guarantees for projects that can qualify only under the old Section 1703 Program (for example, because they will not commence construction by September 30, 2011), borrowers must pay the entire Credit Subsidy Cost prior to closing.

DOE is implementing its authority under the Section 1705 Program through two separate processes:

• For energy projects with high technology risks,  some of which may also qualify for the Section 1703 Program, and for commercial transmission projects, project sponsors or developers will apply directly to DOE for a loan guarantee.  On July 29, 2009, DOE issued two solicitation announcements under which project sponsors or developers could apply directly to DOE for loan guarantees: one solicitation is for project with innovative technologies, and the second is for commercial transmission projects.  If the applicant seeks a guarantee for 100 percent of a loan, the Treasury Department’s Federal Financing Bank will fund that loan.

• For renewable energy projects that use technologies that are already in general use in the marketplace, DOE’s FIPP solicitation requires borrowers to first contact a financial institution (a Lender-Applicant) regarding its loan.   Upon reaching agreement with a borrower on terms for the project loan, the Lender-Applicant will apply to DOE for a guarantee of up to 80 percent of that loan.

The following table highlights three major differences between the innovative technologies solicitation and the FIPP solicitation:

Key Features of FIPP

FIPP is designed for simple plain vanilla project finance structures without complex tax equity arrangements.  DOE delegates the due diligence, loan structuring and documentation work to experienced private sector lenders to accelerate the process for providing financing for shovel-ready renewable energy projects that will create jobs in the U.S.

Eligibility Requirements

In addition to the "Commercial Technology" requirement described above, projects must satisfy the following key eligibility requirements in order to qualify for FIPP:

• Projects must achieve a credit rating equivalent to BB from S&P or Fitch or Ba2 from Moody's, as evaluated without the benefit of the guarantee;
• Projects must commence construction on or before September 30, 2011;
• Projects must be located in, and create or retain jobs in, the U.S. or its territories or possessions;
• Borrowers must pay all laborers and mechanics employed for the project prevailing wages, as determined under the Davis-Bacon Act; and
• The borrower or other principals must make a "significant" equity investment in the project.

Projects that receive DOE loan guarantees are also subject to the National Environmental Policy Act, which generally requires an Environmental Assessment (performed by an independent consultant) to determine the likelihood of a significant environmental impact.

Lenders may be domestic or foreign commercial banks, insurance companies or other entities in the business of lending money that, among other things, have experience in originating or servicing loans for similar projects and are not disbarred or suspended from participation in federal government contracts.   Lender-Applicants (or "Lead Lenders") must also demonstrate experience as the lead lender or underwriter in similar projects. 

Loan and Loan Guarantee Terms

The Loan Agreement and the Guarantee Agreement will be subject to the following key terms and conditions:

• The face value of the loan guaranteed by DOE may be for no more that 80 percent of eligible project costs;
• DOE may guarantee up to 80 percent of the loan (the remaining 20 percent of the loan will be on an uncovered basis);
• The term of the loan may be up to the lesser of 30 years or 90 percent of the projected useful life of project assets;
• DOE will permit lenders to freely transfer economic or beneficial interests (but not legal rights) through loan participations, but any actual transfer or syndication will require DOE approval; and
• DOE will be a party to the Loan Agreement and will reserve the right to exercise all voting and control rights customarily provided to majority lenders.

Application and Review Process

DOE's application and review process consists of three general phases: (1) submission of the Part I Application, (2) submission of a Part II application and (3) loan guarantee documentation.

Lender-Applicants may submit Part I Applications at any time and DOE will conduct rolling reviews.  Part I Applications must include summary-level information about the project, project sponsor and lenders.  DOE will advise the Lender-Applicant whether the project appears to qualify for the Section 1705 program to help the Lender-Applicant decide whether to proceed to Part II.

If its Part I Application is approved, the Lender-Applicant may submit its Part II Application during any one of ten scheduled rounds of review.  The due date for the first round of Part II reviews was November 23, and the due date for the next round is January 7, 2010.  Part II Applications must include lender certifications and detailed project information, including an Information Memorandum, an independent engineering report, a credit rating and copies of all financing and project agreements.

DOE will competitively evaluate all Part II Applications received in a given round.  DOE's review will be based on, among other things, the readiness of the project for financing, financial strength of the project and the extent to which lenders intend to hold their investments. 

DOE intends to inform the Lender-Applicant of its decision regarding the application within two months of the Part II submission.  If DOE approves the project, DOE, the Lender-Applicant and the borrower will negotiate a Term Sheet and execute a Conditional Commitment. Upon satisfaction of the terms in the Conditional Commitment, DOE and the Lender-Applicant may execute a Guarantee Agreement and proceed with financial closing.

Conclusion

FIPP presents a unique opportunity for project developers to obtain long-term, low-cost financing for commercial scale renewable energy projects.  The success of FIPP will depend heavily on the ability of DOE to quickly approve applications and achieve financial closing.  If DOE is able to streamline this process, FIPP will be a useful financing option for project developers, and a means for commercial banks to reduce lending risks.

Erica Ward is a partner, and Mike Klaus is an associate, in the Energy and Infrastructure Projects Group of Skadden, Arps, Slate, Meagher & Flom LLP in Washington, D.C.  Partners Marty Klepper and Lance Brasher also contributed to this article.