The Loan Programs
An Overview
William Pegues
Senior Investment Officer
U.S. Department of Energy
December 3, 2010
Presentation Summary
• What does the DOE Loan Programs Office do?
• Why are we doing it?
• What have we financed?
• What’s on the horizon?
• What is project finance? Why use it?
• How does the process work?
• How is it different from structuring commercial transactions?
DEPARTMENT OF ENERGY 2
Historically, it takes 50+ years to transition from one
primary energy source to another
US energy supply since 1850 Renewables
100%
90%
80%
Percent of Total Energy Mix
70% Renewables
Nuclear
60%
Gas
50% Oil
Hydro
40%
Coal
30% Wood
20%
10%
0%
1850 1880 1910 1940 1970 2000
Source: EIA Example: From 1850 – 1910 U.S. transitioned from Wood to Coal;
transition to nuclear and renewables is just beginning
DEPARTMENT OF ENERGY 3
Loan Programs Summary
Three separate programs having different authorities and mandates
Title XVII of the Energy Policy Act of 2005
Section 1703
Innovative clean technologies unable to secure conventional financing due to technology risks
No more than 3 existing implementations each of which have been active for more than 5 years
Self Pay: Borrowers pay Credit Subsidy Cost.
Section 1705
Established via the Recovery Act. Enables loan guarantees to certain projects not necessarily employing
innovative technologies commencing construction by September 30, 2011.
Congress has appropriated funds to pay the Credit Subsidy Cost for these projects.
Dual eligibility
1703 projects may also be eligible under 1705, thereby qualifying for appropriated Credit Subsidy Cost.
Energy Independence and Security Act (EISA) of 2007
Section 136 established the Advanced Technology Vehicle Manufacturing Program (ATVM)
Supports the production of advanced technology vehicles and related automotive components
DEPARTMENT OF ENERGY 4
Projects Approved to Date
Supporting a mix of technologies and creating jobs
Jobs
Program Loan Amount Perm / Constr Date Locations Energy Sector
1703
Red River $245 million 70/500 Dec 2009 Louisiana Energy Efficiency
Vogtle $8.3 billion 800 /3,500 Feb 2010 Georgia Nuclear
Sage $72 million 160 /210 March 2010 Minnesota Energy Efficiency
Areva $2 billion 310/1,000 May 2010 Idaho Front End Nuclear
1705
Solyndra $535 million 1,000/3,000 Sept 2009 California Solar Manufacturing
Beacon $43 million 14/20 July 2009 New York Battery Storage
Nordic $16 million 75 perm. July 2009 Idaho Wind Manufacturing
BrightSource $1.4 billion 86/1,000 Feb 2010 California Solar Generation
First Wind $117 million 10/200 March 2010 Hawaii Wind Generation
U.S. Geothermal $102 million 10/150 June 2010 Oregon Geothermal Generation
Blue Mountain $79 million 14/200 June 2010 Nevada Geothermal Generation
Abound Solar $400 million 1,500/2,000 July 2010 CO/Indiana Solar Manufacturing
Abengoa Solar $1.45 billion 80/1,600 July 2010 Arizona Solar Generation
AES $17 million 5/30 July 2010 New York Battery Storage
Shepherds Flat $1.3 billion 35/400 Oct 2010 Oregon Wind Generation
ON Line $350 million 15/400 Oct 2010 Nevada Transmission
Totals: $16.5 billion 4,184 permanent/ 14,210 construction jobs
DEPARTMENT OF ENERGY 5
Projects Approved to Date
Supporting a mix of technologies and creating jobs
Number of Annual Fuel Savings
Program Loan Amount Jobs Date of agreement Projects (millions of gallons)
ATVM
Ford $5.9 billion 33,000 Sept 2009 13 228
Nissan $1.5 billion 1,300 Jan 2010 2 26
Tesla $465 million 1,500 Jan 2010 2 2
Fisker $529 million 2,000 Apr 2010 2 18
Vehicle $50 million 900 Nov 2010 1 N/A
Production
Group
(VPG)
Approximate Totals: $8.45 billion 38,700 20 274
Note: Projects in Blue have closed
DEPARTMENT OF ENERGY 6
LPO (1703/1705)
Recently Distributed Term Sheets
Loan Guarantee Size Construction/
Project (approx) Permanent Jobs
700/31
Biofuels $243 million
318/78
Biomass $99 million
75/10
Solar Gen $74 million
300/20
Solar Gen $1 billion
72/15
Solar Gen $45 million
125/10
Wind Gen $86 million
450/53
Biofuels $70 million
332/64
Geothermal $280 million
670/170
Solar Gen $568 million
1,800/200
Solar Gen $2 billion
550/15
Solar Gen $1.4 billion
275/15
Solar Gen $1 billion
2,200/65
Solar Gen $1.3 billion
250/350
Solar Mfg $141 million
170/14
Wind Gen $284 million
240/8
Wind Gen $105 million
DEPARTMENT OF ENERGY 7
LPO (1703/1705)
Recently Distributed Term Sheets
Loan Guarantee Size Construction/
Project (approx) Permanent Jobs
250/345
Biomass $253 million
85/50
Geothermal $284 million
61/0
Solar Gen $57 million
150/1,000
Solar Mfg $301 million
1,150/450
Solar Mfg $204 million
150/301
Solar Mfg $75 million
200/1,310
Solar Mfg $344 million
225/12
Wind Gen $181 million
200/10
Wind Gen $97 million
195/11
Solar Gen $75 million
Approximate Totals: $10.3 billion 10,772 construction/ 4,246 permanent jobs
DEPARTMENT OF ENERGY 8
LPO (1703/1705) Applicant Pool
Demand for the Program remains high
New Manufacturing
Solicitation (est.) Energy Efficiency (7)
Total Applicant Pool Biomass
Demand (est.): $53 B (17)
Fossil (4)
2009 Renewable and
FIPP (est.)
Geothermal (2)
Hydrogen (3)
Hydropower (1)
Wind (13)
Nuclear (1)
Transmission (6)
Solar Mfg (9)
Solar Gen (16)
Technology (# of projects)
Note: “Total Applicant Pool” includes
those projects that are in process, but
which will not reach conditional
commitment by the end of 2010 DEPARTMENT OF ENERGY 9
Loan Programs Conditional Commitments Timeline
Projected 1703, 1705 and ATVM Conditional Commitments
80,000
70,000
60,000
50,000
$ Millions
Applicant Pool
40,000
30,000
Program Created Late 2005
20,000
Initial Funding, April 2007 Actual
10,000
0
Loan Program Conditional Commitments
DEPARTMENT OF ENERGY 10
Different types of financing are appropriate at different
stages of technology and market development
Early Stage Late Stage Mezzanine Corporate Loan
Buy Out Bank Debt
Equity Equity Financing Debt Guarantee
Match the proper project with the proper financial instrument.
Competent developers may be thinly capitalized relative to projected
investments.
This leads to Project Finance structures.
DEPARTMENT OF ENERGY 11
Project Finance
Lenders want to reduce risk arising from:
• Technology • Costs • Schedule
• Performance • Commercial Terms
Project finance involves a loan tied to a specific project rather than
the assets of a broader corporate entity (corporate finance.)
Project finance is primarily the financing of contracts.
• The financed asset is the sole collateral security available to project
lenders.
The performance of the asset and the free cash flow available to
service debt service are crucial.
• Stable, predictable, cash flow
DEPARTMENT OF ENERGY 12
Project Finance: Economic Rationale
Benjamin Esty (HBS) on Project Finance:
Why would the combination of a firm plus a nonrecourse debt-financed project
be worth more than a firm plus a project financed using internal funds?
– Minimize agency costs: Reduce incentive conflicts
– Avoid debt overhang: Reduce leverage-induced underinvestment in firm
– Risk management: Reduce underinvestment in positive-NPV projects
Both the investment and financing decisions may create value.
Project finance is essentially about allocating risk to the party that
best understands that risk.
DEPARTMENT OF ENERGY 13
Project Finance
Characteristics of project-financed entities (Esty)
Concentrated equity ownership (1-3 sponsors.)
High leverage ratios, which forces cash flows toward debt service.
Founded on a series of legal contracts.
Underlying assets are vulnerable to opportunistic behavior because they are fixed,
single-use and long-lived.
Long-term contracts focus attention via incentives.
Certain types of large-scale energy infrastructure assets are suited
for project finance.
Capital-intensive investments support the large transaction costs.
DEPARTMENT OF ENERGY 14
Typical Power Project Financing Structure
The deals we support have complex financing structures
Joint Development
Agreement
Sponsor Sponsor
Proceeds of
Equity Contributions
Other Approved
Project Costs
Shareholders
Agreement
Shareholder Shareholder
Sponsor Support and
Equity
Contribution Agreement
Security Trustee
Site Lessor
(Accounts Waterfall)
(Project Reserves)
Project Debt
and Collateral
SPV Equity Agency Proceeds of
EPC Contract Proceeds and Accounts
EPC Borrower Agreement
Loan Disbursements
Contract Progress
Payments Project Lenders
Commercial
Banks/FFB
PPA
(Construction
Term)
Commercial Guarantees
O&M Department
Banks (L/C
Contract Power Facility) of Energy
Fuel Supplier Purchaser
(if applicable)
Key: Project Bonds
___________ Ownership Relationships
Contractual Relationships
----------------- Cash Flows
DEPARTMENT OF ENERGY 15
How the Program Works:
Structuring and closing a deal is a long, complicated process
Loan Guarantee Approval Process
Part I Part II NEPA Compliance
Due Approval External Closing Deal
Solicitation Negotiation
Diligence Process Reviews Process Monitoring
FIPP Credit Analysis
Activity
Eligibility Market Term Credit Credit Final legal Performance
reviews Technology Sheet Committee Subsidy documents tracking
Credit Calculation
Financial /
Credit Review Treasury
Board Approval
Legal /
Regulatory
DEPARTMENT OF ENERGY 16
The Due Diligence & Transaction Execution Process
Departures from commercial norms:
• Assessment of technological risk (first-of-a-kind, commercial-scale technology)
− Boundary between demonstration- and commercial-scale facilities
• Development of key contracts
• New transmission lines for renewable power generation; pipelines for CCS
• State environmental regimes (e.g., CEQA)
• The NEPA process
• The Federal procurement process
• Internal DOE, OMB and Treasury reviews
• Feedback loops via the Legislative and Executive branches
• Defining the stakeholders
DEPARTMENT OF ENERGY 17