On December 7, 2009, the U.S. Department of Energy (“DOE”) announced the issuance of a final rule amending certain provisions of its loan guarantee program for innovative technologies as authorized by Section 1703 of Title XVII of the Energy Policy Act of 2005 (“Final Rule”). The amendments reverse the DOE’s previous interpretation of two provisions of Section 1702 of Title XVII to require a superior first lien on any property acquired pursuant to a guarantee. The Final Rule was promulgated by the DOE after its review of all comments submitted in response to the DOE’s Notice of Proposed Rulemaking and Opportunity for Comment published on August 7, 2009 (“NOPR”). (Please refer to our summary of the NOPR circulated on August 7, 2009, for more information on the proposed changes.)

The Final Rule deletes the requirement of a first priority lien on all project assets (and other pledged collateral) and leaves to the DOE the project-specific determination as to the appropriate collateral package and intercreditor arrangements for each project. While the DOE may still require a first lien on all project assets for a particular project, this is no longer a threshold requirement. The Final Rule allows the DOE, in its discretion, to accept pari passu liens on projects participating in the loan guarantee program. The DOE acknowledges that Section 1702 does not require that the lender or the Secretary receive any collateral as a statutory requirement for making a loan guarantee.

In addition, the Final Rule removes the prior requirements that the non-guaranteed portion of any Guaranteed Obligation: (i) be repaid on a pro-rata basis; and (ii) not be repaid on a shorter amortization schedule than the guaranteed portion. The Final Rule permits shorter or faster amortization schedules in connection with project-related financings or other credit arrangements (other than the Guaranteed Obligation), provided that the DOE determines that the resulting financing structure reasonably and proportionately allocates the risk of default, assures reasonable prospect of repayment on the Guaranteed Obligation and protects the interest of the United States in the case of default.

For projects that are jointly owned by one or more persons (the typical form of ownership of utility grade power plants), the Final Rule clarifies that applications may be submitted with respect to an undivided ownership interest in such project’s assets or facilities.

The implementation of the Final Rule allows for increased participation of the private sector in the DOE loan guarantee program by allowing the DOE to finance projects with other lenders. The Final Rule will also allow projects with multiple participants (previously effectively disqualified from the program) to apply for loan guarantees. The resulting diversification of the DOE Loan Guarantee portfolio seeks to reduce the risks of the program and the potential cost to taxpayers.

While the final rule does not specifically address loan guarantee programs through Section 1705 (for three categories of projects that commence construction not later than September 30, 2011), the DOE’s reversal of its position concerning statutory requirements will permit the DOE to consider a wider range of collateral packages under the other Title XVII programs.

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Craig M. Kline
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