DOE Loan Guarantee Program

DOE Loan Guarantee Program Situation Overview April 2009 Contact: stephenbucalo@scottmadden.com tiaowens@scottmadden.com tt

Contents ts Background DOE Loan Guarantee Program (LGP) Overview Funding LGP for New Nuclear Build LGP for Front-End Nuclear Fuel Cycle LGP for Clean Energy Projects LGP for Advanced Fossil Energy Projects Appendices Credit Subsidy Cost Considerations Considerations for Regulated Utilities Considerations for New Nuclear Build 1

Background EPAct05 The Energy Policy Act of 2005 or EPAct05 (42 U.S.C. 16511 16514) includes a wide range of provisions which address many aspects of the energy industry. EPAct05 is the first comprehensive energy bill in the US in more than a decade Signed into law on August 8, 2005 Includes $14.5 billion in tax incentives, accompanying additional DOE loan programs Key Provisions Repeal of the Public Utility Holding Company Act of 1935 (PUHCA), removing restrictions on who can invest in utilities and what investments utilities can make Changes to Section 203 of the Federal Power Act (FPA), including revisions to FERC jurisdictional authority in the review of M&A activity in the electric industry Elimination of statutory restrictions on ownership of qualifying facilities) by electric utilities currently included in the Public Utility Regulatory Policies Act of 1978 (PURPA) Provision of additional federal authority in the process of government review and siting of LNG terminals Various new rules related to market transparency, enforcement, and consumer protection which widen FERC's oversight of markets and its enforcement authority Various provisions to address what are widely perceived to be shortcomings in transmission infrastructure. The intent of these rules is to provide incentives to construct transmission that increases reliability and promotes the economic operation of the transmission grid Sources: www.lgprogram.energy.gov; www.skadden.com; www.world-nuclear.org 2 Nuclear Provisions Production tax credit of 1.8 c/kwh from the first 6000 MWe of new nuclear plants in their first 8 years of operation (same rate as available to wind power on an unlimited basis) Federal risk insurance of $2 billion to cover regulatory delays in full-power operation of the first six advanced new plants Rationalized tax on decommissioning funds (some reduced) Federal loan guarantees for advanced nuclear reactors or other emission-free technologies The Price Anderson Act for nuclear liability protection extended for 20 years Support for advanced nuclear technology research, development, demonstration, and commercial application

Background Title XVII Title XVII of EPAct05 provides the basis of DOE's loan guarantee program (LGP). This title provides broad authority for DOE to guarantee loans that support early commercial use in the US of new or significantly improved technologies in energy projects If "there is reasonable prospect of repayment of the principal and interest on the obligation by the borrower" Targeted at early commercial use only (NOT energy research, development, and demonstration programs) The two principal goals of Title XVII are to encourage commercial use in the US of new or significantly improved energy-related technologies and to achieve substantial environmental benefits Eligible ibl projects include those which h "avoid, reduce, or sequester air pollutants t or anthropogenic emissions i of greenhouse gases" and "employ new or significantly improved technologies as compared to technologies in service in the US at the time the guarantee is issued" Title XVII identifies ten discrete categories of projects that are eligible for a loan guarantee which are detailed below: Eligible Project Types Comments 1. Renewable energy systems* Particularly those focusing on: 1) biomass technologies, 2) geothermal technologies, 3) solar technologies, 4) wind and hydropower technologies 2. Advanced fossil energy technology* Including coal gasification meeting certain Title XVII requirements (e.g., emission levels) 3. Hydrogen fuel cell technology For residential, industrial, or transportation applications 4. Advanced nuclear energy facilities* 5. Carbon capture and sequestration practices and technologies 6. Efficient electrical generation, transmission, and distribution technologies* 7. Efficient end-use energy technologies* Including agricultural and forestry practices that store and sequester carbon. IGCC projects must generate electricity, have a design capable of capturing carbon dioxide, have an assured revenue stream, and be approved by the relevant state public utility commission 8. Production facilities for fuel efficient vehicles Including hybrid and advanced diesel vehicles 9. Pollution control equipment* 10. Refineries Meaning facilities at which crude oil is refined into gasoline Sources: www.lgprogram.energy.gov; Federal Register/ 156/8/14/2006 *Note: ScottMadden detailed the firm s capabilities in these categories in application for market consultant to the DOE 3

DOE Loan Guarantee Program Overview Objective DOE believes that accelerated commercial use of new or improved technologies will help to sustain economic growth, yield environmental benefits, and produce a more stable and secure energy supply Technologies for project proposals should be mature enough to assure dependable commercial operations and generate sufficient revenues and not solely a demonstration project (i.e., a project designated to demonstrate feasibility of a technology on any scale) The DOE invites participation from projects which meet the statutory requirements of Title XVII, as well as the goals outlined in the President s Advanced Energy Initiative How it works For projects which are approved, the DOE LGP will provide a loan guarantee on behalf of the federal government for up to 100% of the value of the loan, not to exceed 80% of total project costs Applications, including proposed credit structure (debt-to-equity ratio), are evaluated on a case-by-case basis The term of the loan guarantee is not to exceed the lesser of 30 years or 90% of the projected useful life of the asset Any holders of non-guaranteed debt have a subordinate claim to the DOE in the event of default A "credit subsidy cost" is calculated by the borrower (and independently calculated by the DOE and approved by the OMB) to determine the long-term liability to the federal government in issuing the loan guarantee The DOE must receive either an appropriation for the subsidy cost or payment of that cost by the borrower only a "conditional commitment" may be issued until Congress has authorized the federal loan guarantee in an appropriations act in advance of the execution of a final, binding loan guarantee agreement Approval will be granted by the Credit Review Board (CRB), which is composed of senior members of the DOE (deputy secretary of energy, CFO, general counsel, et al.) Sources: www.lgprogram.energy.gov 4

DOE Loan Guarantee Program Overview (Cont d) Application process In response to each solicitation by the DOE, interested parties are invited to file an initial preapplication for review If the pre-application meets the suggested requirements of these guidelines, DOE may invite it the interested t party to submit a comprehensive application (or "full application") Only comprehensive applications submitted by interested parties that were invited by DOE to submit a comprehensive application for a Title XVII loan guarantee as a result of the initial solicitation will be considered for a loan guarantee The DOE will undertake a comprehensive due diligence review of all comprehensive applications, employing the services of legal, engineering, financial, and market consultants as needed, prior to issuing approval/commitment for a loan guarantee DOE issues solicitation for applications Applicant DOE invitation it ti Applicant submits preapplication to submit full submits full application application (Part I) (Part II) (Part II) Formal review of application by the DOE Term sheet/ conditional commitment Loan guarantee agreement and closing Tailored narrowly or broadly as DOE sees fit at the time Each solicitation it ti includes relative weighting for evaluation criteria Project eligibility is defined in solicitation Pre-applications are solicited anytime during a defined "open period" Contains relevant initial information and overview Pre-application must be complete and submitted before due date defined in solicitation 25% of application fees must be remitted with preapplication On or about 60 days after deadline for Part I Notification timelines are outlined in original solicitation Non-selection notification is sent in writing to applicants not invited to respond Contains detailed due diligence information and any additional information requested by DOE Complete applications must be filed in entirety on or before the date defined in notification from DOE Remaining balance of application fee (75%) due Once an applicant is invited to negotiate, DOE will begin a comprehensive underwriting and due diligence process DOE will conduct technical and financial reviews of each application If DOE determines that a project is suitable for a loan guarantee, the application is presented to the CRB for approval With approval from the CRB, the DOE will notify applicant and provide a proposed term sheet If executed by the applicant, the term sheet becomes a conditional commitment After all the terms and conditions of the conditional commitment are met, a closing date is set On or before the date of close, the applicant must pay the nonrefundable credit subsidy cost Sources: www.lgprogram.energy.gov 5

DOE Loan Guarantee Program Funding First solicitation On August 7, 2006, DOE issued its first solicitation for up to $2 billion in loan guarantees in aggregate Focused on technologies in biomass, hydrogen, solar, wind and hydropower, advanced fossil energy coal, carbon sequestration practices and technologies, electricity delivery and energy reliability, alternative fuel vehicles, industry energy efficiency projects, and pollution control equipment Second solicitation On June 30, 2008, DOE announced three solicitations for a total of up to $30.5 billion in federal loan guarantees for projects that employ advanced energy technologies and that avoid, reduce, or sequester anthropogenic emissions of air pollutants or greenhouse gases The three solicitations are in the areas of energy efficiency, renewable energy, and advanced delivery technologies; nuclear power facilities; and advanced d nuclear facilities for the "front-end" of the nuclear fuel cycle Third solicitation On September 22, 2008, DOE announced a solicitation for up to $8 billion in federal loan guarantees for projects that employ advanced technologies that avoid, reduce, or sequester emissions of air pollutants or GHGs Focused on coal-based power generation, industrial gasification, and advanced coal gasification facilities Overall Timeline New Nuclear Build NOPR filed 5/16/2007 Final Rule published 10/23/2007 Front-end Nuclear Fuel Cycle NOPR filed 5/16/2007 Final Rule published 10/23/2007 Clean Energy Projects NOPR filed 5/16/2007 Final Rule published 10/23/2007 Advanced Fossil Energy Projects NOPR filed 5/16/2007 Final Rule published 10/23/2007 First Solicitation N/A N/A Opened 8/7/2006; closed Opened 8/7/2006; closed (8/7/2006) 12/31/2006 12/31/2006 Funds Available N/A N/A $2 billion in aggregate $2 billion in aggregate Second Solicitation (6/30/2008) Opened 7/11/08 Part I due 9/29/08 Part II due 12/19/08 Opened 7/11/08 Part I due 9/29/08 Part II due 12/2/08 Opened 10/29/08 Part I due 2/29/2009 Part II due 9/30/2009 N/A Funds Available $18.5 billion $2 billion $10 billion N/A Third Solicitation (9/22/2008) Funds Available Sources: www.lgprogram.energy.gov N/A N/A N/A Opened 9/22/08 Part I due 12/22/08 Part II due 3/23/09 N/A N/A N/A $6 billion in funds for carbon capture and storage (CCS) 6 $2 billion in funds for CTL

LGP for New Nuclear Build Background Objective Guidelines Progress to Date On 6/30/2008, the DOE invited Loan guarantees are intended Any ypreliminary approvals The DOE received 19 initial applications for loan guarantees to support the construction of advanced nuclear power plants (up to $18.5 billion in aggregate) to encourage the commercial use of new or significantly improved energy technologies [Technologies which] "will enable project developers to bridge the financing gap between pilot and demonstration projects to full, commercially viable projects that employ new or significantly improved energy technologies" The loan guarantees are ultimately funded by the borrowers and are expected to act as a catalyst and reduce financing cost by demonstrating government support without direct cost to the taxpayer issued in 2009 will be conditional upon the applicant receiving a combined Construction and Operating License (COL) from the Nuclear Regulatory Commission (NRC) The first of these COLs are not expected to be approved before 2010 Applications were due on 12/19/2008, with a fee of $200,000 to accompany the pre-application (Part I) and $600,000 for the full application (Part II) Regardless of their position in the initial queue, all applicants who submitted Part I applications are invited to submit Part II of their applications applications from 17 utilities to support the construction of 14 nuclear power plants involving 21 new reactors of five different designs Total capacity involved is 28,800 MWe The total requested comes to $122 billion, significantly more than the $18.5 billion offered The aggregate estimated construction cost involved the 14 projects is $188 billion DOE will review the submissions and then rank them in order to guide applicants regarding whether to complete Part II of their application in December In light of the interest t shown and the fact that the scheme is borrower-funded, the industry has called for the amount available for reactors to be increased to $100 billion Several analysts have said that the loan guarantee authorization is too small and that the DOE guarantees would have to be supplemented by other sources Sources: www.world-nuclear.org/info/inf41.html; www.eca-watch.org; http://djysrv.blogspot.com/2008/11/nuclearengines-of-job-creation.html 2009 by ScottMadden. All rights reserved. Copyright 7

LGP for Front-End Nuclear Fuel Cycle Background Objective Guidelines Progress to Date On 6/30/2008, the DOE invited applications for loan guarantees to support the construction of uranium enrichment plants (up to $2 billion in aggregate) There are three ways to enrich uranium: gaseous diffusion, gas centrifuge, and laser enrichment. The gaseous diffusion enrichment process is the only method now used in the US USEC, Inc. (originally a government-owned owned corporation, privatized in 1998) is currently the only US provider of enrichment services provides approximately 50% of the US market needs Three companies USEC USEC, Louisiana Energy Services and AREVA Enrichment Services are building or plan to build new gas centrifuge enrichment facilities in the US A fourth company, GE Hitachi Nuclear Energy, plans to build a facility in Wilmington, N.C. that will use a laser process for enrichment Loan guarantees are intended to encourage the commercial use of new or significantly improved energy technologies [Technologies which] "will enable project developers to bridge the financing gap between pilot and demonstration projects to full commercially viable projects that employ new or significantly improved energy technologies" The loan guarantees are ultimately funded by the borrowers and are expected to act as a catalyst and reduce financing cost by demonstrating government support without direct cost to the taxpayer Any preliminary approvals issued in 2009 will be conditional upon the applicant receiving a COL from the NRC Applications were due on 12/2/08, with 25% of the application fee to accompany the pre-application (Part I) and the remaining 75% for the full application (Part II) DOE received two applications for enrichment plants with total estimated project costs of $4 billion DOE will review the submissions and then rank them in order to guide applicants regarding whether to complete Part II of their application in 12/2008 Sources: www.world-nuclear.org/info/inf41.html; www.eca-watch.org; http://djysrv.blogspot.com/2008/11/nuclearengines-of-job-creation.html 2009 by ScottMadden. All rights reserved. Copyright 8

LGP for Clean Energy Projects Background On 8/7/2006, the DOE issued its first solicitation for loan guarantee applications focused on clean energy and advanced fossil technologies (up to $2 billion in aggregate) A second solicitation was issued on 6/30/2008 (and amended d 10/29/2008), focused only on energy efficiency, renewable energy, and advanced transmission and distribution technologies, for an additional $10 billion in loan guarantees Objective Loan guarantees are intended to encourage the commercial use of new or significantly improved energy technologies The loan guarantees are ultimately funded by the borrowers and are expected to act as a catalyst and reduce financing cost by demonstrating government support without direct cost to the taxpayer 9 Guidelines The DOE published initial guidelines in the Federal Register on 8/14/2006, and guidelines were further refined in the Notice of Proposed Rulemaking (NOPR) filed 5/16/2007 and the Final Rule issued on 10/23/2007 In the Final Rule, the phrase "new or significantly improved technology" is defined as a technology "concerned with the production, consumption or transmission of energy that is not a commercial technology, and that has either: 1) only recently been developed, discovered, or learned, or 2) involves or constitutes one or more meaningful and important improvements in productivity or value, in comparison to commercial technologies in the US at the time the term sheet is issued" The Final Rule provides that the DOE may issue guarantees for up to 100% of the amount of the loan, subject to the EPAct 2005 limitation that the guarantee cannot be for more than 80% of the total cost of the project If the DOE guarantees 90% or less of the loan amount, the eligible lender and other holders may strip the guaranteed portion from the non-guaranteed portion of the debt instrument Sources: www.lgprogram.energy.gov; Coal Utilization Research Council report on DOE LGP (12/2007) Progress to Date The DOE received a total of 143 pre-applications for clean energy projects and advanced fossil projects in response to its initial solicitation on 8/7/2006 On 10/4/07, the DOE invited 13 project sponsors for clean energy projects (of a total t 16 projects) to submit full applications for loan guarantees DOE s application review process is ongoing, though availability of loan guarantee authority under this solicitation expires on 9/30/2009 No public announcements have been made on progress with the second solicitation on 6/30/2008, though the original due date for pre-applications was extended from 12/31/2008 to 2/26/2009

LGP for Advanced Fossil Energy Projects Background Objective Guidelines Progress to Date On 8/7/2006, the DOE issued its first solicitation it ti for loan guarantee applications, focused on clean energy and advanced fossil technologies (up to $2 billion in aggregate) Advanced fossil was not included in the DOE s second solicitation, but a third solicitation focused only on advanced fossil was issued on 9/22/2008 The third solicitation specified $6 billion in loan guarantees for CCS projects and $2 billion in guarantees for advanced coal gasification projects (for a total of $8 billion in aggregate) Loan guarantees are intended to encourage the commercial use of new or significantly improved energy technologies A principal goal of Title XVII is to encourage early commercial use in the US of new or significantly improved technologies in energy projects that offer the potential to reduce, avoid, or sequester air pollutants and/or anthropogenic greenhouse gas emissions The DOE published initial guidelines in the Federal Register on 8/14/2006, and guidelines were further refined in the NOPR filed 5/16/2007 and the Final Rule issued on 10/23/2007 An eligible project is defined as a project which: Is not (currently) a "commercial technology" Has the potential for replicability in other commercial projects in the US, and Is likely to be available in the US for further commercial application in order to develop an advanced coalbased power generation, industrial gasification, or advanced coal gasification facility constructed and operated in the US Emission limits are outlined for eligible projects, including sulfur dioxide, mercury removal, nitrogen oxide, and total particulate emissions The DOE received a total of 143 pre-applications for clean energy projects and advanced fossil projects in response to its initial solicitation on 8/7/2006 On 10/4/07, the DOE invited three project sponsors for clean energy projects (of a total 16 projects) to submit full applications for loan guarantees DOE s application review process is ongoing, though availability of loan guarantee authority under this solicitation expires on 9/30/2009 No public announcements have been made on progress with the third solicitation Sources: www.lgprogram.energy.gov 10

Appendices

Credit Subsidy Cost Considerations o s What is a "credit subsidy cost"? This represents the net present value of the expected long-term liability to the federal government of issuing the loan guarantee The LGP was designed to be self-funding and risk-based priced so that more creditworthy borrowers would pay lower fees than capital-constrained, start-up applicants The credit subsidy cost is akin to an upfront underwriting fee charged by a commercial financial guarantor for providing a guarantee of a municipal bond issue How is it calculated? The DOE s approach to calculating the credit subsidy cost is to determine the probability of default (PD) and loss given default (LGD) to estimate the probable loss An important concept is the timeline for the expected outstanding guaranteed principal, loan repayments, default and recoveries of principal after default The DOE will use standardized composite-rating agency tables to determine the expected and extrapolated default rate relating to the rating in the credit assessment The DOE staff will use all information in the application to provide the applicant with a range of potential credit subsidy amounts, and a final amount will be negotiated prior to issuance of a final term sheet What is the role of credit rating agencies? A rating agency preliminary credit assessment must be provided in applications for loans of at least $25 million, followed by a final rating 30 days prior to the close of the loan This serves as an integral input in estimating the initial PD and LGD The assessment is based on the underlying economics of the borrower and/or the project without considering the guarantee The assessment will represent the estimated risk of providing the guarantee from the guarantor s perspective rather than the "AAA" rating of the loan with the guarantee The DOE will consider other types of information similar to that which a commercial lender would require when considering a corporate or project financing to determine its expected liability Who pays this cost? At the time of the closing, the borrower will pay the credit subsidy cost The DOE could alternatively determine that Congress has made an appropriation for the credit subsidy cost, which is considered unlikely at present Sources: "Fitch s Perspective on the US DOE s Loan Guarantee Program" (10/29/2008) 12

Considerations o s for Regulated Utilities t Overview Some of the applicants to the LGP will be rate-regulated utilities or wholesale generators with a power purchase contract with a utility These applications will likely be for projects involving new nuclear power plants or advanced coal projects, such as integrated gasification combined cycle (IGCC) or carbon capture and storage Advantages Among the potential benefits for those regulated utilities in non-restructured states is that their regulatory commissions or state laws may provide greater assurance of revenue recovery than would be possible for similar projects selling into a restructured power market If the state provides a mechanism for a dedicated tariff rider to recover the investment in the new facilities, the DOE might be able to take a secured interest in the dedicated revenues (akin to a tariff-backed securitization bond) and thereby significantly reduce the credit subsidy cost That could reduce the cost of the guarantee because there is an allocation of prudent costs associated with the project to rate payers Complexities Among the issues to be resolved by a regulated utility (or its state regulatory commission or legislature) seeking to take advantage of the DOE loan program are the following: Existing secured mortgage bonds often have a spreading lien that applies to all utility fixed assets The effect of the DOE loan guarantees on the utility s return on equity and profitability The utility s flexibility to structure the investment to enable the utility and its rate payers to maximize the potential risk mitigation of the DOE program Sources: "Fitch s Perspective on the US DOE s Loan Guarantee Program" (10/29/2008) 13

Considerations sdeato sfor New Nuclear ucea Build Overview Prior to commercial operation, credit analysis of a new nuclear plant is similar to other long-lived assets, though there are a number of special considerations Construction Risk The allocation of construction contract risk between the sponsor and engineering, procurement, and the construction contractor is a key rating consideration Pre-completion risk is heightened by the involvement of government agencies in the approval of a license (NRC) and evacuation plan (FEMA), as well as the industry s historically poor track record of accurately predicting the costs and schedule for constructing nuclear plants While the new, streamlined COL process may substantially reduce pre-completion risk, the process remains untested Additional considerations include whether regulatory support (such as forward-looking construction work in progress [CWIP] payments for a regulated utility) and financial support, including federal loan guarantees and state legislative initiatives, are available to reduce construction risk Post-Completion Risk Post-completion, nuclear facilities have a low incidence of failure but high economic consequences in the event of an extended outage Since the variable costs of nuclear generation are extremely low, the incremental cost to purchase replacement power in the event of an extended outage can be very high Companies that own and operate nuclear plants need to maintain an adequate financial cushion in case there is any extended outage to fund necessary repairs and fulfill any contractual power sales obligations with replacement power Sources: "Fitch s Perspective on the US DOE s Loan Guarantee Program" (10/29/2008) 14

Contact Us For more information on the DOE Loan Guarantee Program, please contact us. Steve Bucalo Partner ScottMadden, Inc. Ten Piedmont Center Suite 805 Atlanta, GA 30305 Tia Owens Associate ScottMadden, Inc. Ten Piedmont Center Suite 805 Atlanta, GA 30305 Phone: 404-814-0020 Mobile: 770-331-8605 stephenbucalo@scottmadden.com Phone: 404-814-0020 Mobile: 678-427-2861 tiaowens@scottmadden.com 15