EECBG Revolving Loan Fund Webinar (Text Version)

Below is a text version of the December 10, 2009 Revolving Loan Funds.

Announcer: Merrian Fuller

Hi, this is Merrian Fuller Im pleased to welcome you to our webinar on revolving loan funds. I am an employee of the Lawrence Berkeley National Labs and a member of the Department of Energy's financial swat team. We have a great line up for you today.

Just a few notes, all of the participants can ask questions via the Q&A box, writing them in, all the participants will be muted. We will be going through several different presentations and then taking questions at the end as well, but feel free to kind of write questions in as we go through. I'll be taking not of those and making sure that were able to answer them during the session ideally or if not we'll provide a Q&A follow-up on the website. So, I'd just like to welcome everyone, were really excited to be able to support cities and states creating revolving loan funds, and we have a wonderful set of speakers. Samuel Booth will be going first from National renewable; NREL National renewable energy laboratory, then Eddy Trevino from Texas, with the Texas Loanstar Program, Kathi Montgomery from the Montana Alternative Energy Revolving loan program and Howard Banker from Energy Program Consortium. I will just turn it over directly to Sam who'll be going through kind of a best practice in revolving loan funds. Sam!

Next Slide: Overview

Samuel Booth:

Ok, Thanks Merrian and thanks for everyone that's listing. Basically were just going to go over the purpose of the presentation is to cover an overview of revolving loan funds for state and local officials, and talk a little bit about how to set one up, were going to go over the existing programs structure of revolving loans fund, the loan process, the opportunity presented by our funds, how to set up revolving loan funds, best practices, risk management and look up the results from some of the existing programs.

Next Slide: Summary

Samuel Booth:

So in summary basically, revolving loans fund is a source of money from which loans are made, as the loans are repaid they go back into that same pool of money and additional loans are made so in that way becomes a revolving financing mechanism.

From the benefits you'll see from a revolving loan fund they help encourage investment in energy efficiency and renewable energy, you can provide information and technical assistance to borrowers; this will reduce transaction cost and increase information awareness, you can potentially provide access to capital to borrowers that wouldn't otherwise have access, and typically result in a reduce borrowing cost when compared to private sector interest rates, also it helps create jobs mostly in the manufacturing and installation of the technologies, and reduces energy consumption and provides environmental benefits like greenhouse gas reduction. You can also leverage existing capabilities of your current energy programs like energy audits or technical assistance and sort of use those or roll those into the revolving loan fund.

A few things to consider; other programs could have higher impact in terms of dollars invested per BTU saved, this is in only one of many sources of capital for someone looking to invest in energy efficiency or renewable energy, and prudent risk management is needed to ensure the longevity of your revolving loan fund.

But in conclusion, I think revolving loan funds are a good use of the ARRA capital inflow, and that they're not subject to fund expiration at the end of the 3 year time frame, and they do have limited program administration and staffing requirements compared to some other uses of funds.

Next Slide: Existing Programs

Samuel Booth:

So taking a look at some of the existing energy loan programs, we see that there's a large number of existing energy loan programs for both energy efficiency and renewable energy. Looking just specifically at energy efficiency, 29 state level programs, 34 utility programs, and 5 municipal programs, and some have hybrid programs that combine both the public and private sector. We break these programs downs a little bit more, there's a verity of program types from interest rate buy down to direct grants, loans, and then to revolving loan funds; the funding to these programs come from a verity of areas, from legislation or appropriated funds, from bonds potentially city, state, county bonds, violation funds; many of the existing programs were started with petroleum violation escrow funds, and sometimes there's multi tier funding sources as in part of the funding will come from the private sector, and part of the funding will come from the public sector. There's a verity of loans types for efficiency, renewable, or a combination of those 2 or even efficient vehicles; Loan recipients and sectors can vary from residential, governments, commercial, schools, and industrials as well. But the big take away here is that there are a verity of existing programs and they vary substantially.

Next Slide: RFL Basic Structure

Samuel Booth:

Here's the basic structure of a revolving loan fund, you start out with the initial capitalization, which would probably be ARRA funding in this case and you can add other funding sources as well, you make loans or disbursements or energy efficiency and or renewable energy, and the principal, interest, and the fee's from those loans goes back into the revolving loan fund, and the administrative cost come out on the top. You need to make sure and set your interest and fee's to an appropriate level to cover your administrative cost, and make sure that your capital base isn't eroded.

Next Slide: Loan Process Overview

Samuel Booth:

So here's a basic overview of the loan process. You start out with kind of a first contact with the borrower and a loan application. The application is reviewed, loan closing procedures, project construction, project completion, and loan repayment. The big thing you want to get out of this process is that this process should really be customized for each program. So customize it based on your target audience, your loan terms, the levels of sophistication of people you're trying to subscribe to your program.

Next Slide: The ARRA Opportunity

Samuel Booth:

So, quick overview of the ARRA Opportunity; revolving loan fund are an accepted and encouraged use of ARRA funding, they can see that the large amounts of funding that are available for state energy programs, energy efficiency conservation block grant, and the weatherization intergovernmental program. The funds are not subject to the expiration at the current 3 year ARRA timeframe, but they must be lent out, but the repayment can be stretch over additional years. The money recaptured through those loans payments, must be used for the same purpose unless approved by the DOE, and the eligibility and procurement requirements for programs for those funding sources such as prevailing wages requirements apply, so that needs to be considered. But, RLF's do extend the impact of the ARRA funds.

Next Slide: Starting an RFL: Begin With The Basics

Samuel Booth:

So, Im going to start out here with you know what it kind of takes to set up the basics of a revolving loan fund. I think the best place to start is reviewing existing programs in your state, not just energy programs but other revolving loan funds like the EPA, Clean Water, and ground field revolving loan funds, and look to really leverage some of the expertise and the knowledge in these funds for help in setting up your own funds.

You want to determine a clear purpose and goal for your revolving loan fund, so for example you can say you want to increase small business energy efficiency investment, you want to have an annual savings of $200,000 or 2 million kWh, and you need to determine the allowed and prohibited uses of funds. So you can say you'll be allowed 2 loan funds for energy efficiency investment, but not for the cost of obtaining a financing.

Next Slide: Determine Requirements

Samuel Booth:

So as you get further into determine requirements you'll start out with the borrowers, you need to determine eligibility criteria, reporting criteria, what sort of insurance or collateral you'll want with your loan, and repayment terms.

You'll need to look at the loan terms, in terms of maximum length, max. Or minimal loan amount, the percent of project funding that the loan can be used for, for example some programs will only fund 70% of a project and the other 30% would need to come from the private sector, that percentage can be set almost across the board; administrative fees and interest rates.

You'll need to develop program forums such as the loan application, loan disbursement, reporting, monitored and verification, and all these are kind of interlinked in some way, and that some of these decisions effect others ones, for example, if you decide you're going to loan for energy efficiency rather that PV maybe your maximum length for loan is shorter if your lending for PV maybe you'll need a longer length so people can have enough time on the loan to pay back that system.

Next Slide: Finalize Program Details

Samuel Booth:

You'll need to finalize your program details, so staffing is going to be one of the key area's here, who will be responsible for the program, what administrative duties, staffing requirements, and skill sets are needed, a committee will need to be set up to review the loan applications, I think you're really looking to leverage existing expertise from other agencies or the private sector. Several programs have combined with the private sector to administrate their programs, so they've gotten help from people in the private sector that have expertise in evaluating borrowers and distributing capital to help them in some fashion or verity in running their program.

You'll need to define a matrix for selecting projects as well. So you can rank projects by payback or energy savings, for example and maybe set up some type of criteria like, if you want to save a least 10 million BTU's per $1000 spent.

Next Slide: Program Operation

Samuel Booth:

Looking at program operation, you'll start out with capitalizing the program with funds, you really need to focus on marketing and promoting your revolving loan fund, as we saw before, there's a lot of existing programs out there, a lot of those programs, are undersubscribed, so make sure you have some sort of money set away and a plan for marketing your program to your target audience, and making sure your able to disburse the capital you've put into it, provide loans and technical assistance to borrowers, track and monitor your existing loans, as well as the progress to the program goals, offer assistance to borrowers, technical assistance if they need it as, as well as assistance potentially in flexible terms if there have problems repaying their loan, and communicate success of your program.

Next Slide: Standardization versus Customization

Samuel Booth:

One of the things that have come up recently is kind of the benefit of standardizing these loan packages versus having customized loans. So, national standardization or harmonization; I think we'll hear a little more about this later on but, in the terms of approval procedures, maximum loans links, rates and eventually to allow for packaging of loans to be sold into a secondary market. It would also allow for asset tiers in the loans and some kind of loan tracking, in increased impact through the programs and an increase investment in efficiency and renewable energy by taking advantage of a secondary market for loans, and reduce transaction cost as well so now being a standardized procedure, standardized forms for a known and simple process for getting the loans. There are some negatives to standardizing the terms across programs all across the country, is it limits the amount of innovation that a single program could do and the ability to customize a program, and also the ability to provide flexibility in loan terms for borrowers, and the risk and return are difficult to standardized for energy efficiency across broad categories of investments like lighting, and HVAC as well across broad geographic regions where programs will be administered.

Next Slide: Risk Management

Samuel Booth:

Now we're going to talk a little bit about best practices and one of the things, and if you really want to hit here, one of the important things is risk management. The determining process for dealing with loan defaults, are all of your loans properly secured or guaranteed, and what is the eligibility of your funds for covering losses in the event of a loan default that is not properly secured or guaranteed. I would recommend if possible a loan guaranteed built in to each RLF. Familiarity with borrowers and technical assistance can help prevent delinquencies. Energy efficiency proper characterization of the improvements to be made to save energy is critical for determining and verifying the engineering estimates that the energy savings will amount to enough to cover the loan, and monitoring and verification of those savings can be very important to dispute resolution, and you must set the fee's and the rates at proper levels to prevent erosion of your capital base. But the big take away is just proper risk management will be and should be a key driver of your programs success.

Next Slide: Best Practices

Samuel Booth:

A few more bullets and a little more information on best practices; You'll need to customize your program to the needs of your target audience, so for example if your program is focused on schools, customize your program to the needs of schools so that typical energy efficiency investments these schools would make and know your audience, know their level of knowledge is about their options of energy efficiency.

Start with a user friendly approach and simple policies and procedures; so this will kind of go what a user friendly approach will be depends on your target audience, this also really helps with your program marketing and subscription. So make it easy for people to understand your program, for people to apply for loans to get help from you, etc.

And, clearly define the program goals and the mission, provide good technical assistance for borrowers, invest in information technology and staff capacity, so as your program grows, the more ability you have to track loans, electronically and the more stability your staff has to work with borrowers the better, and make sure you make borrowers aware of other financing sources and the risk of financing sources for these loans, in the private market and as well as the risk of taking out a loan that will need to be repaid and inform borrowers of other energy programs that might be adventurist through your office, leverage theses overlapping capabilities that will leverage the ability to conduct energy audits and provide technical assistance in this revolving loan program.

But a well designed program will help people save time, money, and energy.

Next Slide: Results

Samuel Booth:

I'm going to look at the results a little bit from a couple programs and you'll hear from a few more programs later on, but there's been about 1 billion dollars in loans made by this state's energy programs of Oregon, Texas, and Nebraska combined to date. The average for these programs across all sectors run by sectors is residential, commercial, industrial they don't all necessarily loan the same sector, it's about 15 million source BTU's per $1000 loaned. If I tried to put that in a more understandable context, what that works out to on a national average level is about 8.7 years for simple payback. The results for any 1 specific program are going to vary based on energy prices, incentive programs, and the type of funding or the type of projects your revolving loan will lend into so the payback for HVAC, commissioning, and lighting can be quite different than the payback for solar, and wind. Etc. But what you really want to see here is there is a long track record of success in these energy loan programs in the cross sectors and across locations in this country.

And, that's all I have today _________ and I'll turn it over to the state programs and Thank you very much.

Merrian Fuller:

Thanks Sam, That was really helpful;

Next Slide: New DOE Guidance on RFL's

Merrian Fuller:

I'm now going to go quickly through some of the guidance that did just come out to clarify some of the language that was in a restriction on revolving loan funds for block grant money, so the URL for where you can find a full document on this is at the bottom of the page and we'll also have it at the end of the slide. But the basics point of this guidance is that does confirm that block grant funds that are used to capitalize revolving loan funds, so those are the funds that the direct loan capital for the program are limited to the greater of either 20% or 250,000 million dollars, and particularly its added clarity about what it does not apply to, so it does not apply to funds used for administrative cost to set up a revolving loan fund, it does not apply to funds that are used for a loan off reserve or loan insurance or to do a interest rate buy down, and it doesn't'' apply to any other programs that are not revolving loan funds for your directly loaning out the block grant money. So, we can take some questions on this definitely at the end as well, but this came out just this week, so we wanted to make sure that everyone that are interested in revolving loan funds saw this, it does not apply to states SEP Money, or territories so, important piece of information it was originally in the language for the block grants but there wasn't a lot of clarity around this, so that was the effort to provide some clarity and some additional details on that.

So now where going to go to some folks on the ground who has been running programs for many years. Eddie is from Texas LoneStar Program. I am going to let him start off. Thanks Eddie.

Eddie Trevino:

Thank You Merrian, Im with the state energy conservation office and I manage our Loanstar project here in Texas. Im going to give you just a high level overview of our program, but Im going to focus on our; just thinks to be aware of and lessons learned apart of this process, so as we walk through these slides those items will be highlighted in red text.

Next Slide: LoanSTAR Background

Eddie Trevino:

So, LoanSTAR just so you'll know, the STAR although its Texas means saving taxes and resources and what we do is we finance energy retrofits for political subdivisions. That includes state agencies public schools, county hospitals, and local government. The objective of our loan is to have these energy efficiency retrofits pay for the principal interest of the loan expenses. Our loan was initially capitalize with petroleum violation escrow funds, that was back in 1988, our fund values right now is $125 million dollars, we've actually had 200 loan to date, and the average payback for our loans is 6 years.

Next Slide: Loan Parameters

Eddie Trevino:

Now our maximum loan amount is $5 million dollars, although the political subdivision can get up to 2 loans, what they have to do is be in repayment on 1 of the loans before they can obtain a second loan, and our loans are structured as a reimbursable contract, so as expenses come in the contractors; political subdivisions will request reimbursement for payment to subcontractors. One of the things you have to be aware of is that one of our guidelines is as you can see is that one of the loan must be in repayment to qualify for a second loan. One of the things you may run across is the definition of repayment. There are instances where some escrows or contractors, what they want to do is get in repayment or request reimbursement and start repaying on a reimbursement on part of the loan not the entire loan, and they do that so that they can acquire the second loan and get the extra money of just a little bit quicker. What we do is our policy is that the project has to be completed and completely in repayment before the second loan can be obtained. So, that's a question that will always come up. The interest rate on our loans is 3% fixed, and our loan term is 10 years or less.

Next Slide: Financial Consideration

Eddie Trevino:

Now, our payback guidelines, we have them in 2 different categories. 1 for design bid-bill contracts another for performance contracts. One of the things we require in our guidelines is the cost reduction measures for the individual cost reduction measures you have to have a payback that's less than its economic useful life of that cost reduction measure, and then in composite the cost reduction measure payback has to be 10 years or less, and what this does is this limits some of the potential cost reduction measures that may have an extended payback well beyond the economic useful life or technological useful life of that particular measure. For performance contracts, our composite payback has to be less than 10 years, 10 years or less as well, but part of the composite payback we require that the calculations include measurement and verification cost and also loan interest cost. Now we have an extensive list of checks and balances to make sure that there's complete understanding or transparency for the performance contracting side particularly for state agencies, that's our mandated to provide these guidelines for state agencies. I've provided a website so that you can download those documents if you're interested and get an idea of the check and balances we have in place for these projects.

Next Slide: Project Types

Eddie Trevino:

Now there's 2 types of projects that we fund. The first one is design bid build projects, those are not guaranteed savings but the borrower is still responsible for repaying the loan with energy cost reduction; and there's also an energy savings performance contract, now those are guaranteed savings. In each instance we require performance bonds be issued or be obtained by the contractor for those projects.

Next Slide: Application Process

Eddie Trevino:

Now there's 2 ways for getting in align to obtaining a loan. Our methodology right now is getting ready to change is, first come first serve. What that means is that political subdivisions would submit a memorandum of understanding requesting or getting in line for an energy efficiency retrofit loan. When funding is available what we would do is we would countersign the document and send it back to that political subdivision and they would have a period of time to deliver all of our application requirements, which would include an energy assessment report of it design bid build, or utility assessment report in the case of performance contracting. One of the things you have to do to use that methodology is actually define what you mean by first come first serve. Whether it's by signature date of the memorandum of understanding or if it's whether or not the first one that comes in with a completed application package. There will be some confusion there so just make sure to define what first come first serve means.

The other thing you have to determine in ahead of time, and these are judgment choices, if you go first come first serve by MOU date for example, if a project has a $5 million dollar application in line and you have a $200k application right behind it, then you have to make sure your decide ahead of time do you award the smaller loan before the bigger loan or where do you draw the line for those types of decisions. So that's important.

We're transitioning to competitive application process next year, we should have it posting in the Texas register and a couple of by the end of the week or the beginning of next week, and what we have to do as we transition to a competitive application process is design methodology of how we are going to school the applications, I know Sam covered some of those details in his presentation.

Next Slide: Cost Reduction Measures

Eddie Trevino:

Again on guidelines for cost reduction measures, what you want to do is you want to decide criteria for what's an allowable maximum time for cost reduction measures. If you don't do that ahead of time what can happen is you can get some cost reduction measures but although they composite is reasonable, you may get some smaller cost reduction measures that have a payback that's really not practical or feasible. The other thing you have to decide is the application for your loans, whether you want it to be renovations, in our case we have renovations, major renovations, and new construction, and what major renovations are is the scenario for over 50% of a particular structure is effect by this loan. So, you have to decide what you're going to allow the loans on, not only by energy retrofit types but by the magnitude of the renovations.

Next Slide: Measures and Verification

Eddie Trevino:

Then what you have to do is your going to have to decide the requirements that you have for; the measurement and verification requirements that you're going to have to have for the design bid build, and also for the performance contract. What you have to do is distinguish between what are going to be guidelines and what are going to be requirements because that's a question that always comes up from the vendors and contractors. In our case we use IPMVP which is the international performance measurement and verification protocol and also ASHRAE as our guidelines. I've seen some other states use the federal energy management program in addition to supplement IPMVP because that program has specific procedures to applying concepts in the IPMVP. So you're going to have to decide, you know, on the measurements and verification how long are you going to are you going to measure by, what the reporting requirements are, what the guidelines are, and what requirements that is not negotiable.

So that covers my presentation, if you have any questions Im providing contact information for you, just give me a holler or send me an email, be happy to help you. Thank You!

Merrian Fuller:

Great, Thanks Eddie I appreciate it. We're now going to hear from Kathi Montgomery from Montana. She has a program that also address residential customers, I see we just have a question including, Is there a minimum amount of funding that can capitalize a residential EE program? So Kathi, if you can address that during your presentation that will be great, if you have an answer to that; So, I will let you take over.

Kathi Montgomery:

Great Thanks, Our program is a little bit different from the Texas program, we fund smaller projects, our program began with the legislator setting the criteria for our program at $40k as the maximum loan started out at 10 and we raised it, our program is funded by air quality penalties. So, we never know at any given year what kind of violations there will be. We've collected $2.7 million to date. So, ours is a much smaller program than what they've been running in Texas. The other big difference in our program is that it's really geared toward renewable energy projects, so those often don't have the payback or the kwh saved that perhaps the energy conservation projects would have, so we have different ways of evaluating, I guess the success of our program.

It is a low interest program, and we're getting ready to set out interest rate for next year.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

Here's just a quick rundown of how we started, and I guess this can actually speak to what it takes to capitalize a programs. We've have to date invested or have about $2.7 million dollars that we have collected and by the end of this year we'll have loaned out and what that revolves back in to our program is not enough to sustain the level of loans we have gotten to at this point, so we now will be receiving applications for much more than we have the ability to loan out. I think right now we are assuming that at our current rate we'll only have about $300k a year in principle being revolved back into the plan, so that really is ; we as you can see from the bottom here since July 1 of this year, we will have loaned out $1.3 million dollars by the end of this month. So, that is not enough, I don't know what the magic number is, and we are; go ahead and advance please.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

I guess that's not the right one, but anyway, we are putting $1.2 million dollars of additional funds from the ARRA program into this, so even then we still will not be able to keep up with the demand. So, were looking for some air quality violations.

The Partnerships that we've formed have probably been the biggest reason for our success, we started out with the Montana Renewable Energy Association, we brought those dealers and installers of small renewable energy systems to the table early on to help us develop our program and to help us set criteria that would achieve the goal that the legislator had of providing an infrastructure for this small businesses who were providing these service in our state, if it seemed to the legislator and to the authors to the bill that one of the restrictions in this industry growing was the availability of capital for the projects. Banks were not used to loaning money for renewable energy projects so this gave people away to finance these projects. Montana Business assistance connection is a local economic development agency in our area, and they provide the financial services for our program, so again we work very closely with them to make sure that the information we're requesting from borrowers is adequate for what MBACK needs to process these loans and I rely on their expertise on the financial side of things because my expertise is in the technology.

We also work with the utilities to leverage the incentive programs that are available; we work with the state wide economic development agency and also closely with the USDA programs again to leverage funding in to those projects.

Merrian Fuller:

And, Kathi I just have a question here from Eddie actually, and he's wondering just to clarify the source of funds. Is it regular environmental penalty fees that you're using?

Kathi Montgomery:

Yes, its air quality penalties both the federal and states Penalties, and it's the cash portion of every violation that goes into this fund. So, even when violators have the opportunity to propose supplemental environmental plans, there's always a cash penalty of some sort.

Merrian Fuller:

Got it. Great Thank You!

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

I think I kind of went through the business systems connections contract, we do have a contract with them, we're in the process right now of issuing an RFP for these financial services to meet the requirement of our state procurement laws, but whoever receives the contract will do the credit scoring, they will continue to recommend approval and denial, and they will do the basic loan documents, issuance and they collect the payment and then transfer money back to our fund quarterly.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

We spend a lot of time marketing and Eddie touched on that as well or Sam I think touched on the marketing. This is some of the ways we have tried to get out; media events, television shows, and things like that as well. But a lot of time spent out there marketing this program to get us to the point that we have completely loaned out the funds this year.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

Where we're adding our ARRA funds actually we put in; we're putting in $1.2 million dollars that will allow us to increase the maximum loan to $100,000. I don't anticipate that all of the loans will be that large, but there are some opportunities for some wind turbines that have recently become more available in a range that that matches the use of small businesses. We have a couple of 20 killowatts turbines that are planning to be installed to meet the needs of business, a shopping center and a restaurant, and these are in urban settings so these will be interesting to see how these projects come out. But this allows us to do some things that maybe have not been done before and again to provide a financing mechanism for project that may have had a hard time getting funding from a conventional lender.

We have asked in this program for a categorical exclusion for some of these technologies and has yet to receive that but we already in Montana do; we have MEPA (Montana Environmental Policy Act) so we already do very similar analysis, checklist, similar to what the federal requirements involves. So, we will just if we have to send every one of those loans app; environmental reviews in for a NEPA analysis, but we are really hoping that before we're ready to issues the funds in mid January we'll have an answer on that.

We probably will; we have always allowed people to finance energy conservation measures along with their renewable energy projects, and we may limit that so that people cannot take up to $100k in those energy conservation measures. This is the one piece of our SEP funds that is really targeted toward renewable, the bulk of our SEP funds coming into Montana are going to be used for energy conservation projects, so that why we'll probably limit that on the side.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

We have the RFP out for the financial services, we have begun accepting applications, based on the activity that we've seen in the last 6 months, we expect to fully loan out the ARRA funds in the first 6 months of the 2010. We do have a separate contract that we will write with our financial provider for the ARRA fund and have included the federal language into the loan documents, so there are a few other things that will be required in using these funds but we think we got those addressed.

Next Slide: Montana Alternative Energy Revolving Loan Program

Kathi Montgomery:

What's still out there? There is some language that has been brought to my attention that is in the; on the form that is used to collect or to apply for the federal tax credit for renewable energy projects that seems to indicate that government subsidies loans or funds that; projects that use government subsidies funds or loans may not be eligible for the tax credit, so that will be very important for us to figure out because that will apply to all of the loans that we issued in the last year for these renewable energy projects.

Merrian Fuller:

Yea, and just so that everyone knows, I don't know the direct answer to that, I know that that has been answered for other financing programs like PACE but and for PACE programs for example properties such as clean energy programs, you are allowed to get the solar tax credit for that type of financing, I will check into this language and make sure there is guidance written up on this.

Kathi Montgomery:

That would be great. Thank you, because that's kind of the next big thing that's sticking out there for me. We're setting out interest rate probable this week and we are ready to move forward with getting this money out on to the streets quickly.

Merrian Fuller:

Yea, and so just that everyone knows I will post that guidance both as a Q&A follow-up from this presentation which will go onto the webcast site and also if we can get it as formal guidance it will go onto the formal guidance page which both of those links will be at the end of this PowerPoint.

Kathi Montgomery:

That's awesome thank You.

Merrian Fuller:

Great, so let me just answer one question really quick there's a question here on the Q&A board, confusion still about the restrictions on revolving loan funds. So let me clarify, capitalize the word capitalize really means to provide those initial funds that will be used as direct loan capital for loans. So there's not restrictions on the set fee's, administrative cost, set up cost, various forms of credit enhancement, you might want to use for revolving loan funds, the restriction is on the fund that you put directly into that fund that is going to be used to subsidies direct loans or to directly loan out to folks. So for example, the maximum you can put in there would be 20% or $250,000 into the loan fund that would be given out as loans. So this question on this site here from Dennis, you'll be limited to $250,000 for the loan fund balance for that account. That only applies to block grant money not to SEP money. So hopefully that clarifies.

Im going to move on now to Howard Banker, whose going to talk a bit about how you're going to create a conforming loan product and look at secondary market, Howard?

Howard Banker:

Thanks, Thanks Merrian, So just quickly energy programs consortium is nonprofit organization whose board is made up of all the state energy officials and the public utilities commissioners, and it's a different state energy official networks are EPC and so we've been working on a project with NASEO the National Association of State Energy Officials.

Next Slide: Where should we begin? What is the "Lowest Hanging Fruit" & Why?

Howard Banker:

In several states to design and launch a perhaps a legitimately priced secondary market for unsecured residential loans and so this slide talks little bit about why we made that selection. One is in fact there already exist a secondary market for these kinds of loans, its Fannie Mae. They buy these loans, the problem is that as a pain they buys them at 12-14% interest, so the states that participate in it, and it's about 5 or 6 have to deeply subsidies the energy efficiency loans that are delivered to it. So, it's just not replicable it's too expensive. Another reason however is that, the loan architecture for these kinds of loans already exist, so that we don't need to recreate loan documents or consumer protection, or even a delivery mechanism. We already have financial institutions that know how to make these loans in every states in the United States, and this group of lenders exists and can continue to deliver loans into a secondary market product, and so and those loans can come from as we've heard a verity of places and so in New York states there's a public benefit fund that works to deliver these loans, in Massachusetts there's a utility sponsored program and in Oregon there's now a program between the states energy departments and the city of Portland __________ to deliver this kind of product. So, the notion is that there are thousands and thousands of these loans around the United States already being made. Most of them using the exact kind of conforming approaches that were talking about and so the notion is that then to gather as many of them together as possible and sell them into a single or a small number of secondary market programs so that the necessary scale of energy efficiency product can become of interest to the capital markets. Some other places that already makes these loans one is, folks might know the EPA homes performance with Energy STAR programs, they do about 10,000 loans per year more or less. But the big, the big whale in the ocean is Home owner that replace their HVAC and so contractor direct kind of activity, there's at least 3 million of these replacement that happen and most home owners do not process the funds in hand to do it, so they need financing and the contractor is the one offering it. So, again the goal is to work to produce a set of standard loan documents and approaches that can permit a sale to a secondary market investor, and we have worked to that and have now revived pricing on what this would look like and the basic requirement is that we need at least $25 million dollars per month in the delivery structure to interest the capital markets and so what that would do is change the current Fannie Mae rate from 12-14 and bring it down closer to 8%.

Next Slide: Conforming EE/RE Financing and Consumer Protection

Howard Banker:

So, these are a list of some of the existing consumer protections that this very particular approach offers, and so one is that unlike a credit card or even a home equity kind of financing, it's a fixed rate loan and so the interest does not come down. Terms of the loan, which in fact affect customers almost more than interest rate, in other words the longer a term a loan would be the lower the monthly payment and this is important in states without every high energy cost. So again in Oregon, the loans there are 20 years because the energy cost are fairly low. So, these other bulleted consumer protections are in fact either regulatory or warranty or consumer protections and we have a package of materials that if anybody wishing to have more detail about any role of this can send an email, I have contact information on a later slide, and we will fire out to you the entire package of materials. One of the; some of the other critical issues around creating a conforming loans product is how to manage the contractors. Which is primary concern and must remain a primary concern in any revolving loan program, the more poor work contractors do the less likely we will be to interest a great many home owners not to mention businesses and to consider energy efficient retrograde of their home, and so if you use financing to improvement or to provide energy efficiency upgrades, there is then lender liability which is not present in a direct state weatherization grant or other kinds of programs, so that means that if it doesn't work put simply the lender has liability and the home owner may not have to pay the loan back.

We also have put forward into this approach an automated approval process which allows some discretion amongst different states on how much credit risk they wish to take, and some of the states have modified the approach of an unsecured loan to add an additional security factor into the making of a loan by the financial institution, and it technically called a UCC that is to say they actually put a lien on the improvements, so if an HAVC is installed or a wind mill, there is a lien filed unlike a lien on a house, it is not expensive and does not require a lot of paperwork, it does give additional security to the loan product.

Next Slide: Conforming EE/RE Financing and Loan Collections

Howard Banker:

So, part of the approach here is that a lender; a financial institution that as in its approved by your state make the loan, under the underwriting requirements that the conforming loan product possess, and any state that wishes to either drive the interest rate lower or take on additional credit risk, that's all accommodated but then the state would put up the extra money necessary to accommodate it. So, if the purchase rate the loan is 8% and most states wish to make these loans approximately 5.99 let's say 6%, then there would be a 2. Buy down in interest, if the credit risk represented by the home owners FICA score or credit score is 680, let's just say, and you wish to get down to 620, then that extra credit risk is translated into cash that the state literally deposits into the security to cover what is expected to be a higher loan default rate, and many of those funds that are not actually used, if in fact the default rate is not as high as predicted, then the state gets the funds back. This approach also permits the lender to service the loan that is to say that the lender makes the loan and then collects the payments and it also permits the lender makes the loan and the utility collects the payments, so again this is a Oregon construct but there's legislator been passed in New York that now allows utilities so it's not on bill finance so the utility is not financing the transaction it's still a financial institution that makes the loan, but the utility collects the payments and so this permits a much broader approval process because rather than relying on a FICA score the financial institution can rely on the last 12 months of utility payments.

Next Slide: Contact

Howard Banker:

So, this is the contact information for myself and Dave Carey, who's working with us at EPC to deliver this approach and program by the end of the first quarter of 2010, and the simple approach is or the suggestion is that if you're going to put $250,000 in capital for loans than when that 250 is spent, your loan program has just ended. Another way to think about this is instead of using the 250 as loan capital, you use the 250 that is to say the state or the city and deposit it into a securitize structure and let the capital markets leverage your 250 with another 4 or 5 times of capital, so your $250,000 loan program can become anywhere between $1 million or $1.5 million in loan capital, and again instead of your $250,000 being put a risk in direct loans instead, it is a credit enhancement and so therefore then at least in our modeling those dollars return to the state to a greater degree and quicker than they do in a revolving loan fund.

Merrian Fuller:

Howard can you just explain like let's say you are a city and you got block grant funds, can you just describe like one example of exactly like just one case of how this might work on the ground so that people can have visual like what they would do next. They have you know $1 million what would they do next to set up the type of program you're talking about?

Howard Bankers:

Sure, The first thing is to send me a email, and we will send you the materials which you can study in some more depth, and then were happy to come, we are funded by Ford Foundation and The Department of Energy and some state energy departments and EPA and some others. So, we'll come to you and help explain this in a little bit more detail, but basically your money would be deposited into a security whether you're a city or a state and then the security would be use to buy loans from financial institutions, Did that answer it Merrian, or did I?

Merrian Fuller:

Yea, I think so, I just wanted people to be able to visualize more if they hadn't been in this world for a while, and it can be a little bit abstract. And I guess one question I had for you, We been talking on other call a lot about credit enhancements more generally, and often a typical example on our last call we had AFC first from the Pennsylvania help program, and they you know, they're maybe like a 5 or 10% credit enhancement, loan loss reserve fund sitting there as a credit enhancement, that basically protects a lot of the private capital that's coming in to this. How does that compare to what you're talking about?

Howard Banker:

Actually what's in Peters Bank is one of the approved lenders to deliver this loans and about 8 or 10 states, in effect whether you call it a loan loss reserve or additional collateral and a security, it functions the same way. But the capital market are not use to on any level buying energy efficient loans, then any kind of scale, and so the expectation, our desire here is to by working to bring this to scale and to show in fact that if you look at all of these programs nationally the default rate is less than 2%. So that until the capital markets get some experience in purchasing securities that contains these loans where still going to required to put the kinds of loan lost reserve in additional collateral that Peter's is talking about. But as we go forward and the capital market get more use to the really good performance that these energy efficient loans make, it will drive down the amount of additional collateral that the states and the cities need to deposit into these securities until hopefully someday we end up with none.

Merrian Fuller:

So I guess one question for me is, we actually been quite clear now with this new, set of guidance that came out on revolving loan funds and restrictions on that, that you can use; there is no restrictions on using funds as a loan loss reserve or a loan guarantee?

Howard Banker:

Thanks Correct, and in fact if you make the deposit, we will need some printed guidance on this, but if you make a deposit into a security as oppose to using the loan dollars as direct capital to consumers, you may in face t not necessarily be required to meet the Davis Beacon Prevailing Wage requirements.

Merrian Fuller:

Ok, That's interesting, and I think so I guess, I just want to give people some clear, direction on this in terms of where the restriction applies and where it doesn't, so just to be clear, I know that if you set it aside in Loan Loss Reserve fund there's not the 20% restriction, it sounds like for what you're talking about is still a question that we need to provide some additional guidance on is that.

Howard Banker:

That's Correct, I mean so, some of the participants that are committed to be a part of this, some of the states are, for that matter are calling it loan loss reserves but whatever you wish to call it still functions in the same way inside the security.

Merrian Fuller:

Yea, Ok. So we'll make sure, Howard and I are on the financial technical assistance team, so we'll make sure that we get some information on the particular use of funds in terms of the 20% restriction for block grants.

I'm just going to go through a few question here, there's one question I got from Nancy in Vermont about how people are planning to deal with the Davis Beacon requirements, there's actually going to be some additional guidance from the DOE in the next week, I was told on Davis Beacon Requirements and also on NEPA requirements, that should make thing a lot more clear. We realize that there's some serious issues with very small contractors being able to meet those requirements particularly some of the reporting requirements, so look for those in the next week, we can't answer that right now on the call, its going through a review process right now in terms of clarifying where it applies and where is doesn't. So I just wanted to say that. Looking at some of these other questions here, let's see, questions from Donald is would a securitized deposit need to be reinvested into the revolving loan fund or to an energy related appropriation? Howard, do you know about that?

Howard Banker:

The truth is we don't know, we would expect it would be, but in fact our belief is that the way we've structured these securities is that when the senior investors that is the say the institution investors, the big capital market people, their money is returned first so the additional collateral is stayed under the city provides could roll over in an effect to another security within a 3 ½ year period. So, your money literally revolves more like 3 or 4 times faster than a RLF fund might.

Merrian Fuller:

And just in general, I mean I think everyone knows this already but the block grant and the SEP money that goes into these programs do need to stay in the same type of; whatever they are being used for, the type of things that are required by the stimulus funds, they need to stay in that, kind of indefinitely and that pretty clear from the new guidance that came out but it would do that if you kept it in a type of securitized and deposit that as Howard was talking about.

One more question from Lisa, It looks like, Says "What is the DOE role in reviewing and approving revolving loan fund activity before disbursing funds to an RLF, can we draw down funds upfront to capitalize an RLF or do we need to get DOE approval before we draw down for each loan? No, you don't need to have DOE approval before drawing down each loan, the loan criteria that you'll use however does have to fit, kind of the general guidelines that are set out in the appropriate uses for stimulus funds. But once you set that create your fund, you should be able to just give out the loans based on your criteria without individual DOE approval for each loan.

So any other questions you can just write in to that box to the lower right hand side of your screen, one questions about the audio portion of this set, It will available it usually takes 1 week or 2 for that to come up the audio portion, we post the PowerPoint's usually the next day or the day after, so all of this will be available. Im going to just going to flip to our last slide.

Next Slide: DOE Resources

Merrian Fuller:

And, point out some of the resources that are available to you. First off we do have this technical financial technical assistance response team, Bret Kadison is leading that, and you can email him at the address you see at the top of your screen. We are able to have phone calls with you, give you information directly; if there's a document we know that would answer your question directly we'll send that to you, we've actually haven't been getting that many questions to this email address so please feel free to use it. Another thing we created was resources portal for financing programs, so it on the solution center page, the URL'S right there. It goes through a number of the different financial products you might consider and also the key programs elements to creating a financial product including what markets you might look at etc. so check that out. We have links to the resources we think that is useful for each of these products. Then the guidance that I went over briefly before is available at the 3rd URL you see right there. I would defiantly read through that if you're using block grant funds for revolving loan funds, and then if you want to look at our upcoming webinars and also the past webinars and also the PowerPoint for the past webinars those are all available at that 4th URL.

In terms of upcoming webinars, we do have one tomorrow on property asset clean energy programs, and kind of the administration of them, and how you set them up, and who administers them with some example from the field, and then on Tuesday December 15 we have kind of a __________ of lawyers from different places that are dealing with the legal issues surrounding PACE programs. So, I definitely encourage you to look at those.

One more question has come in, it says from Thomas "How are revolving loans funds accomplishments recorded under EECBG guidelines, total money spent, and number of households? I actually don't know all of the details of all the reporting requirements, you should expect though to have a way of tracking A. The money that goes out and the saving that your getting from those, those loans, and the specific requirements I have not seen any specific requirements yet, but Im not sure about that side of the house so, hopefully they'll get some information out to you already, you can talk to your field officer about more details. Other questions; question from Tim, "Is the conforming loan process that Howard explained considered and revolving loan fund that limits you at the 20% of proceeds? We need additional loan guidance on that, I think, so we're going to try to get that by next week, I think that technically it would not fit, I would say kind of informally that it shouldn't have the 20% restriction if you really just doing exactly just how Howard just describing, but we will get a more detailed memo out on the next week; any other questions or comments from any of the other panelist as well, In response to any of these questions? Ok a new question came in from Wayne, it says " Our county entered into the regional energy alliance that will loan dollars for energy retrofits, the manager wants use to draw down some of the money from the DOE so that it can cover overhead is that allowed? Yes, you can use those fund to cover overhead and administrative cost, there is a limitation on that, I think it's something like 10% but I don't know all of the details, you should be able to see that pretty clearly in the block grant guidelines, there's a administrative limitation so that not too much of the funds are spent on overhead cost.

Howard Banker:

This is Howard, one other comment as we've at least begun with residential, the point of accessing the secondary market, the capital market, is across the broad range of energy efficiency products we only begun with the consumer residential loan only cause it's something well understood. But the goal would be to come at using the same approach with a whole verity of different, whether its commercial, public building or multi-family residential whatever, the initial effort is to access capital market it's with something they understand.

Merrian Fuller:

And just so everyone knows there will be additional webinars on credit enhancement, I think we've rescheduled that one for early January, and a lot of the stuff is very new both to folks in DOE and to the folks in the fields who are doing it, so we want to work with you guys really closely just to make sure we are answering all of your questions as we go along and we will continue to provide additional guidance and webinar and other resources. We really want to hear what you're thinking about on the ground and are literally willing to sit down on the phone with you and figure out, you know what the issues are and get information to you as quickly as possible to make sure these programs are getting started up and getting funds out as soon as possible.

So, I think I will end there. I want to thank everyone for being on the call. Im going to review some of the questions that we've gotten on the call to make sure that if there's not answers provided on this call, that we get those out in the form of written Q&A that will go onto the webcast page afterwards, also look for additional information about the type of secondary market action that Howard was talking about, that would be I think very important for getting our funds to be used more quickly and have more fund available. In general, the message I've been getting from the Department of Energy is that as much leverage as possible, so as much private capital you can get to compliment the public flat funds that are being given to these programs the better, as much as there's a capacity at the local level for looking into various forms of credit enhancement. We really encourage you to do that, working with local banks and credit unions is going to be probably a new and very important source of capital as the credit market unlock they'll probably be more and more available, but as much as we can use public money to enhance what we're able to get in terms of the dollars going out on the ground, the better. So thank you all for participating today and again please feel free to email Bret at the top of the screen, he has access to all of use on the team, and we can coordinate to respond to request that we get from the field. So Thanks you very much and Have a great day!!