Long-Term Debt

6 Months Ended

Jun. 30, 2011

Long-Term Debt

Long-Term Debt

Note 10.  Long-Term Debt

Long-term debt is as follows, which approximates fair value:

	As of:
	June 30, 2011			December 31, 2010
3.04% - 3.97% Note Payable to Federal Financing Bank, due June 2030	$	38,308,484		$	22,152,902
6.5% Note Payable to MassDev, due September 2015	3,449,748			3,797,140
Subtotal	41,758,232			25,950,042
Less unamortized discount (warrants)	(96,654		)	(119,259		)
Total	41,661,578			25,830,783
Less current portion of long term debt	(688,410		)	(661,215		)
Net long-term debt	40,973,168			25,169,568

Based on the amounts outstanding as of June 30, 2011, principal payments required under the DOE and MassDev loans over the next five years, excluding discount due to warrants, are as follows:

	MassDev Loan		Federal Financing Bank Loan		Total
Period ending:
December 31, 2011	$	356,961	$	—	$	356,961
December 31, 2012	751,527		1,064,125		1,815,652
December 31, 2013	803,157		2,128,249		2,931,406
December 31, 2014	857,716		2,128,249		2,985,965
December 31, 2015	680,387		2,128,249		2,808,636
December 31, 2016	—		2,128,249		2,128,249
Thereafter	—		28,731,363		28,731,363
Total payments remaining	$	3,449,748	$	38,308,484	$	41,758,232

Note Payable to the Federal Financing Bank (DOE loan)

On August 6, 2010, SRS, an indirect wholly-owned subsidiary of Beacon Power Corporation, issued a Future Advance Promissory Note to the Federal Financing Bank (FFB) to evidence the loans made by the FFB under the FFB Loan Documents, which loans are guaranteed by the DOE (FFB Loans).  The FFB is an instrument of the U.S. government that is under the general supervision of the U.S. Secretary of the Treasury.  Under the FFB Loan Documents, the FFB has made available to SRS a multi-draw term loan facility in an aggregate principal amount of up to $43.1 million to finance up to 62.5% of the eligible costs of the Stephentown project. At the closing of the FFB Credit Facility, Beacon contributed the remaining 37.5% of the expected project costs in the form of $18.9 million in inventory, assets, and eligible project costs and $7 million in cash, which was deposited into an SRS cash account (known as the “Base Equity Account”) controlled by the collateral agent.

As 62.5% of the aggregate of all eligible project costs as of June 30, 2011, have been funded with the proceeds of the loans, beginning with the July 2011 loan draw, (a) 62.5% of all future requests for funding will be funded with loan proceeds from the FFB, and (b) 37.5% of all future requests for funding will be funded with the proceeds taken from the Base Equity Account.  Beacon is responsible for any cost overruns for the project.  As of June 30, 2011, SRS has spent $4.1 million of the cash that was initially contributed to the Base Equity Account, and has received advances of $38.3 million from the FFB for eligible project expenditures. Additional advances totaling approximately $148,000 were received from the FFB Credit Facility between July 1 and August 3, 2011.  The project is proceeding on budget, and we do not currently anticipate any cost overruns.  Each loan under the FFB Loan Documents is subject to the satisfaction of certain conditions.

The last day to receive an advance according to the FFB Loan Documents for eligible project costs is May 30, 2012, and the loan will mature on June 17, 2030.  Each advance bears interest at a per annum rate determined by the Secretary of the Treasury as of the date of the advance and will be based on the Treasury yield curve and the scheduled principal installments for such advance, plus a .375% premium.  Interest on advances under the FFB loan is payable quarterly in arrears. The weighted average interest rate on advances received as of June 30, 2011, was 3.556%.  Principal payments are due in 72 equal quarterly installments, beginning on September 15, 2012, through June 17, 2030.

Advances on the loan facilities may not be voluntarily prepaid prior to May 30, 2012, without the consent of the DOE.  Any voluntary prepayments shall be subject to the payments by us of a prepayment price determined based on interest rates at the time of prepayment for loans made from the Secretary of the Treasury to FFB for obligations with an identical payment schedule to the advance being prepaid. The loan facilities are subject to mandatory prepayments of differing amounts with net cash proceeds received from certain dispositions, loss events with respect to property and other events.  In addition, concurrently with the payment of any dividend by SRS, the loan facilities must be prepaid in an amount equal to 36% of the amount of such dividend. All obligations under the FFB Loan Documents are secured by substantially all of SRS’s assets (subject to certain exceptions), the book value of which were approximately $60.7 million as of June 30, 2011.

On June 2, 2011, SRS entered into an amendment to the Common Agreement dated as of August 6, 2010, (the “Common Agreement”) by and among SRS, as Borrower; the DOE, as Credit Party; the DOE, as Loan Servicer; and Midland Loan Services, Inc. (“Midland”), as Administrative Agent and Collateral Agent (in such capacity, the “Collateral Agent”) that, among other things, modifies certain covenants and certain provisions regarding the funding of reserves.  The DOE requested the changes (described below) in light of the currently historically low NYISO market pricing for Stephentown’s services.  The Company agreed to increase its corporate support of the Stephentown project because it believes that NYISO pricing will improve back towards historical pricing by the time that SRS is scheduled to make its first principal payment on the loan (September 2012).  We base this belief on internal analysis, on independent reports, and on the recent (February 2011) proposal by FERC to require grid operators under its jurisdiction to develop market pricing that reflects what is called pay-for-performance. The FERC proposal essentially recognizes that fluctuations in the grid can occur very quickly, and hence that frequency regulation that is provided very quickly (by fast-response suppliers such as Stephentown) is far more valuable to the grid than that which is provided more slowly (by slower-response suppliers such as fossil fuel generators).

The Common Agreement amendment, among other things, increased the amount required to be maintained in SRS’s debt service reserve account (the “Debt Service Reserve Requirement”) from an amount equal to two quarters of debt service to an amount equal to four quarters of debt service consisting of principal and interest.  However, the amendment provides that if the rolling 12-month debt service coverage ratio for any period of twelve consecutive calendar months which includes four quarterly principal and interest payments is at least 1.5 to 1.0, the Debt Service Reserve Requirement shall be reduced to an amount equal to two quarters of debt service.  The debt service coverage ratio for any period is the ratio of (a) SRS’s cash available to pay debt service for that period to (b) the debt service required to be paid by SRS during that period.  The amendment also changed the date by which the initial deposit is required to be made to the debt service reserve account (the “Initial Debt Service Reserve Funding Date”) from the Project Completion Date (as defined in the Common Agreement) to the first to occur of (a) the date on which the FFB has funded an advance requested by SRS in an amount equal to two quarters of debt service and deposited the proceeds of such advance to the debt service reserve account, (b) the second anniversary of the Physical Completion Date  (as defined in the Common Agreement) or (c) the Project Completion Date.  Under the terms of the amendment, the increase in the Debt Service Reserve Requirement is to be phased in over time, with the Debt Service Reserve Requirement being raised to an amount equal to three quarters of debt service on the second anniversary of the Physical Completion Date and to an amount equal to four quarters of debt service on the third anniversary of the Physical Completion Date.  The amendment further provides that an amount equal to four quarters of debt service consisting of principal and interest (or, after the rolling 12-month debt service coverage ratio test described above is satisfied, an amount equal to two quarters of debt service) must be on deposit in the debt service reserve account before any dividends may be paid to Beacon.

The FFB Loan Documents also contain financial covenants.  As of the last day of each fiscal quarter, SRS is required to:

· following the Project Completion Date (as defined in the Common Agreement), maintain a specified minimum ratio of current assets to current liabilities

· maintain a leverage ratio as of the last day of each fiscal quarter which does not exceed the maximum ratio set forth in the Common Agreement

· commencing with the first fiscal quarter to end after the first anniversary of the Project Completion Date, maintain a specified debt service coverage ratio as of the last day of each fiscal quarter

· commencing on the Initial Debt Service Reserve Funding Date, maintain in the debt service reserve account an amount equal to the Debt Service Reserve Requirement (as described above); provided that, in the event of any withdrawal from the debt service reserve account, SRS must restore the amount on deposit in the debt service reserve account to the Debt Service Reserve Requirement within ninety days of such withdrawal.

· commencing on the first anniversary of the Project Completion Date, maintain specified amounts in a maintenance reserve account and project capital account.  If SRS draws from these accounts, it is required to restore the accounts to the required amounts within ninety days of the withdrawal. The amount required to be maintained in the maintenance reserve account is an amount projected to be equal to six months of plant maintenance and fixed operating costs, currently anticipated to be approximately $559,000 for the initial year of project operation.  The amount required to be maintained in the maintenance reserve account will be recalculated prior to the beginning of each fiscal year. The project capital account requirement is $1,000,000.

The FFB Loan Documents also contain customary events of default, subject in some cases to customary cure periods for certain defaults.  The FFB Loan Documents provide that it shall not be considered a breach of any of the financial covenants so long as within thirty days of the delivery of quarterly or annual financial statements showing the breach of any such covenants, SRS causes Beacon to contribute cash through Stephentown Holding LLC to SRS in an amount necessary to cure such breach.

The FFB loan requires SRS to establish and maintain collateral cash accounts with a collateral agent.  The collateral agent has sole dominion and control over, and the exclusive right of withdrawal from all project accounts, other than the operating disbursement account and the maintenance reserve account.  All revenue must be deposited in the collateral cash account for subsequent flow to the remaining project accounts, as provided in the FFB Loan Documents.

Beacon has executed an Engineering, Procurement and Construction agreement with SRS, and as such has provided certain facility and flywheel system warranties.  In addition, as indirect owner of all of SRS’s equity interests, Beacon has entered into a Completion Guaranty dated as of August 6, 2010, pursuant to which Beacon has guaranteed all obligations of SRS pursuant to and in accordance with the terms of the Common Agreement and other FFB Loan Documents through the Project Completion Date. In addition, Beacon has entered into a separate Corporate Guaranty dated as of August 6, 2010, (the “Corporate Guaranty”) in favor of the DOE and Collateral Agent under which Beacon has guaranteed SRS’s obligations to fund and replenish the debt service reserve account in accordance with the Common Agreement.  Beacon’s maximum liability under the Corporate Guaranty was initially $2,397,000.  On June 2, 2011, Beacon also amended the Corporate Guaranty to provide that (i) prior to the Project Completion Date (as defined in the Common Agreement), its maximum liability thereunder is unlimited and (ii) from and after the Project Completion Date, its maximum liability thereunder is $5,000,000. Beacon will provide administrative services and operation and maintenance services to SRS, and SRS will be obligated to pay Beacon for those services, according to the terms of agreements between those parties.

Notes Payable to MassDev

On June 30, 2008, we entered into an agreement with Massachusetts Development Finance Agency (“MassDev”) pursuant to which MassDev agreed to lend to the Company up to $5 million. This loan derives from a funding collaboration between the Emerging Technology Fund of MassDev and the Massachusetts Technology Collaborative Business Expansion Initiative. The loan proceeds were used to help fund the expansion of our production facility.

The MassDev loan is evidenced by a promissory note under which we were able to request advances of up to $5 million total for the purchase of equipment and installation of certain building improvements at our Tyngsboro, Massachusetts facility. The initial advance on the loan was made in October 2008 for approximately $3.6 million. The final advance was made in October 2009 for approximately $1.0 million. The approximately $0.4 million balance of the loan commitment has expired. The note will mature 84 months after the initial advance and bears a fixed annual interest rate of 6.5%.

Payments to MassDev began in November 2008. The payments were interest only during the first twelve months. Since October 2009, the balance of the principal outstanding under the note is being amortized in equal monthly installments of principal and interest over the remaining term of the note.

Pursuant to the note, we entered into a security agreement which grants to MassDev an exclusive first priority security interest in all equipment and tenant improvements substantially funded with the proceeds of the loan with an approximate carrying value of $3,438,000 and $3,978,000 at June 30, 2011, and December 31, 2010, respectively. We also entered into a collateral assignment of lease agreement as additional security for the repayment of borrowings.  This agreement grants MassDev all rights, title and interest in and to our lease for the Tyngsboro facility in the event that we default on our obligations. In addition, the MassDev loan requires us to maintain a minimum cash balance of $1,500,000 at all times during the term of the loan.

As partial consideration for the loan, on June 30, 2008, we issued MassDev two warrants. Each warrant provides for the purchase of 8,598 shares of our common stock at an exercise price of $18.90 per share, subject to any adjustments as set forth in the warrants. The warrants are exercisable for seven years commencing on June 30, 2008, and provide for registration rights for the resale of the shares issued upon their exercise. MassDev assigned one of the warrants to the Massachusetts Technology Park Corporation (“MTPC”), as part of MTPC’s participation under the Massachusetts Technology Collaborative Business Expansion Initiative.  The Black-Scholes fair value of the warrants is shown as a discount against the loan, and is being amortized over the life of the loan using the effective interest method at an imputed interest rate of 1.237%.  The amortization of this discount resulted in approximately $23,000 and $27,000 charged to interest expense during the six months ended June 30, 2011, and 2010, respectively.  The effective interest rate of the loan, including the cost of the warrants and other deferred loan costs, is approximately 8.55%.