Skipping safeguards, officials rushed benefit to a politically-connected energy company

Introduction

The Obama administration bypassed steps meant to protect taxpayers as it hurried to approve an energy loan guarantee to a politically-connected California solar power startup, iWatch News and ABC News have learned.

The Energy Department in March 2009 announced its intention to award Solyndra Inc.a $535 million loan guarantee before receiving final copies of outside reviews typically used to vet such deals. An independent federal auditor who has reviewed the energy loan program said moving so quickly without completing thorough reviews exposed the program to perceptions of political influence and put taxpayers at greater risk.

“There’s a consequence if you don’t follow a rigorous process that’s transparent,” said Franklin Rusco, an analyst with the Government Accountability Office. “It makes the agency more susceptible to outside pressures, potentially.”

The loan guarantee, the administration’s first for a clean energy project, benefited a company whose prime financial backers include Oklahoma oil billionaire George Kaiser, a “bundler” of campaign donations. Kaiser raised at least $50,000 for the president’s 2008 election effort.

Kaiser did not respond to interview requests made through Solyndra, and his Kaiser-Francis Oil Company in Tulsa said he declined comment. Solyndra spokesman David Miller said political ties had no bearing.

“We do not believe there was any connection at all,” said Miller. “We have created a substantial number of jobs with Solyndra and we’re very proud of that. I think people are missing a lot of the story getting into the politics.”

He said the company first applied for funding under the Bush administration, though it won it under Obama at a time the commercial financing market was dry.

Several political allies of the president have ties to companies receiving Energy Department loans, grants or loan guarantees. For instance, the venture firm of another top Obama bundler, Steve Westly, has financially supported companies that won more than half a billion dollars in energy grants and loans during President Obama’s time in office, iWatchNews and ABC reported in March. Relatively few applicants succeed in winning such benefits. The Energy Department said every one of those awards was won on merit.

The Solyndra loan guarantee, advertised by the administration as part of its signature effort to create jobs while weaning the U.S. from traditional energy sources, already has drawn scrutiny on Capitol Hill. Republican members of the House Energy and Commerce Committee have requested documents from the Energy Department as part of an investigation into how the company qualified for government support and then, a year later, closed a plant, laid off workers, and eventually had to renegotiate the loan guarantee’s terms while working to shore up its finances. Now, the shortcuts at the dawn of the deal identified by government auditors have stoked more questions.

Energy Department officials said their analysts had gathered more than enough information to bet on Solyndra. They said politics played no role, and that they did not give Solyndra or any other company special treatment.

“All applicants within any solicitation are treated the same way,” said Jonathan Silver, executive director of the Energy Department’s Loan Programs Office, which oversees the administration’s $90 billion in spending on promising alternative energy and on green automobile projects. A former venture capitalist, Silver himself has been an early-stage investor in alternative energy technology. He joined DOE after the Solyndra financing.

When the Obama administration announced financing for Solyndra in 2009, the company was only four years old, and had been shipping solar panels for about a year. Officials said the administration was eager to stimulate the economy and spur green energy start-ups. Energy Secretary Steven Chu promised the package alone would create more than 4,000 jobs.

One year later, in March 2010, the signs were not so encouraging. Solyndra’s accountant, PricewaterhouseCoopers LLC, wrote in an audit being prepared for an initial public offering: “The Company has suffered recurring losses from operations, negative cash flows since inception and has a net stockholders’ deficit that, among other factors, raise substantial doubt about its ability to continue as a going concern.” Solyndra has since boosted revenues, though some analysts remain skeptical about its long-term prospects.

Two months later, in May 2010, President Obama visited Solyndra’s Fremont plant and heralded the project as “a symbol of promise” for the loan program.

A month after Obama’s visit, Solyndra canceled its planned IPO.

The loan guarantee agreement was among 10 examined by the GAO last year, and Congress’ investigative arm privately singled out Solyndra as one of five applications that had received conditional approvals before outside experts had finished vetting the deals. The GAO did not identify the companies, but said the Energy Department had “treated applicants inconsistently, favoring some and disadvantaging others.”

ABC and iWatch News pieced together a fuller picture of the circumstances and identified the companies involved. The Energy Department confirmed that Solyndra and two other projects were those cited in the GAO report.

The vetting of applicants for government financial packages is not merely a technical, bureaucratic concern. “If you don’t have really strong processes in place, and if you’re under pressure to get a lot of these dollars allocated, you can make unproductive decisions and ones that ultimately put taxpayers’ dollars at risk,” said Rusco, director of the GAO’s natural resources and environment team.

The GAO audit said the rules are clear: Before the Energy Department makes a conditional commitment to guarantee a loan, its “procedures call for engineering, financial, legal, and marketing reviews of proposed projects as part of the due diligence process for identifying and mitigating risk.”

Those reviews are meant to form a full portrait of a project’s strengths and potential weaknesses. The legal review explores everything from the equity stake of individual partners to the fine-point details of contracts. The marketing review is crucial in determining a project’s potential to make sales and build a customer base.

In announcing the Solyndra loan guarantee, the Energy Department noted in a public statement that before offering conditional commitments, the government “takes significant steps to ensure risks are properly mitigated” and undertakes “a thorough investigation and analysis of each project’s financial, technical and legal strengths and weaknesses.”

Yet when Chu announced conditional approval for Solyndra that March, neither the legal nor marketing reviews had been finalized, iWatch News and ABC have learned. For Solyndra, the marketing review had special relevance because of the financial troubles that soon surfaced.

Energy officials say they felt they had enough marketing information in hand to proceed. “We had an extensive market analysis conducted prior to the conditional commitment for Solyndra which was updated and finalized prior to closing,” spokeswoman Stephanie Mueller wrote in an email.

Energy Department loan director Silver said Solyndra and two other projects secured conditional commitments without completed legal reviews, which can cost companies thousands of dollars. Red River Environmental Products LLC obtained a $245 million loan guarantee to build an activated carbon manufacturing facility in Red River Parish, La.,and a project to build two new nuclear reactors in Burke, Ga., received an $8.3 billion guarantee. That project involves Georgia Power Company, Oglethorpe Power Corporation and the Municipal Electric Authority of Georgia.

Silver called the decisions to make conditional commitments without full legal reviews routine, and said the arrangements did not subject taxpayers to heightened risk. By the time of the Solyndra closing, six months after Chu’s announcement, he said, all required reviews had taken place.

“A conditional commitment is only an interim step to a loan guarantee. It is not a loan guarantee itself,” said Silver. “Final legal reports would not be expected at conditional commitment. It would only be expected at final close.”

A conditional commitment along with an announcement of financial support from the Energy Department can help startup clean tech firms attract more investors — and distance themselves from competitors lacking the government’s stamp of approval. Final approvals, virtually assured, are granted at closing. By then, companies have already banked on the financial momentum of the agency’s guarantee: The department routinely issues press releases touting its conditional commitments.

Energy boasts of “aggressive timeline” on loan guarantee

Obama’s desire to shift the nation into more environmentally friendly sources of energy while creating jobs during a recession have fueled a raft of projects involving billions of federal dollars.

Against that backdrop, Solyndra was to be an early prototype for government-boosted private sector innovation. The company was the first recipient of an energy loan guarantee through the Obama administration’s $787 billion package of economic stimulus programs. It was the Energy Department’s first loan guarantee since the 1980s.

There’s a long history of federal support for energy exploration. Under past administrations most of those benefiting were from the oil and gas industries. Back room meetings in 2001 between then-Vice President Dick Cheney’s energy task force and top oil executives exemplified what many regarded as coziness between government leaders and Big Oil. When Obama took office, he pledged to help the U.S. pull away from dependence on traditional energy.

When announcing the Solyndra loan guarantee two months after Obama took office, the Energy Department boasted of its speed. Secretary Chu had set a target of May — three months into his own tenure — to announce his initial loan commitment, “but today’s announcement significantly outpaces that aggressive timeline,” the Energy Department noted in a press release.

“Secretary Chu credited the Department’s loan team for their work accelerating the process to offer this conditional commitment in less than two months, demonstrating the power of teamwork and the speed at which the Department can operate when barriers to success are removed,” it said.

That financing came at a time the Department of Energy was thin on staffing in its loan office. When Obama took office in January 2009, the energy loan office had just 15-20 people, director Silver said. Now, he said, it boasts 175 and a rigorous application screening process.

To close the loan, Chu said Solyndra had to meet an equity commitment. It took months to happen. Among the key backers of the $198 million raised: Oklahoma oilman Kaiser’s Argonaut Private Equity, as well as Madrone Capital Partners, a private investment firm affiliated with S. Robson Walton, chairman of Wal-Mart Stores Inc.

Kaiser’s Argonaut Private Equity and its affiliates were the largest shareholder of Solyndra as it pushed for the IPO. Kaiser’s firm remains a “significant financial backer of Solyndra,” Solyndra spokesman David Miller confirmed. The Oklahoma oil magnate hosted a 2007 Tulsa fundraiser for Obama and regularly visits White House staff, visitor logs show.

“I don’t think anybody said we didn’t go through the full process. After the conditional commitment we still went through extensive due diligence. It was still a competitive process,” Miller said. “We applied for the loan guarantee in 2006. It was awarded three years later. It was not like something was done to make this thing really fast. It was a long, arduous process.”

The payoff came with financing that bankrolled a manufacturing plant for the company’s proprietary panels for the commercial rooftop market. The loan guarantee helped trigger 3,000 construction jobs to build the new plant and promised to create another 1,000 fulltime jobs once it was fully operating. “This investment is part of President Obama’s aggressive strategy to put Americans back to work and reduce our dependence on foreign oil by developing clean, renewable sources of energy,” Secretary Chu said. “We’ll rely on America’s innovation, America’s resources, and America’s workers.”

In September 2009, the deal officially closed, with Solyndra using the $535 million loan guarantee from the U.S. Treasury’s Federal Financing Bank to fund construction of the so-called Fab 2 factory, headquarters and customer demonstration facility. Under the terms, taxpayers pick up the tab if the borrower defaults.

At groundbreaking, Chu and then-California Gov. Arnold Schwarzenegger were on hand. “This announcement today is part of the unprecedented investment this administration is making in renewable energy and exactly what the Recovery Act is all about,” said Vice President Joe Biden, appearing via satellite from Washington.

“The promise of clean energy isn’t just an article of faith — not anymore,” Obama told Solyndra workers eight months later. “The future is here.”

Yet Solyndra ran into trouble amid analyst concerns its manufacturing costs were too high. It laid off nearly 180 workers, most of them part-time, as it shuttered another plant and cancelled the IPO.

This year, the Energy Department agreed to a restructuring that pushed back the date on which it will repay lenders. Silver said the modification “was an effort on our part to ensure we had the tightest and best structured project.”

He said early hiccups are not unique for such projects and that the company will prove successful. “I have never seen a company go straight up without a bump along the way,” Silver said. “I have no doubt they will continue to hire more people.”

Despite speed, officials dispute taking shortcuts

During interviews and email exchanges with iWatch News and ABC News, Energy Department officials and independent government auditors told two different versions of exactly when the outside reviews are required — and on the significance of the timing. While the GAO questioned the department for green-lighting loan guarantee commitments without all reviews in hand, energy officials say they have discretion to complete those reports in time for closing.

The GAO noted that the advantages of bypassing the outside reviews were significant, “allowing these applicants to receive conditional commitments before incurring expenses that other applicants were required to pay.” It added, “DOE has treated applicants inconsistently. Although our past work has shown that agencies should process applications with the goals of treating applicants fairly and minimizing applicant confusion, DOE’s implementation of the program has favored some applicants and disadvantaged others in a number of ways.”

The Energy Department’s own documents spell out the importance of the pre-approval scrutiny. “Because each project will be unique and each loan guarantee potentially subjects the Federal government to significant financial liability,” an official notice says, “DOE plans to engage in a rigorous review of a proposed project before determining whether it may be eligible for a Loan Guarantee Agreement and subsequently approving and issuing loan guarantees.”

For its part, Solyndra said the outside legal review was a small matter. “My understanding was it was a procedural thing, there was a step that … happened later,” said Miller. “My understanding is it just had to do with the timing of a form.”

The company has yet to turn a profit. But Miller said Solyndra’s outlook remains bright, and predicted the company would be cash positive by the end of the year.He said Solyndra has 321 more jobs today than at the time of the loan, has already met the 3,000-force construction goal and aims to attain the long-term hiring benchmark. “As we go cash positive, if you were to get that auditor’s opinion today, it would tell a different story,” he said.

Some analysts are far from convinced.

“If anything, they’re still swimming upstream in a very competitive market,” said Shyam Mehta, senior solar analyst at Greentech Media Research.

“The outlook for them has improved relative to, say, a year ago when they had to cancel their IPO or six months ago when they had to close their factory, but it doesn’t mean they are out of the water,” Mehta added. “Their viability is far from resolved, and I think it’s a real risk the company would at some point face the threat of insolvency. I don’t want to be extreme about that, but it is a definite possibility when you are competing in the global market.”

Mehta has long raised questions about the company’s manufacturing costs in a world market where China offers stiff competition. He said Solyndra has focused on cutting those costs, but that there’s no assurance the company — or the government loan guarantee — will prove successful.

“There’s a lot at stake here, not just for Solyndra,” Mehta said. “This is going to be held up as a cautionary tale if things don’t work out for Solyndra. People are watching very closely from all angles.”