The Department of Energy’s Disastrous Management of Loan Guarantee Programs

Note: Ormat is Hawaii’s leading geothermal developer. The company bought Puna Geothermal Ventures in 2004 and is now drilling for geothermal resources on Haleakala. But a US House committee report shows that Ormat benefitted from its close ties to Senate Majority Leader Harry Reid (D-NV) and profited from a potentially illegal $98.5M bailout of an Ormat geothermal project in Nevada.

Excerpt from Report of US House Committee on Oversight and Government Reform March 20, 2012 pp 56-61.

Ormat Nevada: Strong Ties to Harry Reid

Senate Majority Leader Harry Reid announced on September 23, 2011, that DOE finalized a $350 million partial loan guarantee for three geothermal power plants owned by Ormat Nevada, Inc. Ormat also benefitted from the $98.5 million loan guarantee to Nevada Geothermal (see below) as Ormat received an almost $80 million engineering, procurement, and construction contract to build Nevada Geothermal’s Blue Mountain plant.

Meaningful ties exist between the Senator and Ormat. Two of Ormat’s federal lobbyists previously worked for Senator Reid. Ormat’s outside lobbyist, Kai Anderson of Cassidy and Associates, served as Senator Reid’s Deputy Chief of Staff up until 2005. Anderson lobbies both the House of Representatives and the Senate for Ormat. Anderson has given close to $90,000 to Democratic candidates and campaign committees over the past three cycles, including thousands to Senator Reid. Ormat’s company lobbyist, Director of Policy and Business Development Paul Thomsen, served as a “Regional Representative” for Senator Reid through 2005. Thomsen gave thousands in political contributions to Senator Reid. During Senator Reid’s 2010 reelection campaign, Thomsen starred in a campaign ad for Senator Reid to advertise the benefits of Ormat’s loan guarantee for Nevada. In addition to Anderson and Thomsen, Ormat’s President, Yoram Bronicki, gave thousands in political contributions to Senator Reid. Nevada Geothermal’s Blue Mountain Project The strong ties between the company and the Senate Majority leader raise questions about whether the DOE acted in the best interests of the American people when it approved the loan guarantee.

E. Nevada Geothermal’s Blue Mountain Project

The strong ties between the company and the Senate Majority leader raise questions about whether the DOE acted in the best interests of the American people when it approved the loan guarantee. On June 15, 2010, DOE announced that it would conditionally issue a $98.5 million partial loan guarantee to Nevada Geothermal Power Company (Nevada Geothermal). This loan enabled Nevada Geothermal to refinance the Blue Mountain Geothermal Project (Blue Mountain) through John Hancock Financial Services (John Hancock). In other words, the DOE loan paid back a prior financial obligation of Nevada Geothermal. This was the first of DOE’s “Financial Institution Partnership Program” (FIPP) loan guarantees, under Section 1705, where private investment groups worked with DOE to provide financing to energy projects. Less than three months after the conditional approval, DOE finalized this loan guarantee, enabling Nevada Geothermal to refinance a loan from TCW through John Hancock.

The loan did not finance any new construction and therefore did not help to create a single new job. DOE’s awarding of this loan guarantee raises questions about why DOE was investing significant taxpayer resources in an entity with well-established financial difficulties.

In the press release for the project, Secretary Chu and Senate Majority Leader Harry Reid touted Blue Mountain’s potential, with Senator Reid saying that, “I am glad to see economic recovery funding being used to put Nevadans to work on a project that will help us achieve energy independence. Northern Nevada is the Saudi Arabia of geothermal energy and I thank Secretary Chu for recognizing the Silver State’s enormous job-creating potential to produce plenty of clean and affordable energy.” It was known to him at that time, however, that the loan would not create a single job, but instead simply refinance an existing loan, despite DOE’s claim that it would create over 200 jobs.

Misuse of the DOE Loan Guarantee as a Tool to Bailout Creditors

Nevada Geothermal has a well documented history of major financial problems. By the time DOE conditionally approved the loan guarantee, Nevada Geothermal had already violated contract terms and debt covenants relating to financing from its primary lender, TCW. According to Nevada Geothermal’s financial statements, the firm would not avoid default without the benefit of a loan guarantee.

On October 2, 2011, The New York Times ran a story about the financial difficulties of Nevada Geothermal, relying partially on a September 2011 Deloitte & Touche audit of the company which stated “significant doubt about the company’s ability to continue as a going concern.” In response, DOE dismissed the financial problems of Nevada Geothermal and instead pointed to the alleged financial health of Blue Mountain to argue that the loan guarantee would be repaid. Given that Nevada Geothermal’s principal operation is Blue Mountain’s Faulkner I Power Plant, such a distinction has questionable merit.

As noted above, at the time DOE approved the conditional loan guarantee, Nevada Geothermal had already violated terms to the loan agreement with its primary creditor, TCW. Based on financial disclosures, Nevada Geothermal avoided default as a result of TCW’s granting a waiver and extension in anticipation of the John Hancock financing backed by the DOE loan guarantee. The resulting DOE bailout of Nevada Geothermal was planned out in advance, as made clear by Nevada Geothermal’s March 31, 2010 Financial Statements:

The Company has engaged John Hancock to provide long term debt up to $95 million which will be used to pay down the TCW loan and to fund additional drilling. However, this potential John Hancock loan is subject to due diligence and final credit committee approval by John Hancock. There is no certainty that the anticipated debt financing through John Hancock will be obtained. Failure to obtain the John Hancock loan, or a similar loan from another lender, and/or unsuccessful drilling may result in a default under the terms of the TCW loan agreement. In the event of a default TCW may elect to call the loan and execute upon the security, which would result in a material adverse effect on the Company, including delay or indefinite postponement of operations and further exploration and development of our projects with the possible loss of such assets. (emphasis added)

The story continued to unfold in Nevada Geothermal’s June 30, 2010 Financial Statements, where the plan to bailout their lender, TCW, was successfully executed by DOE:

As at June 30, 2010, the Company was not in compliance with the terms of the TCW loan. The non-compliance results from the Company having exceeded the maximum loan amount of $180 million, and having exceeded the drilling expenditure budget by more than $3.8 million, as well as some instances of technical non-compliance with other loan terms .…

As a result, for balance sheet purposes, the TCW long-term loan has been classified as a short-term liability. On November 20, 2009, TCW agreed in principle to waive the non-compliance until March 31, 2010 in return for 4.5 million NGP Inc. warrants exercisable at CAD 1.50 (Note 21(f)). Subsequently, TCW agreed to extend the agreement in principle, without change, until the John Hancock loan [guaranteed by DOE] closed. The John Hancock loan was closed on September 3, 2010, and a repayment of $81,076,669 was made on the TCW loan.

Confirming this troubling misdirection of taxpayer funds, the Summary of Proposed Terms and Conditions for the Conditional Loan Guarantee, signed by Secretary Chu, provides that the “proceeds of the Guaranteed Obligation will be used for the following: (i) Partial repayment of intercompany loan from HoldCo [Blue Mountain], in the amount of approximately 80 million;…” (emphasis added)  This intercompany repayment would ultimately flow to TCW as described above. The remaining amount of the loan went to the posting of cash collateral to NV Energy, Inc., funding a debt service reserve account, funding a maintenance reserve account, funding a drilling expenditure account (which included already incurred costs), and other fees. As these numbers total to around $98 million, it appears that little, if any, of the loan went to fund new drilling or new construction.

2. This Bailout Appears to Violate the American Recovery and Reinvestment Act of 2009

Not only does it appear that DOE purposely directed taxpayer funds to a failing enterprise, DOE’s action robbed taxpayers of genuine investment toward renewable energy. This loan guarantee bailed out lenders (TCW) and provided no assurance that TCW would apply the money that it recovered toward the economy or jobs as required by the American Recovery and Reinvestment Act of 2009. Title XVI, Section 1602 of the American Recovery and Reinvestment Act of 2009, requires that “recipients shall also use grant funds in a manner that maximizes job creation and economic benefit.” Paying off a creditor clearly does not maximize job creation and economic benefits. Rather, it provides an opportunity for private industry to exit an investment, deleverage and transfer the extraordinarily high default risk to taxpayers.

For this reason, it appears DOE, in its very first FIPP section1705-based loan guarantee, violated the spirit and, quite possibly, the letter of the law.

read … The Department of Energy’s Disastrous Management of Loan Guarantee Programs