DOE Loan Programs: DOE Should Fully Develop Its Loan Monitoring Function and Evaluate Its Effectiveness
Published: 2014-05-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOE's Loan Programs Office administers the Loan Guarantee Program (LGP) for certain renewable or innovative energy projects and the Advanced Technology Vehicles Manufacturing (ATVM) loan program for projects to produce more fuel-efficient vehicles and components. As of March 2014, the programs had made more than $30 billion in loans and guarantees: approximately $21.9 billion for 33 loan guarantees under the LGP and $8.4 billion for 5 loans under the ATVM loan program. Both programs can expose the government and taxpayers to substantial financial risks should borrowers default.
GAO assessed the extent to which DOE has developed and adhered to loan monitoring policies for its loan programs for 2009 to 2013. GAO analyzed relevant regulations and guidance; prior audits; DOE policies; and DOE data, documents, and monitoring reports for a nonprobability sample of 10 loans and guarantees. Findings from the sample are not generalizable, but the sample covered a range of technologies and loan statuses. GAO also interviewed DOE officials.
section_title: What GAO Found
paragraphs: The Department of Energy (DOE) has not fully developed or consistently adhered to loan monitoring policies for its loan programs. In particular, DOE has established policies for most loan monitoring activities, but policies for evaluating and mitigating program-wide risk remain incomplete and outdated. These activities are generally the responsibility of the Risk Management Division in DOE's Loan Programs Office. This division, established in February 2012, has been operating since its inception under incomplete or outdated policies. DOE has missed several internal deadlines for updating its loan monitoring policies. DOE officials told GAO that updated policies were delayed in part because the Loan Programs Office did not have a Director of Risk Management until November 2012. Additionally, the Risk Management Division had not staffed 11 of its 16 planned positions until late 2013, when it staffed 6 of the 11 vacancies. Under federal guidance, credit programs should have robust management and oversight frameworks for monitoring the programs' progress toward achieving policy goals within acceptable risk thresholds, and taking action where appropriate to increase efficiency and effectiveness. It is difficult to determine whether DOE is adequately managing risk if policies are outdated or incomplete and key monitoring positions are not fully staffed.
In some cases GAO examined, DOE generally adhered to the loan monitoring policies that it had in place. For example, DOE generally adhered to its policies for authorizing disbursement of funds to borrowers. But, in other cases, DOE adhered to the policies inconsistently or not at all because the Loan Programs Office had staff vacancies and was still developing management and reporting software and procedures for implementing policies. For example:
DOE inconsistently adhered to its policies for monitoring and reporting on credit risk, particularly for preparing credit reports—periodic reviews of project progress and factors that may affect the borrower's ability to meet the terms of the loan. DOE did not prepare dozens of credit reports, mostly in 2011, because according to officials it had not filled positions or fully developed the software needed for producing these reports.
DOE inconsistently adhered to its policies for managing troubled loans requiring that it prepare and approve plans for handling loans to borrowers in danger of defaulting on their loan repayments. For two troubled loans, officials said DOE did not prepare a formal plan, as called for in its policy, in part because implementing procedures were incomplete.
DOE did not adhere to its policy requiring it to evaluate the effectiveness of its loan monitoring because of continuing staff vacancies. Without conducting these evaluations, DOE management cannot assess the adequacy of its monitoring efforts and thus be reasonably assured that it is effectively managing risks associated with its loan programs.
As a result, DOE was making loans and disbursing funds from 2009 through 2013 without a fully developed loan monitoring function. During this time, inconsistent adherence to policies limited assurance that DOE was completing activities important to monitoring the loans and protecting the government's interest.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOE (1) staff key positions, (2) update management and reporting software, (3) complete policies for loan monitoring, and (4) evaluate the effectiveness of its loan monitoring. DOE generally agreed with the recommendations.

section_title: Letter
paragraphs: The Department of Energy’s (DOE) loan programs have made more than  $30 billion in loans and loan guarantees. These include approximately  $21.9 billion for 33 loan guarantees under the Loan Guarantee Program  (LGP) and $8.4 billion for 5 loans under the Advanced Technology  Vehicles Manufacturing (ATVM) loan program. Under the LGP, to  encourage certain types of renewable or innovative energy projects, the  federal government agrees to reimburse lenders for the guaranteed  amount of loans if the borrowers default. The ATVM loan program  provides direct loans to manufacturers to produce more fuel-efficient  vehicles and components. Both programs expose the federal government  to financial risks should those borrowers default.
DOE’s management of these risks is an important aspect of the loan  programs, not only because of the tens of billions of dollars currently at  stake but also because of the programs’ authority to make or guarantee  more loans. As of March 2014, DOE had about $45 billion in loan and  loan guarantee authority remaining for both programs, about $3.8 billion  of which the department had conditionally committed for two guarantees.  In addition, because loan tenure periods may last up to 30 years, DOE’s  Loan Programs Office, which administers both programs, must monitor  and manage the agency’s portfolio of loans and guarantees over  decades. DOE’s policy manuals for the Loan Programs Office state that,  in monitoring the performance of the loans made and guaranteed, DOE  seeks to protect the financial interests of the federal government, and  thus the taxpayer, by “proactively managing risks associated with  projects” receiving support from the LGP or the ATVM loan program.
Our previous reviews of DOE’s loan programs focused on how DOE  established the programs and selected loan and guarantee recipients, as  well as the status of DOE’s efforts to use remaining authorities and  appropriations for the programs. Among our past findings have been that  DOE implemented the LGP in a way that treated loan guarantee  applicants inconsistently; that the LGP did not have the consolidated data  on the status of applications that the department needed to facilitate  efficient program management and oversight; and that, for the ATVM  loan program, DOE had not engaged the engineering expertise needed  for technical oversight of loans or developed sufficient performance  measures.
Under the 2007 Revised Continuing Appropriations Resolution, GAO is  mandated to review DOE’s execution of the LGP and to report our  findings to the House and Senate Committees on Appropriations.  Because DOE is administering the LGP and ATVM loan program through  one Loan Programs Office, we included both programs in this review. For  this report, we assessed the extent to which DOE has developed and  adhered to loan monitoring policies for its loan programs.
To address this objective, we acquired and reviewed DOE’s policy  manuals and documents detailing procedures for implementing those  policies, and we identified 10 loan monitoring activities described in those  manuals or by DOE officials in the Loan Programs Office. We interviewed  DOE officials to ensure that our understanding of these policies and  procedures was thorough and accurate. To determine the extent of  DOE’s adherence to its loan monitoring policies, we acquired and  analyzed documentation from a nonprobability sample of 10 of the 36  loans and loan guarantees that had been made under DOE’s loan  programs, as of March 2013. The loans and loan guarantees were  chosen to cover projects involving a range of technologies, construction  statuses, credit watch list statuses, loan or guarantee amounts, dates of  loan finalization, and amounts disbursed. We examined project files  pertaining to the 10 monitoring activities we identified in order to  determine the extent to which those files—and thus, DOE’s monitoring of  the loans for those projects—adhered to the department’s monitoring  policies, as well as the level of consistency in monitoring across projects.  We did not review adherence to all DOE policies for the programs, rather  only those most directly associated with the 10 activities we identified. In  addition, to provide context, we compared DOE’s monitoring policies with  those of private lenders who finance large energy projects. To do so, we  interviewed a nonprobablility sample of eight experts (four private lenders,  three academic experts, and one industry expert) about private lenders’  monitoring policies and compared the results with DOE’s policies and the  10 activities we identified (see app. IV). A more detailed description of the  objectives, scope, and methodology of our review is provided in appendix  I.
We conducted this performance audit from March 2013 to April 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: DOE’s LGP was originally designed to address a fundamental  impediment for investors and lenders that stems from the risks of  innovative and advanced energy projects, including technology risk—the  risk that the new technology will not perform as expected—and execution  risk—the risk that the borrower or project will not perform as expected.  Companies can face obstacles in securing enough affordable financing  from lenders to survive the gap between developing innovative  technologies and commercializing them. Because the risks that lenders  must assume to support new technologies can put private financing out of  reach, companies may not be able to commercialize innovative  technologies without the federal government’s financial support.
The LGP was established in Title XVII of the Energy Policy Act of 2005 to  encourage early commercial use of new or significantly improved  technologies in energy projects. The act—specifically section 1703— originally authorized DOE to guarantee loans for energy projects that (1)  use new or significantly improved technologies as compared with  commercial technologies already in service in the United States and (2)  avoid, reduce, or sequester emissions of air pollutants or man-made  greenhouse gases. In February 2009, Congress expanded the scope of  the LGP in the American Recovery and Reinvestment Act (Recovery Act)  by adding section 1705 to the Energy Policy Act, which extended the  program and provided funding to include projects that use commercial  energy technology that employs renewable energy systems, electric  power transmission systems, or leading-edge biofuels that meet certain  criteria. As of March 2014, DOE had made 31 loan guarantees for  approximately $15.7 billion under section 1705, which expired on  September 30, 2011, and 2 loan guarantees for approximately $6.2 billion  under section 1703. These guarantees have been for biomass,  geothermal, nuclear, solar, and wind generation; energy storage; solar  manufacturing; and electricity transmission projects (see app. III). Two  borrowers withdrew in 2012 before starting to draw funds from their loans.  Additionally, in September and October 2013, DOE deobligated 2 loan  guarantees because they did not seem likely to meet the loan conditions  required to begin drawing on their loans. Three other loan guarantee  borrowers have defaulted and filed for bankruptcy—one borrower and its  loan guarantee have been restructured, and the guarantee remains  active; the other two borrowers are in liquidation proceedings. In addition,  DOE has conditional commitments,$3.8 billion in section 1703 loan guarantees for two nuclear projects. In  December 2013, DOE announced a new solicitation for applications for  up to $8 billion in loan guarantees for advanced fossil energy projects.   issued in 2010, for approximately  The ATVM loan program was established in December 2007 by the  Energy Independence and Security Act (EISA), and the fiscal year 2009  Continuing Resolution appropriated funding for the program. DOE’s five  loans for $8.4 billion under this program went to both established  automakers and start-up manufacturers. These loans are for the  manufacture of fuel-saving enhancements of conventional vehicle  technology, plug-in hybrids, and all-electric vehicles. In May 2013, one  borrower paid back its loan. Two ATVM borrowers have defaulted on their  loans. In 2013, DOE sold the defaulted loan notes in auction proceedings.  In 2010, DOE consolidated the previously separate LGP and ATVM  program under the Loan Programs Office. Monitoring for both LGP and  ATVM is conducted out of one division: the Portfolio Management  Division, with support coming from several other divisions throughout the  Loan Programs Office.
section_title: DOE Has Not Fully Developed or Consistently Adhered to Loan Monitoring Policies
paragraphs: DOE has not fully developed or consistently adhered to loan monitoring  policies for its loan programs. In particular, DOE has established policies  for most loan monitoring activities, but policies for some of these activities  remain incomplete or outdated. Further, in some cases we examined,  DOE generally adhered to its loan monitoring policies but, in others, DOE  adhered to those policies inconsistently or not at all because the Loan  Programs Office was still developing its staffing, management and  reporting software, and policies.
subsections: section_title: DOE Has Policies for Most Loan Monitoring Activities, but Some Remain Incomplete or Are Outdated
paragraphs: DOE has established policies for most loan monitoring activities, but  policies for some of these activities remain incomplete or outdated. More  specifically, DOE has established policies for loan monitoring activities  including disbursing funds, monitoring and reporting on credit risk, and  managing troubled loans. (For more details about DOE loan monitoring  policies and activities, see app. II.) However, loan monitoring policies for  evaluating and mitigating program-wide risk remain incomplete or  outdated, and several dates DOE set for completing or updating these  policies passed during the course of our work.
Evaluating and mitigating program-wide risk is generally the responsibility  of the Risk Management Division within DOE’s Loan Programs Office.  This division was established in February 2012 and has been operating  since its inception under incomplete or outdated policies. For example,  the policies do not address how the new structure of the Risk  Management Division fits into existing policies, thus not providing clear  guidance on the organizational roles of the division. DOE officials told us  that policy revisions were delayed in part because the Loan Programs  Office did not have a Director of Risk Management until November 2012  and that a planned revision was put on hold to await the arrival of a new  Executive Director in May 2013. Additionally, the Risk Management  Division had not staffed 11 of its 16 planned positions until late 2013,  when it staffed 6 of 11 vacancies.
As highlighted by an independent White House review of DOE’s loan  programs, as well as our discussions with private lenders, a risk  management division is essential for mitigating risk. Similarly, Office of  Management and Budget (OMB) guidance specifies that credit programs  should have robust management and oversight frameworks for monitoring  the programs’ progress toward achieving policy goals within acceptable  risk thresholds, and taking action where appropriate to increase efficiency  and effectiveness. It is difficult to determine whether DOE is adequately  managing risk if policies against which to compare its actions are  outdated or incomplete. Also, without fully staffing key monitoring  positions, the Risk Management Division is limited in its ability to revise  and complete policies, as well as perform its other monitoring  responsibilities.
section_title: DOE Did Not Consistently Adhere to Its Loan Monitoring Policies Because Its Loan Programs Office Organizational Structure Was Still under Development
paragraphs: In some cases we examined, DOE generally adhered to its loan  monitoring policies but, in other cases, DOE adhered to its monitoring  policies inconsistently or not at all because DOE was still developing the  Loan Programs Office’s organizational structure, including staffing,  management and reporting software, and implementing procedures for  policies. As a consequence, DOE was making loans and disbursing funds  from 2009 through 2013 without a fully developed loan monitoring  function. DOE generally adhered to its monitoring policies for activities  such as disbursing funds and reviewing borrower requests for changes to  loan agreement provisions. For example, for the 10 loans in our sample,  we found that, in disbursing funds, DOE generally documented its  analysis of the financial health of the project and recorded supervisory  approvals, as required in its policy. Similarly, we found that in nearly all of  the 30 requests for amendments and waivers to loan agreements for the  10 loans in our sample, DOE officials properly recorded their review of the  requested changes.
In some other cases, DOE inconsistently adhered to its monitoring  policies. For example, in regard to monitoring and reporting on credit risk,  DOE was inconsistent in its preparation of credit reports which, according  to DOE’s policy manuals, provide early warning signs of potential credit  problems and can guide project and loan restructuring efforts should the  need arise. In total, DOE was missing 24 of 88 periodic credit reports due  through May 2013 across the 10 sample loans. Twenty of the missing  reports were not completed because DOE did not begin producing  periodic credit reports until August 2011. DOE officials told us that such  reports were not produced before then because the Portfolio  Management Division had not filled the staff positions needed for  producing these reports, and its management and reporting software was  under development. As a result, DOE disbursed more than $4.7 billion for  the 10 loans in our sample before it began producing periodic credit  reports as required in its policy manuals. According to DOE officials,  although DOE was not producing credit reports during this time, DOE  staff were taking other measures to monitor the loans, such as keeping in  regular contact with the borrowers.
In addition, after DOE began producing credit reports, DOE officials  inconsistently recorded credit risk ratings on multiple credit reports. For  example, of the 64 reports we reviewed as part of our sample, 11 had one  or more credit risk rating fields left blank, and other credit rating fields  contained errors. According to DOE officials, the reasons for the blank  and incorrect fields included human error and a system design error that  occurs in its management and reporting software. Further, there was a  wide range between when credit reports were completed and when they  were reviewed; more specifically, the time it took to review reports  completed on a quarterly basis ranged from as little as a week to over 3  months. DOE officials told us that the reporting and review period  inconsistencies were a result of inadequate staffing and incomplete  implementing procedures that did not provide clear guidance on reporting  dates. Also, some reports were submitted and approved outside of DOE’s  management and reporting software, for which the system design was  still being worked out, and training was being provided. DOE’s policy  manuals specify that one purpose of these credit reports is to serve as an  information source for inquiries by government oversight authorities  seeking to understand the loans’ structures and decisions. Incomplete or  inconsistent credit reporting can make it difficult for these authorities to  understand and assess the status of the loans and determine if corrective  actions are needed. According to DOE officials, as of February 2014, its  staffing levels and its management and reporting software were sufficient  to support full and timely credit reporting. After we found inconsistencies  in DOE’s credit reports, DOE established a draft implementing procedure  to guide the development of future credit reports that clarified reporting  dates and preparation periods for new and existing staff in June 2013.  Furthermore, DOE officials stated, in January 2014, that the department  has taken steps to address human error in the credit risk rating fields by  requiring that the fields representing previous credit ratings are populated  automatically. DOE officials also stated that they are addressing the  system design issue in the next generation of its management and  reporting software, planned for release in late fall 2014.
In another example, DOE inconsistently adhered to policies for managing  troubled loans. DOE’s policy manuals require that DOE prepare and  approve plans for handling troubled loans to borrowers who are in danger  of defaulting on their loan repayments. Once it becomes clear that a loan  is in danger of default, DOE policy calls for the preparation, approval, and  implementation of a workout action plan, which identifies potential  problems and lays out decisive remedial actions to help minimize  potential losses. However, for two troubled loans in our sample, DOE  officials told us they had not prepared a formal workout action plan in a  single document but instead specified problems and remedial actions in  many documents over a period of time. For example, in one case, in  2011, where DOE officials were aware for at least 10 months that the  borrower would likely default on its payments, DOE provided us with  about 20 such documents including analyses of collateral, draft  memoranda, and slideshow presentations, which showed that DOE had  taken or considered some of the options described by its policy. However,  these documents did not conform to DOE’s policy for these plans,  particularly its policy that DOE prepare a workout plan document and  seek formal approval from its management. DOE officials told us that  “operational matters had evolved beyond the steps outlined in their policy  manuals.” DOE officials noted that they were revising the manuals to  better comport with best practices in the finance industry and that DOE  has been operating under draft implementing procedures since June  2012. These officials also noted that DOE’s 2009 and 2011 policy  manuals were inadequate and were completed without the benefit of  experts in the field of workout plans due to limited staffing in the Portfolio  Management Division at the time. Officials noted that managers with such  expertise are now on staff in the division, but the branch within the  division that is tasked with managing troubled loans, including the  development and implementation of workout action plans, had not staffed  four of five positions as of February 2014. DOE officials told us that, given  the availability of third-party financial advisors and the limited number of  assets that fall within that category, they may not need to fill all of the  positions. However, inconsistent adherence to policies and incomplete  staffing limit DOE’s assurance that it has been effectively managing  troubled loans during a period when there have been five defaults and  bankruptcies among DOE loan program borrowers or that it can  effectively manage such loans in the future.
Further, DOE did not adhere to some existing policies for program-wide  evaluation and mitigation of portfolio-wide risk, in particular policies for  evaluating the effectiveness of its loan monitoring. DOE’s 2011 policy  manual states that certain functions are critical to management’s ability to  assess the adequacy and quality of the agency’s monitoring. The manual  further states that failure to maintain these functions is an unsound  practice that could expose DOE to loss or criticism. These functions— which are referred to as credit review, compliance, and reporting  functions—include internal assessment of documentation, portfolio-wide  reporting on risks, and evaluation of the effectiveness of DOE’s loan  monitoring. The Loan Programs Office’s Portfolio Management Division  has conducted some internal assessments of the quality of DOE  documentation and, in May 2013, started some portfolio-wide reporting on  the overall risk posed by DOE’s loan obligations. However, DOE officials  told us that the division has not evaluated the effectiveness of the  agency’s loan monitoring efforts or produced the required reports. DOE  officials told us that these responsibilities have been transferred to the  Risk Management Division, which, as noted earlier, was operating under  incomplete or outdated policies and had staff vacancies. Without  conducting these evaluations, DOE management cannot assess the  adequacy of its monitoring efforts and thus be reasonably assured that it  is effectively managing risks associated with its loan programs.
section_title: Conclusions
paragraphs: DOE’s loan programs began making loans and guarantees in 2009, and  by March 2014 DOE had made or guaranteed over $30 billion in loans  that required monitoring. In its policy manuals, DOE recognizes the  importance of monitoring loans and guarantees to proactively manage  their risks and protect the financial interests of the federal government  and the taxpayer. OMB guidance specifies that credit programs should  have robust management and oversight frameworks. However, DOE has  been monitoring its loans since 2009 without the benefit of a fully- developed organizational structure because staffing, management and  reporting software, and monitoring policies and procedures are still works  in progress. The absence of a fully-developed organizational structure  has resulted in inconsistent adherence to policies during a period of  significant program events, including loan disbursements, borrower  bankruptcies, and loan repayments involving billions of dollars. Because  DOE inconsistently adhered to the policies it had in place, DOE’s  assurance that it was completing activities critical to monitoring the loans  has been limited. DOE has made progress since 2011 in developing its  monitoring functions, but it has repeatedly missed internal deadlines for  completing its loan monitoring policies and procedures. In the meantime,  DOE has recently announced a new solicitation for up to $8 billion in loan  guarantees for advanced fossil energy projects and issued two new loan  guarantees for nuclear generation, adding $6.2 billion in loans to be  overseen.
In addition to a fully developed loan monitoring organization, evaluating  the effectiveness of ongoing monitoring efforts is important to ensuring  risks are being adequately managed in DOE’s loan programs. However,  since the first loans were made, DOE has not conducted evaluations of its  loan monitoring by performing the credit review, compliance, and  reporting functions outlined in its 2011 policy manual. Such evaluations  might have identified and addressed the inconsistent adherence to its  policies that we identified. As DOE’s manual states, a failure to maintain a  reliable and effective evaluation function is unsound and could expose  DOE to loss or criticism. Given the high profile and large sums of money  involved in DOE’s loan programs—more than $30 billion in loans and  guarantees already made and approximately $45 billion in remaining loan  and loan guarantee authority—this exposure is significant.
section_title: Recommendations for Executive Action
paragraphs: To provide greater assurance that DOE is effectively monitoring its loans,  we recommend that the Secretary of Energy direct the Executive Director  of the Loan Programs Office to take the following four actions:
Fully develop its organizational structure by updating management and reporting software, and staffing key monitoring positions,  completing policies and procedures for loan monitoring and risk  management.
Evaluate the effectiveness of DOE’s monitoring by performing the  credit review, compliance, and reporting functions outlined in the 2011  policy manual for DOE’s loan programs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOE for review and comment. In its  written comments, DOE generally agreed with our recommendations.   DOE also said it disagreed with some statements in the draft report.  It  was difficult, however, for us to determine which statements DOE  disagreed with because the comments focused on highlighting DOE’s  monitoring efforts in four areas rather than specifying areas of  disagreement. DOE’s written comments and our detailed responses can  be found in appendix V of this report.  DOE also provided technical  comments that we incorporated, as appropriate.
DOE noted several actions it is undertaking in response to our  recommendations.  Regarding its organizational structure, DOE stated it  would continue to recruit and hire qualified managers and staff for its  Portfolio Management and Risk Management Divisions; implement a  second generation of its software by the end of the first quarter of 2015,  as well as a new information and reporting system by the end of the third  quarter of 2014; and continue to prepare and issue portfolio monitoring  and risk management procedures and guidelines.  However, DOE did not  provide information on any plans for updating and completing its overall  policy manual for the programs.  We believe this action is needed  because it would provide guidance on the organizational roles of the new  Risk Management Division and address inconsistencies we found  between the current manual and current DOE practices, such as those for  troubled loans.  Regarding evaluation of the effectiveness of DOE’s  monitoring, DOE described several efforts for reviewing and monitoring  the Loan Programs Office’s portfolio.  However, DOE did not indicate that  it plans to prepare the required reports to evaluate the effectiveness of its  loan monitoring.
We are sending copies of this report to the Secretary of Energy, the  appropriate congressional committees, and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This appendix details the methods we used to examine the Department of  Energy’s (DOE) Loan Programs Office. The 2007 Revised Continuing  Appropriations Resolution mandates that GAO review DOE’s execution  of the Loan Guarantee Program (LGP) and report its findings to the  House and Senate Committees on Appropriations. Because DOE is  administering the LGP and Advanced Technology Vehicles Manufacturing  (ATVM) loan program through one Loan Programs Office, we included  both programs in this review. For this report, we assessed the extent to  which DOE has developed and adhered to loan monitoring policies for its  loan programs.
U.S. Department of Energy Loan Programs Office, Credit Policies and Procedures, Title  XVII of the Energy Policy Act of 2005 (Washington, D.C.: Oct. 6, 2011).
January 2014, DOE is drafting a new policy manual in order to reflect  current practices and supersede the separate manuals for both programs.  Moreover, we conducted semistructured interviews with DOE staff to  ensure that our understanding of these policies and procedures was  complete and accurate.
To assess the extent to which DOE adhered to its monitoring policies, we  acquired and analyzed documentation from a nonprobability sample of 10  of the 36 loans and loan guarantees that had been made by March 2013,  therefore, requiring monitoring. The use of a nonprobability sample  means that we are unable to generalize our findings to the loans and loan  guarantees not in our sample, but we are able to make observations  about DOE’s monitoring activities for the diverse set of 10 loans and  guarantees. The loans and loan guarantees were chosen to cover  projects involving a range of technologies, construction statuses, credit  watch list statuses, loan or guarantee amounts, dates of loan finalization,  and amounts disbursed. We examined relevant project files, including  disbursement records, plans for troubled loans, and credit reports. We  requested all disbursement records and plans for managing troubled  loans for the 10 sample loans. DOE began producing credit reports in  August 2011, so we examined all credit reports for the 10 sample loans  that were produced between August 2011, and May 2013, when we  completed our data collection. We compared these files with selected  DOE policies to determine where the guidance was followed and where it  was not, as well as the level of consistency in monitoring across projects.  We did not review all DOE policies, rather only those most directly  associated with the 10 activities identified in our summary. In some  cases, our review of documentation was limited by the fact that DOE’s  detailed procedures remained under development.
In addition, to provide context, we compared DOE’s monitoring policies  with those of private lenders. We conducted semistructured interviews  with eight experts (four private lenders, three academic experts, and one  industry expert) about private lender monitoring policies and compared  the information they provided with DOE’s policies and the 10 activities we  identified. We selected a nonprobability sample of four private lenders  financing similar projects to those in the LGP and ATVM loan program,  using additional criteria such as the value of loans issued and number of  loans issued. The use of a nonprobability sample in this case means that  we are unable to generalize the information they provided to the private  lenders not in our sample, but we are able to make observations about  how DOE’s polices compare with those lenders’ descriptions of their own  and industry-wide practices. Our primary source in identifying lenders was  a search of the lenders most active in financing large innovative energy  and advanced vehicle projects in the Bloomberg New Energy Finance  database. We discussed general policies and practices with these private  lenders because they were unable to share specific written policies and  procedures. We identified academic experts through a literature search of  relevant academic articles on project finance loan monitoring practices  and the financing of innovative energy technologies, and we then  contacted the most frequently cited academics. In addition, we reviewed a  study conducted by KPMG on behalf of the Export-Import Bank of the  United States, which compiled leading monitoring practices from  institutions across a number of sectors, including 10 private lenders, as  well as several export credit and government agencies. We then  interviewed the study’s author.
We conducted this performance audit from March 2013 to April 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Summary of Monitoring Activities Identified in DOE Loan Programs Office Policies and Procedures
paragraphs: In order for us to compare the Department of Energy’s (DOE) monitoring  efforts to those of private lenders, we summarized and categorized DOE’s  monitoring into 10 activities based on DOE policy and discussions with  DOE officials (see table 1). Taken together, the 10 activities cover the full  duration of the loan, from the time loans have been made, through  disbursement of funds, construction of the project, and the operation of  the project, until final repayment, which can be up to 3 decades in the  future. Some of the monitoring activities we identified are to be done for  every loan. For example, prior to disbursing loan payments, DOE policies  require that staff perform several steps to review the financial health of  the project and the borrower, such as checking borrower documentation,  performing technical reviews of the health of the project, and obtaining  supervisory approval prior to processing payment. During construction,  DOE policy directs loan monitoring and technical staff to review project  financial and technical documents to ensure that the project is  progressing toward its construction goals. DOE policy for another activity  we identified directs DOE staff to monitor and report on the financial  health of the project and prepare reports about the project’s financial  information, among other things. Other monitoring activities are applied  only if the internal or external risk to the financed project increases. Two  of these 10 activities address this possibility: (1) assessing potential  actions for loans with increasing risks and (2) managing troubled loans.  As part of managing troubled loans, DOE officials are to determine  whether it is preferable to make changes in a troubled loan’s structure,  such as restructuring the project in a way that might reduce risk, or to  seek an outside entity to purchase the loan and take on the risk, among  other options.
To develop this summary of DOE’s monitoring activities, we examined  high-level DOE policy guidance—specifically DOE’s October 2011 policy  manual for its Loan Guarantee Program, its 2009 policy manual for its  Advanced Technology Vehicles Manufacturing (ATVM) loan program,  DOE’s approved implementing procedure documents, and DOE loan  monitoring documentation. In addition, we reviewed a draft policy manual  intended to unify guidance for both loan programs (more detailed  information about how we summarized these activities is available in app.
I). Table 1 summarizes the 10 monitoring activities we identified that are  described by DOE Loan Programs Office policies and procedures.
section_title: Appendix III: DOE Loan Guarantees and Loans as of March 2014
subsections: section_title: Program/borrower LGP - Title XVII Section 1705 1366 Technologies Inc.
paragraphs: Arizona Solar One, LLC (aka Abengoa Solar,  Inc; Solana)
Genesis Solar, LLC  Granite Reliable Power, LLC  Great Basin Transmission South, LLC (aka  SWIP/On Line)
High Plains Ranch II, LLC (aka Sunpower Corp  CA Valley Solar Ranch)
Mojave Solar LLC (aka Abengoa Solar Mojave)  Solar generation  NGP Blue Mountain I, LLC Geothermal  OFC 2, LLC (aka Ormat)
Stephentown Regulation Services, LLC (aka  Beacon Power Corporation)
Tonopah Solar Energy (aka Solar Reserve,  LLC)
section_title: Advanced Technology Vehicles Manufacturing (ATVM) loan program Fisker Automotive, Inc.
paragraphs: Defaulted/auctioned  (subsequently  bankrupt)
section_title: ATVM subtotal Total
paragraphs: Defaulted/auctioned  (subsequently  restructured by the  purchaser)
section_title: Appendix IV: Established DOE Loan Monitoring Policies Generally Align with Those of Private Lenders
paragraphs: In order to provide context and better understand the Department of  Energy’s (DOE) loan monitoring, we compared DOE policies with those of  private lenders that finance large energy projects. We conducted  semistructured interviews with eight experts about private lenders’  monitoring policies and compared the results with DOE’s policies and the  10 activities we identified. For more information on our methodology see  appendix I.
For the activities in which DOE has established policies, those policies  generally align with those of private lenders. More specifically, our  discussions with experts and our review of DOE’s policies indicate that  DOE’s general monitoring activities, frequency of monitoring, actions  taken when risk appears to be increasing, and organizational structures  were all generally similar to those of private lenders. For example, both  DOE policies and private lenders described various monitoring activities  to oversee borrowers including periodic reviews of borrower information,  independent engineering reviews of projects’ progress and expenditures,  site visits to projects to monitor construction, and the tracking of  borrowers’ compliance with loan agreements. In one instance, DOE’s  monitoring policies appear more rigorous than many private lenders’.  Specifically, both DOE’s and private lenders’ policies call for independent  engineers for technical expertise and oversight, but DOE also has  engineers on staff who oversee the independent engineers and advise  DOE’s loan portfolio managers.
While both DOE and private lenders were similar in having separate risk  management functions, we could not directly compare DOE’s reporting  relationship for its Risk Management Division with that of the private  sector because of the incomplete policies and evolving nature of the Risk  Management Division, as well as differences between a private lender  and a government agency—such as the structure of overall management  and the greater diversity of missions assigned to DOE than to a bank.
section_title: Appendix V: Comments from the Department of Energy
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the letter from the Department of  Energy dated April 18, 2014.  1.  DOE states that its disbursement monitoring is fully developed and  that DOE has not made disbursements without confirming that all  required conditions have been satisfied and obtaining all necessary  internal approvals.  We found that DOE generally adhered to its  policies related to disbursements, documenting analyses, and  recording approvals, as we report on page 10. However, as we point  out in the report, other aspects of DOE’s loan monitoring were still  under development while DOE was disbursing funds.  2.  DOE states that its 2011 policy manual requires the agency to  prepare loan review reports for each project, at least annually, and  that the agency has prepared quarterly, semiannual, and annual  reports for all projects since the 2011 manual was issued.  The  manual in effect prior to 2011 also required periodic credit reports, so  we looked for all reports prepared for the 10 loans in our sample.  As  we report, DOE did not start preparing any periodic credit reports until  2011, and 24 of 88 required periodic credit reports were missing for  the 10 loans.  Of these missing reports, 4 were due after the 2011  policy manual was issued.
DOE also states that credit reports are not the only tool in determining  borrower health and capacity to repay the DOE-supported loan.  We  agree that credit reports are not the only tool, but DOE’s policy  manual indicates their importance.  Specifically, it states that reports  will enhance the credit monitoring process by providing (1) an early  warning signal of potential credit issues, (2) a basis for potential loan  restructuring, (3) a basis for reassessing credit risk, and (4) an  information source for inquiries.  3.  DOE states that it prepared comprehensive analyses and  presentations that served as workout plans for the two loans  mentioned by GAO and that consolidation of these analyses and  presentations into a single document would not have changed the  overall effectiveness of the workout plans. We did not evaluate  whether this approach was more or less effective than the stated  approach in DOE’s policies, which call for a formal workout action  plan that must be approved by management. As we note in our report,  DOE did not follow its policies in that area. We also note DOE’s  statements that they are revising the policy manual to better comport  with best practices in this field and that DOE has been operating  under draft implementing procedures since June 2012. The mismatch  between DOE’s written policies and its actual practices highlights the  importance of our recommendation for DOE to complete its policies  and procedures.  4.  DOE describes several actions it has taken and has under way for  reviewing and monitoring the Loan Programs Office’s portfolio. We  note in the report that DOE has conducted some internal  assessments and begun portfolio-wide reporting on risks, but that  DOE was not adhering to its policies for evaluating the effectiveness  of its loan monitoring.  Specifically, DOE’s 2011 policy manual  requires “a formal Credit Review and Compliance report” to be issued  quarterly, but DOE officials told us that none had been produced,  again underscoring the importance of our recommendation in this  area.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Karla Springer, Assistant  Director; Marcia Carlsen; Lee Carroll; Cindy Gilbert; Ryan Gottschall;  Armetha Liles; Eric Miller; Cynthia Norris; Madhav Panwar; Lindsay Read;  Barbara Timmerman; Jarrod West; and Steve Westley made key  contributions to this report.
section_title: Related GAO Products
paragraphs: Federal Support for Renewable and Advanced Energy Technologies.  GAO-13-514T. Washington, D.C.: April 16, 2013.
Department of Energy: Status of Loan Programs. GAO-13-331R.  Washington, D.C.: March 15, 2013.
DOE Loan Guarantees: Further Actions Are Needed to Improve Tracking  and Review of Applications. GAO-12-157. Washington, D.C.: March 12,  2012.
Department of Energy: Advanced Technology Vehicle Loan Program  Implementation Is Under Way, but Enhanced Technical Oversight and  Performance Measures Are Needed. GAO-11-145. Washington, D.C.:  February 28, 2011.
Department of Energy: Further Actions Are Needed to Improve DOE’s  Ability to Evaluate and Implement the Loan Guarantee Program.  GAO-10-627. Washington, D.C.: July 12, 2010.
Department of Energy: New Loan Guarantee Program Should Complete  Activities Necessary for Effective and Accountable Program  Management. GAO-08-750. Washington, D.C.: July 7, 2008.
Department of Energy: Observations on Actions to Implement the New  Loan Guarantee Program for Innovative Technologies. GAO-07-798T.  Washington, D.C.: April 24, 2007.
The Department of Energy: Key Steps Needed to Help Ensure the  Success of the New Loan Guarantee Program for Innovative  Technologies by Better Managing Its Financial Risk. GAO-07-339R.  Washington, D.C.: February 28, 2007.