Tom Konrad CFA
On March 22, Western Wind Energy (TSX-V:WND, OTC:WNDEF) applied for a $90,556,707 tax-free 1603 grant from the US Treasury on behalf of the completed 120MW Windstar project. The press release stated that the grant is subject to approval by the Treasury and payable within sixty days.
|The Windstar Wind Farm. Photo credit: Western Wind Energy|
It’s now more than three months later, and no tax grant. The stock is down 24% since May 22, when the grant was expected, but management remains confident they will get the grant. In the company’s May 30 quarterly earnings announcement, the company said,
Our application has exceeded the 60 day program guidance review period and we continue to monitor our application status on a daily basis. We are not aware of any issues associated with our application and through our network of advisors we believe a majority of the applications are delayed.
The Western Wind CEO Jeffrey Ciachurski had to attest to this statement under the Dodd-Frank rules, so we can be confident he believes the grant is just delayed, and will not be denied. In a phone interview on Friday, he told me flat out that “There is no risk to the cash grant,” and “most 1603 applications are running late.” He also told me that the company has attended legal seminars on 1603 grants, and the average deviation (amount the grant is reduced by Treasury) is 3%, so we can expect Western Wind to receive about $88 million.
According to Western Wind, the reason the 1603 grants are running late is because of a flood of solar applications as the program expired at the end of 2011, and because there is pressure on Treasury to vet applications very carefully given the current charged political climate in Washington.
When I was at the Renewable Energy Finance Forum, Wall Street last week, I tried to get independent confirmation of the company’s statement that most 1603 grants are running late. No one was able to give me direct confirmation. Most industry insiders told me they would not be surprised if that were the case, but they did not have any personal knowledge. I also asked Richard Kauffman, Senior Advisor to the Secretary of Energy in the Department of Energy (DOE). Although DOE helps the Treasury vet 1603 grants, he had not heard anything about grants being delayed.
I also got in touch with a source at Treasury, who was not willing to talk on the record. That source did say that Treasury’s “policy” is a 60 day turnaround. The source said that I should not assume that the grant would be denied just because it had not yet been granted, as there are reasons a grant might take longer than 60 days to process.
Western Wind is still confident they will receive the tax grant, and the Treasury Department did not deny that many 1603 grants are delayed. It makes a certain amount of sense to me that if most 1603 grants are running late, Treasury is not willing to come out and say that’s the case: it would not make them look good. The fact that my Treasury source did not deny that grants are running late and was unwilling to go on the record, lends credence to the possibility that many grants are late. After all, if everything were running smoothly, why not just say so?
Overall, I think the chances of Western Wind receiving the grant are very high. I recently bought more stock at $1.15 on the gamble that I’m right, but to be perfectly clear, it is a gamble. While the chances seem very low to me, if Western Wind does not receive the tax grant, it could easily bankrupt the company. Western Wind had only $272,720 in unrestricted cash on hand at the end of May, and has substantial project-related debt that it plans to pay down with the grant proceeds. If the tax grant were denied, I can’t imagine there would be many lenders willing to step up and fill the breach.
On the other hand, I can’t find any reason to believe that the Windstar project should not qualify for the 1603 grant. If the grant were to be denied, what would be the basis for denial?
Disclosure: Long WNDEF
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