Solyndra report: No smoking guns

March 27, 2012, 3:25 PM UTC

By Roger Parloff, senior editor

FORTUNE — Today Solyndra’s chief restructuring officer — an outside forensic accountant and bankruptcy expert hired by its board — filed a 204-page report with the bankruptcy court in Delaware, offering the most detailed account yet of how the solar panel startup won a $528 million loan guarantee from the Department of Energy in September 2009, and then fell into bankruptcy just two years later.

The report recounts a lengthy loan-application process that was largely completed during the administration of President George W. Bush, consistent with Bush Administration energy policies and pursuant to a Bush-era statute. It also concludes that Solyndra withheld no material information from the Department of Energy and that the company failed due to rapid unanticipated changes in market conditions: chiefly the plummeting price of solar panels due to massively ramped up competition from China, combined with dramatically curtailed demand, triggered by the impact of the global financial crisis on Europe. (Europe is a crucial market for solar panels.)

The report concludes that throughout the relevant time period “the DOE had sufficient information to understand the risks… and make an informed decision”; that the loan funds “were spent in accordance with the relevant loan documents”; that the information Solyndra provided to the DOE in regular financial reports was “materially correct”; that its bonus payments to employees were “within materially acceptable limits”; and that “no material funds were diverted from their original intended use.”

Nevertheless, Solyndra junkies will be frustrated by the limited scope of Neilson’s inquiry, and it is unlikely that partisans will be silenced by it. It sheds no light, for instance, on the basis for the pending federal criminal inquiry into Solyndra, pending in the Northern District of California, which led the FBI and the Department of Energy Inspector General’s office to raid the company’s offices two days after it filed for bankruptcy in September. (A couple weeks later the company’s then-CEO Brian Harrison and CFO Bill Stover each invoked their Fifth Amendment privileges when summoned before a House subcommittee. Harrison and Solyndra founder Chris Gronet both declined to be interviewed by Neilson.)

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Neilson’s report also sheds no light on interactions between the DOE, the White House, and George Kaiser—an Oklahoma oilman and Obama campaign-fund bundler whose family foundation controlled Solyndra’s lead investor, Argonaut Ventures I. “Whoever slept in the Lincoln bedroom—I don’t care,” Neilson says in an interview with Fortune. “I don’t consider that as part of my assignment.” Neilson saw his task as apolitical and independent, he says. “I have no intention of involving myself in political discussions why this was done, or whether it should have been done.”

Neilson, who was a special agent and accountant for the FBI earlier in his career, says he approached the assignment like a bankruptcy trustee, examiner, or expert witness—roles he has frequently played in his past. “I just wanted to throw open the kimono, as it were.” (Though Neilson had access to all of Solyndra’s outgoing and incoming emails, he says, he did not have access to internal White House or DOE emails.)

Neilson was selected for this assignment by four independent directors on Solyndra’s board. But the full board was his client, he says. Steve Mitchell, who heads Argonaut, is still a Solyndra board member.

Solyndra was founded by Gronet in 2005 to build solar panels that used a unique, thin-film photovoltaic material that could be applied to cylindrical tubes. Most solar panels, in contrast, used a polysilicon coating that was applied on flat squares. Solyndra’s tubes, when placed on a white, flat roof, were expected to be far cheaper to install or maintain than flat panels, more resistant to wind damage, and would not need any elaborate tilting apparatus to ensure that they soaked up the direct rays of the sun.

Two months after the company’s founding, Congress passed the Energy Policy Act of 2005, which created a loan guarantee program to spur investment in clean energy projects. In February 2006 President Bush also outlined his Advanced Energy Initiative, which was intended to reduce dependence on foreign energy sources by, among other things, increasing the DOE’s clean-energy technology research by 22%.

In August 2006 the DOE solicited “pre-application” bids for loan guarantees under the 2005 legislation. That December Solyndra submitted a bid, seeking a loan for use in building its first manufacturing facility, known as Fab 1.

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In early 2007 Congress authorized the DOE’s Loan Guarantee Program to issue up to $4 billion in loan guarantees, but the brand-new office was beset by bureaucratic delays as it got organized and plodded through the requisite notice-and-comment rule making processes. DOE finally began reviewing pre-applications in June and in December it invited 16 of the 143 loan applicants to proceed to the next step, submitting full applications. Solyndra was one of the 16.

Because of the delays, Solyndra had by then already found private funding to launch Fab 1, so it notified the DOE that it would seek a guaranteed loan to build the first portion of its second manufacturing plant, known as Fab 2, phase I. (Solyndra’s business plan required a rapid ramp-up in scale, according to Neilson’s report.)

Solyndra submitted its application in stages over the summer of 2008. It sought a $535 million guaranteed loan from the Federal Financing Bank (an arm of the U.S. Treasury), while committing to raise $198 million in equity (27% of the projected costs) on its own.

The next month, September 2008, Lehman Brothers filed for bankruptcy, triggering the global credit and financial crisis. One imminent repercussion of the crisis—not immediately foreseen—was that Germany, Italy, and Spain, strapped for tax revenues, would soon begin curtailing and eliminating subsidies they had previously offered their nationals to invest in solar energy. These countries had been, until then, three of the most important markets for solar panels, with Germany alone accounting for about 40% of the market.

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Solyndra, whose Fab 1 had just begun commercial production in July 2008, naively expected to receive its DOE loan in September 2008, enabling it to dive into construction on Fab 2. But more bureaucracy intervened, and approval was postponed again. CEO Gronet was peeved, writing the David Frantz, the then-head of the DOE loan guarantee program in an email: “I know the intent of the DOE program is to support the expansion of companies like Solyndra that have game-changing technologies that can have a real impact on our energy and global warming issues. But please realize that these delays are now in danger of having the OPPOSITE effect. We are a relatively small company with a small balance sheet and simply cannot afford such delays.”

In January 2009, President Barack Obama took office, and Stephen Chu replaced Samuel Bodman as Energy Secretary. Frantz, the incumbent head of the loan guarantee program, briefed Chu on the Solyndra project, “which was identified as one of the first projects likely to get through the process,” according to Neilson’s report.

On February 17, Obama signed the American Recovery and Reinvestment Act of 2009, popularly referred to as “the stimulus package.” The legislation, responding to the financial crisis, included a provision that, in light of the tight credit conditions, would goose the loan guarantee program by lifting from the borrower the obligation to pay a fee known as a “credit subsidy cost”—something like a homeowner’s “points” on a mortgage. In Solyndra’s case, the change would save it $32-75 million.

In March Solyndra received “conditional approval” of its loan. (Though Neilson’s report doesn’t mention it, that same month George Kaiser, the ultimate owner of Argonaut, reportedly visited the White House at least three times. He has previously stated, through a spokesperson, that he did not discuss Solyndra on those occasions.)

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The loan finally closed on September 3, making it—remarkably—the first DOE loan guarantee to be completed under the program that had been called for four years earlier by the 2005 legislation.

The next day—and, again, Neilson’s report doesn’t go into this—Vice President Joe Biden and Energy Secretary Chu presided at the groundbreaking of Solyndra’s Fab 2 facility in Fremont, California, in a photo opp that they would come to rue. In his remarks, Biden laid the credit for the loan guarantee and construction launch squarely on the Obama Administration’s 200-day-old Recovery Act legislation, downplaying the role of the 2005 legislation and the nearly two-and-a-half-year process that had actually led up to this moment. Thus, Biden unwittingly inflated a political football that would soon grow to the size of a Macy’s Thanksgiving Day float.

Days later, still not sensing the approaching market tsunami that was about to sweep it into obsolescence, Solyndra applied for yet another DOE loan guarantee, that would fund the remaining half of Fab 2, known as Phase II. That December the company also registered for an IPO.

The company’s financials for the last quarter of 2009, however, were already sending ambiguous messages. Its revenue had grown nicely in 2009 (from $6 million to $100.5 million) while its annual net loss had contracted promisingly (by $61 million). But sales figures were ominous. They were half what had been forecast, while operating costs were twice projections. (Quarterly financial statements were promptly shared with the DOE.)

Concerned by the weak sales, in February 2010 Solyndra’s management initiated a “ground-up” review of the company’s business model, and began a search for a “new CEO and/or president,” according to the report. (Meanwhile—though the report does not go into this—the media still saw Solyndra as a rising star. In February it was named one of MIT Technology Review’s “50 Most Innovative Companies,” while the Wall Street Journal that March ranked it number 5 on its list of “Top 50 Venture-Backed Companies,” and number 1 among its “Top Ten Venture-Backed Clean Tech Companies.”)

Solyndra’s management presented their findings to the board at a two-day meeting in April. Management was now forecasting solar-panel price drops due to the rising competition from China and oversupply in the market. China’s share of the solar panel market, which had been less than 10% when Solyndra launched in 2005, was now more than 50%.

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China’s panels were made of polysilicon—the primary component in traditional, flat photovoltaic panels. Due to government-subsidized Chinese production, the price of polysilicon, which had sold for about $250 to $500 per kilogram in 2008, dropped to $60 by the end of the 2010. While Solyndra’s traditional competitors saw their manufacturing costs fall as a result, Solyndra’s unique thin-film recipe—needed to coat a cylindrical panel—remained as expensive as ever. To meet competition, Solyndra had to lower its price nevertheless. Thus, the average sales price for all solar panels, including Solyndra’s, fell from $3.30 per watt at the beginning of 2010, to about $2.39 by the end of that year. Today they fetch about $1 per watt, according to the report.)

The board embarked on a new sales strategy, directly targeting end-users with enormous flat roofs—like Wal-Mart (WMT) and Target (TGT)—rather than relying on installers and middlemen to promote their products. It also strove, with some success, to increase panel efficiency—i.e., producing more watts per panel.

In May, the company scrapped its IPO plans, due to lack of market interest, but that left it in dire need of capital. In June—about two weeks away from having to shut down operations—the Board authorized the immediate issuance of $175 million in convertible notes.

In July Gronet stepped down as CEO and was replaced by Brian Harrison.

The DOE, meanwhile, which, according to Neilson, was kept abreast of the fast changing circumstances, began demanding reams of additional information from Solyndra, as did the White House Office of Management and Budget. Solyndra officials held direct meetings with DOE officials that September, and by October the now-head the DOE’s loan guarantee program, Jonathan Silver, openly questioned Solyndra’s ability to continue operations.

Solyndra responded with a dramatic “consolidation” plan, that called for closing Fab 1 and moving its machinery to Fab 2, which would was almost ready for commercial production. The company would also drop plans for the additional fabrication facility (Fab 2, Phase II).

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Meanwhile, Goldman Sachs was hired to seek out additional funding from “strategic and financial investors.” It found no interest.

Aware that its cash would run dry again in January 2011 without new funding, discussions then turned to a possible bankruptcy filing or, alternatively, a plan to still save the company through a “restructuring” of its debt. The latter called called for the company to get an infusion of $75 million in new funds, largely from existing investors. (Argonaut accounted for 47% of the new funds.) The plan contemplated enticing another $75 million infusion shortly thereafter.

But as is often the case when investors are asked to sink new money into a distressed company, the infusion was conditioned on the DOE’s agreement to subordinate its debt to the investors’ new $75 million tranche. DOE agreed and the restructuring closed on February 23, 2011.

Why did DOE do that rather than letting the company fold and trying to recoup its losses through liquidation? In an interview Neilson says that the DOE is obviously the best one to answer that question, but he believes that DOE “didn’t act all that different from any other secured investor [confronted with] the deteriorating condition of a company in which they’d invested a significant sum of money. Their view, as far as I can ascertain, was that they should move the manufacturing facility to full operability, and that that was their best chance for recovery…They made a calculated decision about what would yield the best return.”

Solyndra’s efforts to find still more funding after the restructuring failed, however, and on September 6 it filed for bankruptcy protection. At that point private investors had sunk $1.2 billion into the company, while the government had invested $528 million.