Economics of the Great Plains Coal Gasification Project

In response to a congressional request, GAO addressed several issues concerning the economics of the Great Plains Coal Gasification Project and the Department of Energy (DOE) monitoring of the project.

Five partners had contributed $320 million in equity to the project as of June 30, 1983, and they estimate that they will contribute $517 million through December 1984. The partners could realize an average annual 20-percent return on their investment over the first 20 years of operation, while the profit after tax on equity for the chemical and allied products industries ranged from 11.4 to 16.7 percent. Three benefits could have been realized by borrowing from the Federal Financing Bank (FFB): lower interest rates, flexibility in how much and how often funds are borrowed, and elimination of underwriter fees. The partners do not directly realize tax credits from the project. However, tax benefits are available to the parent companies of the partners making this a potentially attractive investment. During construction, investment tax credits, energy tax credits, and interest deductions are available. No precise cost estimate could be made as to the loss the Federal Government and project sponsors would have sustained if the project had been terminated on June 30, 1983. At a minimum, DOE would have had to pay the amount that the project borrowed from FFB and the partners would have lost the equity that they had contributed. GAO found that the cash-flow projections were reasonable; however, the projections did not consider the impact of taxes on the parent companies. GAO found that DOE monitoring plans and procedures are adequate and that, if certain conditions occur, DOE could withdraw its commitment on additional borrowings.