SolarCity skyrocketing stock dependent on government tax giveaways

By Tori Richards and Eric Boehm | Watchdog.org

These are boom times for SolarCity, the solar energy company backed by libertarian-leaning entrepreneur Elon Musk.

The company’s stock, initially offered at $8 a share in December 2012, is trading around $82 a share early Monday. And in a shareholder’s meeting last week, company officials said they’re bullish on the company’s future.

Buried in SolarCity documents is the secret to that success. Musk, the billionaire who founded PayPal and is chief executive officer and product architect of electric carmaker Tesla, has built SolarCity on government giveaways — subsidies that will decrease substantially in the next two years.

“If, for any reason, we are unable to finance solar energy systems through tax-advantaged structures … we may no longer be able to provide solar energy systems to new customers on an economically viable basis,” SolarCity’s third quarter 2013 report said. “This would have a material adverse effect on our business, financial condition and results of operations.”

That makes SolarCity no different from countless other companies that have leveraged taxpayer cash for private profit — all part of President Barack Obama’s goal of a green-energy future.

Critics say it’s an abuse of taxpayer dollars — and a risky investment.

“I could see no rational reason why anybody would put money behind this company,” said William Yeatman, a senior fellow with the Competitive Enterprise Institute, a free-market think tank in Washington, D.C. “They have been the beneficiary of $11 million from the stimulus and $411 million from subsidies. It’s a crass market decision based on political considerations. Anyone taking this stock is making a bet that the federal government will not turn off these subsidies.

“Anything that isn’t based on meeting a genuine consumer demand and is instead predicated on direct subsidies — or it’s based upon meeting demand mandated by the government forcing people to buy — that should be troubling to anyone picking stocks,” Yeatman said. “It seems to violate the very basics of stock picking.”

In the shareholder call, jubilant company officials said SolarCity has grown 12 percent more than anticipated, a 78-percent increase from 2012. Chief technology officer Peter Rive said the California-based company will push for expansion in California, Texas, Arizona, Massachusetts, New Jersey and Maryland.

The company’s unique marketing proposition allows residential homeowners to lease solar-energy equipment over 20 years. Because SolarCity retains ownership of that equipment, it reaps any federal and local tax benefit.

That turns out to be a substantial part of the company’s income, a fact SolarCity acknowledges in its financial disclosures.

“Solar energy has yet to achieve broad market acceptance and depends on continued support in the form of performance-based incentives, rebates, tax credits and other incentives from federal, state and foreign governments,” the company’s 2012 report said. “If this support diminishes, our ability to obtain external financing on acceptable terms, or at all, could be materially adversely affected.”

Taxpayer cash is so critical the company that SolarCity officials worried about the business impact of last year’s sequestration. In March 2013, as SolarCity wrapped up its 2012 annual report, company executives repeated their concern about cash flow. As part of across-the-board sequestration cuts, grants handed out through the federal green-energy program were reduced by 8.7 percent.

“As a result, the Company expects to suffer grant shortfalls of approximately $2.4 million associated with its financing funds,” the 2012 report notes. “Reductions in, or eliminations or expirations of, governmental incentives could adversely impact our results of operations and ability to compete in our industry.”

The report also warns investors about a pair of investigations by the Treasury Department and the Justice Department. The agencies had been looking into claims SolarCity inflated its cost of goods in order to collect larger tax credits, but have not released any updates.

According to Solar City, if either investigation determines the company should not have received federal grants, civil charges could be brought against the company and penalties may have to be paid.

“If at the conclusion of the investigation the Inspector General concludes that misrepresentations were made, the Department of Justice could decide to bring a civil action to recover amounts it believes were improperly paid to us … we could then be required to pay damages and penalties for any funds received based on such misrepresentations,” according to the 2012 yearly report.

Much of SolarCity’s funding comes from more traditional sources. The annual report says the company has raised $1.7 billion through deals with Credit Suisse, Google, PG&E Corp. and U.S. Bancorp, among others.

George Conboy, president of Brighton Securities, a financial firm based in upstate New York, said Solar City’s soaring stock price is the result of “irrational exuberance” — borrowing a phrase from Alan Greenspan — that was partially caused by the government’s investments in alternative energy.

“It’s not economical on a stand-alone basis,” he said. “If you look at the underlying issues, it is potentially not a very pretty picture.”

Conboy said he expects things to go badly once the federal grants and tax breaks expire.

“If you subsidize something, you’ll get plenty of it — at least until you stop subsidizing it,” Conboy said. “And when that happens, the market can be pretty vicious about finding its own level.”

SolarCity did not respond to a request for comment for this story.

Contact Tori Richards at tori@watchdog.org and on twitter @newswriter2 and Eric Boehm at eboehm@watchdog.org

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