Perdido 03

Perdido 03

Saturday, October 31, 2015

Will SolarCity Implode And Burn Governor Cuomo's Administration With It?

SolarCity, the company the Cuomo administration is spending $750 million in Buffalo Billion Project funds on, had an interesting week to say the least.

The NY Times had a long piece on the risks/rewards the SolarCity deal has for New York taxpayers - here is the reward angle:

Gov. Andrew M. Cuomo has committed up to $750 million to the project, the biggest economic development effort he has undertaken in his five years as governor.

In doing so, he has not just bet big on solar energy, a competitive and rapidly growing business, but also on the success of SolarCity, a fast-growing California company that will operate out of the factory that the New York State will own.

The potential benefits seem substantial: The state has said the 1.2 million-square-foot SolarCity factory, which is scheduled to open in early 2016, will create 5,000 jobs, with 3,000 of them in western New York.

If the demand for solar power grows, and the companies the state has attracted are able to capitalize on that, then it could be well positioned to profit. Companies lured to New York by generous state grants have created jobs, often in struggling regions or cities like Buffalo. The government hopes a virtuous cycle will follow, and public money will attract private investment.

Sounds swell, except that SolarCity hasn't turned a profit since the company was taken public in 2012, has lost money since 2008, has been plagued by short-sellers making money off its plunging stock prices, and is the target of a federal investigation.
Here's Jim Heaney of Investigative Post on the mounting losses and plunging stock prices SolarCity is enjoying these days:

The company disclosed it posted a net loss of $234 million in the third quarter. That’s the biggest quarterly loss in the history of the company and brings the year-to-date losses to a staggering $537 million.

That puts SolarCity on track to lose more than $700 million for 2015, compared with net losses of $375 million in 2014, $152 million in 2013 and $92 million in 2012.


SolarCity stock prices also took a nasty tumble Thursday, prompting Business Insider to declare “SolarCity is getting nuked.”

The bad news on earnings drove the company’s stock down to $31.15 in after-hours trading. A day earlier, the stock closed at $38.34. That’s down from a peak of $84.96 in February 2014.

Heaney writes that Solar City is also under investigation by the feds for inflating prices to max out reimbursements from the government and was caught using prison labor to make their solar panels for an Oregon installation while taking tax credits that imposed a “job creation and retention requirement" that would pump up the regional economy.

Instead of hiring workers from the region, Solar City paid prisoners 93 cents an hour to make their solar panels.

And of course SolarCity is a part of US Attorney Preet Bharara's investigation into the Buffalo Billion Project contracts, which may have been rigged to benefit Governor Cuomo's campaign donors:

In late June, federal prosecutors sent out several subpoenas for documents on how the facility’s construction contracts were awarded. One avenue of investigation, according to people briefed on the matter but not authorized to speak on the record, is whether a request for proposals was written in a way that would have favored a construction company whose chief executive had donated tens of thousands of dollars to the governor.

While it is not known if SolarCity is a focus of the investigation, the company’s chief executive officer, Lyndon Rive, said in an interview that his company had not been subpoenaed and does not believe it was a target.

The future does not get any easier for SolarCity either.  The company's tax subsidies are set to expire in 2017 and the company's CEO told investors this week that SolarCity will shift from growth to cost-cutting in order to save money in the short term. 

Bloomberg News reports on the challenges that poses:

A recurring slide in the company’s earnings presentations shows how the cost per watt of installed capacity has come down over time. In the past two years, SolarCity says, it has fallen from $3.26 per watt to $2.84, as you might expect for a company growing rapidly and achieving economies of scale.

What’s odd is that the sales and overhead piece of that has actually gone up by half in that time. In other words, while greater scale has helped cut the unit cost of actually installing panels by 28 percent, more than 40 percent of those savings have been eaten away by rising sales and back-office costs.

Fixing that is critical to SolarCity’s new strategy. Looking at its unit-cost targets for 2017, virtually all of the planned savings are in sales and overhead, effectively getting them back to where they were two years ago.

Thumbs up for the objective, especially as federal subsidies boosting demand for solar power may fall away starting in 2017. SolarCity says costs have risen due to upfront investment in anticipation of future growth and that the new strategy will help bring those unit costs down. Investors should watch closely for progress on that front.

So let's sum it all up - Solar City has lost $1.2 billion since 2008 and has seen those losses accelerate by the year, is the target of short sellers and lost a quarter of its stock value this week alone, will lose its generous tax subsidies in a couple of years which puts increasing financial pressure on the company, is the target of a federal investigation for price inflation and is caught up in another federal investigation into potential bid rigging and other corruption around Cuomo's Buffalo Billion Project.

Boy, this sounds like a mess, doesn't it?

Given the financial stake Cuomo has put into SolarCity and the Buffalo Billion Project investigation the feds have launched that appears to center around, if not target, SolarCity, there's an awful lot of downside for both SolarCity and Governor Cuomo here.

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