SolarCity’s shaky foundation

Gov. Andrew Cuomo is investing $750 million of taxpayer funds and the hopes of a community desperate for an economic recovery in a company that is losing money, weathering two federal investigations and facing, by its own admission, an uncertain economic future.

To hear Cuomo tell it, the construction of a solar panel manufacturing plant operated by SolarCity Corp. will be a “game changer,” a catalyst to reviving the Western New York economy. Indeed, the company is regarded as a leader in the burgeoning solar energy industry, has acquired promising technology to manufacture solar panels and has enjoyed soaring stock prices since it went public in December 2012.

But company officials, in their most recent filing with the Securities and Exchange Commission, expressed reservations about SolarCity’s long-term prospects.

“It is difficult to evaluate our business and prospects due to our limited operating history,” the company said in its quarterly report filed with the SEC for the period ending June 30.

The company’s short history has been written in red ink. SolarCity has lost $452.6 million since 2010, including $88.4 million the first half of this year, according to its filings with the SEC.

“SolarCity has been consistently unprofitable,” the financial magazine Barron’s declared in an August 2013 story entitled “Dark Clouds Over SolarCity,” which concluded that “the absence of sunlight surrounding SolarCity suggests that investors should steer clear of its shares.”

SolarCity to this point has focused on selling solar power to homeowners and businesses that lease rooftop solar energy units. The Buffalo plant will move the company into a whole new line of business and make it responsible for operating a large manufacturing plant that will employ 1,500 workers and building a local supply chain that would generate an additional 1,500 jobs.

Is Solar City up to the task?

“We only have limited insight into emerging trends that may adversely impact our business, prospects and operating results. As a result, our limited operating history may impair our ability to accurately forecast our future performance,” the company stated in its most recent filing with the SEC.

That uncertainty has not stopped Cuomo from committing $750 million in state funds to build and equip SolarCity on a restored brownfield near Buffalo’s waterfront. The governor has made the project the centerpiece of his Buffalo Billion program, aimed at rejuvenating the region’s economy.

Despite SolarCity’s losses and the words of caution expressed in its SEC filings, a spokesman for the company said it is “in an extremely strong financial position,” and “excited to build the largest solar facility in the Western Hemisphere in Buffalo.”

Peter Cutler, director of communications and special projects for a local arm of the Empire State Development Corp., pointed to what he considers positive indicators of the company’s financial health. They include a recent analysis by the National Association of Securities Dealers Automated Quotations System, commonly known as NASDAQ, that concluded, “SolarCity maintains a stable financial position” and “a favorable liquidity profile.”

Said Cutler: “We are confident that SolarCity will deliver on its agreement with the state and we have negotiated financial penalties if they fail to do so.”

A Growing Company

SolarCity, based in suburban San Francisco, was founded in 2006 by brothers Lyndon and Peter Rive and financed in part by their cousin, Elon Musk, a billionaire entrepreneur whose ventures have included PayPal, Tesla Motors and SpaceX. Musk is SolarCity’s largest shareholder, owning 22.5 percent of the company’s stock as of this past April.

The company has grown into one of the largest solar energy providers in the nation with a 36 percent share of the residential market and 7 percent share of the commercial market. It had 141,034 customers as of June 30, with the largest concentration in California. It employs 7,500 people in 52 operation centers around the county, including three in New York State, which are located in Albany, Long Island and Westchester County.

The lion’s share of SolarCity’s business involves the company installing rooftop solar systems costing an average of $25,000 to $30,000. The company recoups the expense through a 20-year lease with homeowners, who are charged for the electricity their rooftop unit produces. SolarCity buys its solar panels from a variety of manufacturers in China, Europe and North America.

In June it took a big step toward manufacturing its own panels by purchasing Silevo, a panel maker which had struck a deal with Cuomo last November to open a plant in Buffalo that would be built and equipped by the state. SolarCity officials say Silevo’s solar panels are cheaper to make and more efficient in generating electricity than rival products.

“It’s a really, really good technology,” said Jonathan Bass, vice president of communications for SolarCity.

After buying Silevo, SolarCity initiated talks with the Cuomo administration about building a larger plant in Buffalo in exchange for a bigger subsidy from the state. The resulting deal, announced Sept. 23, commits SolarCity to creating 3,000 jobs at its plant and through suppliers located in Buffalo, and the state to spending $750 million to help construct and equip the plant. The plant is projected to open the first quarter of 2016.

The state investment includes $350 million in cash and $400 million in loans that New York will cover through grants if SolarCity meets its employment goals. In addition, the company won’t pay state corporate taxes because the state Legislature, at Cuomo’s behest earlier this year, eliminated corporate taxes on manufacturers. A state entity will also own the plant, meaning SolarCity will not pay property taxes.

The companies that supply SolarCity will be eligible to participate in Start-Up New York, another Cuomo initiated program, which abates state taxes for participating firms and their employees for 10 years.

Risk Factors

The company that New York taxpayers are investing so heavily in has not been able to produce a profit for its shareholders.

The company’s SEC filings report net losses of $452.6 million from 2010 through June 30 of this year. The losses have grown larger each year, and if trends for the first half of this year hold, losses in 2014 will be nearly four times those of 2010.

Put another way, SolarCity is currently spending more than $2 for every $1 of revenue it takes in.

The continuing losses have prompted more than one analyst to question SolarCity’s viability and ponder its future.

But Bass, the company’s spokesman, countered that “SolarCity has more than $3 billion in assets on its balance sheet, more than $3 billion in contracted payments remaining from customers, and has raised private funds to finance more than $4 billion in solar projects. We are in an extremely strong financial position.”

Bass said the company’s losses are linked to the cost of acquiring customers. The company absorbs the high up-front expense of installing the roof top units and recoups it over 20 years.

“We have contracted with customers to provide us more than $3 billion in payments that have not yet been recognized as revenue in our GAAP financials, and that is the primary impact on the net loss figures,” he said.

Furthermore, Bass said the solar market has “significant growth potential” and that profits will come as the company scales its operation. As for the Buffalo plant, he said, “we’ll absolutely be able to execute this.”

SolarCity’s most recent SEC’s filing strikes a more cautious note, however.

“Our ability as an organization to integrate acquisitions is unproven. We may not realize the anticipated benefits of our acquisitions or any other future acquisition, or the acquisition may be viewed negatively by customers, financial markets or investors,” the filing said.

Elsewhere in the filing, SolarCity lists among its potential risks, “the inability to successfully operate new lines of business in which our management team and personnel may have little prior experience.”

Are the concerns expressed in the SEC filings overly cautious?

“The risk factors are the risk factors,” Bass said. “I can’t comment on the risk factors beyond what is in the filings.”

The MIT Technology Review expressed caution in a Sept. 19 story that reported on SolarCity’s plans for Buffalo and Tesla Motors’ deal to build a plant in Nevada that will build batteries to service both electric cars and solar panels.

“Both companies’ manufacturing plans are ambitious but also risky, given the recent track record of U.S. energy companies, and because unexpected technology advances could quickly render the components produced in those plants outmoded,” the story said.

SolarCity’s stock, meanwhile, is in a state of flux. Initially offered at $8 a share, it climbed to a high of $84.96 in February of this year and has dropped to $56.48 on Wednesday.

Legal Issues

The company faces legal, as well as financial challenges.

SolarCity is one of three leading solar energy companies under review by the U.S. Treasury and Justice Department to determine if they inflated their installation costs to obtain federal tax credits and grants. The companies, according to press reports, charged customers considerably more than the industry standard to install rooftop units. In addition, the IRS has audited two of the investment funds SolarCity established with partner firms to finance portions of its work.

SolarCity insists it has followed all applicable laws and regulations. The government has not concluded its investigations, which could take up to another nine months to complete.

In another investigation, the U.S. Department of Labor issued a preliminary determination in February that SolarCity miscategorized some hourly workers as salaried employees at a facility in Foster City, California. At issue is whether employees are due overtime pay. No penalties or damages have been determined.

The company is also defending itself against two lawsuits brought in March by shareholders who allege violations of federal securities laws. The lawsuits contend that the company and two of its officers issued incorrect SEC filings and press releases between March 2013 and March 2014 that misled shareholders on the company’s financial condition. SolarCity contends the cases have no merit.

While SolarCity is fending off plaintiffs and investigators, company officials are also developing plans for their expansion into Buffalo. Whether they can succeed is a $750 million question.