SolarCity Is Not Pulling A Fast One In Buffalo

| About: SolarCity Corp. (SCTY)

Summary

SolarCity did properly disclose changes to the terms of its agreement with New York.

SEC filings are an accepted and required way for public companies to disclose material new information.

The number of employees SolarCity agrees to employ in New York has not changed.

On Friday, I came across an article published by The Investigative Post, entitled "SolarCity slashes Buffalo factory commitment," in which authors Jim Heaney and Charlotte Keith allege SolarCity (NASDAQ:SCTY) and New York Governor Andrew Cuomo have failed to provide sufficient public disclosure about revisions to SolarCity's agreement for its Buffalo, New York, manufacturing facility. The article claims the changes permit a significant reduction in the number of manufacturing jobs SolarCity is required to create to avoid steep penalties.

Furthermore, Heaney and Keith suggest foul play may have been involved with SolarCity's involvement in Cuomo's Buffalo Billions program, which involved New York state investing $750 million to build and equip a 1.2 million-square-foot plant for SolarCity.

The authors assert SolarCity and Governor Cuomo failed to properly disclose the changes to the company's agreement, which permitted SolarCity to reduce the number of manufacturing jobs it must create at its factory in Buffalo, New York, to avoid steep penalties.

I'm writing this article because the Investigative Post is simply wrong in claiming that SolarCity misled its investors about the changes in the deal. The company properly disclosed the changes to the deal in its SEC filings.

Any other complaint about the lack of disclosures is political commentary about the governor, who had no legal obligation to disclose those changes to his "shareholders" — the people of the state of New York — and thus did not do so.

The authors of the Investigative Post article assert the reduced "manufacturing job commitment" is a "setback" for the project (and SolarCity) and an example of a failure by Governor Cuomo to deliver on his promises.

The reduced manufacturing job commitment represents a setback for the project, the cornerstone of Gov. Andrew Cuomo's Buffalo Billion program.

The revised manufacturing job commitments are in marked contrast to numbers detailed in previous SolarCity filings with the SEC, an earlier agreement between the company and state, and public statements by Cuomo.

The governor promised 1,450 "direct manufacturing jobs at the new facility" at the topping off of the factory at Riverbend in August, according to a press release issued by his office at the time.

This statement incorrectly cites the press release issued by Governor Cuomo's office. Nowhere in the press release does it state that SolarCity will create 1450 direct manufacturing jobs. Additionally, it looks like Cuomo's press release may have included a few mistakes when stating the types of jobs that would be created and the time frame in which those jobs would be created:

SolarCity will create over 1,460 direct manufacturing jobs at the new facility, and employ more than 2,000 additional workers in the state to provide solar services in the next five years. The facility will create more than 1,440 manufacturing support and service provider jobs in addition to the jobs that SolarCity creates directly. [emphasis added]

The following are the terms of SolarCity's original SEC filings (EX 99.2)

We (SolarCity) must

1) use our best commercially reasonable efforts to commission the manufacturing equipment within three months of Manufacturing Facility completion and reach full production output within three months thereafter

2) employ 1,460 high-tech jobs for the manufacturing operation at the Manufacturing Facility for five years after Manufacturing Facility completion

3) employ at least 2,000 other personnel in the State of New York to support downstream solar panel sales and installation for five years after Manufacturing Facility completion

4) work with the Foundation to attract 1,440 additional support contractor and supplier jobs in the State of New York following full production

5) spend or incur approximately $5 billion in combined capital, operational expenses and other costs in the State of New York during the 10 year period following full production

6) make reasonable efforts to provide first consideration to New York-based suppliers

7) invest and spend in manufacturing operations at a level than ensures competitive product costs for at least five years from full production

8) negotiate in good faith with the Foundation on an exclusive "first opportunity basis" for 120 days before entering into any agreement for additional solar panel manufacturing capacity that Silevo may wish to develop during the term of the agreement

The following are the revised terms from the revised SEC filing, referenced by the article.

We (SolarCity) must

1) use our best commercially reasonable efforts to commission the manufacturing equipment within three months of Manufacturing Facility completion and reach full production output within three months thereafter,

2) employ at least 1,460 jobs in Western New York, with 500 of such jobs for the manufacturing operation at the Manufacturing Facility, for the initial two years of collaboration commencing after Manufacturing Facility completion, and we have committed to the retention of these jobs for five years

3) employ at least 2,000 other personnel in the State of New York for five years after Manufacturing Facility completion

4) employ a total of 5,000 people in the State of New York by the tenth anniversary of Manufacturing Facility completion.

5) spend or incur approximately $5 billion in combined capital, operational expenses and other costs in the State of New York during the 10 year period following full production

6) make reasonable efforts to provide first consideration to New York-based suppliers

7) invest and spend in manufacturing operations at a level that ensures competitive product costs for at least five years from full production

8) negotiate in good faith with the Foundation on an exclusive "first opportunity basis" for 120 days before entering into any agreement for additional solar panel manufacturing capacity that Silevo may wish to develop during the term of the agreement.

As best as I can tell, after looking over the complete terms mentioned in the SEC filings, the revised terms clarify the original terms of the original agreement, rather than loosening SolarCity's obligations. Additionally, the initial agreement didn't say all 1460 jobs at the manufacturing facility would be manufacturing jobs.

Conclusion

In my view, from an investor's perspective, investors should ignore the article by the Investigative Post. As best as I can tell, the revised terms were in the company's best interests and clarified and fine-tuned certain provisions in the agreement, and were disclosed in the company's SEC filing.

Additionally, as Kady Cooper, Director of Communications for SolarCity, put it, the reduction in manufacturing jobs does not represent a setback for SolarCity or for New York.

With new advanced semiconductor manufacturing equipment that enables automation, we believe 500 is the minimum number of manufacturing jobs the factory will require," said Kady Cooper, director of communications for SolarCity. "If that is the case, we will hire more staff for sales, project development and other functions.

From the perspective of New York's taxpayers, perhaps the failure by Governor Cuomo and other state officials to make a similar disclosure to the people of the State of New York was politics as usual; but it was not a violation of any law.

In a video interview with WGRZ, Jim Heaney stated he felt SolarCity was trying to hide something, because in his view, SolarCity's SEC filings were an attempt by the company to obfuscate the changes and "leave it for the press to read the fine print buried in documents before anybody fessed up."

In my view, investors should focus on SolarCity's installations and expectations for the year ahead, rather than paying attention to a journalist who believes SEC filings are a way to make it complicated for journalists and investors to find the facts.

SolarCity's stock has been bogged down by lower-than-expected guidance, analysts who feel SolarCity is having an identity crisis, commentary from Jim Chanos, and a cloud of uncertainty that appears to be covering the entire solar sector. Even though it's possible SolarCity could fall a bit further, at $19, I'm confident the upside potential far outweighs the downside risk. Either SolarCity will be very successful or it will fail, and I'm not buying the bears' arguments.

Disclosure: I am/we are long SCTY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.