Tesla uses cash from Nevada casinos to boost its bottom line

Photo: Luis Sinco / Los Angeles Times 2015

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Tesla CEO Elon Musk says “it’s looking like” the company will be profitable later this year.

Photo: Luis Sinco / Los Angeles Times 2015

Given Elon Musk’s dubious track record for reaching his goals, it may be a roll of the dice whether the Tesla CEO delivers a profit this year. His success will depend partly on money from Nevada casinos.

Since 2015, his Palo Alto company has boosted its bottom line by selling tax credits to casinos such as the MGM Grand.

The casinos use the credits, purchased at a discount, to lower the gambling taxes they pay the state. Tesla uses the proceeds to ease its losses or increase its profit.

Musk told investors June 5 that “it’s looking like” the company will be profitable later this year.

Tesla has sold $131 million in credits to casinos and has booked $163 million in anticipation of more sales soon.

Millions more will probably be used in the quarters ending in September and December. That could be enough to swing a loss to a profit for the company.

Nevada lured Tesla’s giant lithium-ion battery plant to a site outside Reno by promising $1.3 billion in incentives. Most of that is in the form of tax exemptions: Tesla doesn’t have to pay sales-and-use, property and general business taxes for 10 to 20 years.

But the state also gave Tesla $195 million in transferable tax credits, which the company can’t use unless it sells them.

There are still $32 million in tax credits unsold and unbooked. A Tesla spokesman said that only $10 million of that “likely” will be used to boost profits in the third and fourth quarters, although as much as $17 million will be available to Tesla starting July 1. An additional $15 million will be available to sell the following fiscal year.

With Tesla racking up $2.2 billion in losses last year on sales of $11.8 billion, $17 million in casino cash could almost be considered a rounding error. The Nevada credit sales “will not have even a close to material impact on our profitability,” the Tesla spokesman said.

But it might be enough money to boost Tesla from a quarterly loss to a quarterly gain. The company has lost more than $5 billion over its 15-year history and has posted only two quarterly profits: $15 million in the first quarter of 2018 and $22 million in the third quarter of 2016.

The casino cash “can technically push them over the limit” for a quarterly profit, said stock analyst Efraim Levy at CFRA. That may cheer some Tesla enthusiasts, he said, but “other investors will say ‘let’s exclude the one-time items from the total’” and see how sustainable its profits appear to be.

Tesla could use some positive news as it struggles to produce its make-or-break product, the Model 3 sedan. Problems in Tesla’s auto assembly plant in Fremont are so severe that the company has installed a third assembly line underneath a temporary tentlike structure. Partially built Model 3s are forklifted from the building and sent through the tent.

Musk has pledged to reach a production rate of 5,000 Model 3s a week by the end of June, although he has not said whether that’s sustainable.

Analysts say the company must raise billions of dollars by next year to survive, which could prove difficult for Musk if the losses continue.

That’s why Musk’s pledge to deliver two profitable quarters this year puts the company under heavy pressure to perform. This month, Tesla announced the layoff of 3,600 workers, 9 percent of its workforce, which should reduce costs.

The Nevada tax credits are part of a “kitchen sink” of items Tesla may use to achieve a quarterly profit, Levy said. That also includes revenue from sale of zero-emission credits Tesla receives from California as part of an air-cleanup program. The company has booked more than $1 billion in such credits since 2014.The Nevada tax credits are issued as Tesla hits benchmarks in capital spending and in hiring Nevada-resident workers.

In its filings with the Securities and Exchange Commission, Tesla has never revealed exactly how much of the credits it applied in any given quarter, either as a reduction in operating expenses or an increase in capital assets. In its annual reports, the company uses general terms to describe when credit cash is posted. “We record these credits as earned when we have evidence there is a market for their sale,” Tesla said in its 2017 10-K report.

The first $20 million were sold to MGM Resorts International, according to reports in the Las Vegas Review-Journal and the ThisIsReno news site. Since then, the buyers have been kept secret, but state records show that all of Tesla’s credit sales have been bought by casinos to lower their monthly gaming revenue tax. MGM had no comment.

Russ Mitchell is a Los Angeles Times writer.

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