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The Government's Buffett-Less Tesla Warrants

Tickers in this article: BAC BRK.A BRK.B F GE GM GS TSLA

NEW YORK (TheStreet) -- As Tesla Motors continues to drive towards profitability, it's increasingly apparent that former Republican presidential candidate Mitt Romney was wrong when he lumped the car maker into a laundry list of alternative energy "losers" receiving government stimulus.

While Romney can easily be criticized for characterizing the Elon Musk-run company as a failure given its current position, his dollars-and-cents critique of the government's efforts to stimulate green energy and the electric car continue to raise some valid points.


Instead of putting taxpayers on the hook for only picking "the losers," as Romney snickered to President Obama in an October 2012 debate, the bigger issue is the government's lack of compensation for picking winners such as Tesla.

Case and point is Tesla's recent announcement it will repay $465 million in loans received under the Department of Energy's Advanced Technology Vehicle Manufacturing Program (ATVM) by late 2017, five years ahead of schedule.

While Tesla and its founder Elon Musk are right to frame the company's ATVM loan repayment within the context of the success of the company's Model S electric car, the early repayment is most relevant to Tesla's shareholders, who've benefitted from an over 100% gain since the company's 2010 initial public offering.

Were Tesla to repay its ATVM loans in full ahead of a 2022 maturity, deeply discounted warrants held by the Department of Energy (DoE) for over 3 million Tesla shares will be cancelled, according to company spokesperson Shanna Hendriks.

The 3,090,111 government-held warrants, some of which Tesla says are priced at an exercise price of $7.54 and some carry an exercise of price of $8.94 a share, according to the company's most recent annual report, currently stand at a profit of roughly $100 million at Tesla's current $41 stock price.

Unfortunately for taxpayers, Tesla's early repayment of ATVM loans will likely expunge government's cheaply priced warrants, which are exercisable between December 2018 and December 2022, according to company filings. "If we prepay the DoE Loan Facility in part or in full, the total amount of shares exercisable under the warrants will be reduced," Tesla says in a 10-K filing with the Securities and Exchange Commission.

A DoE spokesperson wouldn't disclose the exact financial arrangement of Tesla's ATVM loan balance and the government's warrant, however, Hendriks confirmed that the warrants would basically disappear, if the company were to fulfill its plan for a 2017 repayment.

It's obvious that the government-held warrants don't have the teeth of those that Warren Buffett of Berkshire Hathaway hooked into the likes of General Electric , Goldman Sachs and Bank of America during the financial crisis and which are all poised to pay off handsomely.

Tesla likely wouldn't be in such a race to repay its low-priced government financing were it not an easy way out of discounted warrant contracts. Meanwhile, an Oct., 3, 2012 blog post from Musk indicates the DoE initiated Tesla's planned early ATVM loan repayment.

"Far from being worried about our survival, the DoE is highly bullish about our future and doesn't want us to delay early repayment of the loan if we have the cash on hand to do so," Musk wrote. "We have a duty at Tesla, having accepted this loan as a portion of our capital, to repay it at the earliest opportunity."

The DoE spokesperson also didn't comment on the motive of its Tesla warrant.

Larger ATVM loan recipients such as Ford received financing at interest rates in the neighborhood of 2%, but didn't offer the government any stock warrants.

Larry Heck, an executive in Ford's investor relations division confirms the DoE took no warrant position in Ford. Therefore, the auto maker is in no hurry to repay its ATVM loans.

"There is not really any great reason" to repay ATVM loans early, said Heck, while noting that the $5.9 billion in financing the company received helped to electrify Ford's cars such as the Fusion, Focus and its C-MAX hybrid.

Nissan received nearly $1.5 billion in ATVM loans, which helped the company develop its Leaf electric car.


Overall, Tesla's success and its ATVM loan repayment are best characterized as a small victory for taxpayers alongside the overall program, even if the DoE appears to have left money on the table.

Spurring the development of the electric car and the infrastructure necessary to support its adoption at a minimal cost to taxpayers is likely to enrage only the most ardent budget deficit scolds.

Even potential losses to the overall program are likely overstated. The DoE says on its web site for ATMV that the program is responsible for about 60,000 jobs, jobs equal tax revenue, while it also helps to reduce automotive carbon emissions.

Heck of Ford noted that its financing helped to retrofit plants in states such as Michigan that went beyond the automaker's electric car fleet.

The rise of competitors such as Tesla, Nissan and General Motors , is crucial to increasing the number of power stations nationwide and popularizing the electric car as an alternative to carbon emitting vehicles, according to a Ford spokesperson.

Given the likelihood that Ford, Nissan and Tesla will repay their ATVM loans in full, while only $193 million in loans given to Fisker Automotive remain a risk to taxpayers, it's hard not to see ATVM as a classic case of stimulus and development.

For dollars and cents mavens like former Presidential candidate Romney, the government's Tesla stock warrants, however, might be the difference in characterizing ATVM as a success.