By Alexandria Sage and Paul Lienert
SAN FRANCISCO/DETROIT (Reuters) - Tesla Motors Inc
The discontinuation of the buyback program, as of July 1, allows Tesla to free up cash that had been set aside to buy back Model S cars after three years at a value of at least 50 percent of the base purchase price.
The changes come after Tesla warned earlier this month it will miss its vehicle delivery target for a second consecutive quarter.
It faces other challenges, including a regulatory investigation of its Autopilot technology following a May 7 fatal crash and more scrutiny of its financials after a proposed merger with SolarCity Corp
Within the next 12 months, Tesla has disclosed it could pay a maximum of $192.4 million to cover resale value guarantees on 4,209 vehicles. That amounts to a maximum liability of $45,711 per car, although Tesla could offset payouts by reselling repurchased vehicles.
Tesla valued the total liability created by the resale value guarantee at $1.58 billion as of March 31, according to its latest quarterly filing with the Securities and Exchange Commission, up over 20 percent since the end of 2015.
The program, begun in 2013, was intended to help Tesla control its secondary market and reassure buyers purchasing vehicles using its novel technology that resale values wouldn't drop substantially.
A Tesla spokesperson said the program was discontinued to "keep interest rates as low as possible and offer a compelling lease and loan program to customers."
In effect, Tesla is now doing what most established auto makers do: allow market forces to set trade-in values.
LESS CASH IN RESERVE
Only a very small number of Model S sedans are sold through used vehicle auctions, and so far the vehicles "seem to be going for a pretty strong premium in the second hand market," said Patrick Min, an analyst with Automotive Lease Guide.
Ending the guarantee could allow Tesla to hold less money in reserve, Min added. In contrast, resale values for mass market electric vehicles such as the Nissan Leaf are depressed, Min said. A three-year-old Leaf is selling on average for about 20 per cent of its price when new, he said.
As more Model S vehicles enter the market, however, resale values could eventually fall, analysts said.
Tesla has outlined an ambitious and costly plan to speed up the launch of its Model 3 sedan, and boost total production to a rate of 500,000 vehicles a year by 2017. The company is also gearing up to launch production of batteries at a giant factory in Nevada.
Tesla shares closed down nearly 1 percent at $222.53.
Investors are keeping a close eye on Tesla's balance sheet after Chief Executive Elon Musk proposed it acquire solar energy company SolarCity, where he is chairman and a large shareholder.
Musk tweeted on Sunday he planned to soon publish part two of his "top secret Tesla masterplan," prompting speculation he might reveal more details about the possible merger, which has been met with market skepticism.
On Wednesday, Barclays analyst Brian Johnson gave Tesla a D grade for financial stewardship, noting that Musk's original 2006 masterplan "dug a $4.2 billion hole" for the company.
Also on Wednesday, Tesla said a new version of the Model X crossover, the 60D, will be priced from $74,000, $9,000 less than the Model X 75D. Equipped with a 60kWh battery, the 60D has less torque and a shorter range than the 75D.
The Model X price cut follows a similar price reduction for the Model S, whose base price was lowered to $66,000 last month.
(Editing by Frances Kerry and Jeffrey Hodgson)
