THE GAME IS AFOOT Tesla: The Vanishing Sentence That Could Be Worth Billions Minuscule changes to legal boilerplate in a company's financial statements don't exactly sound like compelling reading. But Fool Alex Dumortier thinks a small shift in Tesla's (NASDAQ: TSLA) latest filings could have big consequences — for investors and the electric-car maker alike. To understand why, you need to familiarize yourself with a mostly hidden aspect of the auto industry: regulatory credits. We all agree that air pollution is bad, right? (... Right?) The government sets regulations — standards that automakers must reach to try to keep the air unpolluted, or at least less polluted. But the limits of technology being what they are, not all automakers can meet those standards with their current product lineups. You'd think this would land those laggards in hot water, but Uncle Sam offers a shrewd free-market solution. Car companies whose vehicles pollute less get credits from the government. They can sell those credits to companies whose cars and trucks pollute more, and the credits will offset that pollution in the government's eyes. Companies that pollute less get a cash reward for doing so. Companies that pollute more pay to subsidize their greener rivals, creating a financial incentive to clean up their own act and stop handing money to their competitors. And ultimately, hopefully, overall pollution levels even out right around where the government aims for them to be. Since Tesla's vehicles are all-electric, they pollute the air a lot less than most other automakers, giving the company sizable stacks of credits to sell to its still-playing-catch-up conventional competitors. The money Tesla makes from these sales represents a small portion of its revenue — after all, it sells a fair number of cars! But because these credits essentially mean free money for Tesla, they represented a jaw-dropping 85% of its operating profit over the trailing 12 months that ended June 30. And as Tesla's auto sales have slowed down, regulatory credits have become its only source of profit in recent quarters. Without them, the company would be losing money right now. Tesla has a lot riding on remaining profitable right now, from a potential place in the S&P 500 — which would create steady institutional demand for its shares from index funds and other large buyers — to billions of dollars in profit-contingent compensation for chairman and founder Elon Musk. In that light, the company made a curious change to its latest financial statements — one that suggests it may have somehow altered the way it recognizes revenue from the regulatory credits it sells. The change happened right around the time that reported revenue from those credits started surging — and right when Tesla most needed that revenue to rise in order to stay profitable, at least on paper. To learn more about what this change might mean, and why Tesla investors should keep an eye on it, grab your magnifying glass, maybe get your roommate who's a doctor in to consult, and read the rest. | 
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