SolarCity Bailout Analysis

[neroden]

The thing is that SolarCity was both a very good buy and a bailout at the same time -- as I figured out in advance. This can happen when the fundamental problem is lack of capital market access.

It's like George Bailey's bank from _It's a Wonderful Life_. Yes, it needed a bailout, and Yes, it was fundamentally sound, but it was subject to bank runs.

 

[SBenson]

Tesla's letter stating that focus is on cash preservation and shift away from leasing is music to ears.

Separately, I will post a comprehensive reply to @jesselivenomore question early next week.

 

[neroden]

They're not shifting to cash sales as fast as I'd like. 4% sold in Q4 2015, 13% in Q3 2016, 28% in Q4 2016 -- I want to see that over 75%. But the trajectory is good. I guess we won't get more information about this until May when the Q1 results come out.

It's very likely that the accounting will be completely changed for Q1 due to the changes in GAAP rules; I hope this gives a chance to make sense out of what's going on.

 

[SBenson]

Interesting snippet from Adam Jonas' institutional-client call:

**

I'll bring you back to SolarCity, remember when SolarCity was announced, people were up in arms. They were like "This the bailout!! No one's going to accept this. All the Page One shareholders of Tesla will unite in revolt and this is not going to happen." Then people realized very quickly, huh, SolarCity goes bust, if the $3 billion thing goes bust, then the cost of capital of the $50 billion thing goes way up. Let's do a controlled detonation. We approve your takeover of SolarCity. We'll put it in the back and we'll wind it up and it's gone.

**

So in essence this was always a 'public secret', everybody knew this was a bailout but basically everyone played along the 'synergies' story. Kind of amusing.

 

[ItsNotAboutTheMoney]

Interesting snippet from Adam Jonas' institutional-client call:

**

I'll bring you back to SolarCity, remember when SolarCity was announced, people were up in arms. They were like "This the bailout!! No one's going to accept this. All the Page One shareholders of Tesla will unite in revolt and this is not going to happen." Then people realized very quickly, huh, SolarCity goes bust, if the $3 billion thing goes bust, then the cost of capital of the $50 billion thing goes way up. Let's do a controlled detonation. We approve your takeover of SolarCity. We'll put it in the back and we'll wind it up and it's gone.

**

So in essence this was always a 'public secret', everybody knew this was a bailout but basically everyone played along the 'synergies' story. Kind of amusing.

I think it's more that they simply ignored what Tesla said and focused on the realities. There could have been a cost of capital issue, but it would also impact Tesla plans for solar+battery. Not so much synergy, as avoiding negative impact from external dependency.

 

[Cosmacelf]

It was indeed a bailout, but it was manageable given the relative sizes of the companies. Although I don’t think Elon anticipated the impact of inheriting all those Solar City shorts.

 

[Doggydogworld]

Interesting snippet from Adam Jonas' institutional-client call:

**

I'll bring you back to SolarCity, remember when SolarCity was announced, people were up in arms. They were like "This the bailout!! No one's going to accept this. All the Page One shareholders of Tesla will unite in revolt and this is not going to happen." Then people realized very quickly, huh, SolarCity goes bust, if the $3 billion thing goes bust, then the cost of capital of the $50 billion thing goes way up. Let's do a controlled detonation. We approve your takeover of SolarCity. We'll put it in the back and we'll wind it up and it's gone.

**

So in essence this was always a 'public secret', everybody knew this was a bailout but basically everyone played along the 'synergies' story. Kind of amusing.

Yeah. The premature solar tile launch gave institutions cover to vote yes on the deal, but pretty much everyone understood the real story.

 

[schonelucht]

It’s insane how much pushback we got on here by stating our reservations on the bailout in way less open terms.

 

[TheTalkingMule]

SolarCity was nearly single-handedly driving capacity growth in the US and that's vital to the overall Master Plan. Now that sales have moved online, Tesla is ramping that growth back up by resolving the sales cost issue for the entire marketplace.

Both actions were absolutely crucial to dragging everyone forward into the "Tesla world" where we all drive EVs, generate electricity sustainably, and store that energy in decentralized batteries. It's not about synergies, it's a necessary piece of the puzzle.

Also, in this phase it will finally be wildly profitable.

 

[JohnDinger]

SolarCity was nearly single-handedly driving capacity growth in the US

Source?

This seems wildly inaccurate. They're no longer in the top 10 by market share.

 

[neroden]

FYI, I have been told that the cash flow from the (now mostly discontinued) solar lease "special purpose vehicles" typically went to the outside partners for the first ten years, and to the promoter (SolarCity) for the second ten years. We are starting to roll into the second ten years now.

GAAP income is allocated in a screwball way done for tax purposes, so more and more income will be allocated to the outside partners now (previously they were allocated "losses"), but apparently cash flows are going to shift towards Tesla now. Should take a couple more years to become obvious since there wasn't much volume in the first year of leases.

I am no expert on this arcane area of accounting so I could be wrong, but this is what I think I learned.

 

[Doggydogworld]

FYI, I have been told that the cash flow from the (now mostly discontinued) solar lease "special purpose vehicles" typically went to the outside partners for the first ten years, and to the promoter (SolarCity) for the second ten years. We are starting to roll into the second ten years now.

SCTY slides show two big cash flow "flip" events. After about 7 years, cash flows to tax equity partners drop from ~35% to ~8%. At that point cash flow to lenders kicks up from something like 50% to 70%. Cash flow to SCTY improves slightly, from 15% to 20% or so.

Around year 17-18, the lenders are fully repaid and SCTY captures 90%+ of cash flow.

They scheduled inverter replacement for year 10 which really crushes levered cash flow. I don't know if that's just an assumption of when the inverters will blow or if they're contractually obligated to replace them as a form of preventive maintenance. If the latter, I don't see SCTY cash flow growing much until almost 2030. Until then, cash flows are generally enough to pay interest on SCTY's corporate level debt, but Tesla has to pay the principal (e.g. the 566m due in November).

 

[neroden]

SolarCity started panel leasing in 2008. So based on what you've told me, the first cash flow flip away from the tax equity partners would have happened in 2015. Cash flow should now be pointing more towards SolarCity for the 2008, 2009, 2010, 2011, and 2012 vintages. It should start being noticeable on the financial statements once the year-7 flip has happened for the 2013 vintages, I'd guess.

Going from 15% to 20% may not be much; it's about a $12 million a year boost to cashflow overall, I'd say, from reviewing Solarcity's 2016 financial statements (though smeared out across the vintages). Going from 20% to 70% should be a boost of $168 million/year for the last couple of years of the contracts. I doubt they'll get many contract renewals, so I expect them to offer the homeowners the opportunity to buy their panels starting in 2023 (when the 15-year leases from 2008 run out). They'll probably have to offer prices a bit lower than new solar installs, and I think most people will take the opportunity. While that may not make them much money, it'll make them some money at that point.

I believe for the PPAs the inverter replacements were merely estimated (i.e. the inverters are warranted for 20 years, but only expected to last for 10); if the inverters happen to not fail, they can replace them later. For the leases, which have a production guarantee, I'm not sure; I would expect not, though. They have monitoring systems so they should be able to tell when they have an inverter failure (rather than waiting for the homeowner to call) and prioritize it. Inverter costs have come down somewhat in the years since initial install, though the service costs of showing up to replace the inverters remain significant. Even if they do preemptively replace them (which I doubt), the first inverter replacements should have happened last year, but significant numbers not until next year.

 

[TheTalkingMule]

Source?

This seems wildly inaccurate. They're no longer in the top 10 by market share.

Was driving capacity growth. Up until the absorption into TSLA, SCTY was rolling at about 35% marketshare and handling about half the regulatory battle effort and costs. The southwest US would look mighty different right now if it weren't for SCTY forcing their way into markets.

After SCTY acquisition Elon made the obvious decision to end door-to-door sales and just sit on his hands until better options came along. Sunrun and Vivint were more than happy to carry on the old SCTY sales model so no need for Elon to do so. Both those entities are still of course losing tons of money as they gain share and surpassed SCTY/TSLA. Costs for both are in the $3.50+/W range. Not price mind you....just the cost to them.

Tesla has now quietly moved into online sales priced with less than half the sales cost of their competitors and more importantly no annoying salesman in your living room(or the boardroom). Sunrun has threatened to match with an online product of their own, but I doubt their organization has the political will to do so. These are simply massive sales orgs that happen to be selling solar, sales runs everything and will never give up their cash cow business model. Tesla will be back on top by end of next summer(profitably this time), just as Powerwalls get a little cheaper and more mainstream.

My hope is that the competition is slow to adapt and we can acquire Sunrun on the cheap in a couple years. Vivint will fade to bankruptcy, Tesla will own 20-30% of straight solar sales and 60+% of leasing. I think that's a pretty good sustainable mix for the next decade.

 

[Brovane]

Source?

This seems wildly inaccurate. They're no longer in the top 10 by market share.

The key word is "was" which is past tense.

In 2015 Solar City installed more solar energy systems than any other company. Source Solar City 10-K.

scty-10k_20151231.htm

 

[Doggydogworld]

SolarCity started panel leasing in 2008. So based on what you've told me, the first cash flow flip away from the tax equity partners would have happened in 2015. Cash flow should now be pointing more towards SolarCity for the 2008, 2009, 2010, 2011, and 2012 vintages. It should start being noticeable on the financial statements once the year-7 flip has happened for the 2013 vintages, I'd guess.

The cash flow statement only shows deltas from the income statement, though, and GAAP income for the legacy SCTY business is pretty much impenetrable. Especially since they through storage in with solar to obfuscate the results.

I doubt they'll get many contract renewals, so I expect them to offer the homeowners the opportunity to buy their panels starting in 2023 (when the 15-year leases from 2008 run out). They'll probably have to offer prices a bit lower than new solar installs,

Quite a bit lower, IMHO, unless there's a huge net metering grandfather clause or something that incents people to keep the old panels. The cost of removal is high for SCTY, the house has probably changed hands and Sunrun or whoever will be offer the same "free" deals on new, warranted panels that SCTY used originally.

I believe for the PPAs the inverter replacements were merely estimated (i.e. the inverters are warranted for 20 years, but only expected to last for 10); if the inverters happen to not fail, they can replace them later. For the leases, which have a production guarantee, I'm not sure; I would expect not, though.

That would really help. Inverter replacement creates a huge cash flow hole at the 10 year mark. Since SCTY ramped installations through 2016 the hole for each vintage wipes out the cash flows from prior vintages. But if they can wait for them to fail the hit would be smaller and much more spread out.​

 

[electracity]

but pretty much everyone understood the real story.

Your view of rationality here at TMC is.......optimistic.

The key word is "was" which is past tense.

In 2015 Solar City installed more solar energy systems than any other company. Source Solar City 10-K.

scty-10k_20151231.htm

They are about 20% of their peak size, according to GTM. I assume that the Tesla solar business is treading water until the solar roof is available.

Also according to GTM they had a $7K customer acquisition cost through home depot and $4.5K door to door. Not a viable business model.

 

[TheTalkingMule]

Yeah, that's why they've completely abandoned both strategies and moved to online sales. Keep up!

Note: Technically Home Depot was just a 3rd party lead generating scheme. Total cost for the HD end was probably $500-1500/install and then you add on the $4500 from the formal sales rep. Absurdly anti-Elon obviously.

 

[electracity]

Yeah, that's why they've completely abandoned both strategies and moved to online sales. Keep up!

Treading water. "Direct sales" won't be viable either. They are just burying the losses against Tesla Energy battery sales. The situation has reached pathetic proportions when Tesla is claiming to be the low cost installer. This is exactly the type of business Tesla can't be in.

Solar roof is a product where Tesla can have success, as long as they move away from doing installs themselves.

 

[TheTalkingMule]

Nonsense. Energy installs(of all kinds) and more importantly services have greater long term margin potential than any product Tesla might simply produce and sell other than the Gigafactories themselves.

Traditional solar installs, and solar roof production to some extent, are just the infrastructure to let Powerwalls do their thing. I'm sure Tesla would be perfectly happy skipping forward 6 years to when solar is more mainstream, but we've seen again and again that Elon is better off leading the progress. Look at residential solar as a whole, it's completely stagnated since Elon shut down SCTY.

As for "success" via the solar roof....to me that like saying GoPro will be successful. It's easy enough to replicate once the market demands it in large quantities. A tile is a tile, and from what I can tell there's no cost advantage to making them in Buffalo with Tesla's process.

Getting to a place where solar companies are selling installs as hardware plus labor plus rational lean overhead is where we're headed next and again it's Tesla forcing a complacent market to make the clearly necessary changes. $2//W installs, $3500 Powerwalls, and a Tesla energy management subscription is where it's at. "Teslife" as it were. Sign here and we'll take care of all your sustainable energy and transport needs