SolarCity (SCTY)

[SBenson]

The biggest problem with solar city is their financials are one of a kind because they invented their business model. They are not deceptive like chanos and his cronies that intentionally misrepresent their business model.

Ever since Brad took over as cfo they have been trying to explain their financials better.

There will be a massive correction with solar city's stock and I fear your gut will truly wrench when it happens. It might take a couple months or a few years. I hope you go long with short term options at the exact right time

I'm selfishly hoping it stays low for a couple/few more months so all this work I am putting in can be magnified through scty leaps. Working to expand my business from one installation crew to two! I am a bit smaller than solar city's 40k+ employees.

Wow, so you are a local installer. That's a good data point to know.

You created this account in Jul 2012. I wonder if you have been actively following SolarCity since then.

There used to be guy named sleepyhead. He was quite popular in these threads. He was dead against SolarCity. He was quite an evangelist at that, to a point he thought it's his 'mission' to educate people on SolarCity's evil practices, as he puts it. I was equally evangelical on the long side and pickedup a few fights with him and got into trouble with moderators. He used to say that SCTY will get into $20's if there were to be a recession. He was quite bold in saying that when the stock was still a high flyer. We longs took his predictions as mere provocation. In fighting with him I got kicked out twice. (Overtime I learnt to behave and keep my third login).. Oh well, here we are in 20's and there is not even a hint of a recession. And since the plummeting, his arguments have been literally haunting me.

In anycase, his chief argument was that SolarCity has no chance to compete with local installers because of its bloated corporate structure. For instance he computes that the sales/marketing costs and GA costs are near 0 for local installers, while it's quite heavy for SolarCity. He used to argue that the only reason why SolarCity is able to push sales is due to its gimmicky lease/ppa's and people would be much better off if they were to buy systems outright from local installers (by taking on financing if needed). - What are your thoughts on this perspective?

Being a local installer, while still being long on SCTY, I guess you see room for both types. But I will appreciate any detailed thoughts you have on that.

 

[blakegallagher]

Wow, so you are a local installer. That's a good data point to know.

You created this account in Jul 2012. I wonder if you have been actively following SolarCity since then.

There used to be guy named sleepyhead. He was quite popular in these threads. He was dead against SolarCity. He was quite an evangelist at that, to a point he thought it's his 'mission' to educate people on SolarCity's evil practices, as he puts it. I was equally evangelical on the long side and pickedup a few fights with him and got into trouble with moderators. He used to say that SCTY will get into $20's if there were to be a recession. He was quite bold in saying that when the stock was still a high flyer. We longs took his predictions as mere provocation. In fighting with him I got kicked out twice. (Overtime I learnt to behave and keep my third login).. Oh well, here we are in 20's and there is not even a hint of a recession. And since the plummeting, his arguments have been literally haunting me.

In anycase, his chief argument was that SolarCity has no chance to compete with local installers because of its bloated corporate structure. For instance he computes that the sales/marketing costs and GA costs are near 0 for local installers, while it's quite heavy for SolarCity. He used to argue that the only reason why SolarCity is able to push sales is due to its gimmicky lease/ppa's and people would be much better off if they were to buy systems outright from local installers (by taking on financing if needed). - What are your thoughts on this perspective?

Being a local installer, while still being long on SCTY, I guess you see room for both types. But I will appreciate any detailed thoughts you have on that.

Full disclosure, I am an installer but not for solar (yet).

I remember so sleepy head quite well I remember so sleepy head quite well and I have been following Solar City since about 2013.

I thought his arguments then were very flawed and I still do. He was very educated on solar and was well of enough that buying panels was an option.

I believe for a long time people will remain largely uneducated and more importantly they don't want to have to think about solar once it's installed. As you know with scty once your panels are up they take care of all the monitoring and repairs.

People are so against these ppa's and claim they are such a bone head move. They are buying electricity at a lower rate than everyone without panels on their roof and as long as that's the case I think you will have people gladly taking the 0 percent down solar option.

I think sleepy feel into the very common trap of thinking that everyone else was like him.

I have seen this in Real Estate many times. People remodel their house in a way that it loses appeal to the majority of the market. Or buy a rental property and then they fix it up as if they were living in it. I have seen people buy a mobile home for rental and then put in hardware floors, tile back splash in the kitchen etc,

I'm getting off topic but I think it is similar with solar, is a ppa the best financial decision in every situation-no

Is it smarter than buying electricity from the Utility-yes

I have been very wrong about sctys stock price and paid the price with options expiring worthless but I believe I am still right on the company, time will tell

 

[TheTalkingMule]

I think sleepy feel into the very common trap of thinking that everyone else was like him.

I have seen this in Real Estate many times. People remodel their house in a way that it loses appeal to the majority of the market. Or buy a rental property and then they fix it up as if they were living in it. I have seen people buy a mobile home for rental and then put in hardware floors, tile back splash in the kitchen etc,

I'm getting off topic but I think it is similar with solar, is a ppa the best financial decision in every situation-no

No you're not getting off topic, this is the SCTY Investors thread and you're hitting on the single most important knowledge gap. SCTY doesn't provide even remotely close to the same product that a local installer provides and no one can seem to understand that.

Both are wonderful ways of going solar, but SCTY is for the everyday folks who want to go solar without becoming "one of us". They have no interest in the minutia or upkeep, they have a million other things to do. And if that is the case, who else can provide what SCTY can provide? No one that I can see. That's their differentiation.

 

[jhm]

Over the weekend I've been playing around with a financial model for leases under 10% ITC. I wanted to how it might be possible to get to a 40% return on equity.

The first problem is that ITC step down removes a lot of upfront capital from the cashflows. Offering zero down financing with a 2.3% escalator pushes alot of the customer payment stream way out into the future as well. This is fine if all you want is a 6% return on equity, but to get to 40%, you've got to get customer payments to arrive earlier. There are but two ways to do this. Reduce the escalator, which also increases the price per kWh at the beginning or take a customer down payment. Of the two, cutting the escalator has the biggest impact on advancing the payment stream. Keep in mind that the 30% ITC functioned like a huge down payment that the customer did not have to make. So basically I see escalators as basically dead in a post ITC world in which SolarCity pursues high ROE.

The second thing that ITC stepdown does is reduce the total price that the market can bear. Consider this under a total price of $4.62/W with 30% ITC. The customer pays for about $3.234/W. So no matter how you finance it, customers are not likely to be willing to pay much more net. So if ITC is just 10%, the gross price goes to about $3.60/W, so that net of ITC the customer is still at $3.24. Moreover, the 10% ITC under this gross price is only worth $0.36/W, whereas under 30% and $4.62 gross, it was $1.386/W. So we see that the stepdown does far more damage than just reducing the ITC by 2/3. It reduces it about 74%.

As depressing as all that may seem, it is still possible to achieve 40% ROE. I will now describe one scenario which does this. So we assume $3.60 gross price. ITC contributes $0.36 upfront. A customer lease will finance a $3.24 contribution assuming 0% escalator, 0.5% annual performance decline, 6% discount, and nothing down, all over a 30 year term. This leads to an annual payment of $0.234/W or $0.167/kWh. Next, SolarCity kicks in $0.44/W equity, 20% of the total $2.20/W cost. This leaves $1.40/W to finance at 4.5%, over 20 years, for an annual pament of $0.103/W. This financing is just 64% of the cost of the system. Thus, for the first 20 years, SolarCity nets $0.131/W per year and upto $0.234/W per year for the next ten years of renewal term. Under a 40% discount rate this has an NPV of $0.01W, so we know that this setup is consistent with a 40% ROE. Using the customary 6% discount, this has a NRV of $1.55/W. Moreover, within the initial 20 year term this has a NNRV of $1.04/W.

So conceptually it is posible for SolarCity to hit a NRV of over $1/W with a 40% ROE. But it should be noted that PPA customers will be asked to pay more upfront per kWh with the promise of little to no escalation. Additionally, SolarCity will need to drive its costs below $2.30/W. I believe they can do this, but interestingly this is not the big driver to getting initial PPA rates low. I do think it is reasonable for equity to kick in 20% of the upfront cost. This assures that the company is not too highly leveraged. If equity kicks in a bigger share, then ROE is substantially reduced. It equity contributes a smaller share, this can boost ROE, but it puts ABS investors at risk and thins out PowerCo Available Cash.

There are lots of ways this basic scenario can be tweaked to make it more friendly to customers. A 1% escalator would reduce initial PPA rates to $0.151/kWh with no loss of NRV, but NNRV drops to $0.97/W and ROE to 33%. It's not clear what consumers will require in the post ITC world. All installers will be pressed to pass more net cost onto consumers, and utilities will likely push rates up faster with less threat of competition from rooftop solar. If so, we could see the competitive price for PPAs jump above 15c/kWh.

 

[SBenson]

jhm, Excellent analysis. This sort of analysis is very much needed.

You are suggesting that SolarCity will kick in in $0.44/W equity. That translates to $440Mln for 1GW installs.

Have you looked at how cash/debt changed over last 4 to 8 quarters? Over last 4 quarters, they burnt cash at $80mil/quarter pace(on top of debt raised to finance the installs). This includes all cash coming from the PowerCo as well. This is directly looking at the Balance Sheet.

So effectively with your model they will need close to $200mln of cash infusion every quarter to run the business.

Where will the money come from? I don't see it as sustainable.

 

[TheTalkingMule]

Over the weekend I've been playing around with a financial model for leases under 10% ITC. I wanted to how it might be possible to get to a 40% return on equity.

The first problem is that ITC step down removes a lot of upfront capital from the cashflows. Offering zero down financing with a 2.3% escalator pushes alot of the customer payment stream way out into the future as well. This is fine if all you want is a 6% return on equity, but to get to 40%, you've got to get customer payments to arrive earlier. There are but two ways to do this. Reduce the escalator, which also increases the price per kWh at the beginning or take a customer down payment. Of the two, cutting the escalator has the biggest impact on advancing the payment stream. Keep in mind that the 30% ITC functioned like a huge down payment that the customer did not have to make. So basically I see escalators as basically dead in a post ITC world in which SolarCity pursues high ROE.

I think folks tend to over-work these numbers, forget where the real value lies and to whom SCTY is presenting this value. These are upper-middle class consumers whose priorities are something like ease of initial installation, ease of maintenance, reliability of management company, downpayment, monthly cost relative to grid, and origination of hardware.

In Pennsylvania for instance, no one has the first clue what's gonna come out of my mouth when I ask them how much they think a no money down solar setup will cost them. That's why it surprised me to see SCTY installing PPAs at 15% less than grid rate in PA, I don't think these customers need to see that 15% to be sold. They're infinitely more interested in going solar with no hassle.

That being said....

If you dump half the sales cost in the current model, you're there.
If you add an optional $399 downpayment, the escalator can be removed.

Just because the current SCTY model is tight, doesn't mean there's not a whole ton of wiggle room in the value proposition vs. price. There's at least $1500 just in sales cost on the front end of every PPA. Do we really think that's necessary moving forward?

 

[jhm]

jhm, Excellent analysis. This sort of analysis is very much needed.

You are suggesting that SolarCity will kick in in $0.44/W equity. That translates to $440Mln for 1GW installs.

Have you looked at how cash/debt changed over last 4 to 8 quarters? Over last 4 quarters, they burnt cash at $80mil/quarter pace(on top of debt raised to finance the installs).

So effectively with your model they will need close to $200mln of cash infusion every quarter to run the business.

Where will the money come from? I don't see it as sustainable.

Yeah, it's good to check those implications. Right now most of the equity comes from the Tax Equity Partners, who not only buy the ITC credits, but kick in a little more equity as well. So TEP remains one source of equity, though this competes for shareholder equity. Another possible source would be issuing preferred shares. I like the idea of attracting dividend investors to provide an influx of capital.


But the main thing to understand about this model is that we are targeting a 40% return on equity. So it is the cashflow to equity that drives the sustainability. So if 1GW represents 40% growth, that in steady state over say 20 years implies a base of 2.5 GW. Under this model that base is generating $0.131 to $0.234 (in renewal once we get out there). So let's just assume the lower on 2.5GW. This kicks in $327.5M. So the transition is tricky, but in the long run equity is just reinvested at a 40% rate of return. So ROE is what makes this finacially sustanable.

I would also point out that 40% ROE doubles every 2 years, given the finite size of the global energy market, this does pose some saturation limits over the long run. So let's back off an say that MW installations are growing at just 25%. So now our 1GW is on a base of 4GW, and that base is spinning off $524M. Thus after reinvestment of $440M, there's an extra $84M in extra cashflow available for other investments or to be returned to investors. So the big payoff to shareholders will come once unit growth is sufficiently below ROE. Until then, everything gets reinvested in growing the business.

The frustrating thing about the present situation is that escalators have held back early cashflow. So we have to wait many years for the escalators to thicken the payment stream to the point that it solid source of funding. Slower unit growth is really important to allowing the payment stream to catch up and support growth. Perhaps an even bigger issue than that is the preflight TEP distributions. These distributions are really high in the first 7 years and then thin out considerably. So over the next 7 years the impact of TEP will back off, and we'll see a more sustainable profit stream emerge. Sadly, the company is quite hooked on TEP like a bad drug. ITC stepdown could prove to be shortest way to kick the habit.

 

[SBenson]

Is there any particular reason why you chose 40% ROE?

Is this annualized 40%? Isn't SolarCity's claim of current IRR is about 12% and they guided to 6% post-ITC (in Q2 CC). 40% sounds insanely high.

 

[jhm]

One thing we may want to look into is forecasting Available Cash, because that become our base for equity funding.

Last 12 months, PAC was $112M. In 2016, this should come in range of $220M to $250M. So on 1.25GW in 2016, this provides $0.18 to $0.20 per W to be installed. With one more year of 30% ITC, escalator 1.5%, cost $2.50/W and just $0.20/W from equity, my model suggests ROE in excess of 100%, NRV $2.22/W, and NNRV $1.61/W. This would start PPAs at 14.3c/kWh and add about $0.133/W or $166M in incremental PAC next year. Something like this would help transition to post ITC wit PAC getting to around $400M in 2017.

I'm hoping Dec 15 well see some strategy like this. If we can transition to $400M PAC in 2017, I think we'll be in a good position to grow forward. SolarCity needs to minimize the escalators as quickly as possible.

- - - Updated - - -

Is there any particular reason why you chose 40% ROE?

Is this annualized 40%? Isn't SolarCity's claim of current IRR is about 12% and they guided to 6% post-ITC (in Q2 CC). 40% sounds insanely high.

The 12% IRR is ignoring leverage. With leverage they should be getting a much higher ROE. The point of targeting a high ROE was to measure how fast the company can sustainably fund growth. The 40% ROE I targeted is consistent with 30% unit growth.

Without use of leverage a 12 IRR restrains the company to grow equity at just 12% per year, maybe a little faster with a few direct sales and prepayments. Chanos even pointed to this as some sort of critique of growth. However, most businesses do use debt to leverage slow growth assets in to yielding higher ROE. It is just silly to think that SolarCity or any other company would try to grow without any use of leverage. But there are limits to how much leverage is prudent to use. If a business uses too much, they will find their credit rating impaired and interest rates go up. Even banks have to fund about 8% of a loan from equity.

 

[SBenson]

One thing we may want to look into is forecasting Available Cash, because that become our base for equity funding.

Last 12 months, PAC was $112M. In 2016, this should come in range of $220M to $250M. So on 1.25GW in 2016, this provides $0.18 to $0.20 per W to be installed. With one more year of 30% ITC, escalator 1.5%, cost $2.50/W and just $0.20/W from equity, my model suggests ROE in excess of 100%, NRV $2.22/W, and NNRV $1.61/W. This would start PPAs at 14.3c/kWh and add about $0.133/W or $166M in incremental PAC next year. Something like this would help transition to post ITC wit PAC getting to around $400M in 2017.

I'm hoping Dec 15 well see some strategy like this. If we can transition to $400M PAC in 2017, I think we'll be in a good position to grow forward. SolarCity needs to minimize the escalators as quickly as possible.

Jeez jhm, you trust their slide decks too much. Take a look at the official Balance Sheet from the 10Q/K documents. Take 'Cash and cash equivalents' + 'Short-term investments' for their cash situation. Track that over last four quarters.

I mean look at end of 2014 Q4, 2015 Q1, Q2, Q3. If you include the periods before, it gets distorted because they got cash from public markets through convertibles/secondary.

They are bleeding cash as I pointed earlier. You are thinking they are bringing in cash. No they are not.

Sorry, this is no fun poking holes at your model. You actually quite very well illustrated the problem with ITC step down. I don't quite get the solution.

If the escalators are taken off, and upfront payments are increased, doesn't it go against their entire sales/marketing model?

"Go solar for $0 down and pay less for your energy." This is literally on the website main page, in big, bold letters.

 

[drinkerofkoolaid]

The media still doesn't understand that SolarCity didn't really lower guidance or expectations for 2016. SolarCity, unlike certain other companies, chose to be conservative when guiding for 2016, and was very clear that they are ready to "re-evaluate" guidance and plans if the ITC isn't eliminated, or other incentives are introduced. The lack of clarity about what tax incentives will exist in 2016, and going forward is the reason the entire sector has been very volatile. Only one more weeks until Paris.
A vote against actions to address climate change, is a vote for supporting ISIS, and political and social unrest.

http://www.breitbart.com/big-government/2015/11/23/obama-climate-change-summit-paris-message-terrorists/

The GOPs Plan to Thwart the Paris Climate Conference | New Republic

 

[TheTalkingMule]

A company that sells 20 year contracts, fully funds all expenses up front, and doubles in sales every year doesn't have a lot of cash on hand? Shocking!

Shouldn't there be a net retained value counter somewhere on the SCTY website? Maybe we could make a simple one based on publicly disclosed figures? That might make the picture a little less easily clouded.

 

[blakegallagher]

Jeez jhm, you trust their slide decks too much. Take a look at the official Balance Sheet from the 10Q/K documents. Take 'Cash and cash equivalents' + 'Short-term investments' for their cash situation. Track that over last four quarters.

I mean look at end of 2014 Q4, 2015 Q1, Q2, Q3. If you include the periods before, it gets distorted because they got cash from public markets through convertibles/secondary.

They are bleeding cash as I pointed earlier. You are thinking they are bringing in cash. No they are not.

Sorry, this is no fun poking holes at your model. You actually quite very well illustrated the problem with ITC step down. I don't quite get the solution.

If the escalators are taken off, and upfront payments are increased, doesn't it go against their entire sales/marketing model?

"Go solar for $0 down and pay less for your energy." This is literally on the website main page, in big, bold letters.

I realize the fundamental difference between us right now is I believe in management and you don't but. .. you are looking into the past to predict the future.

They are intentionally slowing growth which will significantly slow cash burn. They also have multiple ABS offerings coming soon which will also "distort" the cash burn. I think many people (sbenson) included (hopefully because I like him) will jump back in to the stock when they see that scty really is on a path to cash flow positive in 14 months.

 

[Jack6591]

I realize the fundamental difference between us right now is I believe in management and you don't but. .. you are looking into the past to predict the future.

They are intentionally slowing growth which will significantly slow cash burn. They also have multiple ABS offerings coming soon which will also "distort" the cash burn. I think many people (sbenson) included (hopefully because I like him) will jump back in to the stock when they see that scty really is on a path to cash flow positive in 14 months.

SolarCity is a fundamental part of Elon Musk's master plan. He commit more and more of his focus and resources to solidify the success of SolarCity. He telegraphs his intentions, and then doggedly pursues them.

 

[doggusfluffy]

China's dirtiest city can't clear the air | Reuters.com

Indian solar park highlights clean energy goals | Reuters.com

 

[SBenson]

I think I should clarify what I meant by cash bleed and how it relates to the future. I get that it's not easy to get a point across with snippets of info on a complex matter.

Here is an ultra-simplified model (jhm does lot better than me in modelling the detail)

For simplicity let’s forget about the renewal piece entirely. If there is renewal, it will be bonus for shareholders; if there is not, nothing is lost. So let’s focus just on the 20-year segment. jhm too agrees that the system would have been fully paid for itself by the end of 20-year cycle.

Now within this 20-year timeframe, let’s say SolarCity has 0% profit. Even then, the business model can survive itself.

Say, system costs $100
Tax Equity guys provide $30
Asset-backed financing provides $70

SolarCity doesn't have to provide any cash into this cycle (except for maybe initial transitory purposes).

Now lets say SolarCity has 10% profit, then this 10% effectively becomes SolarCity's 'equity' as this 10% neither needs to come from tax-equity or asset-based financing.

This means that, at a steady state, there should be no cash drain on the company.

But we see that over last 4 quarters there was an average of about $80mil/quarter cash drain. Keep in mind that the $80mil/qrtr is in addition to burning off the $112mil the PowerCo allegedly made over trailing 12 months.

This can be explained to some degree as SolarCity is investing into growth (greater working capital) and into future (capex). So that is putting a drain on cash. There are yet more venues of non-asset based drains like R&D and other expenses and who knows what else.

As you see breaking free of all these expenses AND preserving enough cash to provide $0.44/W of additional equity that jhm is asking for in post-itc-step-down is *quite* a tall order.

Also keep in mind there are quite a number of obligations ahead for SolarCity. Those damn convertibles that are ‘assumed’ to settle in Equity will very much likely settle in cash that SolarCity needs to pay. SolarCity committed to some insane expenditure in the proud state of New York. Apparently, in Utah too they committed to large investments. And then, what happened to that milestone based payment part of Silevo acquisition?

The only way I see SolarCity surviving the stepdown is by drastically cutting down on costs where the equity contributed by the firm actually comes off of the profit-margin. In other words, SolrCity will not supply cash directly. In yet other words, each install would have to be self-financed, just the same way it is today. Asking for ongoing cash infusion for installs is not going to work IMHO.

In my view, if SolarCity is able to cut costs to that low, they might do lot better if they just dump away all these sophisticated financing schemes. Just compete head on with local installers. Work with a few banks to provide financing directly to the homeowners. All the leg work will be streamlined and done by SolarCity. Make a profit on the sale upfront.

All this complicated math is mere gimmickry to fool homeowners and investors as value is leaked away through all sorts of unaccounted channels. Slim down and shut all of this down already.

 

[jhm]

Let me be clear that I am only trying to model project financing, not the entire enterprise. Moreover I never claimed that SolarCity was cashflow positive. In fact, I said that ROE has to be sufficiently above the unit growth rate for self-financing to kick in. SolarCity has been doubling unit installations for the last 5 years. So it is a gross misunderstanding of my post to object with comments about former cash bleeds. What I am trying to get to is how SolarCity can transition to a positive cashflow future. They may well have one or two cashflow positive quarters in 2016, but the serious question is how they achieve this in a post ITC world.

PAC is very important to understand for what it is and what it is not. It is the annual cashflow from deployed MW netting out distributions and debt payments specifically tied to this book of business. It does not net out other expenses and obligations SolarCity may have. So it is not intended to represent the full enterprise cashflow, nor should it. The point is that SolarCity's book of installed MW is a complex income producing asset, and we need to understand that asset on its own terms, not overburdened taking a full enterprise view. NRV is but one valuation of that asset, and we can have as many alternative valuations of that asset as we would like for whatever purpose we may have in mind. However we arive at a valuation, it is important to know that this asset does indeed have value. Second, it is important to understand that this is an income producing asset. Customers buy electricity, pay leases and pay loans. All this generates cashflow from this asset. Again do not confuse cashflow from a particular asset with enterprise cashflow. We are not talking about the enterprise in its entirety. So this cashflow from the asset is presently $112M over the last 12 months. A portion of that cashflow can be used as equity to add installed MW to the asset. Moreover, what is not supplied by this equity must be supplied by issuing new debt, IT and customer prepayments. So in general we want to think of some portion of PAC supplying a certain fraction of the capital needed to install additional MW. Depending on what assumptions we make this will lead to a certain ROE and natural self-funding unit growth rate. So in my model and assumptions I found that a 40% ROE was sufficient for self-funding at a 30% unit growth rate. By "self-funding" what I specifically mean is that this asset can generate its own required equity to keep growing at these rates. At an enterprise level we would have to consider management's appetite to grow at a faster of slower rate than these self-funding rates. So I am emphatically not trying to resolve what growth appetite management should pursue. I am simply trying to determine what this complex asset can support through self-funding.

PAC is a very key metric. The size of PAC in 2017 will be very important to know how much equity the installed MW can fund for new installations. I would like to see management set out a path to $400M or more PAC in 2017. At the $400M level, the asset can self fund 1250MW to the tune of $0.32/W, or 800MW to the tune of $0.50/W. I suspect that management's growth appetite may be somewhere in this range. Moreover, this should be a large enough equity contribution that ABS investors will be happy to provide debt financing at a good interest rate. So this would not be a banner year, but it can be a year to set a base from which to grow into 2018 and beyond. So the path to PAC in 2017 is what we should keep our eyes on. SolarCity needs to leverage the ITC opportunity in 2016 so as to get a solid boost to PAC in 2017. For example, this is why raising the initial PPA rate from 13 c/kWh to about 14 c/kWh in 2016 is very important. This can add an extra 7% to the 2016 contribution to PAC in 2017. And why should customers be willing to pay 14c/kWh in 2016? Because the escalator will be less steep. This will help reset consumer expectations, and SolarCity can get experience changing its messaging. They need to shift messaging from "Zero down, save immediately," to "Zero down, zero inflation for life." Many consumers are already worried about escalators as are investors. It is perhaps the most gimmicky aspect of PPAs right now. But locking in zero inflation for 30 years could sound like a solid value. Regardless how marketing positions this, it is a solid play for investors to ween solar customers off of escalators as it enhances the amount of PAC added each year. And this in turn sets the whole enterprise on a path toward positive cashflow and profitability. By itself, it may not suffice, but it moves in the right direction.

 

[SBenson]

Thanks jhm for the clarification. The asset level costs, cashflows and profits are good to model. This gives a perspective into what is possible.

As a shareholder I would want to look at the enterprise level to see if it can sustain itself. The gap between asset level cash flows and enterprise level numbers is significantly high to tip the business one way or the other.

I guess my worry is still I don't see adequate proof/info that the enterprise can sail through ITC step down ok. And that is not what you seem to be trying to answer (per your clarification). That's cool with me. Didn't mean to distract your analysis. I wasn't sure what the objective was.

 

[Foghat]

Let me be clear that I am only trying to model project financing, not the entire enterprise. Moreover I never claimed that SolarCity was cashflow positive. In fact, I said that ROE has to be sufficiently above the unit growth rate for self-financing to kick in. SolarCity has been doubling unit installations for the last 5 years. So it is a gross misunderstanding of my post to object with comments about former cash bleeds. What I am trying to get to is how SolarCity can transition to a positive cashflow future. They may well have one or two cashflow positive quarters in 2016, but the serious question is how they achieve this in a post ITC world.PAC is very important to understand for what it is and what it is not. It is the annual cashflow from deployed MW netting out distributions and debt payments specifically tied to this book of business. It does not net out other expenses and obligations SolarCity may have. So it is not intended to represent the full enterprise cashflow, nor should it. The point is that SolarCity's book of installed MW is a complex income producing asset, and we need to understand that asset on its own terms, not overburdened taking a full enterprise view. NRV is but one valuation of that asset, and we can have as many alternative valuations of that asset as we would like for whatever purpose we may have in mind. However we arive at a valuation, it is important to know that this asset does indeed have value. Second, it is important to understand that this is an income producing asset. Customers buy electricity, pay leases and pay loans. All this generates cashflow from this asset. Again do not confuse cashflow from a particular asset with enterprise cashflow. We are not talking about the enterprise in its entirety. So this cashflow from the asset is presently $112M over the last 12 months. A portion of that cashflow can be used as equity to add installed MW to the asset. Moreover, what is not supplied by this equity must be supplied by issuing new debt, IT and customer prepayments. So in general we want to think of some portion of PAC supplying a certain fraction of the capital needed to install additional MW. Depending on what assumptions we make this will lead to a certain ROE and natural self-funding unit growth rate. So in my model and assumptions I found that a 40% ROE was sufficient for self-funding at a 30% unit growth rate. By "self-funding" what I specifically mean is that this asset can generate its own required equity to keep growing at these rates. At an enterprise level we would have to consider management's appetite to grow at a faster of slower rate than these self-funding rates. So I am emphatically not trying to resolve what growth appetite management should pursue. I am simply trying to determine what this complex asset can support through self-funding. PAC is a very key metric. The size of PAC in 2017 will be very important to know how much equity the installed MW can fund for new installations. I would like to see management set out a path to $400M or more PAC in 2017. At the $400M level, the asset can self fund 1250MW to the tune of $0.32/W, or 800MW to the tune of $0.50/W. I suspect that management's growth appetite may be somewhere in this range. Moreover, this should be a large enough equity contribution that ABS investors will be happy to provide debt financing at a good interest rate. So this would not be a banner year, but it can be a year to set a base from which to grow into 2018 and beyond. So the path to PAC in 2017 is what we should keep our eyes on. SolarCity needs to leverage the ITC opportunity in 2016 so as to get a solid boost to PAC in 2017. For example, this is why raising the initial PPA rate from 13 c/kWh to about 14 c/kWh in 2016 is very important. This can add an extra 7% to the 2016 contribution to PAC in 2017. And why should customers be willing to pay 14c/kWh in 2016? Because the escalator will be less steep. This will help reset consumer expectations, and SolarCity can get experience changing its messaging. They need to shift messaging from "Zero down, save immediately," to "Zero down, zero inflation for life." Many consumers are already worried about escalators as are investors. It is perhaps the most gimmicky aspect of PPAs right now. But locking in zero inflation for 30 years could sound like a solid value. Regardless how marketing positions this, it is a solid play for investors to ween solar customers off of escalators as it enhances the amount of PAC added each year. And this in turn sets the whole enterprise on a path toward positive cashflow and profitability. By itself, it may not suffice, but it moves in the right direction.

Jhm, I'm sure you know this, but the escalator is optional. It is not required for a lease or ppa. People choose between 0% - 2.9%. It's all sliding net present value calculation. People choose what $/kWh they want along the slide. After all is said and done, the average escalator is 1.7%. Also, look at the capital investment numbers for utiltiies right now in Solarcity markets. They are projected to dramatically increase. The nat gas craze has put a big 20-30 year capital return number out there and it's not going away even if Solarcity continues compounding growth because they are already building the nat gas investments. Like you said, big stranded assets are inevitable. So, retail rates will not go down, they will continue to rise well beyond 1.7%.Secondly, we are not even close to understanding the value of these assets and solarcity's network and network data. remember, they are building out an infrastructure that is already giving realtime data on production, use, and now with energy storage, behavioral data, predictive data points, as well as everyday interaction through the Solarcity app and associated platforms. They are the link between other consumer products such as nest thermostats, smart air conditioners, heating systems, coffee makers, dishwashers, Windows, security systems, weather sensors, lighting, matress covers, and much much more... In a sense Solarcity, will have almost an app developer network with near unlimited potential.Think about he value of this network and your mind will explode. Solarcity solar systems are the seed to a vastly larger value that will only compound over time.This doesn't include any advancements to solarcity's own software or hardware which I'm sure they will have many over the course of the next 20 years and beyond. One of my many predictions is that Solarcity will start offering Internet services down the line as well. We haven't even scratched the surface of value of Solarcity systems.

 

[TheTalkingMule]

The idea that a company growing at 80-90% annually would not require cash to move into these new markets is laughable.

New markets require $1500 in sales cost on the front end of each PPA until they get a foothold, that's wildly expensive.