The proxy which will be filed in about 10 days will provide some details about inter-company transactions.
Sure, but God speed in unpacking the intricacies of SCTY's SPEs/VIEs and HLBV transactions. To me, they are like the sliced and diced tranches of credit default swaps of a decade ago. No one understood them. but their promoters assured the naive they were "can't lose" (aka "no brainer") investments.
SCTY/TSLA provides zero details about the underlying terms of the tax equity transactions. They eschew Brandeis' "
sunlight [transparency/ openness
] is the best disinfectant." If you want any affirmation of that, just look at Exhibit 10.25 to SCTY's 10k--the Riverbend deal with Panasonic.
scty-ex1025_1256.htm. There are more asterisks (*) than virtually any other character. Why even go through the pretense of filing such a useless "disclosure"?
Far be it from me to curb your enthusiasm about the profits/benefits of the SCTY acquistion. I have not followed solar, but have the impression that competition was cut-throat recently, and many nationwide players either were insolvent or lost considerable sums. I just do not understand how large regional/nationwide solar sellers can compete with small, local independent contractors/installers. None of the big HVAC, electrical, or plumbing equipment manufacturers, or similar firms like Generac, have in-house sales and installation crews. They all work through regional distributors and local SBO sellers/installers. During slack periods they do not carry their crews on overhead, but furlough them and allow them to go hunting, fishing or return home south of the border until business picks up.
Regardless of what SCTY can lay off to SPEs/VIES, if the underlying leases/PPAs are unprofitable, it's just delaying the inevitable "come to Jesu" accounting. You yourself have observed (among other things):
"coming into 2016 solarcity was running a bloated operation. they had sized the business for about 30% more activity than they were able to achieve. the high cost overheads - particularly in sales/customer acquisition costs - basically exploded their cost per watt installed.
More significantly, our sales costs rose 80% as compared to Q4 2015 to $0.97 per Watt owing to a decline in MW Booked to 160 in the quarter. - scty q1 2016 shareholder letter
the other problem they were facing is that other large players had arrived into this solar financing and development business. the value per installed watt they were able to realize dropped meaningfully from 2015. with collapsing margins, a business model that needed constant cash infusion to keep going, and an industry that was seeing big bankruptcies like sunedison, solarcity's stock was taking a beating.
after q1 2016, they had already decided to do some restructuring to cut costs and make sales more efficient. they were going to shift their mix towards more 3rd party solar loans that would result in upfront revenue and gross profit vs delayed cash flow realization. the biggest problem they had was being stuck in a me-too commodity business. most of the financing and installation costs were going to be the same for everyone, so it was going to come down to the strongest would be those who could acquire customers most efficiently."
URL="2017 Investor Roundtable:General Discussion"]2017 Investor Roundtable:General Discussion[/URL]
Another issue is :
"Of the more than 300,000 solar power systems the company has installed, the majority are under leases and PPAs and are contracted to generate more than $8 billion in customer payments over the next 20 years, and up to $4.8 billion more with customer renewals after year 20."
So the cost per year to the lessees and PPA purchasers in years 20 to 30 is going to be 20% higher than in years 0-20? This only works if technology stands still and the price from legacy utilities for electrical service sky-rockets. If not, SCTY incurs the obligation after 20 years to remove obsolete systems from the properties.
With respect to the VIEs, there may be an unrecognized liability exposure:
"The arrangements used are complex and the number of parties that have been willing to invest in tax equity has been limited. As a result, both the administrative costs (in terms of legal and accounting fees) and financing cost (in terms of rate of return required by tax equity investors) are high. As of this writing, tax equity investors require 7.5-9.5% for unleveraged projects. This is the after-tax return to the tax equity investor, net of its tax benefits. The cash return to the tax investor and cost of capital seen by the developer are lower."
"There are two major sub-types of the partnership flip. The so-called yield-based flip is the most popular. Tax Equity gets the vast majority of the tax benefits plus enough cash to get its required after-tax IRR at an expected target flip date. If the assets under-perform, the flip is delayed until Tax Equity gets its agreed return."
Tax Equity 101: Structures
Admittedly, those are generic comments about tax equity transactions and do not necessarily apply to SCTY. However, in the first half of 2016, SCTY was generally considered a basket case. Listen to the May 2016 CC, if you are skeptical. It's likely that Investors in the following transactions used SCTY's situation to maximize their returns:
"On May 2, 2016, the Company pooled and transferred its interests in certain financing funds into a special purpose entity, or SPE, and issued $121.7 million in aggregate principal of debt of the SPE (see Note 12, Indebtedness) and also issued $100.7 million of equity interests in the SPE, both to the same investor. Of the net proceeds from this transaction, $125.0 million was used to partially prepay the revolving aggregation credit facility due in December 2018, $25.7 million was used to partially prepay the term loan due in December 2016 and the remaining amount was retained by the Company to fund its operations.
On September 8, 2016, the Company pooled and transferred its interests in certain financing funds into a SPE and issued $210.0 million in aggregate principal of debt of the SPE (see Note 12) to a syndicate of banks and also issued $95.2 million of equity interests in the SPE to an investor. Of the net proceeds from this transaction, $192.3 million was used to partially prepay the revolving aggregation credit facility due in December 2018 and the remaining amount was retained by the Company to fund its operations.
On December 16, 2016, the Company pooled and transferred its interests in certain financing funds into a SPE and issued $170.0 million in aggregate principal of debt of the SPE (see Note 12) to a syndicate of banks and also issued $70.9 million of equity interests in the SPE to an investor. Of the net proceeds from this transaction, $131.0 million was used to partially prepay the revolving aggregation credit facility due in December 2018 and the remaining amount was retained by the Company to fund its operations."
scty-10k_20161231.htm
Regardless, the SCTY component to the financial statements is largely a diversion. Although positive profits after NCIs may fool some of the people some of the time, the quintessential issue for the next year is whether the M3 can generate enough operating leverage to sustain consistent profits and pay off maturing debt.
