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2017Q1 results

Discussion in 'TSLA Investor Discussions' started by schonelucht, Apr 3, 2017.

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  1. luvb2b

    luvb2b Member

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    #121 luvb2b, Apr 19, 2017
    Last edited: Apr 19, 2017
    i had to spend money on a consultant, study esoteric accounting, and get @neroden's help to understand what is going on.
    and it actually makes good sense to me. and i believe that using the hlbv accounting method it does reflect changes in value that are building towards solarcity. whether the market views it that way or not remains to be seen.

    they are related to the number of deals in the spe's and the number of deals installed this quarter too (my view). the deals in the spe's determine depreciation that flows through to noncontrolling interests, the deals installed this quarter drive a cost vs. sale price adjustment. so those are the two big factors. a simple regression will show a good linear regression fit to cost of revenues (r-square 0.85).

    while there is not specific information, there are numerous links i posted about hlbv's which discuss how the valuation method is done on alternative energy deals.

    @neroden i've beaten this horse to death you want to take a shot to see if solarcity nci can be explained in plain terms?

     
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  2. surfside

    surfside Member

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    I tend to agree (which is a big reason why I didn't invest in SolarCity as a standalone entity), but like it or not we now have to deal with the complicated SolarCity accounting, and I appreciate @luvb2b for all his hard work trying to understand the likely impact on Tesla's financials.

    I know @luvb2b has mentioned this before, but one thing that I think is worth mentioning again is that the quality of the SolarCity earnings aren't super high (in big part due to their difficulty to understand), so in my mind a big beat that is due primarily to the non-controlling SolarCity impact may not be as "exciting" for investors.

    What will be interesting to me is how much time management spends in the letter or on the call explaining / dissecting the SolarCity impact - last quarter with it only being a stub period with a partial quarter I don't think it was worth them trying to make sense out of it for folks, but I am hopeful Tesla will do their best to simplify things and provide better guidance with regard to SolarCity and/or TE. I think Tesla by nature likes to be transparent all things being equal, with the exception of situations where it is in their interest to hold the cards close to their chest (e.g. order backlog, battery costs, etc). So I think it comes down to whether or not they think they are better off waiting to guide on TE when they have certainty that things are going to look really good.

    Just my $0.02 of course.

    surfside
     
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  3. surfside

    surfside Member

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    I'm not super excited to do so, but perhaps I will do some reading on hlbv. I'll look back at your old posts to find the links for my pleasure reading.

    In the meantime, here is my stab at trying to put in plain words what is going on with SolarCity's financials (including the non-controlling interests).

    I think to understand the non-controlling interests, it helps to start with how/why the non-controlling interests are involved in the first place, which relates to tax equity.

    So SolarCity has either a big commercial project or lots of little residential rooftops aggregated into a pool, and in order to take advantage of governmental subsidies, it raises tax equity from investors that can benefit from the tax incentives that are available. The reason it is attractive/desirable for SolarCity to raise this money from third parties is that the tax incentives are much more valuable to other institutions with significant earnings to offset than to SolarCity. As a result, the cost to SolarCity of this equity is much cheaper than their own equity, with the added advantage that SolarCity doesn't have to dilute existing shareholders to help fund the Company's growth.

    As @neroden has mentioned previously, each one of these tax equity deals are structured differently; my sense is that they must be customized based on maximizing value to both the tax equity investor and SolarCity based on whether SolarCity would rather reap more of the benefits today or in the future (both from a cash flow and earnings perspective). The fact that each project has different structures definitely makes it difficult to make generalities about these deals, given I think there can be a very wide range of outcomes with regard to impact on the current and future period financials based on how the deals are structured.

    To come back full circle let's remember that this tax equity makes up a portion of SolarCity's equity contribution into these pools, with SolarCity funding the remainder of the build out cost with some form of debt.

    To @luvb2b's point there are two components/drivers to consider with regard to SolarCity's activities on this front: i) current period sales and ii) future period earnings and cash flows. I definitely agree that the non-controlling interests line item is impacted by both of these activities (assuming there are sales to SPE's involving non-controlling interests in the current period, which doesn't necessarily happen every quarter to my understanding).

    In these situations where SolarCity raises tax equity from third parties, SolarCity has effectively sold either a portion or all of the future cash flows related to the project. In situations where the Company has sold all of the cash flows to a tax equity investor, pre-Enron SolarCity would no longer have had to reflect revenues and expenses from these SPEs on their books on an ongoing basis, but under the new accounting rules the SPEs are referred to as variable interest entities (or VIEs), and given SolarCity effectively "controls" the SPEs, they therefore have to consolidate them for GAAP purposes.

    Now this can make things really whacky, as there can be situations where a company like SolarCity per GAAP is reflecting revenues and earnings on their income statement from an entity that it literally has zero economic interest in. I haven't read enough about SolarCity's tax equity deals to know whether or not SolarCity retains any ongoing interest (my guess is that in some cases they may, in others they may not) -- if someone knows the answer to that question, please chime in.

    To reach the end of this (much longer than I had expected) description, the non-controlling interests line item effectively backs out the impact of the portion of SolarCity's revenues and expenses (in a single line item based on the aggregate net earnings impact) that the Company is not entitled to (in this case, primarily revenues and expenses that the tax equity partners are entitled to given their ownership of the projects resulting from their tax equity contribution to the project).

    How did I do? Anyone still reading this? I realize this is about as clear as mud, but it is the best I can do to try to put non-controlling interests in layman terms and trying to related it specifically to my understanding of how this is working for SolarCity.

    Ok, so I have a couple questions for @neroden and @luvb2b about hlbv and the numbers flowing through SolarCity's NCI line item. Presumably a big portion of the expenses related to in-place projects is depreciation and amortization of the capitalized assets; I'm assuming that is why the NCI number is a loss at the net earnings level? In order to attract tax equity investors I'm assuming that once completed these projects must be generating positive free cash flow after debt service. I would be very interested to know what that noncontrolling interest line it looks like on an EBITDA basis (or even just adding back depreciation and amortization) instead of a net earnings basis.

    On another somewhat tangential topic, something that always concerned me about SolarCity was that they did not seem to be financing the debt portion of the project costs with long term debt that fully amortized over the life of the existing lease -- does anyone that followed SolarCity closely know if management ever talked about this? My sense is that for residential projects, they weren't able to get long term institutional debt investors (life companies are the big players in this market given the nature of their long term liabilities and the desire to run a matched book by putting on long term fixed rate debt as assets) to underwrite a pool of 10k (or whatever the number is) residential customers -- institutional investors like to underwrite large creditworthy takers like utilities, not a bunch of individuals paying their solar leases. How creditworthy those large utilities are likely to be in the long run is a whole other discussion, but I'm speaking from experience on this topic as far as how institutional debt providers see the world today. Hopefully Tesla will over time refinance SolarCity's shorter duration debt with longer term debt so as to reduce the Company's refinancing risk.

    Ok, I'm going to stop writing now. Would be interested in others' thoughts on the above.


    surfside
     
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  4. luvb2b

    luvb2b Member

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    sounds pretty good to me. thanks for taking the time to write this.



    in fact, part of the deal in addition to the 30% tax credits is accelerated depreciation. the tax equity investor can depreciate the whole project over 5 years instead of the 20 year life of the project. i think there's also bonus depreciation which allows the tax equity investor to depreciate 50% of the value in the first year. so in the early years, lots and lots of depreciation losses are being taken and flowing out to those outside investors as they are getting cashed out. here's a link discussing:
    https://woodlawnassociates.com/tax-equity-101/
    Federal Incentives for Solar
    There are three federal incentives for businesses that invest in solar systems:

    1. Investment Tax Credit (“ITC”) – Purchasers can take a tax credit equal to 30% of their basis in a new solar system.
    2. Bonus Depreciation – Business owners of solar systems put in place before the end of 2017 are eligible to depreciate 50% of their basis in the first year.
    3. Accelerated MACRS Depreciation – Businesses can depreciate solar systems using a 5-year schedule even though the useful life of a solar system is 30-35 years.


    i haven't delved deeply into this so hopefully someone else can comment. what i have seen is that solarcity has a lot of fixed for floating interest rate swaps. the effect of those swaps is to lock in their interest costs over a long period of time while they finance in the near term rate markets. this is why you see benefits flowing through the interest expense line as rates rise. i'm not sure why they did this other than perhaps the cost of their issuing long term debt was too high relative to issuing short term debt and doing the fixed for floating swap (essentially a synthetic long-term debt issuance).
     
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  5. surfside

    surfside Member

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    you're welcome - the least I could do given all the work everyone else has done.

    I think you are right re: accelerated depreciation - this make the "losses" even bigger. Something I am somewhat concerned about is that i'm not sure even the equity research analysts are going to understand what is happening with SolarCity's earnings; I could easily see them get the wrong end of the stick and paint these non-controlling losses negatively.​

    I think you hit the nail on the head on this - they have swapped the floating rates offered by the banks to fixed to hedge against rising interest rates, but either the cost of the long term debt or the lack of availability of long term debt (more likely in my view) prevented them from matching up a long term asset (long term leases) with a long term debt obligation. Financing long term assets with short term liabilities can be a recipe for disaster when the capital markets seize up; I am hopeful that Tesla is smart enough to refinance the SolarCity debt with longer term debt as soon as it is possible/economic.

    surfside
     
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  6. sunhelm

    sunhelm Member

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    Thank you. My accounting understanding is so basic and appreciate your taking the time to break this down. From where I'm at, I had to google tax equity investing before I could understand the rest. Here's a primer for those like me :
    Solar Tax Equity ROI
     
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  7. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    #127 neroden, Apr 19, 2017
    Last edited: Apr 19, 2017
    Yeah, pretty much.

    But it's worse than that. HLBV is valuing the change in the value of the *entire VIE* if it was liquidated today. That last clause is the kicker: the liquidation provisions change over time on these VIEs. They may have a high liquidation preference to SolarCity earlier on, and a high liquidation preference to the other investors later on (or vice versa); I don't actually know what's common. This means that the portion allocated to noncontrolling interests can arbitrarily shift from year to year as the liquidation terms change according to the contract.

    The point I made earlier is that the solar panels get the PTC, bonus depreciation, and accelerated depreciation for tax purposes, and these are always allocated to the "tax equity" investors (since they're only useful for a company which is showing profits on a tax basis, which SolarCity and Tesla aren't!). The excess of these over GAAP straight line depreciation creates "tax assets". They have value in a liquidation of the VIE! So they show up on the GAAP books! And their value drops every year as they get used, so the value of the VIE drops every year, which has to show up as a loss on the earnings statement. This loss has no effect whatsoever on SolarCity (which couldn't use the tax deductions anyway) and so it is entirely allocated to the tax equity investors. (This "loss" comes back to them in the form of lower tax bills *for them*, which I think are not considered a GAAP profit of the partnership, but what do I know, I don't do this sort of accounting...)

    Anyway, this craziness ends after 5 years when all the tax breaks are used up.
    Yeah, what I'd like to see is a cash flow statement regarding the NCIs and VIEs. The earnings basis is a mess.

    This was what was about to kill SolarCity before the merger.

    They're already doing it. I wouldn't have supported the merger otherwise -- they stated their plans to do so before the merger.

    One method is called "monetization" or "cash equity financing" where the debt financing is replaced with selling off the entire future income stream for cash now. They've made a bunch of these deals.

    Another method is, indeed, longer-term bonds.
    The 2013 asset-backed notes mature in 2035 (22 years, probably enough to maturity-match with the income stream from the panels).
    The 2014 asset-backed notes mature in 2038 or 2044, *definitely* long enough.
    The 2015 asset-backed notes mature in 2045.
    The 2016 asset-backed notes mature in 2046 or 2048.
    The three "cash equity debt" groups mature in 2033, 2034, and 2035, and these are probably for even older leases, so probably long enough.

    With the panel leases/PPAs usually being contracted for 20-year to 30-year lifespans, (and designed to pay for themselves over that lifespan), these are maturity-matched.

    The shorter-term loans remaining from SCTY are:
    (recourse) "Solar Bonds"
    (recourse) "Secured Revolving Credit Facility"
    (non-recourse) "Revolving Aggregation Credit Facility" -- this is supposed to be a temporary place for solar panel install financing until they can put them into a VIE or issue long-term bonds or whatever
    (non-recourse) Solar Renewable Energy Credit Term Loan -- this is is the highest-rate loan on the books. They were already paying it down between the acquisition and December 31; it may be gone by now.
    (non-recourse) December 2017 Term Loan
    (non-recourse) January 2021 Term Loan

    There's substantially too much in the Revolving Aggregation Credit Facility as of December 31. They need to empty the pipeline by getting outside investors for all the panels in that. We'll see how much progress they've made in the Q1 report.

    That's *probably* the stuff the floating-for-fixed swaps are hedging against, although they haven't accounted for them as hedges (sigh).
     
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  8. luvb2b

    luvb2b Member

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    @schonelucht, @surfside, @neroden and others who are interested:
    got a hold of one of goldman's recent financial models for 2017 compliments of another member.
    it shows 1.1b of non-controlling interest losses for the full year, which would be around 275m per quarter.

     
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  9. surfside

    surfside Member

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    Great idea and interesting to get confirmation of that number (especially from an institution with a bearish view like Goldman). I have access to some equity research through Capital IQ, but wasn't able to find any other models with projections of SolarCity's NCI's. Morgan Stanley posts their model, but given they value Tesla's energy business (including SolarCity) at zero, they don't even try to model their numbers.

    surfside
     
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  10. TMSE

    TMSE Member

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    Thanks for sharing. Would it affect your estimates for Q1?
     
  11. luvb2b

    luvb2b Member

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    no. i've already incorporated that roughly on par with goldman.
     
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  12. surfside

    surfside Member

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    I searched a little more, and Ben Kallo from Baird (one of the more bullish equity research analysts, who also happened to previously cover SolarCity before Tesla bought it) doesn't bother to forecast NCI's in his modeling either. Interestingly enough, looking back to one of his last reports on SolarCity prior to the closing of the transaction in 4Q2016, while his model shows historical NCI numbers, he didn't have a forecast for NCIs 4Q2016 or for FYE 2017. Pretty surprising given what a big impact it has on the financial statements.

    This got me thinking -- most of Wall Street covered SolarCity -- what were these guys projecting NCI's to be for FYE 2017 when they were covering SCTY last year? So I looked back at old coverage of SCTY.

    Of the major banks, JP Morgan didn't bother forecasting NCIs, nor did UBS (and Vishal Shah was a solar industry specialist). I kept looking, and while I don't have access to every bank's reports, the only other analyst that I was able to find that made an estimate was Raymond James, who forecasted $893.8 million of NCIs for FYE 2017 in their report dated November 10, 2016.

    surfside
     
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  13. luvb2b

    luvb2b Member

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    #133 luvb2b, Apr 21, 2017
    Last edited: Apr 21, 2017
    maybe analyst estimates are not comparable across the board.

    a good question is what are they modeling for net income ex-nci, and is this what they use to get to gaap eps?

    do we have a good enough collection of analyst reports to answer?

    as of 3/8 ms has -1.94 for gaap eps, and this excludes nci's. it also seems to exclude top line revenue from solar city.
    goldman has nci's but i don't know quarterly breakdown. i think they forecast a loss even with nci's.

    merrill i can check later today. @surfside or anyone else who has access to other analyst reports please post the estimate, whether it includes solar city revenue, nci's , and what numbers are gaap or nongaap (excluding stock comp). we can try to aggregate to get apples to apples comparisons.

    edit - merrill punted on trying to include solarcity.
    More information & estimate revisions may be forthcoming
    Importantly, Tesla has revised the presentation of its financials following the acquisition of SolarCity. This change will likely require the reconstruction of a number of Street models, ours included, in the coming weeks, and could result in an estimate revision cycle as well. As more information will likely be disclosed by the company in the Tesla and SolarCity 10-Ks, we plan to revisit our estimates when the filings are published. However, as SolarCity is still losing money and burning cash at this point, it is likely any earnings revisions would reflect greater losses and accelerated cash burn.​

    are we one of few crews that has tried to merge scty into estimates?

     
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  14. schonelucht

    schonelucht Active Member

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    Trying to summarize for my own benefit the nci situation based on what I (hope) I learned from the above.

    Solarcity records short term losses on certain sales since they are essentially (kind of) leases : costs come (mainly) at installation while revenue trickles in over the lifetime of the product. SolarCity spins bundles of these installations in special variable interest entities (vie). Therefore these entities will also show a short term loss over the very first year as the installation costs get charged to the costs side of the balance sheet in the short term and are expected to generate longer term profits as revenue continues to trickle in. So far so good.

    Outside investors participate in these entities (so called non-controlling investors, nci). Despite outside investment, SolarCity needs to consolidate the full revenue/costs in its own balance due to whatever regulations. The conditions on these structures are such that some of the costs are attributable to the outside investors (and consequently later some of the revenue will be). Therefore to clean SolarCity's profit sheet to show really what shareholders get from these deals, you need to deduct from the consolidated sheet the short term losses within such a vie that are attributed to its outside nci. Later you will need to deduct the profits in that same vie that are attributable to the nci (but we are not yet there).

    Is the above a correct summary of the situation?
     
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  15. luvb2b

    luvb2b Member

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    the first part of what you described is i think what's discussed in the 10k, that there is a difference between the market price and cost - and cost is used for liquidation value, and that is always a loss to the outside investors.

    the second part below, the one key piece i think is missing is that the rules for tax equity investors include bonus depreciation and accelerated depreciation. so the systems are depreciated rapidly up front (in 5 years). the tax equity investors get this depreciation which they can offset against other income they have earned. later on, when depreciation has lapsed the revenue/cost of the vie is flowing, there won't be any depreciation left so costs later on will be lower across the board. but the key - i think - is that early on large amounts of depreciation are flowing to tax equity investors. to me this provides some rational foundation for which nci's are expected to continue this year (esp. for systems installed last few years).

     
  16. schonelucht

    schonelucht Active Member

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    Thanks for your continued hand holding here. Much appreciated.

    So if the losses come from aggressive depreciation then we should have some link between amount installed over the last X year where X is the average period in which they depreciate the assets and the losses attributed to the nci? Obviously, book value getting re-evalued for liquidation at end of each quarter (like probably in terms of changing interest rates, default events by solar panel leasers, etc.) will muddle things so the following should only work in very rough terms when making abstraction of that.

    First off, looking at the annual reports and comparing the total solar assets under VIE management and the total cash contribution from non controlling investors, these numbers track very closely. That suggests that the investors have a nearly 100% (funding) stake in the VIEs and SolarCity pretty much nothing. Which makes sense, these VIEs are there to let outside investors participate and claim tax deductions. SolarCity was losing money with little to no tax obligations on its own. For those installations that it self-funded, much easier to keep it on your general book.

    Next I see that last year, solar assets in VIEs increased by $1.2B while the nci losses increased by $330M. This suggests a depreciation age of roughly 3 years (the VIEs were getting some revenue too). Cross checking with 2015 that seems to hold up. Solar assets also increased by $1.2B while losses increased by nearly $400M (the VIEs, being a little younger on average didn't make that much money?). Year before that we had an increase in assets of $822M by corresponding to an increase of losses of $225M. Still within the ballpark. Earlier years it breaks down but there are weird things happening anyway there because we have profits(?!?) attributed to the ncis from time to time.

    Trying to project what will happen in 2017. We should see asset increases from 3 years ago dropping from the losses (fully depreciated) That's some $820M divided by 3 or roughly $270M. If my reasoning is correct we get to $1060 - $270 = $780M losses to nci's in 2017?

    Cannot stress enough I may be completely of the mark here.
     
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  17. brian45011

    brian45011 Active Member

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    #137 brian45011, Apr 21, 2017
    Last edited: Apr 21, 2017
    There is bonus depreciation of 50% of the basis for the first year.

    PS Any Grohmann news that may hit before today's market close?
     
  18. schonelucht

    schonelucht Active Member

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    So 50% first year, the rest over a 5 year period for tax reasons? If I model this, I get a much more severe reduction in nci losses. Falling back to a third of 2016 for next year.

    Nop. Seems quiet. I think they are back to the negotiation table based on the new offer from Musk.
     
  19. brian45011

    brian45011 Active Member

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    That's how I understand it.

    The other variable is new PPAs/leases during 1Q17 that can go into VIEs/SPEs. I have not seen any significant announcements lately.
    I think the Samoa project was a sale
    "The solar project was installed by SolarCity, a California-based company recently purchased by Elon Musk’s Tesla. The $8 million project was funded by the U.S. Department of Interior and the American Samoa Power Authority (ASPA)." How a Pacific Island Changed From Diesel to 100% Solar Power
     
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  20. surfside

    surfside Member

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    From the reports that I looked at yesterday, only Raymond James actually broke out NCIs as a separate line item, so I don't think it is possible to know whether the others are using some kind of assumption about NCIs but just aren't breaking it out as a line item, or whether they are just assuming there will be no impact from NCIs in their estimates because they don't know how to forecast them.

    Given GAAP net income includes the impact of (backing out) NCI's, I think we have to assume that whether or not the analysts are taking a shot at estimating NCIs, the number being used for GAAP EPS has an inherent assumption about the NCI's. If I were to bet (and I guess I am to a degree given my plan to maintain my position through earnings), I think most analysts are using the worst possible assumption of zero (based on "i don't know how to model this").

    surfside
     

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