SolarCity Bailout Analysis

[SBenson]

scty already install 2GW, is it correct?

This is another misconception.

Unfortunately, you can't rely on the official 10Q/10K balance sheet because we are talking about future cashflows. Given no other legitimate option, lets take SCTY's own numbers to look at this.

Refer to latest quarterly slide-deck, page 6:

Here is the Portfolio Value:
Contracted Pre-Tax Unlevered NPV Remaining (PV6)...............$2,766
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV6):.......$103
SREC Financing.............................................................................-$15

Net Portfolio Value: $1,226Mln

Note 1: I deliberately took out the Renewal assumption out of the equation. No company on earth gets to take credit for future sales/cash-flows that may or may not happen, no less 20 years down the line. Can Apple claim credit for future revenues today saying a current iPhone user will buy an iPhone 2 years down the line because, well, you know, the customer uses iTunes that we built.

Note 2: A discount rate of 6% is ridiculously low. Recent Hancock deal made it abundantly clear that the discount rate should be north of 8%. Check CC transcript on that. So with 8% discount rate the math changes to:

Contracted Pre-Tax Unlevered NPV Remaining (PV8)...............$2,314
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV8):.........$98
SREC Financing.............................................................................-$15

Net Portfolio Value: $769 Mln

I got the PV8 numbers from the appendix C of the same slide-deck (page 24).

Here is the Corporate Debt and Cash
Debt – Recourse.....................................-$612
Debt – Convertible..................................-$909
Cash & Short-Term Investments..............$361

Net corporate Debt and Cash: -$1,160

Cumulative Value of SCTY: -$391 Mln

So my statement of 5 Bln is off. But there is no 8 Bln portfolio that Tesla is inheriting.

In a nut shell, whatever TSLA pays in equity is the cost and then some.

 

[SBenson]

"When the numbers are viewed from a GAAP perspective, SolarCity is losing about $150 million per quarter, but what a lot of people don’t understand is that SCTY has $2.7 billion in net retained value after all the debt is paid off over 30 years. SCTY leases most of their systems, therefore the earning per quarter is stretched out over a long period of time. Therefore, I don’t see SCTY as an anchor for TSLA. In the short run this does not look good, but in the long run, everything becomes more cost efficient."

quoted from article in Forbes: Why A Tesla Acquisition Of SolarCity Makes Sense

This Forbes dude is so far behind the curve that it is beyond sad. What a pity that financial media has come down to.

The concept of "Retained Value" existed up to Q3 2015 and then they stopped. Check the slide decks.

Where is he getting 2.7 Billion anyway? Even SolarCity is not claiming such a lofty number anywhere.

For context: that metric was an outright lie all along. The hidden secret was that metric was based off of Bookings and it turns out many of the bookings were phony bookings. Over time cumulative bookings vs cumulative installs diverged so much (by a factor of 2 or so) that SCTY eventually had to rescind it.

Here is another tid-bit, even when SCTY was lying with this metric (Q3 and before), you would never see this metric in the official 10Q, 10K filings. Meaning this metric is never really audited by a 3rd party auditor.

All the more reason why I say people to rely more on 10Q/10Ks as much as possible than their presentations, shareholder letters etc. Management can not be trusted.

I say all this because I got personally burnt by the exact same thinking as you posted. I bought 1000s of shares blindly trusting management and their rosy presentations. Alas, market caught all the lies ahead of me and plunged the stock price and I ended up taking a substantial hit (I sold off in 40s).

 

[TheTalkingMule]

Cumulative Value of SCTY: -$391 Mln

So my statement of 5 Bln is off. But there is no 8 Bln portfolio that Tesla is inheriting.

In a nut shell, whatever TSLA pays in equity is the cost and then some.

Wouldn't this be true of nearly every explosive growth company? Yes, there is debt being accrued in order to facilitate rapid growth, but that was the plan. Having a slightly negative valuation on paper before you even get remotely up to speed is right where they should be. Did Amazon's books not look exactly the same not that long ago?

What worries me is not the model or the balance sheet or nailing down exactly how much retained value is really there, the concern is around costs making the model ineffective. Costs eat into the slack that banks need to see in the equation in order for them to buy in confidently. The 1-2 punch of pivoting to then abandoning slower growth then getting hit with Nevada has created a set of inputs that is not palatable to banks.

The inputs are way too out of whack for this machine to operate fluidly, the equation is way too tight. Half the sales cost(or it's equivalent) needs to go in order for it to loosen again. To me that happens one of two ways:

1) TSLA takes over, eliminates the door-to-door sales effort and shifts customer acquisition to online/viral commissions. Using their brand recognition to bypass the ridiculous SCTY sales process could solve all problems instantaneously.

2) Buy themselves 6-9 months for the market to mature naturally and squeeze out the cost of customer acquisition. Every SCTY PPA customer saves money the minute they sign up, that should not cost $.55/W to sell let alone $.91/W. People are rapidly educating themselves, but that process takes time.

Not sure which of these Elon prefers, but he's left both options open. He could drag this out for 4 months to get past a hopefully positive 3Q earnings report and nearer the elections, or he could actually do the merger.

Given the exponential growth of solar in general, it wouldn't be too tough for SCTY to make a concerted effort to drive for dramatically better 3Q numbers while sacrificing a bit of residential growth. That goes against the plan, but there's an existential element here and they just need to get past November.

 

[marvinat0rz]

Does anyone have any detail on the rumors that Musk has a personal stake in this beyond his 20% ownership in SolarCity? I've read hints of this in other threads, specifically that he has some loans to large investment banks that are tied to the stock price of Tesla and SolarCity. Implying that he would get a margin call and have to sell shares to pay back parts of these loans if the stock price fell below a certain level.

I'm concerned that this is part of the motivation for suggesting this acquisition; preventing such a margin call. Do we have any more specific information on this, or is it possible to reason about what the consequences of such a situation would be? I'm thinking e.g. the risk of Musk losing enough ownership share in Tesla that it would be possible for other actors to meddle with Tesla's business development, for example making more short-term decisions regarding how the company is run.

 

[neroden]

Exactly, people see the model seizing up and say to scrap the model.

Well, I have specific reasons to believe the PPA and lease model is bad (I know you disagree with me). A lot of other analysts agree with me, and the market seems to be moving towards straight-up bank loans. I think in the early days banks weren't comfortable making loans against solar panels, which is why all this other stuff was developed. Now banks understand these loans -- they're just like a home equity loan or a mortgage -- and are quite comfortable making them, so that model is going to dominate.

It's not the model, it's the inputs. There's a hump that needed to be gotten over by now and they haven't, so each bit of growth becomes a struggle. With the most recent "monetization" it's unclear how much of a struggle, and I guess that could be described as part of the problem.

I don't see any way in which adding this huge financing struggle to Tesla, which already has large capital costs, is a good idea.

 

[SBenson]

Does anyone have any detail on the rumors that Musk has a personal stake in this beyond his 20% ownership in SolarCity? I've read hints of this in other threads, specifically that he has some loans to large investment banks that are tied to the stock price of Tesla and SolarCity. Implying that he would get a margin call and have to sell shares to pay back parts of these loans if the stock price fell below a certain level.

I'm concerned that this is part of the motivation for suggesting this acquisition; preventing such a margin call. Do we have any more specific information on this, or is it possible to reason about what the consequences of such a situation would be? I'm thinking e.g. the risk of Musk losing enough ownership share in Tesla that it would be possible for other actors to meddle with Tesla's business development, for example making more short-term decisions regarding how the company is run.

No, that is a false accusation.

You can double check SEC filings of TSLA but his loans are about $185Mil. His combined net-worth is $8.7Bil. Even if SCTY becomes 0, his net worth is still $8.3Bil. Effectively his loans are less than 2.5% of his net worth.

His SpaceX stake alone is considered to be valued at $3.8B and growing fast (with reusable rocket tech success).

There is absolutely no possibility of a margin call.

 

[luca]

This is another misconception.

Unfortunately, you can't rely on the official 10Q/10K balance sheet because we are talking about future cashflows. Given no other legitimate option, lets take SCTY's own numbers to look at this.

Refer to latest quarterly slide-deck, page 6:

Here is the Portfolio Value:
Contracted Pre-Tax Unlevered NPV Remaining (PV6)...............$2,766
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV6):.......$103
SREC Financing.............................................................................-$15

Net Portfolio Value: $1,226Mln

Note 1: I deliberately took out the Renewal assumption out of the equation. No company on earth gets to take credit for future sales/cash-flows that may or may not happen, no less 20 years down the line. Can Apple claim credit for future revenues today saying a current iPhone user will buy an iPhone 2 years down the line because, well, you know, the customer uses iTunes that we built.

Note 2: A discount rate of 6% is ridiculously low. Recent Hancock deal made it abundantly clear that the discount rate should be north of 8%. Check CC transcript on that. So with 8% discount rate the math changes to:

Contracted Pre-Tax Unlevered NPV Remaining (PV8)...............$2,314
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV8):.........$98
SREC Financing.............................................................................-$15

Net Portfolio Value: $769 Mln

I got the PV8 numbers from the appendix C of the same slide-deck (page 24).

Here is the Corporate Debt and Cash
Debt – Recourse.....................................-$612
Debt – Convertible..................................-$909
Cash & Short-Term Investments..............$361

Net corporate Debt and Cash: -$1,160

Cumulative Value of SCTY: -$391 Mln

So my statement of 5 Bln is off. But there is no 8 Bln portfolio that Tesla is inheriting.

In a nut shell, whatever TSLA pays in equity is the cost and then some.

DId you try to make the simple thing complex and mess up them?

We know scty already installed 2GW solar panel, which will generate about $8B worth electricity in 20 years.

Scty's total debt is 3.3B ( I don' t care recourse or non-Recourse)

Is there sth wrong?

 

[SBenson]

DId you try to make the simple thing complex and mess up them?

We know scty already installed 2GW solar panel, which will generate about $8B worth electricity in 20 years.

Scty's total debt is 3.3B ( I don' t care recourse or non-Recourse)

Is there sth wrong?

LOL

Yes, everything wrong in how you looked at it. I assume you don't have enough background for this. I think I tried enough to educate you. Lets leave it at that.

 

[dakh]

This is another misconception.

Unfortunately, you can't rely on the official 10Q/10K balance sheet because we are talking about future cashflows. Given no other legitimate option, lets take SCTY's own numbers to look at this.

Refer to latest quarterly slide-deck, page 6:

Here is the Portfolio Value:
Contracted Pre-Tax Unlevered NPV Remaining (PV6)...............$2,766
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV6):.......$103
SREC Financing.............................................................................-$15

Net Portfolio Value: $1,226Mln

Note 1: I deliberately took out the Renewal assumption out of the equation. No company on earth gets to take credit for future sales/cash-flows that may or may not happen, no less 20 years down the line. Can Apple claim credit for future revenues today saying a current iPhone user will buy an iPhone 2 years down the line because, well, you know, the customer uses iTunes that we built.

Note 2: A discount rate of 6% is ridiculously low. Recent Hancock deal made it abundantly clear that the discount rate should be north of 8%. Check CC transcript on that. So with 8% discount rate the math changes to:

Contracted Pre-Tax Unlevered NPV Remaining (PV8)...............$2,314
Debt – Non-Recourse................................................................-$1,628
Contracted SREC Pre-Tax Unlevered NPV Remaining (PV8):.........$98
SREC Financing.............................................................................-$15

Net Portfolio Value: $769 Mln

I got the PV8 numbers from the appendix C of the same slide-deck (page 24).

Here is the Corporate Debt and Cash
Debt – Recourse.....................................-$612
Debt – Convertible..................................-$909
Cash & Short-Term Investments..............$361

Net corporate Debt and Cash: -$1,160

Cumulative Value of SCTY: -$391 Mln

So my statement of 5 Bln is off. But there is no 8 Bln portfolio that Tesla is inheriting.

In a nut shell, whatever TSLA pays in equity is the cost and then some.

Excuse me if this shows my ignorance too blatantly but does this include the value of a devCo at all? Patents, factory in NY and Fremont, etc.?

 

[luca]

LOL

Yes, everything wrong in how you looked at it. I assume you don't have enough background for this. I think I tried enough to educate you. Lets leave it at that.

Say this can not add any credit on what you claimed

Just directly answer the question with 2GW installation him much rev will scty generate in 20 years

 

[X Yes?]

I think Tesla name and vertically integrated product offering would open-up new market that financing or PPA cannot address.

This is what many Tesla shareholders are afraid of. Tesla's capital needs are large enough with bundling SolarCity's voracious appetite for capital.

 

[Vitold]

This is what many Tesla shareholders are afraid of. Tesla's capital needs are large enough with bundling SolarCity's voracious appetite for capital.

I think I did not make my point clear:

Current financing schemes PPA/MySolar/MyPower (with terms up to 30 years!) make the solar product look as cheap as possible because their peach is primarily about saving money.

Customers buying from Tesla Solar maybe interested in saving environment and/or run their cars on renewable power. They may be happy to pay premium for Tesla integrated product (battery+storage+inverter+software) that is pleasing to the eye to boot.

 

[neroden]

Excuse me if this shows my ignorance too blatantly but does this include the value of a devCo at all? Patents, factory in NY and Fremont, etc.?

Pardon me for speaking for SBenson, but no, it basically doesn't include that. On their existing "lease/PPA financing" business, SolarCity is worth $-391 million.

If Musk is offering a $2.8 billion bid, he's valuing the patents, factories, etc. at $2.8 billion + $391 million "bailout" of the financing business = $3.2 billion. (Actually plus *more* because of the interest payments on the financing.)

Maybe they're worth that much; they're probably worth at least the money which went into them, which is Zep $158 million + Silevo $200 million + Buffalo factory $750 million = $1.1 billion. If you believe Musk's assessment of the value of the new Silevo panel design, which I do, you might believe that they were worth the $3.2+ billion.

Musk made it quite clear in the conference call that he's making a bet on the Silevo(/Zep) product with SolarCity's installation techniques being a compelling, superior product with a compelling production/installation cost. There are definitely reasons to think that's an unsafe bet, in the highly competitive solar industry However, that's a bet not so far off from the Tesla Energy bet, and honestly it's not what we're concerned about. The trouble is that he really really didn't talk about the financing mess.

The tertiary risk I'm worried about is that SolarCity will not have any market share due to being uncompetitively priced (since they are currently uncompetitively priced in most markets). Musk is basically saying that the new Silevo factory will change that, so I'm not terribly worried about that; this is the sort of engineering thing I tend to trust Musk's expertise on especially when he has inside information.

The secondary risk I'm worried about is that Musk will keep SolarCity in the doomed, money-sink financing business. But his comments at the conference call make me think that he's thinking entirely about the Silevo factory and has no attachment to the financing business. So I'm worried about that but not *too* worried.

The *primary* risk I'm worried about is that SolarCity has to not merely service its debt, but also refinance its debt.

Debt – Recourse.....................................-$612
Debt – Convertible..................................-$909
It's been very hard to extract a complete rate and duration schedule for these from SolarCity's confusing and vague publications. Most of the convertibles are long-term I believe (correct me if I'm wrong). But all of the recourse debt has terms less than 20 years, and it looks like most of it has terms less than *5* years. That's a lot of recourse debt to refinance.

Maybe one of you can figure out better than I can how much of it needs to be refinanced in each year. Tesla can probably handle a refinancing hit 20 years out, but needing to do a large refinancing in 5 years (2021) would be a major drag on expansion, and needing to do a large refinacing in 2 years (2018), before Model 3 has shipped in high volume, would be disastrous.

 

[Perfectlogic]

DId you try to make the simple thing complex and mess up them?

We know scty already installed 2GW solar panel, which will generate about $8B worth electricity in 20 years.

Scty's total debt is 3.3B ( I don' t care recourse or non-Recourse)

Is there sth wrong?

When you say it like that it sounds great, that must be $4.7B in profits right? What you are missing is the interest on their debt, which will cut deeply into the gross profit on those figures, especially with their rising borrowing cost. Add to that other overhead costs. And then there is the risk of contracts going sour, 20 years is a long time. Large risks could be a financial crisis and the utility rate going lower making the SCTY contract more expensive.

 

[luca]

When you say it like that it sounds great, that must be $4.7B in profits right? What you are missing is the interest on their debt, which will cut deeply into the gross profit on those figures, especially with their rising borrowing cost. Add to that other overhead costs. And then there is the risk of contracts going sour, 20 years is a long time. Large risks could be a financial crisis and the utility rate going lower making the SCTY contract more expensive.

Give me a number, interest is how much

 

[Perfectlogic]

Give me a number, interest is how much

I don't know SCTYs cost of capital, but I do know it has been rising. Say it is 7% which might even be too low at this point, then the total debt payments over 20 years would be $6.14B. Add some other costs and some contracts going sour and they might not make any money on existing contracts. On the other hand if everything is just hunky-dory over the next 20 years they will make money. The risk is significant though, and I don't think the reward is great as the utility scale solar model is simply superiour.

 

[neroden]

The *primary* risk I'm worried about is that SolarCity has to not merely service its debt, but also refinance its debt.

Debt – Recourse.....................................-$612
Debt – Convertible..................................-$909
It's been very hard to extract a complete rate and duration schedule for these from SolarCity's confusing and vague publications. Most of the convertibles are long-term I believe (correct me if I'm wrong).

I'm wrong. Thank you Cosmacelf -- Short-Term TSLA Price Movements - 2016

Solarcity is obligated to pay $200M in 2 years, $566M in 3 years

Those appear to be *convertibles*. It looks like substantial parts of the convertibles come due in 2 and 3 years.

So the refinancing exposure is pretty bad, probably on the order of $1 billion dollars in the first 3 years.

When the SCTY offer was announced, someone else calculated that TSLA dropped by an amount which meant the market was valuing SCTY at $-1 billion. Now you know why: in order to merge SolarCity, Tesla basically has to raise another billion dollars. Probably by diluting our stock with another share issuance, since I don't see where else they're going to get it.

Elon needs to provide a compelling alternative scenario for dealing with this financing problems.

 

[dakh]

Pardon me for speaking for SBenson, but no, it basically doesn't include that. On their existing "lease/PPA financing" business, SolarCity is worth $-391 million.

If Musk is offering a $2.8 billion bid, he's valuing the patents, factories, etc. at $2.8 billion + $391 million "bailout" of the financing business = $3.2 billion. (Actually plus *more* because of the interest payments on the financing.)

So there, this puts the whole thing perfectly in balance. Market values essentially devCo + yieldCo at what, 2.2B. Tesla wants to acquire a solar installation business and it knows how to make good money off of that, and to Tesla that business is worth more than to SCTY shareholders. Because nobody but Tesla can utilize what SCTY got in this unique way. That is the whole "synergy" piece from the acquisition, and this would make it a fair, win-win, deal for everyone. Peace?

 

[Seesaw]

How much do people think the Tesla offer should be for SCTY?

 

[SBenson]

How much do people think the Tesla offer should be for SCTY?

The purchase price is largely irrelevant.

SCTY as it stands today is a bad buy even at 0 dollars, as it risks core Tesla failure (not kidding).

It has
- A mediocre product
- A terrible business/financing model
- An awful sales model
- Untrustworthy management, who lost credibility in the marketplace

It is launching an MLM program. That's like trying to be Amway or Herbalife. Geez, how disgusting can they really get?

Does anyone want any part of Tesla to be an MLM?

BUT, it appears that after the merger Musk seems to be intending to do a fundamental makeover where much of SolarCity in its current form will be purged away. This purging makeover exercise won't come cheap mind you.

It would be incredibly cheaper and simpler to pick off relevant pieces once SCTY bankrupts itself. The issue there is Musk will lose credibility and that poses problems for TSLA and SpaceX.

Hence we are in this predicament.