SolarCity Bailout Analysis

[Vitold]

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.

On one hand you say that you don't want it for $0 yet on the other you want tesla to pickup the pieces.


Musk said that he wants actually workforce, and Silevo. How much would Silevo be in the open bidding?

 

[X Yes?]

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.

Bingo. In a nut shell, that's it.

 

[EinSV]

I like a good conspiracy theory as much as the next guy, but this is not all that complicated. The Tesla "Secret Master Plan" has always included providing zero emission electric power options:

If you travel less than 350 miles per week, you will therefore be “energy positive” with respect to your personal transportation. This is a step beyond conserving or even nullifying your use of energy for transport – you will actually be putting more energy back into the system than you consume in transportation! So, in short, the master plan is:​

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero emission electric power generation options

Don't tell anyone.
​

Although the initial implementation of this plan involved Tesla promoting Solar City solar products the situation has now evolved:

1. Tesla is a stronger manufacturing company than Solar City and will be able to build solar panels more efficiently and cost-effectively.
2. Tesla is one of the most innovative companies in the world and Tesla Solar should be better at innovating in the solar space than Solar City.
3. Tesla is better at product design than Solar City and should be able make more attractive and desirable solar products.
4. There is a need for an integrated solar/battery product, which can be more effectively and efficiently designed and produced within an integrated company, instead of separate companies.
5. Combined Tesla/Solar City should have reduced SG&A, especially in more bang for the buck in sales.
6. Tesla and Solar City have a significant overlap in customers -- BEV customers are far more likely to buy solar than the average consumer.
​

Seems pretty straightforward to me.

 

[tander]

In my view, for SCTY access to (enough) capital is bigger issue than the cost of capital itself.

At a high level, to do 1GW of installs it needs a capital of $3Bil or thereabouts. Even if it keeps it's install rate constant, it needs external financing of $3Bil each year.

So if SCTY chooses to grow the rate of installs, even worse, it needs ever increasing amounts of external capital each year.

For the longest time, Lyndon Rive famously/repeatedly claimed that SCTY will double it's installs each year for foreseeable future. Had he followed through on that, the capital needs from external financing would be something like:

2016: $3B
2017: $6B
2018: $12B
2019: $24B

LOL

Obviously this is unsustainable. For that matter even raising even $3Bil year in and year out is simply unsustainable.

Essentially, the business model was to become Freddie Mac or Fannie Mae of Residential Solar, but with no backing from Treasury or Fed. Another big LOL.

Anyways, coming to the specifics of the financing, some of it comes through asset-backed financing in one form or other but some has to come directly from SCTY. The more that comes in the form of asset-backed debt the better. So that's always the first priority. Second priority is to raise capital through financing against itself. Third is to deplete cash.

When Lyndon Rive or Musk say that SCTY will become cash-flow positive, they are essentially saying that all company operations will be adequately financed through asset-backed financing. Thus, SCTY doesn't need to raise capital against itself or deplete cash.

Over the last few quarters something became very apparent. SCTY effectively ran out of ways to find non-asset financing (second option).

For instance it did a heroic raise in Q4 through the Silver Lake deal, which effectively amounts to avoiding the financial system to borrow from an old friend or brother-in-law.

Period........Cash & Equiv....Change
Q1 2016....361,660,992....-32,194,016
Q4 2015....393,855,008....-24,511,008
Q3 2015....418,366,016....-70,718,976
Q2 2015....489,084,992....-86,764,032
Q1 2015....575,849,024....-66,844,992
Q4 2014....642,694,016....-90,764,992
Q3 2014....733,459,008
Q4 2013....577,080,000
Q3 2013....132,986,000
Q2 2013....159,606,000

For context, even with Q1 ending figure, SCTY is operating with the lowest cash level since Q4 2013. The company operations more than tripled since then (#employees went from 4K to 15K), so it needs lot more cash in the bank to run it's day to day operations.

In Q4 the cash drop blow was lowered through Silver Lake deal. In Q1 a remarkable number of asset financing options opened up and SCTY figured out a way to raise cash against old deals (existing pool of leases). So the cash depletion wasn't too bad. But as data indicates they were more of one time in nature than a going forward norm.

You can look at all the press releases here to compare Q2 vs previous quarters in terms of how much funding opened up.

I firmly believe cash depletion this quarter has been rather dramatic.

Lets say the world comes to know that it's cash balance is sub 300Mln end of Q2, what will happen? Will financing partners, business partners and suppliers balk and say they can't do business with SCTY anymore?

That's my suspicion. So Musk was desperate to shore up the capital and all desperate measures were already exhausted. So Musk is trying to make a last ditch attempt to save the firm (by taxing TSLA share holders).

Future Scenarios:

If merger falls appart, SCTY will end up declaring bankruptcy. It cannot possibly gradually scale down. The fixed costs will overwhelm. Even a small squeeze in asset-backed funding will thoroughly destroy it.

If merger happens:

SCTY's biggest problem is the business model. Especially the way it sources financing. It did it this way because it believed leases/PPAs were much more profitable. It deluded itself with gimmicky math and fairy tale assumptions. But with the recent Hancock deal, things became abundantly clear that SCTY is not making much money (in DCF) with this model. This is the first time it sold all of the contracted cash flows. So for the first time it got a realistic appraisal of what the value of the contracts is.

So management finally woke up and said, we will do the sales/installs the traditional way where homeowners directly borrow from banks and will simply be facilitators and we would be just as profitable. Thus we get all cash upfront. No need for all these complicated financing schemes and gimmicks. No liquidity issues.

This is the transition SCTY desperately needs. Which I and a few others have been advocating in the SolarCity thread for a long time.

Once it is merged up SCTY will (or should) very swiftly scale down all these PPA/lease stuff and move into traditional sales model. But SCTY needs time and money for this transition. Tesla will provide that - is the idea.

BUT, once SCTY is folded into Tesla umbrella, if it continues will it's old ways, rest assured it will destroy the mother-ship for sure. Absolutely positive on that.

The reason the deal looks scary is that Musk/Tesla were actually praising SolarCity's creative financing schemes as a strength. If Tesla/Musk really believe that, we might as well run for the hills. I hope that is just sweet talk and they don't really mean it.

Admittedly I haven't been paying super close attention. But I remember from a SCTY conf call or something a quarter or two ago was basically that since the blind growth strategy wasn't going to work in a climate of receding payments from utilities, they were going to start growing at a slower pace so they could be more strategic about which markets they enter and thereby getting a higher ratio of money making installs instead of just aiming for the most installs. That seems like a pragmatic plan to bridge the gap between now and when they can start doing a lot of low cost installs with their own panels/battery packs.

 

[tander]

How long should this merger proces take? Any ideas?

They said a month or two in the conference call.

 

[tander]

Great stuff as always SB, but the we are missing one vital ingredient. Elon will never abandon this business line, it's absolutely vital to his vision.

To me all your analysis comes down to cost and growth. These guys(like a lot of us) thought growth would be no issue and sales cost would be down around $.45/W by now even with some new market troubles. That cost being double(or even the $.65/W it was before Nevada) makes the whole thing seize up.

Banks would be more than happy buying into the SCTY PPA model forever if it were more profitable. IMO sales cost could be cut this low under the Tesla umbrella plus they only really need to buy themselves 6 months to let the market mature a bit and to get past the elections.

So in many ways I think this is just a stalling tactic and an attempt to set a price floor. Not a bad idea.

Well see how it goes. The real question is if it's utterly insane to buy $80 SCTY 2018 calls next week.

What happens to those calls after the merger? My perception is that there is a misperception that SCTY has been mismanaged or about to collapse due to generally fear in the solar industry. In reality my opinion is that they've had some pretty exceptional management and are still basically the cream of the crop in terms of solar companies.

 

[engle]

There are several good posts in this thread. I'm one of the small investors that will end-up owning more TSLA if this deal closes. The only insight I have to offer is from having to read the Solarcity PPA (Power Purchase Agreement) in detail in the days leading up to the announcement.

My wife and I co-own a Silicon Valley real estate brokerage. We represented a Buyer who purchased a home in Los Altos that has a Solar City PPA with 6,755 kWh estimated first year production. The seller signed it 10/9/2014. His listing broker failed to disclose it - they thought it was a "lease" - so there was no agreement in the $3M+ cash purchase agreement on how it would be handled. I discovered it in the preliminary title report, since SCTY records a lien against the property under UCC since they/their investor LLC owns them.

These PPA's give a property seller 4 options when selling their home. They are:

1. Transfer the PPA monthly payments to the Buyer.
2. Move system to Seller's new home.
3. Prepay the PPA and transfer only use of the system.
4. Purchase the system.

Our Buyer was under no obligation to agree to anything since the PPA was between Seller and SCTY. Option #4 was off the table, since the PPA has to be at least 5 years old. First, Seller's broker wanted our Buyer to accept #1 to buy the electricity for the next 18 years, with a +2.9% annual cost escalator buried into the fine print of these PPAs. The average consumer doesn't see that (I read the whole thing). I did the math, you end-up paying about +78% more than the starting 15.90 cents per kWh in year 20 (28.3 cents). My Buyer declined. Next, the Seller offered to split 50/50 the $16,119.16 "Full Prepayment Amount" for 18 years of future electricity generation. Again, my Buyer declined.

Next, the Seller's broker tried a bluff, saying his client would have SCTY relocate the system under #2. I knew from looking up the address Seller was using (property was vacant) that they were renting a townhome in Saratoga. Also, there was no way SCTY could remove that in 2 days before close of escrow to clear the title. Any delay would put the seller in default. Seller had also listed "solar system (leased)" on a long list of recent upgrades, which I included in the sale, so they had to leave it there. "(leased)" was Seller's unintentional misrepresentation. I pointed this out to Seller's broker. Seller finally decided to pay the full $16,119.16 to SCTY (actually Castello Solar I, LLC). My client was very happy.

Bottom line is consumer's don't understand what they are committing too. These PPA's reduce the value of their homes - especially when their listing broker's are clueless about them. However, if the average property turns over every 7 years, and if a significant percentage of the PPA's are pre-paid, this will generate accelerated cash flows. I'm just not sure if cashflows to a Castello Solar I, LLC benefit SCTY in any way? Does anyone know?

 

[anticitizen13.7]

I like a good conspiracy theory as much as the next guy, but this is not all that complicated. The Tesla "Secret Master Plan" has always included providing zero emission electric power options:

If you travel less than 350 miles per week, you will therefore be “energy positive” with respect to your personal transportation. This is a step beyond conserving or even nullifying your use of energy for transport – you will actually be putting more energy back into the system than you consume in transportation! So, in short, the master plan is:​

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero emission electric power generation options

Don't tell anyone.​

​

For reference, "The Secret Tesla Motors Master Plan" can be directly read in a Blog post from 2 August 2006, here: The Secret Tesla Motors Master Plan (just between you and me)

Item 3 is Model 3. Item 4 is SolarCity.

From a product perspective, I think it makes sense for Tesla to absorb SolarCity. Being able to sell a complete [SolarPanel, Inverter, StationaryStorage] platform is attractive. It makes it easier for the consumer.

Intel did something similar decades ago. Intel processors got all the headlines, but the true driver of Intel's success in desktop computing was platform integration with CPUs and Chipsets (basically the interconnecting hardware between the CPU, memory, graphics/sound subsystems, and peripherals) being co-developed and qualified to work with each other. Similarly, mobile phone hardware has also evolved around a platform paradigm, with RAM, analog hardware, and LTE modems being integrated into a single package.

As I've stated elsewhere, the key issue for me is whether SolarCity's finances could potentially be a drag on Tesla's operations. Elon states that he believes there will be no negative impact. So far I've been unable to decipher what exactly is going on money-wise at SolarCity, and it seems from reading the threads that there is considerable disagreement among members of the community here.

 

[X Yes?]

On one hand you say that you don't want it for $0 yet on the other you want tesla to pickup the pieces.

Pickup the assets in BK, leave the liabilities.

While doing above, also provide zero emission electric power generation options

Makes sense. But it has to be cost effective. At some point, (maybe after this fiasco) Tesla will not be able to raise additional capital.

Bottom line is consumer's don't understand what they are committing too. These PPA's reduce the value of their homes - especially when their listing broker's are clueless about them. However, if the average property turns over every 7 years, and if a significant percentage of the PPA's are pre-paid, this will generate accelerated cash flows. I'm just not sure if cashflows to a Castello Solar I, LLC benefit SCTY in any way? Does anyone know?

Yes, this business model is clearly not sustainable. Many folks move every 7 years. The Solar companies that are successful, will have the lowest costs and will sell the systems for the lowest price.

 

[dakh]

Bottom line is consumer's don't understand what they are committing too. These PPA's reduce the value of their homes - especially when their listing broker's are clueless about them. However, if the average property turns over every 7 years, and if a significant percentage of the PPA's are pre-paid, this will generate accelerated cash flows. I'm just not sure if cashflows to a Castello Solar I, LLC benefit SCTY in any way? Does anyone know?

The key is where grid electricity cost is going to be 7 and more years down the road. If PPA price is substantially lower, it will add all that value back into the house. Remember these are grandfathered net metering deals that won't be around much longer.

 

[dakh]

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 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.

You're getting into tftf territory. First off the market values SCTY far better than 0. It's either somewhere in your understanding of their financials there's a hole or the market is wrong.

Even if everything goes well with the merger, it's far from certain that it'll be consummated by Q3 earnings report. And financial reporting will stay separate as per Musk even after that.

In light of that what you're saying makes no sense. If this is a bailout they are late and SCTY troubles will be on display for everyone to see before the acquisition takes place.

Remember this is far from done. A plausible scenario is SCTY delivers per-watt cost reductions they were promising in Q2 and Q3, the damn net metering grandfathering deal goes through in Congress and the stock will be in the 30's by then. We'll just have to wait and see, nothing is final yet.

 

[EinSV]

Makes sense. But it has to be cost effective. At some point, (maybe after this fiasco) Tesla will not be able to raise additional capital.

That has been a mantra of the bears/shorts like yourself since the 2010 IPO and and it has always been wrong. It is still wrong. In addition, a further cap raise may not be necessary after the TE money printing press is up and running by early next year.

 

[anticitizen13.7]

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.

The best data I can find is from SolarCity's 10-Q filing from Q1 2016: SolarCity - Quarterly Report

Scroll down to Page 16 to the chart titled "Indebtedness".

375M matures between Dec. 2016 and Dec. 2017.

230M matures in Nov. 2018

566M matures in Nov. 2019.


Factors at play (1) Can SolarCity and/or Tesla re-finance this debt on favorable terms? (2) Could economic conditions make this debt difficult to maintain? (3) What impact on cash availability for Tesla to complete its plans?

Again, I am on board with this merger CONTINGENT on financial concerns being addressed.

 

[dakh]

The best data I can find is from SolarCity's 10-Q filing from Q1 2016: SolarCity - Quarterly Report

Scroll down to Page 16 to the chart titled "Indebtedness".

375M matures between Dec. 2016 and Dec. 2017.

230M matures in Nov. 2018

566M matures in Nov. 2019.


Factors at play (1) Can SolarCity and/or Tesla re-finance this debt on favorable terms? (2) Could economic conditions make this debt difficult to maintain? (3) What impact on cash availability for Tesla to complete its plans?

Again, I am on board with this merger CONTINGENT on financial concerns being addressed.

You seem to know what those numbers mean, care to explain? Say the 566 number is convertible notes. So in my limited understanding that means that for example if the merger goes through either the debt will be repaid or converted to common Tesla stock worth around that much, so it's going to be a fairly small delusion. What's the big deal?

I'm assuming when they took these loans the plan was that they'll be in the 80's at least thus 8B valuation, so even for standalone SCTY that'd be a reasonably small delusion. By 2019 that might as well be the case.

 

[anticitizen13.7]

You seem to know what those numbers mean, care to explain? Say the 566 number is convertible notes. So in my limited understanding that means that for example if the merger goes through either the debt will be repaid or converted to common Tesla stock worth around that much, so it's going to be a fairly small delusion. What's the big deal?

I'm assuming when they took these loans the plan was that they'll be in the 80's at least thus 8B valuation, so even for standalone SCTY that'd be a reasonably small delusion. By 2019 that might as well be the case.

Both the 2018 (230M) and 2019 (566M) debts are listed as "senior convertible notes". As far as I can tell, the holder of the note has the option of converting the security into shares of common stock. I don't think it is mandatory that the note holder exercise that option, but I'm not 100% sure without seeing the terms of the specific note.

I am not concerned about dilution.

 

[dakh]

You were referring to "make debt difficult to maintain" and "refinance". I don't see this as a concern, from what I can tell such notes are a fairly standard way to finance startups. What is a scenario where this becomes a serious problem? The only one I see is if SCTY valuation is very low by 2019 (substantially lower than current levels), in which case we got much bigger problems than debt servicing.

 

[dakh]

Overall I keep looking for some credible evidence here that you guys know what you're talking about and there indeed are some grave issues, but so far I only see some vague statements that fall apart on even my completely amateurish validation. I will stop fishing for now and just watch reality unfold.

 

[anticitizen13.7]

Overall I keep looking for some credible evidence here that you guys know what you're talking about and there indeed are some grave issues, but so far I only see some vague statements that fall apart on even my completely amateurish validation. I will stop fishing for now and just watch reality unfold.

I freely admit:

(Found image in this thread: Repairing a Flooded Tesla Model S : HOW-TO)

This is exactly why I'm bringing up possible issues, because this proposed acquisition contains topics I am unfamiliar with. If I'm an idiot, it is what it is.

Ideally, someone with a background in corporate securities and finance can help out here.

 

[EV-lutioin]

So far, everything Tesla has done has turned to gold despite continuous dire predictions of failure. Yes, there have been plenty of bumps in the road, but anyone who has driven an MS or MX understands this company developed the best and safest cars in the world on their first try. With a "status quo be damned" attitude, a relentless push for excellence and clever marketing strategy, Tesla has turned the automotive industry on it's head. I don't know enough about Solar City to comment on it's value, but if Tesla thinks it is good for the long term success of the company, then I think we need to consider Tesla's track record of success when we make our analysis of whether this is a good deal or not. Keep in mind how many people have lost money shorting Tesla over the years.

 

[Seesaw]

Nearly every investor in Tesla was on board or agreeance with the development of the Model S, X, & 3. You now have many of the same investors very much against the SC deal. So to suggest that Tesla has flown in the face of investors wishes in the past is a little misleading.

I don't buy the argument that just because Tesla make excellent cars then them buying a loss-making solar installation company is automatically a wonderful idea.