SolarCity Bailout Analysis

[neroden]

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.

Thank you -- I'm sure I've seen that before!

With the date of model 3 release, the most critical question is the ability to refinance the first $375 milliion, which will come before Model 3 is generating any significant cashflow.

For the later maturities, Tesla can always (sigh) use Model 3 profits to pay down the debt, instead of using those profits for expansion. Though I wouldn't like that, it wouldn't be deadly.

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.

Agreed.

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.

We need to know more about the terms of the convertible notes. Sometimes they have an "immediately repayable upon merger" clause -- hopefully these do *not* have that clause.

If they don't, they probably convert the same way stock and options do (i.e. if it can currently be converted into X shares of SCTY stock, then it will be convertible into .122 X shares of TSLA stock). But if they do have such a clause, that's a much larger refinancing problem!

 

[neroden]

The key is where grid electricity cost is going to be 7 and more years down the road.

It'll drop. (Well, in most areas; I'm sure there will be a few stupid utilities.) Utility-scale solar is being installed all over the place, and total electricity demand is dropping thanks to efficiency improvements.

If PPA price is substantially lower, it will add all that value back into the house.

The PPA price will be substantially higher. The escalator guarantees that. It makes the PPA contract a liability, as Engle documented here. SolarCity Bailout Analysis (Of course, if the seller buys out the PPA on every house, that vastly accelerates SolarCity's cash recovery for these old contracts!)

Residential PPAs are a dying business model. I've been assuming that Musk recognizes this. SolarCity has been making a transition towards plain vanilla bank loan products. I hope they continue to do that. From what I've read, they seem to be doing so, but it would be good to have confirmation of this.

 

[Donkasan]

I have a model 3 reservation. If this SCTY deal goes through, then I will have to consider canceling it.

 

[SBenson]

I have a model 3 reservation. If this SCTY deal goes through, then I will have to consider canceling it.

Curious, why?

 

[neroden]

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?

Exactly -- this is the "vote no" argument.

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.

And this is the "vote yes" argument...

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.

Actually, there's a second problem, and it's a big one. I don't think Musk can pick up the piece he wants in bankruptcy.

The Silevo factory in Buffalo is owned by the state of New York, subject to a $1/year lease arrangement with Silevo (which is a subsidiary of SolarCity). If SolarCity declares bankruptcy, I believe -- and I could be wrong -- that this violates the lease covenants and causes the factory to revert to the state of New York. So if I'm right, it's impossible to buy the Silevo factory, which is the key piece which Musk wants for Tesla, out of the bankruptcy.

And do you think New York would be likely to make a lease deal with Tesla after SCTY went bankrupt? I bet they wouldn't; while a disinterested bankruptcy court might be happy to sell the pieces of SolarCity to Tesla, the grandstanding politicians in New York State government would be hyper-alert to the issue of Musk's short-term "credibility".

In order to get the Silevo factory, I think Musk *has* to buy it before SCTY goes bankrupt. An interesting pickle.

 

[Donkasan]

Curious, why?

These developments reduced my confidence in Tesla. Perhaps I am more comfortable with ordering a model 3 after it is already in production.

 

[neroden]

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?

It's all completely opaque and concealed for "commercial confidentiality".

It's most likely that the accelerated cash flow remains effectively in escrow, earning interest, until the other investors in Castello Solar I get their guaranteed payback, so that SolarCity only benefits on the back end, years down the road. But it's possible to write the contracts a different way; we don't know how they're written.

 

[engle]

I'm in the same boat, thinking about pulling out my reservation and maybe getting back later in a year or so down the track.

While not a comment on the worthiness of the SC deal, it's more of a wake up call for me on the level of investment I have in the company and maybe thinking I need to back off a bit. Having said that, probably too lazy to change anything!

OK, in high school I was on the math team and specialized in "worst case analysis":

Let's assume TSLA absorbs SCTY for TSLA stock, and, in retrospect, it was a terrible move and becomes a major drain of TSLA treasury and human resources. TSLA could simply spin-out SCTY again to a separate entity. All of us TSLA holders would receive shares in "New Sick Solar City". Worst case, it would go bankrupt and those "NSSC" shares would become worthless. However, TSLA would be fine. Therefore, I don't see why this proposed acquisition of SCTY by TSLA, that hasn't even been approved by both sets of "disinterested shareholders", would change someone's mind as to whether or not to keep a $1,000 M3 reservation?

 

[schonelucht]

> However, TSLA would be fine

No. That's not how it works. You can't just spin off debt-gone-bad in a new company and go on your merry way.

 

[Vitold]

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.

What you said had been true until accelerated production of Model 3 was announced. Now days many investors including bullish analysts have doubts about Tesla.

Energy play is a bit of a fresh air. There is undeniable synergy between SolarCity and Tesla Energy. TE needs reliable market and we know that it would be the best if Tesla was in control. Just like selling direct instead of dealerships.

 

[marvinat0rz]

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.

Thanks for the information, this alleviates my worries about this. I wasn't aware that this information was disclosed in an SEC filing. The information in this thread (yours included) is very valuable.

 

[TheTalkingMule]

The PPA price will be substantially higher. The escalator guarantees that. It makes the PPA contract a liability, as Engle documented here

Except that this hasn't happened anywhere yet and no one can point to a believable scenario where it will ever happen on a large scale. As peak demand decreases and costs remain flat, prices MUST go up. It is a physical certainty.

Average residential rates in Pennsylvania(home of the Marcellus Shale and essentially free methane) are up 5.16% in 2016 vs. 2016, a 2% escalator will have a hard time catching up to that rate increase. Fact of the matter is, PPA rates are considerably more likely to be a locked-in bargain in the vast majority of markets.

Railing against the PPA model is perfectly valid exercise, but when you directly contradict obvious truths it can seem like you're purposely trying to mislead folks.

 

[neroden]

Except that this hasn't happened anywhere yet

Already happening in upstate NY. Look, I've *priced* things. Have you looked into what happens in a market where generation is decoupled from production, if it's properly regulated (as it is in NY)? Generation prices drop.

and no one can point to a believable scenario where it will ever happen on a large scale. As peak demand decreases and costs remain flat

Costs are dropping.

* Installation of utility-scale wind and solar causes a drop in generation costs. This isn't controversial, is it?

* Distribution rates are rising, largely to eliminate the cross-subsidy from generation to distribution. Also, peak demand is rising at the moment due to electrification of everything. However, when peak demand decreases, the need for distribution drops, so they should in the long run end up flat.

prices MUST go up. It is a physical certainty.

Well, yeah, if your assumptions are totally wrong. Basically you're assuming that utilities will continue to use fuel-based generation. Why?

As long as they use fuel-based generation, their prices will go up; but as they move away from fuel-based generation, prices will drop. And they *will* move away from fuel-based generation. In 20 years, those PPAs at 28 cents / kwh will be "competing" with 11 cent/kwh utility electricity. Or cheaper. And there will be a lot of buyer's remorse.

Another way to look at this: *the grid can do whatever SolarCity can do on your rooftop*. Hell, in Kauai, the grid is even buying from SolarCity. If you can lock in a constant price (which you can by buying outright instead of having an escalator clause PPA), so can the grid. The grid *will* do this, so if you have an escalator, you'll be in trouble.

 

[Perfectlogic]

Well, yeah, if your assumptions are totally wrong. Basically you're assuming that utilities will continue to use fuel-based generation. Why?

If utility rates dropped that would go against the viability of residential solar. And we all know residential solar is the be all end all, so your mistake should be very clear now. Fact #1: Residential solar will win in the end. The rest will just have to fit under this assumption.

 

[TheTalkingMule]

"...eliminatethe cross-subsidy from generation to distribution"

Straight from the NV Energy script. Residential solar is eating the utilities alive, these nonsense solar charges are designed to:

1) Sabotage residential solar in regional markets.

2) Paint a picture of increased cost for nondolar customers where in fact the utility's problem is a hole where production revenue once lived(lower demand).

Residential solar lowers costs for ALL ratepayers and is therefore a net savings for all.

Large scale solar will have tons of applications, but will have no power to dictate the mix. That decision is now in the consumers control.

The power has permantly shifted to the other side of the meter. Period.

 

[EinSV]

Over the past 10 years -- 2006 through 2015 -- average residential electricity prices in the U.S. have increased every single year.
EIA - Electricity Data

This is so even though natural gas prices have dropped, the bottom has fallen out of the coal market, and low-cost solar and wind options have become available.

Natural gas | 1990-2016 | Data | Chart | Calendar | Forecast | News
Coal Prices and Charts - Data from Quandl

It is theoretically possible that the long-term trend will change at some point in the future as higher volumes of even lower-priced utility scale solar is available, but I would not bet on monopolistic utilities reducing prices even if input costs are reduced, unless forced to do so by residential solar.

 

[Perfectlogic]

Over the past 10 years -- 2006 through 2015 -- average residential electricity prices in the U.S. have increased every single year.
EIA - Electricity Data

This is so even though natural gas prices have dropped, the bottom has fallen out of the coal market, and low-cost solar and wind options have become available.

Natural gas | 1990-2016 | Data | Chart | Calendar | Forecast | News
Coal Prices and Charts - Data from Quandl

It is theoretically possible that the long-term trend will change at some point in the future as higher volumes of even lower-priced utility scale solar is available, but I would not bet on monopolistic utilities reducing prices even if marginal input costs are reduced, unless forced to do so by residential solar.

If you scrolled down a bit you would find that this year the price has dropped to the lowest price in 3 years. Utilities are forced to lower prices if their cost go down by the government, they have a set profit margin.

@Mule

If you seriously think residential solar is cheaper than the utility then outline its cost structure, how much are the 3 costs that make out the consumers electricity bill for the residential solar model? If you can't talk tangible numbers then it's proof that you are living in fantasy land.

 

[EinSV]

If you scrolled down a bit you would find that this year the price has dropped to the lowest price in 3 years. Utilities are forced to lower prices if their cost go down by the government, they have a set profit margin.
.

You are misreading the table. Prices YTD in 2016 are higher than 2014 ($.1226 v .1200) and essentially flat YOY compared to 2015 ($.1226 v .1231).

 

[Perfectlogic]

You are misreading the table. Prices YTD in 2016 are higher than 2014 ($.1226 v .1200) and essentially flat YOY compared to 2015 ($.1226 v .1231).

If you go by the numbers up top 2014 and 2015 was higher than 2016. If you look at "all sectors" you have to go all the way back to 2012 to find a lower price. Your point was that the drop in NG cost didn't transfer to savings for the consumer, that is clearly wrong.

 

[EinSV]

If you go by the numbers up top 2014 and 2015 was higher than 2016. If you look at "all sectors" you have to go all the way back to 2012 to find a lower price. Your point was that the drop in NG cost didn't transfer to savings for the consumer, that is clearly wrong.

The statistics on price increases for residential solar over the past 10 years are remarkably clear. Residential solar was the focus of the discussion above so you appear to be ignoring the relevant data.

Prices in other sectors are still significantly higher than they were a few years ago but were down a bit in 2015 from highs in 2014.

Across all sectors, 2015 was essentially flat and matched highs from 2014 ($.1042 in 2015 v. $.1044 in 2014).