SolarCity Bailout Analysis

[neroden]

So we're seeing commercial and industrial customers being subsidized out of residential customers in some areas -- not a new thing, this has been done for a long time in the utility business. I believe this will end.

Rooftop solar is great because it keeps utilities honest. If they start trying to screw you you can just put up panels and batteries and say "to hell with you!" However, I think it's really unwise to assume that all utilities will continue to try to screw their customers. Look at what's happening in NY. The utilities have been playing nice here. They really can deliver utility-scale at lower prices than rooftop, and they're going to.

 

[Perfectlogic]

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).

When I mentioned all sectors being the cheapest since 2012 I was obviously talking about this year and not last year. It is this year we have seen remarkably low NG prices.

The residential rate has gone up 1.8% per year on average over the last 10 years which is significantly less than the 2.9% escalator on the standard SCTY constract which starts out only a tiny bit below the utility rate today. Over the past 7 years the rate has gone up less than 1% per year. It's also hard to say how much the utility rate adjusts to the temporary fluctuations in fuel price, the rate might very well drop further if we continue to see these low fuel prices in the short term moving forward. Over the medium term utility scale solar and wind will help push the prices lower.

 

[Perfectlogic]

So we're seeing commercial and industrial customers being subsidized out of residential customers in some areas -- not a new thing, this has been done for a long time in the utility business. I believe this will end.

Rooftop solar is great because it keeps utilities honest. If they start trying to screw you you can just put up panels and batteries and say "to hell with you!" However, I think it's really unwise to assume that all utilities will continue to try to screw their customers. Look at what's happening in NY. The utilities have been playing nice here. They really can deliver utility-scale at lower prices than rooftop, and they're going to.

Both distribution cost and load balancing is cheaper for commercial and especially industrial consumers. The consumption of electricity is predictable and steady.

 

[neroden]

Both distribution cost and load balancing is cheaper for commercial and especially industrial consumers. The consumption of electricity is predictable and steady.

It really isn't. Not even slightly.

Industrial customers are generally charged for peak usage, which simplifies things -- they pay for their unpredictability. A lot of people think this will end up happening to residential customers too.

 

[EinSV]

When I mentioned all sectors being the cheapest since 2012 I was obviously talking about this year and not last year. It is this year we have seen remarkably low NG prices.

For the record, you are again ignoring residential data.

And even for "all sectors" you are incorrect again. As you can see from the 2014 and 2015 monthly charts prices are higher in the summer (air conditioning) than early in the year. You can't compare Jan.-April data with full year -- apples and oranges.

 

[Perfectlogic]

It really isn't. Not even slightly.

Industrial customers are generally charged for peak usage, which simplifies things -- they pay for their unpredictability. A lot of people think this will end up happening to residential customers too.

Paying for peak usage isn't a problem when you pretty much use the same amount of power all day. Are you saying the power consumption of industrial consumers wary wildly? I would argue that a factory produces at the same pace throughout the day which is cheap to match.

 

[Perfectlogic]

For the record, you are again ignoring residential data.

And even for "all sectors" you are incorrect again. As you can see from the 2014 and 2015 monthly charts prices are higher in the summer (air conditioning) than early in the year. You can't compare Jan.-April data with full year -- apples and oranges.

Are you blind? 2/3rds of my post was on residential.

 

[neroden]

Paying for peak usage isn't a problem when you pretty much use the same amount of power all day. Are you saying the power consumption of industrial consumers wary wildly?

Yes. Many industrial consumers have wildly varying power usage. ("Is the electroplater turned on right now?" "How many welders are welding this minute?" "Is the electric arc for melting steel currently turned on?")

I would argue that a factory produces at the same pace throughout the day which is cheap to match.

Nope. Factories aren't quite as continuous as that.

Well, *some* factories are quite continuous, but a lot of the ones with really heavy electric usage have *extremely* high variance in their power draws.

The high peak demand charges actually make factories a good market for batteries, to "peak shave". Many factories would save a fortune if they could only pay for their *average* daily demand rather than their *peak* demand.

 

[Perfectlogic]

Yes. Many industrial consumers have wildly varying power usage. ("Is the electroplater turned on right now?" "How many welders are welding this minute?" "Is the electric arc for melting steel currently turned on?")


Nope. Factories aren't quite as continuous as that.

Well, *some* factories are quite continuous, but a lot of the ones with really heavy electric usage have high variance in their power draws.

The high peak demand charges actually make factories a good market for batteries, to "peak shave".

I believe a lot of welding is done by machine today which adds up time. In general the automation wave has added to the steadyness of power use, I would need a source to change my mind. My theory also explains why they pay a lower rate, it's either that or the state forces them to lower the rate for industrials in order to get business to the state.

 

[EinSV]

Are you blind? 2/3rds of my post was on residential.

Your post and earlier posts (see below) inaccurately suggest or state outright that the price of residential electricity has been dropping for the past several years.

You should correct that factual inaccuracy instead of slinging insults.

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.

 

[Perfectlogic]

Your post and earlier posts (see below) inaccurately suggest or state outright that the price of residential electricity has been dropping for the past several years.

You should correct that factual inaccuracy instead of slinging insults.

Ill correct it after you correct your initial post starting this discussion where you state that the rate has gone up every year over the past 10 years when in fact it is down y/y.

 

[gigglehertz]

Max pain is stuck at $22 this week and $22.50 next, then goes up to $25 the week after next with fairly heavy volume of contracts. I'm assuming this means the street thinks the deal will go through.

 

[EinSV]

Ill correct it after you correct your initial post starting this discussion where you state that the rate has gone up every year over the past 10 years when in fact it is down y/y.

My statements, quoted below, were accurate. Yours were not.

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.

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).

 

[Drivin]

The residential rate has gone up 1.8% per year on average over the last 10 years which is significantly less than the 2.9% escalator on the standard SCTY constract which starts out only a tiny bit below the utility rate today. Over the past 7 years the rate has gone up less than 1% per year.

Based on that, I am not sure there is anything more to say on this.
Unless people think paying 2.9% is a better deal than only 1% due to...uh...due to...some reasons!

 

[Perfectlogic]

My statements, quoted below, were accurate. Yours were not.

"Over the past 10 years", I know you write 2015 after but the past 10 years implies that this year is part of it, which would make the statement untrue. Also your entire premise of the post was the drop in fuel prices hasn't transfered to lower electricity prices, and that is just not true as they have fallen YoY, and over the years before that the rise in prices have been very minimal. And we may even see further drops as it is hard to say how fast utilities adjust their rates to fuel prices. They might very well use trailing averages on cost over perhaps last 2 or 3 years to keep rates more steady, which would mean a high chance of further drops.

 

[EinSV]

"Over the past 10 years", I know you write 2015 after but the past 10 years implies that this year is part of it, which would make the statement untrue. Also your entire premise of the post was the drop in fuel prices hasn't transfered to lower electricity prices, and that is just not true as they have fallen YoY, and over the years before that the rise in prices have been very minimal. And we may even see further drops as it is hard to say how fast utilities adjust their rates to fuel prices. They might very well use trailing averages on cost over perhaps last 2 or 3 years to keep rates more steady, which would mean a high chance of further drops.

This is nonsense. Check the numbers I posted above, which are 100% accurate.

Your earlier claim that residential electricity prices have been decreasing over the past several years is inaccurate. You seem to recognize this but refuse to admit it.

Most people on TMC are here to exchange information, learn something and maybe have a little fun. I wish TMC would get out the broom and clean house of the short sellers and FUD merchants, several of whom have now descended on this thread and other threads about the SCTY merger.

There are many legitimate questions to be asked about SCTY and the SCTY merger (I still have many myself) but spreading misinformation is not helpful.

 

[neroden]

it's either that or the state forces them to lower the rate for industrials in order to get business to the state.

Ding ding ding. It's the second one. They even *admit* that it's the second one, if you care to look. It's policy almost everywhere to subsidize industrial usage to attract heavy industry.

 

[neroden]

OK, so there's a weird divergence of views on the future of electricity prices from "the grid".

I think this is about what state you live in. I live in NY, which is now being widely acknowledged as "the future" of the legal architecture for the grid, where the utilties are embracing distributed generation. An example:
New York Energy Week Highlights the Rapid Changes Underway in the Power Sector

Our retail prices are already separated into connection charge, distribution & transmission charge, and supply charge.

We can choose our supplier, and the one I chose provides 100% renewable energy for a 1 cent/kwh over their dirty-energy price, which is probably extortionate, honestly.

The connection charge has risen, but unless I go off-grid, I can't offset that.

Supply prices have been roughly constant for 7 years, averaging 5 or 6 cents/kwh, admittedly partly due to the natgas glut. However, I know that there is cheaper renewable supply coming online all the time.

Distribution prices have gone up quite a lot. But this has taken me, total of supply and distribution, from 9 cents/kwh to 11 cents/kwh. That's an annualized increase of a little under 3%. It's also been slowing down, most of the increase was in the earlier years. Having an escalator of 2.9% in a PPA is... pretty much wiping out all benefits?

If you're fighting with a hostile utility in Arizona or New Mexico or Nevada with completely different rate policy, you're probably going to make different assumptions about the future of electricity prices.

 

[Cosmacelf]

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?

So, here's a link to the prospectus for the $230M that matures in 2018 (Morningstar Document Library).

It is a fairly conventional convertible bond. Only the bond holder has the right to convert the bond into shares, at about $68/share, so that isn't going to happen. The bond must be repaid in November 2018. Even worse, it has a provision such that the bond holders can demand immediate repayment if SolarCity is acquired/merged.

So yeah, Tesla would immediately be on the hook to repay that $230M.

Assuming the other convertible bond is similar, Tesla would immediately have to finance $796M. And finance the $375M of bank debt.

Do note that these convertible bonds had been trading at a 20% yield before the Tesla announcement. They are still trading at a hefty 13% yield. That yield rate means that Solarcity CANNOT refinance any unsecured debt since the interest rate is too high - the debt markets are closed off to it. This is a major reason why people see this as a SolarCity bailout.

 

[EinSV]

So, here's a link to the prospectus for the $230M that matures in 2018 (Morningstar Document Library).

It is a fairly conventional convertible bond. Only the bond holder has the right to convert the bond into shares, at about $68/share, so that isn't going to happen. The bond must be repaid in November 2018. Even worse, it has a provision such that the bond holders can demand immediate repayment if SolarCity is acquired/merged.

So yeah, Tesla would immediately be on the hook to repay that $230M.

Assuming the other convertible bond is similar, Tesla would immediately have to finance $796M. And finance the $375M of bank debt.

Do note that these convertible bonds had been trading at a 20% yield before the Tesla announcement. They are still trading at a hefty 13% yield. That yield rate means that Solarcity CANNOT refinance any unsecured debt since the interest rate is too high - the debt markets are closed off to it. This is a major reason why people see this as a SolarCity bailout.

I have not studied these convertible bonds in any detail yet but why would an ordinary bondholder be in a hurry to cash in a loan paying 13 percent interest? And even if they did, whatever constraints on raising cash SCTY might have pre-merger, it seems to me that Tesla would have no trouble raising a few hundred million on the debt markets at rates well below 13 percent. Its 2014 convertible bond offering was at 0.25 percent and 1.25 percent and they raised $1.5 billion in equity recently without the market batting an eyelash.

I am still getting up to speed on SCTY so please let me know if I am missing something.