SolarCity (SCTY)

[drinkerofkoolaid]

VSLR, which is basically a terrible "company" (semi conglomerate?) , and Sunedison (a company that has too much debt and its hands in too many pots), had to spoil what should have been a good day for the "sector". :wink: Let's see what happens tomorrow. Elon bought a lot this week. My guess is an announcement will be made any day if this whiplash keeps up. A confirmation of the holding company strategy Elon mentioned a while back, or something that clarifies Solar City's long term strategy would be helpful. Although I guess it's possible Tesla and SolarCity are avoiding saying certain things for regulatory reasons.

 

[jhm]

I gotta think Germany and France would buy all the LNG we could send them.

I'll leave LNG investors to make that bet. The globe needs to flush fossil fuels out of the system within 30 years. I just don't see how this is a good use of public funds to build out infrastructure that will need to be shut down within 30 years.

BTW, German is netting about $2B per year on net electricity exports.So with batteries coming online, it looks like they have alot of excess capacity. So if the gas plants aren't already built, why should they ever be built? Just more stranded assets in the making.

 

[drinkerofkoolaid]

I'll leave LNG investors to make that bet. The globe needs to flush fossil fuels out of the system within 30 years. I just don't see how this is a good use of public funds to build out infrastructure that will need to be shut down within 30 years.

BTW, German is netting about $2B per year on net electricity exports.So with batteries coming online, it looks like they have alot of excess capacity. So if the gas plants aren't already built, why should they ever be built? Just more stranded assets in the making.

In natural gas related news

http://abc6onyourside.com/news/local/breaking-house-explosion-at-the-800-block-of-lock-avenue

Why Natural Gas May Be as Bad as Coal

Methane Leakage from Natural Gas Production Could Be Higher Than Previously Estimated - Plugged In - Scientific American Blog Network

 

[TheTalkingMule]

BTW, German is netting about $2B per year on net electricity exports.So with batteries coming online, it looks like they have alot of excess capacity. So if the gas plants aren't already built, why should they ever be built? Just more stranded assets in the making.

Those Germans are a crafty bunch.
Get out in front of solar so you can reverse the electricity faucet with France, then try to deregulate the whole area so you can sell like crazy at peak and take all the profits.
Setup a European currency to devalue your home currency and hurt other nation's imports while each individual nation still has their own borrowing rate.
Genius!

 

[Foghat]

Heres What It Would Take for Solar Installers to Adapt to a World Without the ITC | Greentech Media

according to this local installer, everyone is screwed unless they can hit 2.80/watt in total cost. He's thinking growth is going to be wishful thinking post ITC for a while.

Solarcity is expecting to beat 2.50/watt already. And if I heard them correctly on q1(or q2?) conference call, they are going to revise that guidance down to 2.30/watt. This means Solarcity is only going to gain more demand as the distinctly lowest cost option highest margin installer.

It might take a second to see all of the massive implications but they are many in a very positive way.

 

[TheTalkingMule]

Heres What It Would Take for Solar Installers to Adapt to a World Without the ITC | Greentech Media

according to this local installer, everyone is screwed unless they can hit 2.80/watt in total cost. He's thinking growth is going to be wishful thinking post ITC for a while.

Solarcity is expecting to beat 2.50/watt already. And if I heard them correctly on q1(or q2?) conference call, they are going to revise that guidance down to 2.30/watt. This means Solarcity is only going to gain more demand as the distinctly lowest cost option highest margin installer.

It might take a second to see all of the massive implications but they are many in a very positive way.

The feasibility of getting down to a profitable $2.10/W total install price isn't the problem, Germany has been there for a while now. The issue will be America not having a cohesive energy policy nationwide that creates enough investment certainty to get things fully up to scale and cheap. Obviously there are entrenched forces that will hold back this progress and when you have a capitalist system rather than socialist, it's going to be tougher to have similar support on the federal or state side. All these ups and downs and ITC/NM uncertainty are keeping us from having a normal functioning market where competition gets us running efficiently nationwide all the way up the chain of operations. Germany set their feed in tariff payback at $.68/kwh and stepped it down over the years to $.11 or $.12 today, that's it. The certainty of that FIT let the market function and got them to full scale almost immediately. Now their soft costs are about as low as you can get, a good $.60/W less than us on a straight install.

SCTY is within a year or so of getting to this kind of scale, but installers outside of CA and a few other hot spots aren't. There's no reason southeastern PA should not be a hotbed of solar installs at $2.25/W right now, but the best you can do is around $3.30 because we're not to scale and you have to do all the legwork. Most people aren't interested in that, they want savings and simplicity. That's why SCTY will dominate every new market.

Keep in mind, SCTY will never get down to the cost level of local bare bones installers at scale. SCTY installs quality panels, do all their installs by the book, provide excellent customer service and have a huge sales force. So what you're talking about above is never going to be the case for straight installs. SCTY will always be a premium player in the install world and leader in the PPA world plus whatever convoluted solution is needed next to make progress(batteries, microgrids, etc).

That being said, it seems pretty obvious to me that with install costs at $1.92 today and the PPA model to scale there's likely no stopping the machine. If they can transition from this heavy sales cost down to something rational and cheap, it's game over and their overall share should only grow(if you can even imagine that). I just don't see there being a better product out there over the next few critical years in the non-purchase market. They should be able to put up huge numbers in new markets and the local installers can then backfill the other 50% at a cheaper rate for all the people that want to run their own show.

 

[Jack6591]

I worked for years as a solar power inspector. SolarCity as an organization simply executes, by that I mean, they are a paradigm of efficiency. As building codes and utility requirements change, they adapt and get the job done. More than this, SolarCity employees are true believers.
Importantly, solar competes at a retail level, SolarCity is competitive today. Their sales organization reminds of Alex Baldwin in Glengarry Glen Ross, a boots on the ground, drive through the finish line, no excuses.
I'm going long.

 

[ludicrousspeed]

Up 4% pre-market on news that a big private equity firm is investing $100M

 

[TheTalkingMule]

Silver Lake Is Said to Invest $100 Million in SolarCity

As SolarCity’s stock tumbled over the last three weeks, Silver Lake Kraftwerk executives approached Mr. Rive and offered what they described as a show of confidence in the company: a big investment.

Under the terms of the deal, Silver Lake Kraftwerk will buy $100 million worth of notes, convertible into shares at $33 each. Mr. Musk will put in $10 million, and Mr. Rive will buy $3 million.

The convertible notes do not pay out interest, these people said, because Silver Lake Kraftwerk expects to reap its profit from what it hopes will be a resurgence in SolarCity’s stock price.

While Silver Lake Kraftwerk will not take a seat on the company’s board, it will have weekly access to Mr. Rive and have regular updates on the company’s plans and strategy.

Behind the investment firm’s move is a belief that SolarCity will remain the biggest and hardiest company in the solar power industry. The company’s shift to focus on positive cash flow signified to Silver Lake Kraftwerk an effort to prepare for the long term, becoming less of a speedy growth company and more like a reliable utility, the people briefed on the matter said.

As an investor looking to buy at the end of December, I'm hoping the world takes this with a grain of salt.

 

[farzyness]

Curious to see the amount of short covering that will happen at the open. Hoping for a big run.

 

[electracity]

Silver Lake Is Said to Invest $100 Million in SolarCity

As an investor looking to buy at the end of December, I'm hoping the world takes this with a grain of salt.

It is a highly specific story to not be true. Without knowing most of the terms of the notes, it is hard to say what it means. If SC doesn't have a liquidity problem, why would this deal be in the interest of shareholders?

 

[jhm]

I think SolarCity will take that same level of intensity and discipline it applies to cutting every cent out of the installed cost per Watt and apply that to cutting every cent of sales cost per Watt. So in Q3 sales/W hit an incredible 64 cents. They've got the opportunity to cut at least 24 cents out of this, and that's a whole lot more fat than in presently in the $1.92 for installation. Cutting 2 cents out of sales has the same savings as cutting 2 cents out of installation.

By targeting 40% in 2016 rather than 80% growth. They will have the lattidute to pass on the 20% of prospects that are most expensive to acquire. If the 80/20 rule applies here, then passing on this 20% could help them avoid as much as 80% of their excess marketing and sales costs. Moreover, this 20% driving 80% of the cost very well could have come at negative marginal value. For example, if average NRV per customer is say $1.12/W. And you spend say $2.40/W trying to get this most expensive 20%, then marginal NRV on this segment is negative, a loss of at least $1/W. So when they cut this segment, while that slows their growth in terms of installed MW, it may actually accelerate growth in NRV. For example, installing 1.3 GW retaining $1.4/W is worth $1.82 B in incremental NRV, while installing 1.6 GW retaining $1.1W is worth $1.76 B in incremental NRV. I don't know what internal assumptions SolarCity is making, but I do suspect that they backed into 1.25 GW as about the breakeven point with growing faster at higher sales cost. They should actually state the target as something like $1.75 B in incremental NRV, not 1.25 GW installed, as this would allow management to make appropriate tradeoffs for volume versus profitability.

So my expectation is that we will see sales/W drop to 50 cent by Q4 and 40 cents by 2016Q1. We'll also see a few more cents come out of installation and G&A each. All combined, I hope to see $1.4/W or better retained through most of 2016. SolarCity has alot of sales and marketing fat to cut, and I believe they will do it.

 

[blakegallagher]

Heres What It Would Take for Solar Installers to Adapt to a World Without the ITC | Greentech Media

according to this local installer, everyone is screwed unless they can hit 2.80/watt in total cost. He's thinking growth is going to be wishful thinking post ITC for a while.

Solarcity is expecting to beat 2.50/watt already. And if I heard them correctly on q1(or q2?) conference call, they are going to revise that guidance down to 2.30/watt. This means Solarcity is only going to gain more demand as the distinctly lowest cost option highest margin installer.

It might take a second to see all of the massive implications but they are many in a very positive way.

That 2:30 a watt figure came from an analyst who figured what they would need with a 40% growth to become cash flow positive. Linden told him that he was good at math so it seemed like that number was pretty close but not official guidance yet.

 

[SBenson]

Silverlake Math

Working with known data.

Their $100mln investment being a convertible bond, they are senior to equity. So silverlake gets their money fully paid off before anything gets paid to equity shareholder. We all know that SolarCity has a pile of about $2Bil NNRV. Effectively, return of their capital is "guaranteed".

The convertible option is akin to a LEAP call option. Assuming the price scales the same way between now and 2020 maturity vs now and 2018. Working with market data, we have a mid price around $8.30 for Jan 18 leaps. At $33 conversion price you get 3 options per $100. In other words we have $25 dollar value per $100. As this is for 2 years, on an annualized basis we have 12% yield.

At 12% yield, Silverlake buying this convertible bond is no different than buying the existing convertible bonds in the open market. It shouldn't be either because why would Silverlake leave money on the table? In fact for buying a lump sum, they are getting a higher yield than the existing bonds.

In summary, SolarCity raised additional capital at distressed levels. Perversely, this adds more proof that the firm is distressed.

Sorry to break the bubble.

- - - Updated - - -

I worked for years as a solar power inspector. SolarCity as an organization simply executes, by that I mean, they are a paradigm of efficiency. As building codes and utility requirements change, they adapt and get the job done. More than this, SolarCity employees are true believers.
Importantly, solar competes at a retail level, SolarCity is competitive today. Their sales organization reminds of Alex Baldwin in Glengarry Glen Ross, a boots on the ground, drive through the finish line, no excuses.
I'm going long.

SolarCity installation crews are ultra-efficient, best in class. There is no question about it. At $1.92/W install cost, the numbers speak for themselves.

The real issue with SolarCity is various value leaks that happen at the corporate level. For example take a look at the latest 10Q. There is this line item in the Statement of operations: "Other expense - net" which happens to be a money sink of $16.8Mil in the quarter. Digging into the report to find out what it is -

"Other expense, net, increased by $13.9 million, or 469%, for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. This increase was mainly due to the $12.3 million loss from interest rate swaps and the $1.1 million of deferred financing costs written-off upon the partial prepayment of the term loan due in December 2016, in the three months ended September 30, 2015. We have entered into forward interest rate swaps, in order to fix the variable interest rates, for each draw under the MyPower revolving credit facility and the revolving aggregation credit facility. We account for interest rate swaps as non-hedging derivatives and record any changes in their fair values as a component of other expense, net."

There are many such leaks, which makes the cost that they show not add up to the ultimate shareholder value that they are generating.

As a shareholder you own all the leaks. Not just the installation crews.

 

[doggusfluffy]

The Clean-Energy Revolution Gathers Speed - Scientific American

It's not just the U.S. A recent analysis by researchers at Massachusetts Institute of Technology and Tsinghua University suggest such commitments from the E.U. and other nations like China could drive further cost reductions in wind and solar as well as installations. And all of this U.S. action fits comfortably within recommendations by the U.N. Framework Convention on Climate Change's plans for how to restrain global warming, which even singles out the DoE's SunShot initiative to lower the cost of solar power as an example of climate action happening now.

 

[TheTalkingMule]

Yeah, its very common for investors to dump $100M into a company in exchange for zero board control when they feel its a failing business. This stuff is gold Jerry! Gold!

Edit: Also nice to see SCTY leveraging interest rate swaps to flatten the risk curve. We should see a nice "return" on this when rates go up next month. Just another indication of how far ahead SCTY is relative to the yield co based installers who need to sweat every little rate/market shift.

 

[jhm]

SolarCity and Silver Lake Kraftwerk Announce $100 Million Strategic Investment (NASDAQ:SCTY)

So here's the official PR on Silver Lake deal. The $113M bond should convert into 3.42M shares by Dec 2020. So this represents a 3.5% dilution of shares.

While I am not clear why SolarCity needs to raise capital from equity at this time, I would point out the following. To raise $113M through a secondary offering at $26/shares would require the sale of 4.35M shares for an immediate dilution of 4.5%. Thus, this offer exposes shareholders to substantially less dilution.

It's tough to take any sort of capital raise at such a time when the market is hating on the stock. But for the foreseeable future SolarCity does need capital to finance onstallations. Raising debt increases leverage, reduces NRV and increases risk for shareholders. Tapping equity causes dilution, but it improves NRV, and decreases leverage and risk to shareholders. So this zero coupon convertible deal tilts more to equity than debt. As a shareholder, I prefer modest share dilution to mounting leverage. We can take some risk off the table and continue to grow this franchise.

 

[hockeythug]

Musk with another $5.3m buy on the 16th.

 

[SBenson]

SolarCity and Silver Lake Kraftwerk Announce $100 Million Strategic Investment (NASDAQ:SCTY)

So here's the official PR on Silver Lake deal. The $113M bond should convert into 3.42M shares by Dec 2020. So this represents a 3.5% dilution of shares.

While I am not clear why SolarCity needs to raise capital from equity at this time, I would point out the following. To raise $113M through a secondary offering at $26/shares would require the sale of 4.35M shares for an immediate dilution of 4.5%. Thus, this offer exposes shareholders to substantially less dilution.

It's tough to take any sort of capital raise at such a time when the market is hating on the stock. But for the foreseeable future SolarCity does need capital to finance onstallations. Raising debt increases leverage, reduces NRV and increases risk for shareholders. Tapping equity causes dilution, but it improves NRV, and decreases leverage and risk to shareholders. So this zero coupon convertible deal tilts more to equity than debt. As a shareholder, I prefer modest share dilution to mounting leverage. We can take some risk off the table and continue to grow this franchise.

It's a good deal for both. Silverlake gets guaranteed return of capital with a juicy option. SolarCity shareholders get lower dilution.

Nevertheless, it's not a 'show of confidence' like the way NY Times tried to spin it.

 

[jhm]

The real issue with SolarCity is various value leaks that happen at the corporate level. For example take a look at the latest 10Q. There is this line item in the Statement of operations: "Other expense - net" which happens to be a money sink of $16.8Mil in the quarter. Digging into the report to find out what it is -



There are many such leaks, which makes the cost that they show not add up to the ultimate shareholder value that they are generating.

This is not a leak. This is how a business manages finances. The only reason to take a loss on an interest rate swap is because this is a hedge on interest rates and the market has simply reprised the instrument. This hedge protected us from interest rate increases but as expectations shift downward in the maket it loses value. Had the value gone up, the company 2ould have been in a much worse rate environment. So this is good news.

Also the only reason to take a loss on prepaying a loan is if you can lock in substantially better financing.

So both of these issues are about navigating long-term finances to a better situation. And it looks like our CFO is being quite proactive about managing interest rate risk. This is not a leak; this is about protecting shareholders against financial market risks.