SolarCity (SCTY)

[electracity]

The reason it is low is the unprecedented level of repayments. They currently enjoy repayment about as close to 100 percent as you can get

I agree that the payments are sound, but the holder of the contract also has to perform duties in the contract. To perform these duties takes a solar company. But, if the ABS was bought by insiders who are confident in solarcity being in business, there is no concern about ABS holder's potential obligation.

 

[AudubonB]

electracity

Isn't great to be Lyndon Rive? Solarcity has never made a dime, and he has taken $47,340,739 in equity out of the company. Nothing better than the American dream of complex financial product and massive government subsidies.

Please provide - jot & tittle - where the $47mm number comes from.

It also would be instructive to learn if you share the same attitude toward other corporate executives and their fiduciary habits.

 

[jhm]

I agree that the payments are sound, but the holder of the contract also has to perform duties in the contract. To perform these duties takes a solar company. But, if the ABS was bought by insiders who are confident in solarcity being in business, there is no concern about ABS holder's potential obligation.

You're saying that SolarCity has to collect and process payments and provide ongoing solar maintenance services for the ABS investors to be paid, right? So this gives the ABS investor some exposure to risk if SolarCity should fail in these duties. This is part of why an ABS investor wants SolarCity to retain an equity stake in the underlying assets. But I suspect that their is a Special Purpose Entity that stands between SolarCity and the ABS investor to provide a layer of protection. Certainly any number of loan servicers could process payments and other solar service companies could be contracted to replace SolarCity in the even that SolarCity fails in either of these area. Structured securities like this usually have numerous provisions to protect the ABS investor. So I don't think you can look at the ABS yield and say that it reflects on the creditworthiness of the originator. It is structured to mitigate that sort of risk.

This is also why it is non-recourse debt. It is structured so that it depends on the creditworthiness of the solar customer, not the originator. So it is structured to protect SolarCity as well. ABS investors only have a claim on payments from customers per contract, nothing else. Now to the extent that SolarCity still has equity in these systems and liabilities, it is still exposed to risk of customer default and other physical risks to the solar systems. But it is protected from the ABS investor. So specifically when a customer fails to make payment this hurts both ABS investors and SolarCity, but SolarCity does not guarantee the difference back to the ABS investor. It is structured so that the ABS investors get paid first, but beyond that SolarCity is off the hook. So this is why I view non-recourse debt differently than other forms of debt. It is structured to be much safer to shareholders than recourse debt.

 

[jhm]

Please provide - jot & tittle - where the $47mm number comes from.

It also would be instructive to learn if you share the same attitude toward other corporate executives and their fiduciary habits.

Yeah, I'm not sure what $57M ABS Benson has been talking about. The last ABS was the first MyPower ABS which brought in $185M in two tranches.

SolarCity Completes First Distributed Solar Loan ABS - Monitordaily

This first four ABS issues were for leases and PPA. These four brought in a total of $450M, and the yield improved with each round.

So $185M on the first try for MyPower is not a bad start. Yeilds while probably decline as the market gets more experience with these.

 

[SBenson]

Yeah, I'm not sure what $57M ABS Benson has been talking about. The last ABS was the first MyPower ABS which brought in $185M in two tranches.

SolarCity Completes First Distributed Solar Loan ABS - Monitordaily

This first four ABS issues were for leases and PPA. These four brought in a total of $450M, and the yield improved with each round.

So $185M on the first try for MyPower is not a bad start. Yeilds while probably decline as the market gets more experience with these.

I think AudubonB is referring to electracity comment of Lyndon Rive cashing the shares.

Regarding your question:

First, here is a fun quote from Q3 CC:

<A - Brad W. Buss>: It's like I said before, it's really a function of having a complete tax equity fund to put in there. You really can't split it like in chunks. So as the funds get done, like I said, they'll go in. If you look at it from the end ABS market, and it was a great thing, right. So when we did that last ABS, it was in the beginning of the solar turmoil and I did a postmortem post-op meeting with some of our vendors and the banks and the biggest complaint they had is we want bigger ones and we want them more frequent. And those are great problems to have, and the nice thing is with the backlog of the financing receivable that we have, that's exactly what we'll be delivering going forward. So I think we're in a good position. They'll probably tend to get bigger than what we've historically done because our funds are technically getting bigger. So they'll be bigger and again, like I said, more frequent.

Now about the deal I was talking about:

Here is the related SEC filing

http://www.sec.gov/Archives/edgar/data/1659428/000119312516452117/d49288dabs15g.htm

Here is some additional detail from Kroll bond rating company

Kroll Bond Rating Agency Assigns Preliminary Ratings to SolarCity LMC Series V, LLC, Series 2016-1 | Business Wire

It says that the underlying PPAs represent $76.4mil.

I got to review the pre-sale report they referred to in the publication. It says there will be two notes

Class-A is for $52.15mln and class B is for 5.3mln. Bringing the total to $57.45mln.

 

[electracity]

I like http://www.secform4.com/, but it doesn't seem to have recent data. Here's an interesting chart:

 

[jhm]

I think AudubonB is referring to electracity comment of Lyndon Rive cashing the shares.

Regarding your question:

First, here is a fun quote from Q3 CC:

<A - Brad W. Buss>: It's like I said before, it's really a function of having a complete tax equity fund to put in there. You really can't split it like in chunks. So as the funds get done, like I said, they'll go in. If you look at it from the end ABS market, and it was a great thing, right. So when we did that last ABS, it was in the beginning of the solar turmoil and I did a postmortem post-op meeting with some of our vendors and the banks and the biggest complaint they had is we want bigger ones and we want them more frequent. And those are great problems to have, and the nice thing is with the backlog of the financing receivable that we have, that's exactly what we'll be delivering going forward. So I think we're in a good position. They'll probably tend to get bigger than what we've historically done because our funds are technically getting bigger. So they'll be bigger and again, like I said, more frequent.

Now about the deal I was talking about:

Here is the related SEC filing

http://www.sec.gov/Archives/edgar/data/1659428/000119312516452117/d49288dabs15g.htm

Here is some additional detail from Kroll bond rating company

Kroll Bond Rating Agency Assigns Preliminary Ratings to SolarCity LMC Series V, LLC, Series 2016-1 | Business Wire

It says that the underlying PPAs represent $76.4mil.

I got to review the pre-sale report they referred to in the publication. It says there will be two notes

Class-A is for $52.15mln and class B is for 5.3mln. Bringing the total to $57.45mln.

Ok, thanks. This is now their sixth ABS. I guess in the Q1 ER we will learn what the ultimate proceeds were whether more like $57M or $76M. I do think it is a bit premature to read anything into the size of this offering. It is possible that SolarCity is simply migrating to a more frequent schedule. For example they may move to a quarterly issue. This would help them show positive net cash flow each quarter and quarterly increases in working capital. I'd like that very much. It was a pity they did not get the MyPower ABS out in Q4 because that would have finished the year with positive cash flow and more working capital than they began the year with. So sense the market has become spooked about cash and solvency, they really need to stuff the cash register every quarter. At least that is what I'd like to see.

 

[jhm]

For the record, net cash flow for 2015 was $(121.8)M and change in working capital (according to the Q4 2015 Review deck) was $(183.8)M. So had the $185M MyPower ABS been done a month earlier in Q4 both metrics would have been positive for the year. Cash flow is all about timing. At least cash flow should look pretty good in Q1.

 

[TheTalkingMule]

Can short interest works it's way back up toward 30M shares or is that the impossible dream? I assume it's not worth their time to try and drive the stock lower than it's current $1.?B valuation and that the rundown from $52 to $17 was where the money got made. Any thoughts on this? The last update we have is from 1/29 with a slight uptick to 23.9M shares short. Should we expect it's already gone higher from there?

 

[jhm]

New York Fed CEO: Economy and Homeowners Are in a Better Position than You Think - DSNews

This is good news. Homes are appreciating about 5% per year. A typical home worth about $200k has gained about $27k in equity over the last 3 years. This is enough to completely pay for a new solar system. SolarCity needs to look into providing mortgage refinancing options (through partnering mortgage lenders) to tap this equity. This could be total cash upfront for SolarCity, which would vastly enhance cash flow.

For the customer, the proposition is pretty compelling. Tap the equity in your home and cut your power bill by 80% to 95% for 25+ years. For seniors living on fixed income, this is much better than a reverse mortgage. Pay no taxes on savings from power bill and get mortgage interest tax benefit, all incremental to one-time ITC.

My analysis of Zillow Home Value Index data reveals that median homes gained over $30k in value over the last three years in 40% of zipcodes, and over $58k in 20% of zipcodes. This means that SolarCity could target a home equity marketing program to about 40% of zipcodes, over 5000 zipcode, where they would find a very high prevalence of SFR homeowners who could fully pay for solar out of existing equity in their home. Of couse, in the other 60% of zipcodes, you can still find homes with sufficient equity, but the prevalence would be lower. So targeting helps focus marketing effort where it can meet with the most success. This is actually a huge opportunity just to focus on the top 20% to 40% of zipcodes.

 

[TheTalkingMule]

That's not necessarily good news if wages are flat. SCTY can roll through the wealthy, and I think they'll have major success there, but what we're looking for is a scenario where the average Joe can easily and cheaply go solar. Banking on the housing market inflating is not a good medium term plan.

 

[Foghat]

Pennsylvania net metering decision: Full net metering.
Pennsylvania regulators set retail rate net metering for distributed generation | Utility Dive

Cybersecurity for distributed resources validated by NREL(with participants such as viasat).
ViaSat Helps Validate NREL's Cybersecurity Framework for Distributed Energy Grids - Yahoo Finance
"The introduction of new technologies like smart meters and renewable energy resources requires the energy grid to move from a centralized architecture to one that is highly distributed..."

I hope this hits home for many. Our grid will transition to be much, much more distributed architecture, one that Solarcity will have a significant footprint within (and is playing a significant part in designing). It is critical for all of us to keep an eye on the 13 value stacks for its next generation product and how they will be valued. We should see a lot of movement on this by the end of the year, especially as more powerwalls/powerpacks are produced this summer/early fall...

to note, California commissioner peterman recently stated they did not expect to see energy storage prices to be as low as they are right now as they move forward with the new demand response environment. A demand response environment of which Solarcity intends to enter as an aggregator.

 

[jhm]

That's not necessarily good news if wages are flat. SCTY can roll through the wealthy, and I think they'll have major success there, but what we're looking for is a scenario where the average Joe can easily and cheaply go solar. Banking on the housing market inflating is not a good medium term plan.

Wages are up 2.5% y/y. Expanding home equity is good for the whole economy. Homeowners are still delevering, paying down debt, but consumption should start to rise with the wealth effect. Growing home equity is especially good for construction and home improvement industries, which including rooftop solar. Homeowners are willing to put more money into their homes when home values are increasing. So this puts an awful lot of people to work.

SolarCity tapping into existing home equity is not a matter of banking on the housing market inflating in the future. It's about helping homeowners monetize existing value in their homes. Being able to cut your power bill by 80% enables the homeowner to weather any adverse economic conditions going forward. For example, if a spouse gets laid off, the reduction in monthly expenses helps the family stretch savings further while new employment is sought. In the extreme where long-term unemployment may lead to mortgage default, it is beneficial that the solar system does add value to the home (studies have confirmed this). Thus, the severely distressed family can sell the home, get out of the mortgage and into lower cost housing. So it is beneficial to both mortgage borrower and lender that the equity that was taken out to pay for solar was also added right back to value of the home. 10 years ago people where accessing home equity to finance cars and vacations. This was very risky because the equity taken out was not put back into the home. It set people up for a negative equity situation. Using equity for solar does not repeat those mistakes. It actually enhances the financial stability of the family. Mortgage lenders should welcome this sort of opportunity to grow assets with less risk than equity out refinancing.

 

[TheTalkingMule]

Pennsylvania net metering decision: Full net metering.
Pennsylvania regulators set retail rate net metering for distributed generation | Utility Dive

We should have zero problems out of Pennsylvania for the duration. We have an excellent governor right now who should likely breeze through re-election in 2018 and PECo(Exelon) has been more than decent as far as utilities go. 6th biggest market in the nation is now an even more stable solar market, the only headwinds are zero state incentive and the grid being super cheap and neither of those are really even a negative.

 

[SBenson]

jhm, Working Capital and Net Cash Flow are not really my concerns.

My core issue is with the need to borrow recourse debt every quarter, no matter what the growth rate is. Some folks here (blake) suggest that such borrowing is to support the future. But you can easily see R&D and Capex and net them out. The problem still remains. SolarCity needs about $200mln of recourse borrowing per quarter to 'run the shop'. This is very unsustainable.

Here is all the data:

	Period		2014 Q1	2014 Q2	2014 Q3	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q4
Line 1	MW Installed	MW	82	107	137	177	153	189	256	272
Line 2	R&D Expenses	$M	($1.90)	($3.00)	($4.20)	($10.00)	($12.10)	($12.40)	($17.70)	($22.80)
Line 3	Capital Expenditures	$M	($4.70)	($2.90)	($5.80)	($9.50)	($30.50)	($71.60)	($45.70)	($28.80)
	Debt and Cash:
Line 4	Debt – Recourse	$M	($153.40)	($204.70)	($154.00)	($143.70)	($284.20)	($425.00)	($522.00)	($602.50)
Line 5	Debt – Convertible	$M	($230.00)	($230.00)	($730.00)	($796.00)	($796.00)	($796.00)	($796.00)	($909.00)
Line 6	Cash & Short-Term Investments	$M	$519.60	$405.30	$733.50	$642.70	$575.80	$489.10	$418.40	$393.90
Line 7	Cumilative Debt, net cash (not including non-recourse)		$136.20	($29.40)	($150.50)	($297.00)	($504.40)	($731.90)	($899.60)	($1,117.60)
Line 8	Change QoQ - Recourse borrowing done in the period			($165.60)	($121.10)	($146.50)	($207.40)	($227.50)	($167.70)	($218.00)
Line 9	Net out R&D and CapEx			($159.70)	($111.10)	($127.00)	($164.80)	($143.50)	($104.30)	($166.40)
	Current Portfolio Value
Line 10	Cumulative MW Deployed under Energy Contracts – EoP	GW	0.6	0.7	0.8	1	1.1	1.3	1.5	1.7
Line 11	PowerCo Portfolio’s Pre-Tax Unlevered NPV remaining	$M	$1,030	$1,212	$1,445	$1,735	$2,032	$2,391	$2,790	$3,235
Line 12	Debt – Non-Recourse	$M	($206)	($324)	($448)	($485)	($617)	($731)	($1,013)	($1,242)
Line 13	Change QoQ - Borrowing done in the period			($118)	($124)	($37)	($132)	($114)	($282)	($229)
Line 14	PowerCo portfolio Pre-Tax Unlevered NPV Less Debt	$M	$824	$888	$997	$1,250	$1,415	$1,660	$1,777	$1,993

.
Scroll to the right side if you don't see the full table up to 2015 Q4.

Line 7, 8, 9 and 13 are my calculations. Hope the labels are self explanatory.

Lines 8 and 9 drive home the point.

Of course this is dependent on what happens on line 13. If increased non-recourse borrowing happens, then there will be a lesser need to borrow through recourse debt and vice versa. But my sense is that they are maxing out the potential debt in non-recourse land. So I don't see a rescue unless they change the business model, like keep selling the contracts to 3rd party investors or do more outright cash installs etc. Whatever it is, they not only will have to do it once but repeat each and every quarter. Essential being long now is keeping faith in unknown potential future business model. That is really a leap of faith!

About that MyPower ABS deal, in my view that is not to be counted as a reliable source of debt. We all know MyPower loans are a small fraction of SolarCity's installs. For a deal of that size to happen again, it may take more than an year. I am much more interested in the stream of PPA/lease deals. They are supposed to get bigger and more frequent. Neither of which is happening. In any case, ABS deals and non-recourse debt is not the primary issue here. The need to borrow through recourse debt systematically every single quarter is the big problem.

 

[TheTalkingMule]

Has there ever been a scenario where 'Company A' looking to dominate a massive but fledgling service industry nationwide would ever have a sustainable balance sheet in expansion stages? What about one that's entire model is based around pushing revenue off into the future? I just don't see the logic of looking at today's costs as if that's some semblence of the future norm, especially if indications are toward cash-flow positive in short order.

Sales cost should be the focus, everything else is lean enough for the time being. That MUST be lowered relatively on par with the wider install industry in order for confidence in the PPA model to continue. So far so good, but I'm still not nearly comfortable with the current product positioning in the average non-Californian consumer's mind. That translates directly into sales cost and that cost can quickly become a self-fulfilling feedback loop that ends up validating the original misinterpretation of product value. That's about my only concern right now.

I'm in southeast PA and ready to sign up, how do I do so online with no sales cost baked into my rate?

 

[SBenson]

256MWs in Q3, 272 in Q4, with 180 guidance in Q1.

That is no 'take over the world' growth.

You are missing the fundamental point: Tesla sells a car, makes money immediately. SolarCity does an install, makes money in 20/30 years. They need to borrow to survive.

The cash-flow positive that management is promising is utterly meaningless net-cash-flow (maybe you are thinking free-cash-flow, see jhm's markers post to understand better).
That promise has no meaning or value. It all depends on whether debt markets cooperate an ever increasing debt binge. No, they won't.

In any case, I think I made my point with enough posts and content. I will stay out for a few days/weeks.

 

[TheTalkingMule]

Growth was 50-something percent last quarter on October's guidance of 40% moving forward.

Sufficient growth in solar is nowhere near my concern, if the product is tight there will be massive PPA demand. Maintaining of increasing share with shrinking sales cost is all that matters.

The appetite for ABS will never dry up so long as the customer base is this high-end. Might be a concern in a few years as solar wiggles down more average Joe's, but by then it's game over and bond costs will likely be far lower based on a few year's track-record.

 

[Jack6591]

SolarCity Selects Battery System for Kauaʻi Co-op Solar Storage Project -- LHU'E, KAUA'I, Hawaii, Feb. 16, 2016 /PRNewswire/ --

Industries are disrupted when their business models are disrupted. Solar+Storage+Demand Management will disrupt the electric utility industry.

SolarCity+Tesla+SolarEdge=Disruption

 

[Foghat]

It's real simple: customers have to make their monthly payments to solatcity in order for Solarcity to get financing. Period. It's thst straightforward.

So, let's review... Do Solarcity customers make their payments? 99% out of over 300k lease/ppa customers have made their payments on time since the company was founded 2006. 99%. It's in the investor letter so I advise people read it before they come on here with bold claims of bankruptcy.

Name me me a company with 300k customers that make their monthly payments 99% on time (and soon they will have some thst have done so for a decade on time every time). Now tell me if they great access to capital or not. I'll be waiting.

Bottomline, solarciry conracted payments are an extremely attractive vehicle at all levels of the capital markets. All you got tondo is compare and it's no question, Solarcity will have extensive access to the capital markets for a long time. Hard facts matter.