SolarCity (SCTY)

[TheTalkingMule]

For reference, I have a top notch installer in Philly willing to give me $3.20-$3.35/W for a small flat roof install.

 

[doggusfluffy]

A Texas Utility Offers a Nighttime Special: Free Electricity

“The American consumer wants choice,” said Jim Burke, TXU’s chief executive. “Consumer choice, with its impacts and benefits, will drive the future of the power industry.” But he quickly added a note of caution: “I think the pace at which it evolves is the unknown.”

 

[SBenson]

I am afraid a lot of discussions here are way too abstract and theoretical. The ship is sinking while management is rearranging the chairs on the deck.

The writing is on the wall. SolarCity has no means to survive NEM dilutions together with ITC step down. The whole talk of lowering the costs is simply not going to help or work.

I could write a *lot* of stuff based on what I found over last week. I have been debating if it will help or hurt if I write it here. Maybe it will help a few people. So with best intentions I decided to post.

To follow..

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In my earlier post I tried to put a number on Incremental NRV/W in Post ITC world. In subsequent discussions with jhm (both in the thread and outside) I discovered a hole in the model.

The Incremental NRV includes all costs, like R&D and CAPEX. But my savings only included guidance of savings that are part of EVC math (installations, sales, g&a).

In other words, I didn’t include any potential savings in R&D and CAPEX (on a per Watt basis). We have no precise idea what those savings will be.

Nevertheless we can still come up with reasonable Inc NRV/W estimates, or at least put an upper bound of what that will be.

Lets begin with the EVC style guidance of $0.60/Watt in post ITC world. This is from Q2 CC. Firstly I don’t believe this number is sandbagged. The very purpose of EVC is to selectively pick expenses and cashflows, and show a rosy picture of the operations. I can’t imagine they will use EVC but then sandbag the guidance.

It’s like makeup for a woman. The whole point of makeup is to enhance the beauty. A rational woman wouldn’t use makeup to deliberately make herself look worse, especially when making an all too important public appearance. Knowing Lyndon, he simply wouldn’t do it.

We don’t fully know all the gaps between EVC style math and Incremental NRV. But we figured two things so far, R&D and CAPEX. Looking at financials, there are these “other expenses - net” which might be contributing to some. There might be even others too.

Now lets pretend CAPEX drops all the way down to zero and R&D stays flat at $0.07/W and we ignore everything else all together.

We have the upper bound as $0.53/W as the upper bound for Incremental NRV. Keep in mind, this is quite an optimistic estimate.

**

There is another important subtlety here. The renewal porting of the RV can NOT be sold or mortgaged to raise cash, as it is un-contracted.

So effectively the entire operation needs to be funded by the contracted portion.

Lets call Incremental Renewal RV as ‘Inc RRV’.

Lets call ‘NRV - Renewal’ as Net Net RV or NNRV.

If Inc NRV is lower than Inc RRV, it effectively means they would have to borrow cash against the existing/prior NNRV. There is a limit to this which is the existing NNRV of about $2Bil.

But much before they hit this limit, they will run out of financing options, you can’t possibly mortgage away “everything” you have and still expect good financing rates.

So it is very desirable or even *needed* to keep the Inc NRV above Inc RRV.

In yet another perspective, when Inc NRV becomes same as Inc RRV, all shareholders are left with is the “hope” that consumers will renew their contracts and that is the cashflow that comes to the shareholders. There is nothing in it for the shareholders from the contracted portion.

Now lets look at the Inc RRV per watt as it stands today.

Q2
Bookings: 395 MW
Incremental RRV: $141mln
Incremental RRV/W: $0.36/W

Q3
Bookings: 345 MW
Incremental RRV: $116mln
Incremental RRV/W: $0.34/W

Q2 + Q3
Bookings: 395 + 345 = 740 MW
Incremental RRV: $257mln
Incremental RRV/W: $0.35/W

In a nutshell they need to keep Inc NRV above $0.35/W for smooth running of operations but they seem to get at very best $0.53/W. As you see we are dangerously close here.

I will note again, this is NOT including ‘any’ NEM dilutions. Add in the dilutions, it’s game over.

Believe it or not, based on guidance, the Opex/Watt is expected to go UP in Q4. Seriously, you can’t make this up. I mean after all the talk of cost savings in the call, it is just unbelievable. They are saying something but doing something.. In Q1 it will be even harder to show cost savings progress as deployment watts decline and many fixed costs will overwhelm. They seem to be on NO trajectory to reel in the costs.

SolarCity is effectively on the verge of shutting down. They will lose financing as soon as the big boys see this. I suspect CA NEM 2.0 announcement to be the catalyst that will unravel this company.

This will be quite a bad mark on Musk’s reputation, which is extremely valuable for Tesla and SpaceX. So I expect him to do something about this much before it unravels.

Of all the options, a more likely option is SolarCity will be acquired by Tesla and will be put under Tesla Energy operations. This will leave the existing consumers and financiers comforted and will slow down the unraveling.

Once acquired, there will be no obligation to report SolarCity’s finances independently. They will shut off from Residential operations for the most part and focus more on commercial and grid operations. This is the best that could happen to SolarCity’s customers, employees and financiers. I am not sure what will happen to the shareholders. It all depends on the sequence of events. Overall I don’t expect shareholders getting much more than current price because I expect the price to sink before a rescue (of operations) by Musk.

P.S: I could be all wrong with this whole thing. I have been wrong many times before (a prime example is actually getting into SolarCity in the first place lol). In any case, I will pay for my errors and I will accept it which ever way things unfold. Research on your own and decide on your own. Use my analysis as a random internet poster’s ramble. Maybe there is value in it. Maybe there is not.

 

[Johan]

Wow Benson. I will read and re-read your posts before deciding how to act myself.

Thanks for taking the time to lay out your thesis. It's also brave as time will show if you're correct or not.

 

[farzyness]

Thanks Benson for your write up. Very interesting indeed. Could this be linked to the rumors of Musk acquiring SolarCity? If so, does Tesla become burdened by a failing SCTY model (if your thesis is correct)?

 

[doggusfluffy]

Solar panels will boom in the first half of 2016 - Fortune

 

[jhm]

Smart inverter market grows on rise of virtual power plants | PV Insider

It's good to kept an eye on developments in the VPP world, within which SolarCity is but one pioneer.

Smart inverters are key, and they are presently more expensive than standard inverters. So SolarCity may be spending as much as an extra 10c/W installing smart inverters in anticipation of VPP and other aggregation schemes. We know that Musk is forward thinking on installing advanced hardware in Tesla vehicles so that features my be turned on with software upgrades downstream. Could SolarCity be deploying this strategy as well? If so, that can help explain higher prices now, but bigger unexpected opportunities later. It's a hardware option for a software upgrade, and options have value, even if they are hard to value.

 

[ggies07]

Solar panels will boom in the first half of 2016 - Fortune

I counter that article with this one. I was reading the one you posted and I'm tired of people writing about the "certainties" of what will happen if the ITC is brought down to 10%. Could/will sales go down a bit, possibly, but no one knows how much for certain. Glad I found an article with a more positive voice in the industry.

Sunrun CEO: Saying the ITC Won | Greentech Media

“I don’t think we should be saying it’s not going to be renewed. I really don’t,” she said Tuesday at GTM’s U.S. Solar Market Insight conference.

Jurich agreed that businesses should prepare internally for the ITC to drop. But in its outward messaging, the solar industry should maintain strong, unified support for an extension. “Let’s not shoot ourselves in the foot,” she said.

Edit: She seems like a smart cookie:

“That’s a problem for us, because we are not educating outside of the energy market,” she said. “We’ve got to educate growth investors, the long-term investors that want to hold stocks that believe in the long-term macro trends. We need to bring those people into the markets.”

 

[gene]

Hmmm....I am down by 35% on $200,000 worth of SCTY. SBenson's post is a good one and gives me much to think about. But, then again. I am heavily invested in TSLA and had a lot of Tesla stock around the time of the f*res. I saw all sorts of previous bulls jumping ship and selling out, many at a loss. I held my TSLA and I am very, very, happy that I did. Might this be one of those times? Better to hold? Why did Elon buy $5,000,000 at $40. Would he not have better knowledge of the situation than us? Further thoughts, it took some serious brainpower to build up a company the size of Solar City and be the #1 installer. So, these guys aren't stupid. I'm going to hold tight for now, I just can't stand the thought of selling now and losing $75k. I'm just sharing my gut thoughts with you guys.

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I counter that article with this one. I was reading the one you posted and I'm tired of people writing about the "certainties" of what will happen if the ITC is brought down to 10%. Could/will sales go down a bit, possibly, but no one knows how much for certain. Glad I found an article with a more positive voice in the industry.

Sunrun CEO: Saying the ITC Won | Greentech Media





Edit: She seems like a smart cookie:

Thanks ggies07, really she is right! Why do we assume the ITC will end? Is anyone really expecting a Republican president to win? Any of the democrats would be on the side of solar.

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Call your senators to extend ITC. This came minutes ago in my email: Call your Senator: Extend the ITC

 

[electracity]

....

Believe it or not, based on guidance, the Opex/Watt is expected to go UP in Q4. Seriously, you can’t make this up. I mean after all the talk of cost savings in the call, it is just unbelievable. .....

I think you will see OPEX/watt improve next year. They will greatly reduce hiring, reduce capital costs, and further tighten the types of leads they pursue. I would only be concerned with bankruptcy if they don't do mass layoffs at the point the ITC extension fails.

I think Musk probably has little interest in having SC be part of Tesla. It's a business with very different characteristics. An acquisition would introduce all sort of new risks in how Tesla is judged.

 

[ggies07]

Something I remember Lyndon saying: Elon would tell them in meetings to hit the pothole now to avoid a bigger problem later....I wonder if this whole ITC debate/debacle is the pothole and the market can't see what they are doing in the short-term.

 

[TheTalkingMule]

I am afraid a lot of discussions here are way too abstract and theoretical. The ship is sinking while management is rearranging the chairs on the deck.

The writing is on the wall. SolarCity has no means to survive NEM dilutions together with ITC step down. The whole talk of lowering the costs is simply not going to help or work.

Yes, if the ITC stepdown goes through and net metering grinds to a halt, SCTY will have difficulty making money. Fortunately those two things are not happening, at least not both of them. When the stock is doing well people are overoptimistic, now that it's down people are thinking about residential customers never again being allowed to sell their excess capacity tot he grid.

We're talking about the #1 installer in an industry that we know is the next big thing for the US and has just recently gotten to scale ahead of almost everyone else. The only valid criticism at this point is that the model is flawed. I'm 98% sold that it's the way to go, but opinions vary. Other than that, pretty much every market force appears to be in their favor vs the grid and vs the competition. So long as you see value in the model.........

We shall see!

 

[SBenson]

I think you will see OPEX/watt improve next year. They will greatly reduce hiring, reduce capital costs, and further tighten the types of leads they pursue. I would only be concerned with bankruptcy if they don't do mass layoffs at the point the ITC extension fails.

I think Musk probably has little interest in having SC be part of Tesla. It's a business with very different characteristics. An acquisition would introduce all sort of new risks in how Tesla is judged.

Just for clarification, I was NOT trying to suggest that SolarCity will declare bankruptcy.

All I am trying to say is that the residential business model does not work in post-itc, diluted nem world. It doesn't in the sense of it doesn't provide any shareholder value for each new install, if anything it will start eating into already accumulated retained-value. SolarCity will be forced to wind down business in many states, CA will be a very important one of them. That winding down will cost money, which too will come off of NRV. In a nutshell, NRV will go down, potentially rapidly, and thus the share price. As it becomes apparent to the market the stock price will continue to go down much ahead of the business fundamentals move that way.

CA NEM 2.0 announcement will be a major catalyst on the down side. Did anyone do proper (un-biased) research into it? All the potential outcomes are already public info. The proposals are posted online. There is only one proposal, which is put forth by SolarCity type group of companies, in which SolarCity will be able to survive. Even a nominal reduction of net-metering (lower fit price) will kill off SolarCity margins entirely in post-ITC land.

Quite very oddly there is no press or analyst freaking out on this. But at the same time nobody made a big deal out of ITC until after SolarCity made adjustments based on impending ITC.

I don't think the repricing of stock by -22% in a single day was unwarranted. It is more of an early warning signal of what is about to come. Just my perspective.

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Another misplaced optimism in this thread is hope that somehow ITC will be extended. I believe it is coming due to Lyndon's framing of it in the CC. Please do yourself a favor. Verify things for yourself.

ITC extension needs congress approval. Both House and Senate are dominated by Republicans, who are dead against any extensions. Apparently Obama tried to put into the budget several times but congress struck it down. We need a remake of congress where *both* house and senate are dominated by Democrats. Then they need to consider, debate and pass the bill, which President should sign (not veto). So effectively you need a government where all three house, senate and president are Democrats. Even if that were to happen say in 2016, when will the law pass? will go into effect when? Can the business model survive until then?

A whole bunch of NEM dilutions are already coming into play in 2016 itself. So can SolarCity survive NEM dilution alone to begin with?

 

[ggies07]

Another misplaced optimism in this thread is hope that somehow ITC will be extended. I believe it is coming due to Lyndon's framing of it in the CC. Please do yourself a favor. Verify things for yourself.

ITC extension needs congress approval. Both House and Senate are dominated by Republicans, who are dead against any extensions. Apparently Obama tried to put into the budget several times but congress struck it down. We need a remake of congress where *both* house and senate are dominated by Democrats. Then they need to consider, debate and pass the bill, which President should sign (not veto). So effectively you need a government where all three house, senate and president are Democrats. Even if that were to happen say in 2016, when will the law pass? will go into effect when? Can the business model survive until then?

A whole bunch of NEM dilutions are already coming into play in 2016 itself. So can SolarCity survive NEM dilution alone to begin with?

They are? The CEO from the article I just linked said they were not against it. Don't know how many are though, do you have a stat on how many are against it?

“There is a lot of support for [the ITC],” Jurich said. “The policy is working, it is good, and we have Republican support. There is a very strong possibility this will be renewed, a very strong possibility.”

 

[SBenson]

They are? The CEO from the article I just linked said they were not against it. Don't know how many are though, do you have a stat on how many are against it?

Jeez, just another CEO of a solar installation company, who says we should NOT say 'ITC won't be extended' out in public says there is republican support. That forms the basis for the optimism.

No I don't have stats. I based my assumption on what I read on a friend's Bloomberg terminal.

The balance of power in the next Congress, responsible for extending tax breaks, may determine the long-term future of solar investment tax credits. Several times, President Barack Obama proposed permanent clean-energy tax credits in his budgets, but Congress hasn't taken the bait.

Sorry can't provide a link or screenshot. Take it for what it's worth. Don't take my word for it anyway. Dig up the data for yourself. Let us know if you find anything interesting.

Last thing you want to believe it something coming off the captain of a sinking ship. All of this is arranging chairs on the deck.

 

[Ingenieur]

Have you guys looked at Bonds?
Bonds Detail

Its now 68 cent on the Dollar of massive 566 Mio issuance, almost 12% yield, Bond market is obviously worried, if you think Solar City will survive until 2019, just buy the bond + difference between face value and current market price (ca 32 Cent on Dollar) in stocks and options. So if stock drops to 1$ but bond is repaid you wont get your face ripped off.
I would strongly suggest you dont though. Personally im still short Solar City but i enjoy your conversation very much, so i hope you think about buying the bond rather then equity or at least not 100%

Usualy stocks with this kind of bond yield trade below book value like some energy names.

 

[SBenson]

Based on that link, because these execs think it's a self fulfilling prophecy, don't want to say ITC won't be extended.

So they all come out and say that they think ITC will be extended and we now are supposed to believe it.

Very amusing.

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Something I remember Lyndon saying: Elon would tell them in meetings to hit the pothole now to avoid a bigger problem later....I wonder if this whole ITC debate/debacle is the pothole and the market can't see what they are doing in the short-term.

Please don't take this as attacking you. But I want to put forth something related to the topic you mentioned.

The whole reduction in growth targets is the side show. It was a complete distraction. All of the financial media focused on that.

The real story is:
- Sales dropped (check both MW bookings or no. customers)
- Costs kept going up
- NRV going up at an abysmal rate. On a per-share basis it is flat (after rounding)

This is when there are very supportive policies in place.

 

[ggies07]

Based on that link, because these execs think it's a self fulfilling prophecy, don't want to say ITC won't be extended.

So they all come out and say that they think ITC will be extended and we now are supposed to believe it.

Very amusing.

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Please don't take this as attacking you. But I want to put forth something related to the topic you mentioned.

The whole reduction in growth targets is the side show. It was a complete distraction. All of the financial media focused on that.

The real story is:
- Sales dropped (check both MW bookings or no. customers)
- Costs kept going up
- NRV going up at an abysmal rate. On a per-share basis it is flat (after rounding)

This is when there are very supportive policies in place.

ok, thank you for your analysis...it's noted and we shall see what happens....

 

[SBenson]

Hmmm....I am down by 35% on $200,000 worth of SCTY. SBenson's post is a good one and gives me much to think about. But, then again. I am heavily invested in TSLA and had a lot of Tesla stock around the time of the f*res. I saw all sorts of previous bulls jumping ship and selling out, many at a loss. I held my TSLA and I am very, very, happy that I did. Might this be one of those times? Better to hold? Why did Elon buy $5,000,000 at $40. Would he not have better knowledge of the situation than us? Further thoughts, it took some serious brainpower to build up a company the size of Solar City and be the #1 installer. So, these guys aren't stupid. I'm going to hold tight for now, I just can't stand the thought of selling now and losing $75k. I'm just sharing my gut thoughts with you guys.

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Thanks ggies07, really she is right! Why do we assume the ITC will end? Is anyone really expecting a Republican president to win? Any of the democrats would be on the side of solar.

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Call your senators to extend ITC. This came minutes ago in my email: Call your Senator: Extend the ITC

We have a Democratic president right now!

That didn't help, did it?

We need Democratic congress in both house and senate. That's the issue here. The obvious fact is that the force of inertia is certainly in favor of ITC step down.

Interestingly , I am one of those folks that took losses in Tesla f!res. Luckily I held on to my core position, and still holding on. In this case though I sold out everything. Maybe I spell the bottom. lol

That's why I keep saying you should research and decide on your own.

But I somehow feel compelled to present information when the thread is going into wrong places (in my perspective anyway).

 

[gene]

But I somehow feel compelled to present information when the thread is going into wrong places (in my perspective anyway).

Your comments are appreciated and noted.