SCTY - Solar City Corporation

[jay21]

SolarCity's ST debt is in part funded by Space X. Cant make this up.

 

All these entities might be terminal but shorting isnt my game so not spending the time.

[benhacker]

Thanks for your comments picasso.

 

I agree that SCTY's cost for financing is lower if they want to dilute the hell out of shareholders (at least their upside) or secure the paper.

 

As a short, I hope they raise a lot of money to cap the downside for me.

 

I'm actually slowly exiting here... borrow rate rapidly rising and price tanking so I'm going to exit shortly. 

 

I think Musk may or may not save this company, but I think they *will* need to be saved. 

[Palantir]

Ahmad Chatila will save them.

[opihiman2]

This one may be going into as one of the "blow ups of this sub-section".  kevin4u2 is right, and I don't know why this was even discussed on here.  I think this one is a zero.  Almost everything about it is a stinker.  It has the jockey slant (Musk can do no wrong bullcrap) going on, huge debt leverage ratios, widening negative FCF, negative EPS every quarter, unsustainable gov't subsidies... 

 

Lesson learned: don't take on a Chanos short.

 

 

[benhacker]

This one may be going into as one of the "blow ups of this sub-section".  kevin4u2 is right, and I don't know why this was even discussed on here. 

 

Well, to be clear, the first post in this thread was in response to my post in TSLA thread that SCTY was a good short.  So I'm not sure this qualifies for your blow up / sub-thread analysis comment considering a short thesis was the kick off....  Also, I think most folks positing positive comments, weren't actually long, it was more in admiration for the things Musk was changing / commenting on. (certainly some exceptions)

 

I think this one is a zero.

 

I'm not so sure, but the business does seem to be fundamentally non-economic and dependent on capital markets.  I think $0 is within the realm of possibilities for sure.

 

I have no position right now.

[opihiman2]

Ah, ok.  It seemed from perusing the thread that this one was kind of an iffy long.  I didn't get the impression that anyone was trying to short it. 

 

Anyways, looks like a stinker.  Can't believe Morningstar is rating this crap three stars!  Actually, what is up with their ratings?  VRX is rated five stars.  Hahaha, holy hell.

[awindenberger]

Solar City has been overpriced for much of its life, but the company is worth something. I havent decided exactly what that number is, but its higher than zero.

 

The issue is that the company is spending money upfront to generate a 20-30 year income stream. In order to do that and grow quickly, they are but definition going to need to raise a lot of debt, and the upfront costs will massively outweigh near term revenue, leading to massive GAAP losses in the short term.

 

However, the company could be cash flow positive by simply ending growth plans. They could cut all the sales staff, a large portion of the G&A, and simply collect payments on their existing 2GW worth of systems. These payments are contracted to go up by about 2% every year, and as long as they cost less than the price from the utility, SCTY customer's don't have any real reason to revolt against the payments.

 

2GW worth of systems generates an average of $400mil in annual customer payments (it starts off around $330mil). Over 20 years that is $8Bil in customer payments rolling in. Those payments are used to pay tax equity investors, interest, and ongoing maintanance, with the remaining amount being the final cash flow to SCTY.

 

SCTY notes that at 6% discount rate, the NPV of the contracted cashflows (20 years) is $2,766M. At 8%, its $2,314M.

 

Extrapolating that to 10% discount rate is about $1.8Bil.

 

SCTY's market cap is currently $1.75Bil.

 

This means the market is currently ascribing negative value to the DevCo, as well as to any renewal cashflows the company is able to generate past the 20yr contract term.

 

There are many variables to consider looking out 20yrs, but at current prices, I would not want to be starting a short on SCTY.

[benhacker]

SCTY notes that at 6% discount rate, the NPV of the contracted cashflows (20 years) is $2,766M. At 8%, its $2,314M.

 

Extrapolating that to 10% discount rate is about $1.8Bil.

 

SCTY's market cap is currently $1.75Bil.

 

This means the market is currently ascribing negative value to the DevCo, as well as to any renewal cashflows the company is able to generate past the 20yr contract term.

 

There are many variables to consider looking out 20yrs, but at current prices, I would not want to be starting a short on SCTY.

 

If you believe the above $1.8B value is net of debt, you can buy near term SCTY converts at $50 on the dollar, yielding (YTM) 25% which get paid ahead of common.

 

They seem like an eminently better bargain than the stock, unless you can lend the short borrow out at 80-100% of full value.

[awindenberger]

SCTY notes that at 6% discount rate, the NPV of the contracted cashflows (20 years) is $2,766M. At 8%, its $2,314M.

 

Extrapolating that to 10% discount rate is about $1.8Bil.

 

SCTY's market cap is currently $1.75Bil.

 

This means the market is currently ascribing negative value to the DevCo, as well as to any renewal cashflows the company is able to generate past the 20yr contract term.

 

There are many variables to consider looking out 20yrs, but at current prices, I would not want to be starting a short on SCTY.

 

 

 

If you believe the above $1.8B value is net of debt, you can buy near term SCTY converts at $50 on the dollar, yielding (YTM) 25% which get paid ahead of common.

 

They seem like an eminently better bargain than the stock, unless you can lend the short borrow out at 80-100% of full value.

 

I like both of those ideas.

[Liberty]

Likelihood that this gets taken private?

[benhacker]

Likelihood that this gets taken private?

 

0-1% chance in my mind.  I could see a combination with another Musk businesses for stock, maybe.

 

I like both of those ideas.

 

If you guys think go private or SCTY's estimate of NPV here of the business are even in the realm of credible outcomes in reality, you should be long these bonds up to your eyeballs, I'm serious.

 

If you are *not* long these bonds, I'd love to know why.

 

Sorry if I sound like I'm pushing here, but I really find opinions on these boards hard to gauge.  If folks talk up a business as "good" or valuable, but aren't buying 25% YTM debt... well, I kind of want to disregard everything they say about this or any other business... you have that many high probability ideas yielding 25% with a near term rock hard catalyst (maturity)???

 

My 2 cents.  I'd rather know what folks *actually* do with their money, then what folks talk about doing in a theoretical world... maybe... with their money. :)

 

By the way, my comments go double for Ophiman who comes in here after the stock is crushed and calls it a zero... I mean, we all have opinions, but I think the weight of all of our opinions should be reduced about 95% if we don't / aren't willing to put $$$ behind them being "right".

 

(says the guy with no current position in SCTY... I know.  But I did have one for much of last year and this year.... too hard now w/ current price + borrow for me).

 

 

[awindenberger]

Likelihood that this gets taken private?

 

0-1% chance in my mind.  I could see a combination with another Musk businesses for stock, maybe.

 

I like both of those ideas.

 

Sorry if I sound like I'm pushing here, but I really find opinions on these boards hard to gauge.  If folks talk up a business as "good" or valuable, but aren't buying 25% YTM debt... well, I kind of want to disregard everything they say about this or any other business... you have that many high probability ideas yielding 25% with a near term rock hard catalyst (maturity)???

 

My 2 cents.  I'd rather know what folks *actually* do with their money, then what folks talk about doing in a theoretical world... maybe... with their money. :)

 

Its a fair question. I don't have any position on SCTY because each time I see it this low, I decide I need to look more into it, and then within a couple weeks its back higher than I'm interested in buying at, so I don't finish focusing on it.

 

I've never looked much into bonds. Its something I should do more of, but none of the brokers I use make it a click to buy process, so I haven't dealt with them as investment options.

[Picasso]

Musk invested in a business of the Rive's before 2008 hit.  When that business was sold in 2008 and Musk received his share, it was a nice size windfall that 100% saved Tesla and SpaceX.  His companies would have failed without the success of his cousins.  On that alone, I don't think you'll see SCTY hit $0.  I'd like to think that Musk would get involved and help resolve any SCTY capital issues as long as there aren't the kind of defaults that guys like Chanos are expecting.  Not even Musk could resolve that.  But Tesla is going to be dependent on SCTY being a viable business since their energy business is paired up in the big way with SCTY. 

 

Tesla offering to buy Solar City.  I think I'll need to close Twitter for a couple weeks...  It's going to get pretty unbearable.

[valueinvesting101]

http://www.cnbc.com/2016/06/21/tesla-makes-offer-to-acquire-solarcity.html

 

There is 39% short interest in solar city

 

Acquiring at close to $2.75 billion. Almost the amount Tesla raised in FPO in mid-May

[fareastwarriors]

Whoa....

[Broeb22]

It's a stock deal, so how much money they raised a few months ago is pure coincidence.

[TwoCitiesCapital]

http://www.reuters.com/article/us-solarcity-m-a-tesla-idUSKCN0Z72WP

 

Musk may be a genius, but he doesn't appear to have much concept of numbers/valuations if he thinks that the combination of TSLA (a $29B company) and SolarCity ( a $2B company) is likely to create a trillion dollar business...

 

I mean, I already thought TSLA's $29B was a little shaky...

[Oreo]

Was short TSLA on-and-off since 2014 but I can't find good borrow to short at these levels. Anyone seeing borrow, and if yes, at what cost?

[awindenberger]

BenHacker's asked me to discuss why I like SolarCity here, as we were talking a bit about it on the Tesla board.

 

In short, my analysis indicates that on average, solar leases are not actually the terrible deal they are made out to be, because there are many consumers that can't take advantage of the ITC credit anyways. See my SA article on this matter: http://seekingalpha.com/article/4007021-solarcity-deep-dive-solar-leases-make-surprising-amount-sense-least-45-percent-americans

 

Thus, I think demand for SCTY's core product will remain strong until the ITC expires in 2022.

 

I also believe that SCTY's business model is better than people give it credit for. I have an article that goes into that which should be published in the next day or two on SA, so I won't bother repeating myself but will instead link to it when it comes out.

[benhacker]

Hey AW, I think the analysis in the SA article misses a couple of points, but I appreciate you sharing.

 

1) *all* solar solutions (whether retail or utility scale) rely on backup / storage.  In the case of current implementation of resi solar, there is a regulatory free ride (net metering) that I think is a hidden tax on non-solar users which should and will be terminanted.  I think not baking that effective battery / storage cost into the equation is problematic for the real value creation measurement.  I think this alone will make your math non-economic.

 

2) Utility scale solar makes eminently more sense than resi solar in most cases.  Further, with wholesale cost for these installations pushing <$0.05kwh *all in* costs, I think the analysis using CA residential retail pricing is not remotely close to reasonable (I pay $0.11 for example just a bit North).  I am a huge believer in solar, I just don't think resi solar makes much sense unless massively subsidized (net metering, ITC, etc)

 

3) Finally, and I think perhaps most importantly, I think as solar gains scale in the US, overall electricity prices will DECLINE.  Your analysis assumes a 1% annual rise in power costs - seemingly conservative - but when marginal cost for utility scale is $0.05, and serious pressure on coal pricing, natural gas, etc, I don't see a scenario where power prices rise substantially.  I think as you look out a few more years, you will begin to see a wave of regret from folks who have 1-3% annual escalators built into their solar power purchase agreements while power prices start to decline overall... when this happens I think there will be investigations into sales tactics, defaults, and overall legal unpleasantness - I don't expect this to be a big issue, but small things can snowball.

 

There are several other issues I have with resi solar, and SCTY specifically (GSE treatment of leases, highly capital markets dependent model with limited scale, overcharging / accounting for system cost and legal issues related to that, related party conflicts, valuation), but mostly, the above 3 issues are the big ones.

 

I wish you the best, and my opinion should be discounted as I don't feel strongly enough right now to have a position like you do.

 

Thanks,

[awindenberger]

Ben,

 

Thanks for the comments. I sort of agree with you on most of them.

 

1) Net metering is a bit of a free ride, but solar does also benefit the grid. Personally, i think that full credit is too high, but the avoided cost rate the utilities want to offer is too low. I'd say the fair approach long term would be to pay something down the middle between the two extremes.

I also believe that its fair for current customers to be grandfathered for the reminder of their contracts once net metering laws are changed. So far, we've seen that happen, even in Nevada.

 

2) Utility scale is cheaper...for the utility, but they don't seem to be dropping consumer rates much yet. Those plants are cheap to build, but you still need the transmission lines, and the utility wants a profit, so net cost to consumer is still similar.

 

3) I completely agree with you on this point. I too think long term electric rates will decrease due to solar and wind penetration. However, at higher penetration levels we will need more storage capacity, which will add to the final cost of electricity. So maybe we see utility rates continue to rise for the next 10 years, and then start to decline.

 

Interestingly enough, the NPV of a lease for the consumer that can't take advantage of the tax credit is even better compared to a purchase if we assume electric prices fall in the long term. Its counter-intuitive, but plays out when you consider the time value of the money saved at the beginning of the contract.

 

 

Also, my article on why solar leases are a profitable model for SCTY posted today:

http://seekingalpha.com/article/4009541-solar-leases-actually-make-money-solarcity

 

Curious for your thoughts.

[benhacker]

AW,

 

I think you seem to brushing aside some things or assuming away a lot (utility scale pricing being = residential, solar helping the grid... yes, but only up to a very small % I think... I may be wrong) - but honestly, this is fine, we may just simply disagree.

 

As to your article, I suggest only that you justify your equity investment with adjustments to SCTY's published and audited financials - basically, if SCTY is a profitable business inherently, you should back into that argument not brushing aside the 10-k, but altering the 10-k line items and adjusting them to get a pro forma... without doing that, it's challenging to have a discussion... It also will help silence the bears who generally start from audited financials... (perhaps you are doing this by just saying that SG&A can go WAY down, and underneath is a profitable biz... ok, but I think there is a question of if that SG&A spend was good, if not why not, what about their business model actually scales vs. comp, etc - maybe you have written about all this in different places, apologies if so)

 

Frankly, even assuming I agree with the SCTY bulls like yourself (which I don't), I find it difficult to understand the argument mathematically because it always ends up with "buy the stock" which makes negative sense to me.  If anything... you should be doing a synthetic long (short puts, long calls), or buying debt with a larger than common position size, or buying SSFs or whatever.  The borrow on this stock is 60%+ (was down a bit after TSLA merger, but back up again)... anyone buying the stock (and not lending it out) is leaving ~30-60% on the table... unless you are planning on holding for 2-3 months, this has to be a big deal...

 

That's probably all I have to say here.

[awindenberger]

AW,

 

I think you seem to brushing aside some things or assuming away a lot (utility scale pricing being = residential, solar helping the grid... yes, but only up to a very small % I think... I may be wrong) - but honestly, this is fine, we may just simply disagree.

 

As to your article, I suggest only that you justify your equity investment with adjustments to SCTY's published and audited financials - basically, if SCTY is a profitable business inherently, you should back into that argument not brushing aside the 10-k, but altering the 10-k line items and adjusting them to get a pro forma... without doing that, it's challenging to have a discussion... It also will help silence the bears who generally start from audited financials... (perhaps you are doing this by just saying that SG&A can go WAY down, and underneath is a profitable biz... ok, but I think there is a question of if that SG&A spend was good, if not why not, what about their business model actually scales vs. comp, etc - maybe you have written about all this in different places, apologies if so)

 

Frankly, even assuming I agree with the SCTY bulls like yourself (which I don't), I find it difficult to understand the argument mathematically because it always ends up with "buy the stock" which makes negative sense to me.  If anything... you should be doing a synthetic long (short puts, long calls), or buying debt with a larger than common position size, or buying SSFs or whatever.  The borrow on this stock is 60%+ (was down a bit after TSLA merger, but back up again)... anyone buying the stock (and not lending it out) is leaving ~30-60% on the table... unless you are planning on holding for 2-3 months, this has to be a big deal...

 

That's probably all I have to say here.

 

Ben,

 

Perhaps my latest article will help you understand the SGA expenses more clearly.

http://seekingalpha.com/article/4009730-solar-installers-constant-losses-due-rapid-growth

 

The fact is that a large portion of SGA expenses are related to booking and installing more leases, so if the business were to go into run-off mode, SGA should go way down.

 

You do make a good point regarding lending out the stock. I don't have any experience doing this. What brokers would allow me to do this? I have accounts with Vanguard (IRA), TDAmeritrade (old thinkorswim account and also IRA) and IB.

[benhacker]

Thought I would post this follow up now that the pension litigation by TSLA holders against the company for the SCTY acquisition has revealed pretty substantively that SCTY was insolvent and nearly value-less at the time of the acquisition.

 

 

Dan Telvock is a journalist in Buffalo who has been following Tesla Solar/Solarcity for a long time critically, and accurately (as an FYI).