 But behind the solar-energy provider’s allure of celebrity owner Elon Musk (of
PayPal, Space X and Tesla Motors) and lightning-speed growth – its construction
of a $750-million improbably-named “gigafactory” in New York – is a company
trying desperately just to break even. And to catch a break.
Disappearing federal grants and tax breaks to green-energy producers – key to
SolarCity’s business model – helped push the company into the red last year. And
two federal investigations into SolarCity’s business practices could wreak even
more financial havoc if stiff financial penalties are imposed.
On the other hand: All that growth.
“We’ve exceeded 1 terawatt hour of energy production for the past 12 months and
as we enter the spring and summer we are breaking records,” SolarCity chief
financial officer and part owner Peter Rive chirped during a May 5 investors
call. “Over the past couple of months we’ve broken through the four- and five-
and six-gigawatt hour-a-day-a-month.”
Rive was talking about the production of electricity via the solar-energy
systems his company leases to homeowners. A gigawatt powers 700,000 homes, a
terawatt 90,000 homes.
No one is disputing SolarCity’s hold on the nation’s largest share of
residential solar, with footholds in 18 states and counting. It’s the long-term
viability of a company with massive debt to investors like Bank of America and
Credit Suisse Bank along with dependence on government subsidies fading away
over the next 24 months.
This has caused many to place SolarCity in the high-risk category.
“TheStreet Ratings team rates SolarCity Corp (stock) as a Sell with a ratings
score of D+,” wrote the Wall Street analyst bible TheStreet. “The company’s
weaknesses can be seen in multiple areas, such as its generally high debt
management risk, disappointing return on equity, weak operating cash flow, poor
profit margins and generally disappointing historical performance in the stock
itself.”
Nick Loris of the Heritage Foundation think tank told Watchdog that SolarCity’s
tenuous business model is beholden to the whims of the economy.
“When your business model is built on taxpayer money, it doesn’t bode well when
that money goes away,” Loris said.
SolarCity says the business is in strong financial health.
As of March 31, the company has a projected $6.1 billion in contracted payments
that are scheduled over the next 30 years and are not reflected in quarterly
financial reports, according to Jonathan Bass, SolarCity’s spokesman.
“We incur the costs to acquire customers in the current period and we recognize
the revenue over 30 years,” said SolarCity spokesman Jonathan Bass. “We made
$147 million in Q1 2015. We also have the lowest cost structure in the solar
industry and a well-defined cost reduction roadmap, and we’re ahead of schedule
to reduce our costs more than enough to offset the reduction in the federal
investment tax credit in 2017.”
Most of SolarCity’s business involves leasing rooftop systems to homeowners at a
cost that escalates each year on a 20-year contract. As the system owner,
SolarCity reaps the federal 30-percent tax rebate, an amount that will disappear
in 2017. Rebates will decrease to 10 percent for commercial customers, a group
not currently a large portion of SolarCity’s customer base.
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 Likewise, President Obama’s stimulus fund has been drying up,
doling out a fraction of the billions it has paid for renewable
energy since 2009. In 2013 SolarCity received $127.4 million in
federal grants. And last year? Just $342,000, according to its 2014
SEC report.
The SEC report also shows that SolarCity recorded a net loss of $375
million on a total revenue of $176 million.
Even though SolarCity has been given a virtually free solar panel
factory courtesy of New York taxpayers – rent is $1 a year – the
company is still on the hook to spend $5 billion in the state over
the next five years and employ 3,460 workers. SolarCity acquired
existing panel manufacturer Silevo in the deal, but the proposed
state-of-the-art technology and massive output is something that
neither company has attempted before.
SolarCity admits in the SEC report that the “technology is novel and
involves proprietary and complex manufacturing techniques, which may
result in undetected errors or defects in the solar cells produced.
Any defects in our solar panels could cause us to incur significant
warranty, non-warranty and re-engineering costs.”
Construction has started on the Buffalo factory, which will be 1
million square feet – longer than four football fields.
The last and likely highest financial hurdle facing SolarCity is the
two different federal investigations into its business operations
that could result in damages of millions of dollars.
The first is a U.S. Treasury Dept. probe into whether SolarCity
inflated the sales costs of its leased systems in order to obtain an
increased tax payout.
“If the Internal Revenue Service or the U.S. Treasury Department
were to object to amounts we have claimed as too high of a fair
market value on such systems, it could have a material adverse
effect on our business, financial condition and prospects,” the SEC
report said. “A hypothetical five percent downward adjustment in the
fair market value in the approximately $501.2 million of U.S.
Department of Treasury grant applications that have been awarded
(from 2007) through June 30, 2014 would obligate us to repay
approximately $25.1 million to our fund investors.”
In the second investigation, the U.S. Labor Dept. is looking into
wage and hour issues in California.
“On February 28, 2014, the Department of Labor informed us that it
had made a preliminary determination that some of our employee
positions were not properly classified, and has made a preliminary
determination of damages,” the report said.
If the Department of Labor were to conclusively determine that we
violated certain of these labor laws and regulations, Solar City
says it would be required to make the appropriate payments of back
wages and other amounts to employees, and could be subject to fines
or penalties.
But the key challenge for SolarCity remains that business model –
leasing rooftop solar systems in order to claim state and federal
subsidies.
“What’s really alarming to me is that solar technology keeps getting
better and better and this works against SolarCity because people
aren’t going to want antiquated, outdated technology on their homes
with leases locked into an escalator cost,” said Heritage
Foundation’s Loris. “We don’t know the rate of electricity in the
future. They are in a mad dash to take advantage of the tax credit
because it’s expiring at end of 2016 and it’s their only way to
raise free money. Otherwise, no one would pay the high up-front
cost.
“I don’t know what will happen to them — do they have the money to
handle these main issues?” Loris asked.
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