Part 11 of 11 in the series SolarCity
California-based SolarCity’s website proclaims, “Every three minutes, someone switches to SolarCity.”
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. 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 technology 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.
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.
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.
SolarCity admits in the SEC report 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 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 Department 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.
Part 11 of 11 in the series SolarCity
Sunset of solar subsidies shadows SolarCity