6 Risk Factors That Could Destroy SolarCity

Risk 1: Solar Tax Credit Expiration

SourceSource: 26th Annual Roth Conference, SolarCity investor presentation, page 16

Dependent on credits•SolarCity is currently dependent on the 30% renewable energy tax credit that expires at the end of 2016.•Third party investors such as Google, PG&E, US Bancorp and Honda provide financing to install SolarCity’s panels in exchange for an estimated $13,000 in tax credits per system. •This provides 62% of installation costs.•A reduction or elimination of this tax credit would result in substantial slowing of SolarCity’s growth plans.•To minimize this future risk, SolarCity must quickly lower installation costs, however this generates an additional risk.

Risk 2: Silevo Purchase Results in Cost Reduction Slowdown

•SolarCity achieved 40% cost reduction/installed watt between mid 2012 and the end of 2013.•This far exceeds its long-term 5.5% annual cost reduction target.•However, SolarCity recently acquired panel maker Silevo for $350 million in stock and plans to increase production from 32 MW/year to 1 GW/year within just two years.•SolarCity plans to eventually expand production to 10 GW.•Phase 1 of Silevo Expansion is taking place in Buffalo, New York.•$750 million investment to build 200 MW of capacity.

Mounting Losses

•Between 2011 and 2013 SolarCity lost $318 million.•SolarCity’s leveraged free cash flow is -$785 million over the last year.•It was expected to lose $734 million in 2014 and 2015, before it announced its Silevo acquisition and expansion plans.•SolarCity’s eventual goal is to produce all its solar panels in house, higher efficiency resulting in 25% cost reduction.

Hyper-Ambitious Growth Plans

Risk 3: High Shareholder Dilution

•Growth goals create another risk for investors•Shareholder Dilution

SCTY Shares Outstanding data by YCharts

Dilution Risk Is Increased by 3 Factors

1. Inability to borrow several billion dollars given current cash flows.

• SolarCity’s 2015 revenues projected to be $500 million.• Tesla downgraded to junk status after issuing $2 billion in bonds to build Gigafactory.• Tesla has 2015 projected revenues of $5.4 billion.

2. Interest rates expected to start to rise in 2015, 2016 making debt expensive

3. SolarCity’s stock is cheap currency• Trading at 31 times sales.• 4.7 times retained value (present day value of profits of current customers over the next

30 years).

Risk 4: Customers Buy Instead of Lease Solar Systems

•Declining cost of solar systems is driving customers to buy -- not lease. •SolarCity achieved -4% gross margins on system sales in Q1 vs 40% retained value margins on leases.•First Solar is predicting 66% reduction in system cost within next 10 years.•Would likely result in 33%-50% reduction in cost of residential solar system.•SolarCity leases typically include 2.9% annual price increases.•Customers face a 77% increase in energy prices over 20-year contract versus no increase if they buy a system.

Risk 5: Retained Value Assumptions May Prove False

•SolarCity has 100,609 current customers with $2.5 billion under contract, with $1.3 billion estimated retained value.•Retained value assumes 6% discount rate for cash flows. •Assumes 90% 10 year contract extension at present rates.•29% of retained value is derived from this contract extension.•Customers will have legal right to require SolarCity to remove its system and purchase competitor’s system that can generate power at 5-6 cents/KWH vs SolarCity’s 27 cents/KWH (in 20 years).•Wall Street Journal calculates retained value with 10% discount rate and 66% contract extension results in 40% drop in retained value.

Risk 6: Valuation

•SolarCity trades at 4.7 times official retained value estimates -- estimates that are most likely themselves greatly overstated and will have to be adjusted downwards.•SolarCity trades at 7.8 times more conservative retained value estimates.•SolarCity currently trades at 31 times sales, 7 times 2016 sales.•Beta of 5.66 indicates immense volatility.•At current valuation the slightest misfire, market correction, or recession could result in massive investor losses and permanent loss of capital.

SolarCity Bottom line: immense potential but high risk

SolarCity investment thesis requires four things:• Renewal, in full, of renewable energy tax credit at end of 2016,• Continued cost reductions AND growth in solar leases,• Minimal share dilution despite immense and accelerating capital

requirements, and• SolarCity’s retained value assumptions proving true despite increased

competition potentially providing cheaper solar power alternatives in 20 years.

SolarCity may still be great long-term investment but this highly speculative company needs to be approached cautiously.•1%-5% of well diversified portfolio•Buy in fifths, dollar cost average, accumulate on weakness•Carefully watch for worsening risk factors

SunEdison: High growth with less risk than SolarCity

Source

SunEdison: Superior to SolarCity For 5 Reasons

1. Superior Scale -- $2.5 billion in current revenue, estimated to grow 40% through 2015.

2. Estimated to be profitable by end of 2015.3. Global diversification: 1.9 GW of solar projects under

management in 12 countries with enormous project pipeline.4. Technology neutral: can source cheapest panels, minimize cost. 5. TerraForm Power yieldCo creates MLP like symbiotic

relationship.

Enormous growth runway

TerraForm Power: Solar Distribution Growth Investment

•TerraForm Power is a yieldCo created by SunEdison.•YieldCo is an MLP like security that owns cash producing assets, pays distributions to unit holders.•Sponsor owns units, receives incentive distribution fees.•TerraForm Power IPOed with 807 MW solar capacity projects with 20-year PPA (power purchase agreements) contracts.•Has right to acquire an additional 1.1 GW of projects, expected to increase cash available for distribution by 40% through 2016.•2.7% current yield with 15% projected distribution growth through 2016.

SunEdison and TerraForm Power: Symbiotic Relationship

•SunEdison has enormous and fast growing portfolio of solar projects.•TerraForm needs new projects with 20-year PPAs to grow cash available for distributions.•SunEdison gains guaranteed market for its projects, improves its balance sheet and receives 65% of TerraForm distributions as well as escalating incentive distribution right fees.•TerraForm gains strong sponsor with enormous project supply to drop down solar projects, fuel strong long-term distribution growth.

SunEdison and TerraForm Power Bottom Line

•SunEdison and TerraForm Power are excellent ways to invest in solar power boom with less risk than SolarCity.•TerraForm Power is excellent distribution growth investment for income seeking investors.•SunEdison is a fast growing, soon to be profitable solar project manager with scale, global reach and enormous project backlog to fuel continued earnings growth.•Both SunEdison and TerraForm are likely to outperform the market in the long-term.

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