solarcity corporation (scty) earnings report: q1 2016 ... · solarcity corporation (scty) earnings...

CompanyName:SolarCityCorpCompanyTicker:SCT YSector:Utilit iesIndustry:Utilit ies

EventDescription:Q12016EarningsCallMarketCapasofEventDate:2.12BPriceasofEventDate:17.0

©2014TheStreet,Inc.Al l R ightsReserved Page1of24

SolarCityCorporation(SCTY)EarningsReport:Q12016ConferenceCallTranscriptThefollowingSolarCityCorporationconferencecalltookplaceonMay9,2016,05:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

AaronChew;SolarCity;InvestorRelationsLyndonRive;SolarCity;Co-Founder&CEOTanguySerra;SolarCity;PresidentandCFOPeterRive;SolarCity;Co-Founder&CTO

OtherPart icipants

PatrickJobin;CreditSuisse;AnalystKrishSankar;BoAMerrillLynch;AnalystPhilipShen;ROTHCapitalPartners;AnalystBrianLee;GoldmanSachs;AnalystColinRusch;Oppenheimer&Co.;AnalystJulienDumoulin-Smith;UBS;AnalystBenKallo;RobertW.Baird&Company,Inc.;AnalystVishalShah;DeutscheBank;AnalystGordonJohnson;AxiomCapitalManagement;AnalystMichaelMorosi;AvondalePartners;AnalystSvenEenmaa;StifelNicolaus;AnalystSophieKarp;GuggenheimPartners;AnalystEdwinMok;Needham&Company;AnalystPavelMolchanov;RaymondJames&Associates,Inc.;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheSolarCityfirst-quarter2016earningsconferencecall.

Today'scallisbeingrecorded.

IwouldnowliketoturntheconferenceovertoMr.AaronChew,VicePresidentofInvestorRelations.Pleasegoahead,sir.

AaronChew(InvestorRelations):

Thankyou.GoodafternoontoallthosejoiningustodayforSolarCity'sfirst-quarter2016earningsconferencecall.

LeadingthepresentationtodaywillbeadiscussionfromourChiefExecutiveOfficer,LyndonRive;ourPresidentandChiefFinancialOfficer,TanguySerra;andourChiefTechnologyOfficer,PeterRive,afterwhichpointintimewewillopenupthecalltoquestions.

Asareminder,today'sdiscussionwillcontainforward-lookingstatementsthatinvolveourviewsasof




todaybasedoninformationcurrentlyavailabletous.Forward-lookingstatementsshouldnotbeconsideredaguaranteeofthefutureperformanceorresults,andreflectinformationthatmaychangeovertime.

PleaserefertoSolarCity'squarterlyshareholderletterissuedtodayandtheslidesaccompanyingthispresentation,aswellasourperiodicreportsfiledwiththeSecuritiesandExchangeCommissionforadiscussionofforward-lookingstatements,andthefactorsandrisksthatcouldcauseouractualresultstodifferfromourforward-lookingstatements.

Wedonotundertakeanyobligationtopubliclyupdateorreviseanyforward-lookingstatement.

Inaddition,duringthecourseofthiscall,wewilluseanumberofspeciallydefinedtermsrelatingtoourbusinessmetricsandfinancialresults,includingnon-GAAPfinancialmetrics.

WerefertodefinitionsofthesetermsandrequiredreconciliationbetweenallGAAPandnon-GAAPfinancialmetricsincludedintheshareholderletterissuedtodayandtheslidesaccompanyingthispresentation,whichareavailableonourInvestorRelationswebsiteatinvestors.solarcity.com.

Withthatfinallybehindus,IwouldliketointroduceSolarCity'sChiefExecutiveOfficer,Mr.LyndonRive.

LyndonRive (Co-Founder&CEO):

Thanks,Aaron.

Forthequarter,weinstalled214megawatts.Thatisdramaticallyaboveourforecastof180megawattswaswhatweforecastedduringthelastearningcall.Tanguywillgiveanupdateonthebigimprovementthere.

LetmejumpintoQ1bookings.So,Q1bookingscameinalotlowerthanexpected.Wehadabunchofheadwindsthathitusallatthesametime,andIwouldliketowalkthemthrough.So,forNevada,wewereexpectingthatgrandfatheringwouldbeapprovedthebeginningofFebruary.

Atthetime,everybodywasinfavorofgrandfathering.TheGovernor'sofficewasinfavorofit.Thesolarindustry,thelegislators,consumers,andaswellastheutilities,wereinfavorofgrandfathering.Now,thatdidnothappen,andthatactuallyhadaspillovereffectintootherstates.Customerswereconcernedaboutiftheygosolar,wouldtheygetgrandfathering.

Now,thishasactuallybeenaddressed.Alotofstateshavemadeitclearthat[there's28]grandfathering.AndinQ2,wearenotseeingthisconcernmuchatall.

WealsohadabunchofpendingregulatoryitemsinCalifornia,MassachusettsandNewHampshire.TheseareallopenitemsinQ1thatnowhavebeenresolvedandactuallylookreallygoodforthesolarindustry.Wenowhavelong-termvisibilityinthosestates.And,infact,wehaveneverhadthistypeoflong-termclarityforsometime.So,thoughitwasrockyinQ1,wenowhavethatclarity.

WealsoincreasedpricinginJanuary.Andwiththeincreaseinpricing,itpulledinoursalescycle.So,typically,wehaveabouta15to20-daysalescycleforresidential.WithourcustomersknowingthatwearegoingtoincreaseinJanuary,theycameinandmadethedecisionearlier.Whatthatessentiallyallowed--whathappenedtous,then,isthatstartingtheyear,essentiallyflushedourpipelineandnowwehavetobuildanewpipeline.

Wealso,halfwaythroughthequarter,endedourMyPowerproduct.Wenowredesignedit.It'salotbetter,andalotmoresimpleproductforacustomertounderstand.Previously,itwaskindofahybridbetweenapowerpurchaseagreementandaloan.Nowitisafixedmonthlypayment.Customerslikeitalotmore.




Wejustlaunchedit.Welauncheditlastweek.Andweareexpectingtoseeabigdemandforthat.

Wealsohavedifferentfinancingterms.Previously,itwasonly30-yearfinancing.Nowwehave20-yearand10-yearfinancing.Wearealsoseeingabigincreaseindemandforownership,andwewanttomakesureweaddressthatmarket.Sowearequiteoptimisticaboutourloanproductthatwejustlaunched.

Andthen,the30%taxcredit,thatgotextendedforfiveyears,whichisagreatwinfortheindustry.Buttheeffectofthatiscommercialcustomerswhoareundertimepressuretomakethedecisioninordertogetthesystemsinstalledin2016,theynowhavemoretimetomakethedecision,justgoingthroughthestandardprocurementprocess.So,weareseeingthebookingsincreaseagaininQ2,butwehadalullinQ1.

Becauseofalltheseheadwinds,volumewaslowandthatincreasedourcustomeracquisitioncosts.Thesehaveallbeenaddressed.Sothesearealltemporaryaffectedus.WearestartingtoseecustomeracquisitioncostscomedownquitedramaticallyinQ2.Butitwilltakeusabouttwoquarterstogetbacktonormalizedcustomeracquisitionlevels.

So,becauseoftheeffectofQ1bookings,weactuallynowneedtore-guideontheyear-endguidance.So,thepreviousguidancewas1,250megawatts.

Thenewguidanceisgoingtobe1,000to1,100megawatts.ThisisbecauseofQ1bookings.Andthen,aswellaswearetimingourcommercialinstallationsclosertointerconnectionfromtheutility.Wehaveseennowthatafterweinstallsystemsandtheinterconnectiontimelagmaybethreetosixmonthafterwards,soweareactuallytimingittomatchtheinterconnectiontimeframe.

Forthequarterfor2Qbeforecosting185megawattsinstalled.But,asmentioned,theseheadwinds,asIdiscussedthathitusinQ1,theyarepassednow.Wearelookingforwardtoseeingtheeffectofourconsumerloanproduct.The--thiswillalsoallowustoexpandintonewstates.TherearesomestatesthatdonotallowustoofferaleaseorPPA,andwiththisnewconsumerloanproduct,wewillbeabletoofferaleaseandPPAinthosestates.

Andthenintermsofregulationorpolicy,wenowhavebetterclaritythanwehavehad--(audiogap)rightontime.

ButIwillhanditovertoTanguy.

T anguySerra(PresidentandCFO):

Thanks,Lyndon.

Weinstalled214megawattsinQ1.Inthe214megawatts,thereisa14-megawattutilityscaleprojectthatcameininthelasttwodaysofthequarter,whichwewerereallyexpectingtocomeinthefirstfewdaysofApril.Crewsoutperformedandtheweathercooperated.

Butnevertheless,wecameinnicelyaboveourconservativeprojectionsonourresidentialinstallation,andcommercialcameinwhereweexpected.ThemegawattswedeployedinQ1hadavalueof$3.46perwatt,downslightlyfromthepriorquartersonthebackoflower[ESRIC]pricing,andanincreaseinthemixofcommercialdeployments.ThepieceIamthemostexcitedaboutforthisquarterishowmuchwemonetizethe$728millionoffinancingcomingininQ1.Thiswasamassiveaccomplishmentbyourcapitalmarketsteam,ledbyRadSmall.

At$3.12perwattdeployedinassetfinancing,itisalittlebitabovewhereweexpecttobeonarunratebasis,givenwetookourassetswithnobackleverage,downto76megawattsfrom257megawattsinQ4.Financingforusreallyislikeworkingcapital,andthe76megawattsrepresentsaboutamonthofassets




thatareintheToBeFinancedbucket.

Furthermore,aboveandbeyondtheabsolutedollaramount,Ilikewherewearestrategicallyonfinancing.Wehavemonetizedeverypieceofthevalueofawatt,withtaxequity,residentialandcommercialassetdebt,aswellas[extra]financing.Wetappedthebankmarketsandthesecuritizationmarkets.

WealsodidacashequitytransactionatthebeginningofQ2,andIwilltalkmoreaboutthatlater.Buttosummarize,wemonetized$3.12perwattdeployed,or$728million.And,asperusual,thereisamemothattiesourauditplanstatementexplainingthisnumberindetailedmethodology.

Ourbillcostscontinuetobebest-in-class,under$2awatt,theteamledbyEricRothenberg,whoisdoingaphenomenaljob.BothourresidentialandcommercialbillcostswereflatinQ1inspiteoflowervolume,whichimpliesourvariablecostscontinuetocomedown,andweareontrackwithourlong-terminstallgoals.

LyndontalkedalittlebitaboutoursalesinQ1andpartofthefixedcostswerebookedthroughyieldingahigherthanwewouldlikecustomeracquisitioncostsof$0.97perwatt.Overheadismarginallyuponanabsolutedollarbasiswithsomeinvestmentsinpolicyandlegal.Butwefeelgoodaboutwhereweareheadingthere.

Lastly,quickhousekeepingnote,wetweakedthemethodologyforcapitalunitcosts.Weaddedinthecancelcostsaspertheindustrystandard,butwetookoutthecostassociatedwithmanagingtheportfolio,whichwearenowreportingseparately.Andthere'safullcostmemoexplainingthedetailsasperusualonourwebsite.

SoasImentioned,we'vebeendoingalotofworkonourfinancereportinginprovidingclaritytoourbusiness.[Regarding]showingourrecurringcashflowsfromthegenerationofourportfolio.Wegenerated$67millionofbillings,paidfor$14millionofmaintenancecosts,andasImentioned,thosecostswerepreviouslytheunitcosts,unitbillcosts,wearetakingthemoutandputtingtheminherenow.

Andwepaid$21million[tax]distributions,about$37(inaudible),andwepaid$14millionofinterestontheassetfinancing,whichleavesinQ1$18millionofrecurringcashflowtoSolarCity.

NotethatinQ1thatthecashflowfromtheportfoliowas$27million.Thatincludedone-off$10millionpaymentfromMyPowercustomerspayingdownprincipalaftertheirtaxcredit.We'vegonebackandcheckedonthishistoricallyandprovidingamemoonthewebsitetyingbacktoourfinancials.

Whenyouputitalltogether,withthe$768millionofcashwereceivedfromfinancing,the[$780million]wespenttobuildtheassets,payfortheoverheadandtheworkingcapital.Ourdevelopmentcompaniesroughlybreakeven.Butwhenyouaddinthe$28millionofcashreceivedfromtheportfolio,oursolarbusiness,oursolardevelopmentbusiness,generated$10millionofcashinQ1,evenafterpayingforalltheR&D(inaudible)ourinvestmentinGridsoftwarethatwehaveatSolarCity.

Cashflowpositiveforthesolarbusiness--forthecoresolarbusiness.Furthermore,weinvested$42millioninourcellandmodulebusiness,whichcontinuedsuccess.AndPetewilltalkmoreaboutthat.Butoverall,Iamhappytohaveproventhatoursolarresidentialandcommercialbusinesscanbecashflowpositiveandgeneratevaluecontractedin[menial]cashflowsaboveandbeyondthecash.

Asyoumighthaveseen,weexecutedcashequitytradeoversomeofourassets.It'sagreattrade.Wehadasuperhighqualityinstitutionalinvestordiligenceourassetsandourprocesses,andwedidafirstofitskindtradefor$227million.Thereisalargeclassofinvestorsthatarelookingforunleveredyield,andthesecurednewpricehasnoreferenceforLIBORandis[non-recoursetoOC.




Ifitisaclearflooronthevalueofourresidentialasset,atleast$3.25perwattofcashupfrontandwestillownsomeresidual,andweownthe20to30-yearresidualcustomerrelationship.Iamhappytohaveprovenoutthisalternativesourceoffunding.

Thethingthatmatterstousiskeepingthecustomerrelationship,andweoffergridservicesfromthoseassets.Weliketheideaofleveraginginourrecurringcashflowsandredeployingthatcapitaltodevcotocontinueloweringoncostsandgrowing.Thisquarter,wealsoaredisclosingour[ESHER]book.

Thisiscashflowfromourassetsontopoftherecurringcashflow[retained]value.Wegenerateroughly282,000SRECsinEastCoaststates,whichwecanmonetize.Andassumingonaverage$100permegawatthour,wegenerateanother$30millionperyearofcash,andthenumberisgrowingaswecontinuedeployingassets.

ThechartintheearningsdeckprovidesexplicitlycontractedSRECswithinvestmentgradeofftakersthatwehaveandtheimpliedcashflowsfromthosecontracts.Retainedvaluecontinuestogrowonanunleveredbasis,andgiventhefinanceoftheassetsandreducingthemegawattsunfinancedasdiscussedatthebeginning,thenetretainedvalueincreasedfrom[$1,963,000,000to$1,994,000,000].

Ourbalancesheetcontinuestobehealthy,andwearecontinuouslymovingassetsfromthe--indevelopmentfromourrevolverintoouraggregationfacilitiesandthentoourlong-termoptions,beitsecuritizations,timesdebtorcashequity.Openingnewfinancingsourcesoftakeoutwasanimportantstrategicstepforus.

Itisimportanttounderstandthatallofourdebtpiecesarespecificassetsyieldingeitherrecurringcashlessorwhetheritisaclearfinancingtakeoutorvehiclesthataretiedtothem,andthatareenginesthatcandeployhundredsofmegawattshaslimiteddebt.

Withthat,letmepassitovertoPetetotalkabitmoreaboutthenewproducts.

PeterRive (Co-Founder&CTO):

Hi,everybody.PeterRive,ChiefTechnologyOfficer.Sothepastcoupleofmonths,somegreatprogresshasbeenmadetowardsthefuturevisionforhowrooftopsolarcanbecompensatedandintegratedintoutilityoperations.Specifically,agroupofutilitiesandsolarcompaniesjointlyproposedalong-termsolutionthatsupportsnetmeteringbeinginplaceuntil2020,removesuncertaintyforcustomersongrandfathering,andrecognizesthevaluethatsolarprovidesthedistributionsystem.

Thepost-2020frameworkisbasicallytovaluetheseexportedenergyattheenergypriceplusthevaluetothedistributionsystemplustheenvironmentalbenefits.Thisapproachshouldworkforusandisinlinewithourgoaltoincludestoragewithmostofoursolarsystemsaroundthattimeframe.

Additionally,abigpartofthediscussionswearehavingwithregulatorsandutilitiessurroundadditionalbusinessmodelopportunitiescreatedbycustomer-sitedenergyresources.Andtothatend,weareexcitedaboutsomeproductreleasesthataddressutilityinfrastructureneeds,whichismorethana$50billionayearmarket.

Wenowprovideproductsandservicesforfirmgenerationaswellasthetransmissionanddistributionsystem,nowseeinga3Xgrowthrateinthisarea.Wehaveover100megawatthoursofstorageundercontract,andplantocompleteoneoftheplanet'slargestfirmanddispatchablesolarsystemsinHawaiithisyear.Wearealsoengagedinseveralpilotswithsomeofthelargestinvestor-ownedutilitiestoprovethebenefitsofourcontrolsystemswithinthedistributionsystem.

Gridfunctionsthathavetraditionallybeenperformedthroughequipmentliketransformersandcapacitorbankscannowbeperformedbysolarinverters,providinguswithopportunitiestoextendourincome




streamsbeyondthesaleofenergy.

Andwiththatupdate,Ithinkthatwearemovingtoquestionsandanswers,Ibelieve?

AaronChew(InvestorRelations):

Operator,wewillopenuptoQ&A,please.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

PatrickJobin,CreditSuisse.

PatrickJobin (Analyst-CreditSuisse):

Thanksfortakingthequestions.Firstquestionjustaboutthecashequityfinancing,whatisyouroutlookforthatmarketorsourceofcapitalforremainderoftheyear?Andthenthanksforthisdisclosure.Wearekindofbackingintojustoveran8%unleveredIRR.Isthataboutright?AndthenIhaveafewfollow-ups.Thanks.


Hi,Patrick.Thanks,it'sTanguy.Solook,wethis--thethingthatiscleartoushavingdonetheworkhereisthatthismarketisreal,exists,andthereismarketparticipantsthattheyarevery,veryactiveinit.Theytypicallyhavehadexposuretotheresidentialandsolarassetsbutinvestedinanumberofdifferentinfrastructureclasses.

SoIthinkthismarket,asIdiscussed,isreasonablybig.Sinceweannouncedthis,we'vehadanumberofinbounds.But,atthisstage,wearenotwillingtomakeanycommitmentsfortheresttheyear.Butit'sa--it'sclearlyanassetclassthathasinterestfromsomeofthelargest,mostsophisticatedinstitutionalinvestorsontheplanet.

Andthenthespecifictermsofthisspecificagreementdon'tallowustodisclosethediscountrate,butwehavedisclosed,Ibelieve,enoughinformationforyoutodoyourwork.Andit's--yournumberisprobablyright.


Okay,andthenmysecondquestion,Iguessit'satwo-partquestion,relatestothecoststructure.Justwhenwethinkaboutputtingfewervolumesthroughthesystemherein2016,giventhebookingschallengesinQ1,howshouldwethinkaboutcadenceoftotalcoststructurethroughtheendoftheyear,whereyouthinkyoucanendtheyear?

Andthentherelatedquestion,Iguess,relatestomix.HowsizablewouldtheC&Imixbeinthevolumeguidancenow?Andwhat,ifany,volumesareyouincludingwiththeutilities,scale,solarandstorage?Thanks.


Sothe--PetementionedthereisaprojectinKauaithathetookscalethatwewouldbebuildingout.Thatoneisclearlyintheguidance.Therestofthemixisroughlythesamemixashistorically,callit80/20,residential/commercial.Wecontinueonthatmix.Doesthatansweryourquestion?





Andthenthecostquestion,theequipmentcostswehaveclear--


Wevariable-izesignificantlytheinstallcoststructure,sothatnumberisgoingtocontinuetocomedownonalike-for-likebasis.So,residentialassetsaregoingtocontinuegettingbuiltforless.Therearesomeprocurementsbenefitsthataregoingtoripplethrough.Costofpanelsaregoingtoquicklytodeclineaswellascostconverters.Sothosenumbersaregoingtokeepcomingdown.

Andthen,Lyndonhadsomecommentsaroundthecostofacquisition--.


Yes,thecostofacquisitionwillcomedownquitedramaticallyinQ2.Butitwillprobablytakeabouttwoquartersorsobeforewegettonormalizedacquisitionlevelsthatwehaveseeninthepast.


Andalso,Ithinktheywere--ontheutility-scalequestion,likewearecarvingoutaprettyspecialnichehere,andadifferentiatedtypeofgeneratorwhenyoucombinesolarandbattery.Soit'snotlikeatypicalutilityscalesolareconomics.

LikewithKauaiasanexample,itisabout$0.14akilowatthourPPA,anditisaverydifferenttypeofPPAandthatitiscombinedwithabatteryintheenergyisavailableatnight.ButthesameisalsotruewiththeprojectthatwearefinishinginstallingrightnowinConnecticut.It'sacombinationofapowerpurchaseagreementwithacapacityagreement.

Sothemajorityoftheutilityscalebusinessthatwearepursuingisthiskindofhybridbetweensolareconomicsandbatteryeconomics.Butit'snotlikewearesigningup$0.03,$0.04akilowatthourutilityscaleprojectsoranythinglikethat.


Thankyou.

Operator :

KrishSankar,BankofAmericaMerrillLynch.

KrishSankar (Analyst-BoAMerrillLynch):

Thanksfortakingmyquestion.Ihadafewofthem.Firstone,Lyndon,ahigh-levelquestion.IfIlookatitoverthenextlastcoupleofyears,ithasbeenalotofmovingparts.Youguyswantedtoretainassetsnow.Thefocusisshiftingalittlebit.Wearewillingtosellmaybeforpricediscounting,whateveritis,youchangefocusfromgrowthtocostreduction.Somybigpicture,firstquestioniswhatexactlyisthebusinessmodelofSolarCity?AndIhadacoupleoffollow-ups.


SothebusinessmodelofSolarCityistoprovideenergyatalowercostthanyoucangetittodayfromfossilfuel.Andthenlong-term,ourgoalistotransformenergyinfrastructuretoarenewableenergyinfrastructure.Indoingthis,therearemanydifferentproductsthatcustomerswant.Somecustomerspreferapowerpurchaseagreement,somecustomerspreferleases,andwehaveseenagrowingdemandforcustomerswantingtoowntheequipment.Andthatiswherewehavesolarloans.




Buttoansweryourquestion--Ithinktherewasanotherquestiononvolumeandcostoptimization.Yes,wehavereducedvolumeandwearefocusingoncostoptimizationforthisyear.


Allright.Didyouguysquantifywhatexactlywouldbethecostexitingcalendar2016?


No,wehaven'tgivenaforecastfor2016.Wehavegivenaforecastfortheendof2017of[225].


Butthatisstillontarget?


Yes,westillfeelgoodaboutthat.


Allright,andthenanotherfollow-upis,itlookslikeyouneed60%ofyourinstallisweightedinthesecondhalfoftheyeartomeetthe[32]gigawatttarget.SoIamcuriouswhatgivesyoutheconfidenceyoucanhitthat,andwhatarethekeyfactorsthatwillbethekeydriversforyoutohitthe[32]gigawattsthisyear?


Yes.Sowefeelveryconfidentaboutourgigawatts.Nowthekeythingthereisbasedonthestatepolicies,the[WC]rightnow,isthatweactuallyhavetremendousclarityinallourprimarystates.So,ifsomethinghappenstooneoftheprimarystates,feelgoodaboutthegigawatts.Thegettingto[1.1],thatalsothenweneedtoseeimprovementinconversionratefromtheloanproduct,andIamoptimisticabouttheloanproduct.ButIfeelveryconfidentaboutthe1gigawattsanddependingonhowtheloanproductgoes,willgetuspotentiallyto1.1gigawattsorover.


Gotit,thankyou.

Operator :

PhilipShen,ROTHCapitalPartners.

PhilipShen (Analyst-ROTHCapitalPartners):

Thankyoufortakingmyquestions.Justasaquickfollow-uponMyPower,canyoutalkabout--canyoujustgiveusabiggeroverviewoftheproduct?Specifically,doyouhaveapartneronthesolarloanproduct?Doyouhaveasourceofcapitalthatyouhavealreadydesignatedandidentifiedforthatproductspecifically?Andthengettingbacktomix,canyouhelpusunderstandontheannualguidancehowmuchmightbeMyPower?


Sure.Sothe--sointermsofthepartner,foressentiallytherelaunchofMyPowerweareactuallynotgoingtobecallingitMyPower.Itisjustalittleconfusinginthename.It'sgoingtobeasolarloan.It'sa




littlemorestraightforward.Butessentially,itisMyPower2.0.

Theproducts,thefixedmonthlypaymenttothecustomer,the--outofthegateswearegoingtobepartneringwithmultiplefinancialpartnerstoprovideit,toactuallyreviewitasacashsale.Wewillbesellingitandthensomebodyelsewillbefinancingit.Sothatisthecurrentplanfortheloanproduct.

Intermsofmix,itishardtoforecast.Historically,ouroutofthegates,MyPowerwasrun20%range.Thenitstartedwindingdowntoaround12%,15%,dependingonthestate.ButIamoptimisticaboutit.Wehaveseenatrendtowardsconsumerswantingtoownit,andifyoucanprovidefinancingcosts,itmakesitveryaffordable.Wethinktheownershipmodelwilltakesomeshareofourbusiness.


Lyndon,canyoushareanyofthenamesofthefinancialpartnersbychance?


Notatthisstage.


Okay,onemoreifImay,andIwilljumpbackinthequeue.Withthecashequitydealinplace,canyoutalktousabouthowyouviewABSversuscashequity,howyoumighttogglebetweenthetwo?Whatmightweseenext?ShouldweexpecttoseeacashequitydealnextoranABSaheadofthat,sincethedebtmarketsareincrementallyimprovingsinceearlythisyear?

Andthenadditionally,canyoutalkusthroughpotentiallytheeventualtaximplicationsofthecashequitydeal?So,giventhefactthatmuchofthedepreciationispassedontotaxequityinvestors,whatarethepotentialtaximplicationsfromthecashequityfinancing?Thanks.


Thanks,Philip,it'sTanguy.Sofirstquestiononsecuritizationversuscashequity,thewayourbusinessworksisindevelopedassetsandpipelineisfinancedbytherevolver.Wethentakethatoutwiththetaxequityandtheaggregatefacility.Andthen,wehavegottimeandwhatwereallywanttodoisoptimizearoundthat.Sothere'sanumberofmarketsthatcantakeoutandputpermanentcapitalintheseassets.

SothesecuritizationmarketIhavealwaysliked.Weclearnorthof$3awattinthesecuritizationcontext,andasignificantportionofthebackend.Sowelikethatmarketalot.Again,thekeyhereisclearingourcosts.Onceweclearourcosts,thenitisaliquiditydecisionasopposedtoapenultimatedecision.

Thecashequitymarketis--webelieveinpricebest-in-class,firstofitsclass--kindsecurity.Thatisamarketthatisgoingtocontinuetobeavailable.Moreplayersareenteringthisparticularmarket.And,overtime,wethinkthecostofthatisgoingtobecomingdown.

Andthenthereisthebankdebtmarket.Idon'tthinkyoushoulddiscountthebankdebtmarket.Thebankdebtmarketisattractiveandthere'sanumberofbanksthatarelookingforreallyelongatedpaperat--withsuperhigh-qualityassetsinUSdollars.AndthethingIwouldsayaboveandbeyondanythingelseisthatthequalityofourreporting,thequalityofourdata,thequalityofourprocess,theauditabilityofeverythingfromourpeopleinChinathatarelookingatoursupplier'sfactories,downtoourO&Mbusinessandthewayweacceptassetsorfleetistrulyphenomenal.

Andsoweareabletoaccessbothcapitalthatotherplayersmightnotbe.So,Ifeltaboutallthosedifferentsectors.




Idon'twanttopredictwhatwearegoingtodonext.Ithinkthebeautyofhavinganumberofchoicesisthatwearenotoverlyreliantonanygivenmarket.AndIthinkthat'sreallyimportantaswethinkaboutcapitalstructurehere.So,onthetax(technicaldifficulty)--doesthat--sodoesthatmakesense,Phil?Doyouneedanyotherclarificationsthere?


No,thatmakessense.Andifyoucantalkaboutthetaximpact,especiallyonthepretaxMPV,thatwouldbefantastic,thanks.


Sure.Sothe--Idon'twanttospendtootechnicalhere,buttheinvestmentisstructuredasacombinationofdebtandapieceofpreferred.Andso,asaconsequence,itisfinancingandthe--thereisnotaximplicationforusupfront.


Okay,thanks,TanguyandLyndon.Iwilljumpbackinthequeue.


Thanks,Phil.

Operator :

BrianLee,GoldmanSachs.

BrianLee (Analyst-GoldmanSachs):

Thanksfortakingthequestions.Ihadtwoofthem.Maybetheeasyonetostartoff.Ithinkintherecentpast,youguyshadtalkedabout,Ithink,about$2.8billionto$3billionofcapitalintotalneedingtohittheoperationalplanfor2016.Nowwiththenewtargetinplace,canyouupdateusastowhatthatnumberwouldbe?

Andthenasafollow-uptothat,howmuchyouhavealreadysecured,maybeaquickrundownontaxequitytodate,DES,andanyotherformsofcapitalyouwouldcounttowardsthatto2016fundingtarget?AndthenIhadathirdquestion.


Sure.Hey,Brian,it'sTanguy.Sotheroundnumbers,right?Aboutagigawattofvolumeandroughlyonaverage[$2.7billion,$2.8billion]coststructure,andabout$2.8billiontotal,sothat'stheroughbreakdownoftheassetsofthecapitalthatweneedforrefinancingpurposes.Overthelastfourmonths,wehaveraised$1.1billionandowearewellontracktobeabletoraisethatcapital.

TheonethingthatwiththecashequityIthinkisinterestingtonoteisthat,asaconsequenceofthecashequity,weactuallypaiddownsomeofouraggregationfacilities,freeingupmorecapacityfromthere.Sothat'sthebeautyofbeinginamodelwhereyouarerecyclingcapital,whichisyou'reabletousecapitalmorethanonce.Andsowiththat,rightnowwehavegot$714millionofavailableprojectfinancingcapacity,whichincludesjustunder$500millionoftaxequity,asyoucanseeonpage9.

BrianLee (Analyst-GoldmanSachs):

Okay,thankyou.That'shelpful.Thesecondquestionwasjustaroundthe--Iguessmaybethephilosophyaroundgrowthhere.Thisisthethirdyearinarowyouhaveloweredthevolumetarget.Idon'tthink




therehasbeenoncewheretherewasafinancingissueatplay,atleastperyourguys'commentaryastowhatmighthavedriventheneedtoadjustvolumetargetsoverthepastcoupleofyears.

Sogivenhowimportantthatpartoftheequationistoyouguysfundingthebusiness,wonderingIguessatahighlevelwhatthethoughtprocessisaroundmaybecompletelyslowingdowncustomeraddstothepointwheremaybethecumulativecashfromtheinstalledbasestartstooffsetsomeofthegrowthOpEx,andyoucanself-fundtosomedegree.Andsobasicallytargetingabsolutevolumesnottogroweachyear,whichdoesn'ttranslatewellrightnow.--itappears,basedonthemarket'sreaction.

But,justmaybestartfocusingonnetcustomeradds,eveniflowereachyear,thetargetedbettercashflowandprofitabilityprofile.So,justbecurioustohearyourthoughtsontransitioningtosomethinglikethat?


Sure.Letmejustaddressthe[refi]costsforthisyear.Sotheoriginalplanwas1,250megawatts.Theadjustmentforthatisnothingatalltodowithanythingrelatingtofinancing.ItispurelyjustbecauseoftheessentiallymultipleheadwindsthathitusinQ1.

Ifitwasn'tforthat,wewouldprobably--theguidancewouldstayasisorprettyclosetowhereitisrightnow.The--everythingjusthappeningallinonequarterwasjusttoomuchtorecoverfromandstillkeepontrackfortherestoftheyear.WehavealreadyseenbigimprovementsinQ2,anditshouldgeteverythingbacktonormalizedlevelsagaininQ3.

Intermsofgrowth,weareveryexcitedaboutalotoftheinnovationthatwearedoinghere.Andalthoughweareseeingabout20%growththisyear,Idon'twanttoforecastfor2017,butoncethebusinessstartsgeneratingcash,thegoalwouldbetogobackintogrowthmodeagain.

Operator :

ColinRusch,Oppenheimer.

ColinRusch (Analyst-Oppenheimer&Co.):

Canyoutalkalittlebitaboutthecosttrajectorytodate,justintermsofyourconstructioncosts?Obviouslynotcomingdownquiteasmuchaswewouldhaveexpected.Canyoutalkalittlebitaboutwhat'sgoingoninternallywiththat?Andhowweshouldseethatmoveforward?AndIknowyouhavetalkedaboutitalittlebit,butjustspecificallywhatareasyouaregoingtogetthecostoutof?


ThanksColin,Tanguy.Absolutely.Sojusttobeclear,theQ1costsontheinstallpanelareacombination--


Yes,yes.Iamjusttalkingabouttheconstructioncosts.Iamfullyawareoftheamortizationoverthenumberofmegawatts.


Agreed.So,theQ1costswas$1.98inQ1;(technicaldifficulty)[$1.92]in4Q.So(technicaldifficulty)makesureweareclearonisthatthisisablendofresidentialcostsandcommercialcosts.Ourresidentialcostsarelowerthanourcommercialbuildcosts.Andbothresidentialandcommercialwereflattodownonalike-for-likebasisbetween4QandQ1,butthemixaffectofdeployedassetsin1Qskewedupthecostper




wattofresidential--oftheblend,sorry.

Butthethingtonoteisthatbothresidentialandcommercialareseparatelyonadownwardtrajectory.Sothat--nothinghaschangedthere.ThathasbeentrueaslongasI'vebeenhere,Ithinkhistoricallyforever.


Yes,andacoupleofthingsonwhatweareseeingthatwillhelpreducecostsaswehaveseentheISPofmodulepricesdecline.Weareseeingthesamehappeningwithinverters.Andthenthereisacoupleofprettybigbreakthroughsinthemountainharborontheresidentialsideaswellasonthecommercialsidethatwillfurtherdrivedowncostsandgiveusalotofconfidenceforourlong-termcosttargets.


Okay,great.Andthenasyoulookatthevarietyofthewaysthatyoucanmonetizetheseassets,howmuchlead-timedoyouneedfordecision-makingpurposesfromlookingatwhat'sgoingoninthemarkettodecidingwhichrouteyouaregoingtogo,andtothepointthatyoumonetizeandactuallypricethesethings?Andhowmuchflexibilitydoyouhaveintermsofswitchingfromonestrategytoanotherwithagivenportfolio?


Well,so,thekeyhereishavingtaxequityfundsthatarefullydeployedwithalltheassetsbilling.Onceyouhavegota--becausethatcreatesavery,veryneatseriesofassetswithinthecashflowsthatareverydiscreetandeminentlyfinanceable.So,justforthesakeofargument,typicallyyouwouldraisethetaxequityinagivenquarter,deployit,andinstallitinthenext,andthenhaveeverybody--allthecustomersintheunderlyingassetsreachpermissiontooperateintobeingabletobebillinginthefourthquarter.

Sothat'sthetimeline.Sotheassetsgofromtherevolverandthenultimatelytotheaggregationfacility.Andthenatthatpoint,executingwhetheritisonabankdebttransaction,asecuritizationorcashequitytrade,inweeks,not--sortof--callittwomonths,60days,90days,togetatradedonealongthoselines.Dependingonmarketconditions,thesecuritizationmightgofaster.Thiscashequitytradewedid,wediditinthatsortoftimeframe,andthiswasamarketthatdidnotexist,wherewehadtowritethedocsfromscratch.Sothatgivesyouasenseofthespeedatwhichwecanexecutehere.


Okay,great.Iwilltaketherestoftheoff-line.Thanksalot,guys.

Operator :

JulienDumoulin-Smith,UBS.

JulienDumoulin-Smith (Analyst-UBS):

Sojustfollowingupalittlebitonthatcashflowbreakevencommentaryinbringingthebusinessbackinlinethere,whendoyouthinkyou'llgettheresuchthatyouwillbeginfocusingongrowthagain?Ijustwanttokindofreframethestory.

Andthensecondly,youtalkaboutnormalizingyourcoststructure.Iwouldjustbecurious--youareindeedreiteratingyourcosttargetsfor2017,correct?IjustwanttomakesureIhavethiscorrectthatyouwillgettothatlevelatthatpointintime?





Wewon'tgetto2017costdollarsinthenexttwoquarters,sothatisnottheaddcounts--the--


Right,butyouareontargetfor2017,in2017?


Yes,yes.Westillfeelverygoodaboutourontargetfor[225]attheendof2017.Sowestillfeelgoodaboutthegoal.So,butintermsofyourgrowthquestion,weareworkinghardtowardsbeingcashflowpositiveinQ4.Andatthatpointintime,wearegoingtobelookingat,asyouknow,themarketconditions,thecashgenerationofthebusiness,andthendecideifwewanttogobackintogrowthmode.


Andcanyoudefinethecashflowtargetalittlebitmore,justwhatthatmeans?


Cashiscominginthebusinessismorethanthecashgoingoutofthebusiness.


Thedifferenceincashpositionbetweentwoperiodsbeinghigher.


Yes,andnotcountinganydilutedequityrate.


Julien,justonecomment,justtobeclear,inQ1--soweactuallyachievedthattargetonjustthesolarbusiness.Weactuallycleared$10millionandsomeretainedvalue.Onacashbasis,wecleared$10million.Andtheninvested$42millionintooursouthernmodulebusiness,wherewearebuildingabest-in-classasset.Sothatfeelsprettygood.


Gotit.Sojusttobeclear,though,aboutlikehittingthedevcocash,youhititforthisquarteroutsideofthe--obviouslythecellmodule?


That'sright.


Andsothegoalhereisthat,toLyn'spoint,tomakethecellularmodulebaronslide12gototheothersideofthechartthatsaysunequivocalthatwearegeneratingcashevenafterhavingpaid(technicaldifficulty).


Okay.Fairenough,guys.Thankyou.




Operator :

BenKallo,Baird.

BenKallo (Analyst-RobertW.Baird&Company,Inc.):

Hey,Lyndon,Peter,AaronandTanguy,thankyoufortakingmyquestion.Krish'satmotherMerrill,Ithinkhisquestionwasverygood.WhatisSolarCity,ifwetakeastepback?AndIthinkthemarketthinksthattheresidentialbusinessintheUSisnotagoodbusiness.Andsocanyoujustexplainwhyitisagoodreturnoninvestedcapitalrightnowforyouguys?

There'salotofmathbeingdonearoundsomeoftheseassetsalesandpeopleworryaboutcapital.Andjusttalkusthroughwhatyou'rethinking,whatthebusinesslookslikeinfiveyears.Andifthereturnoninvestedcapitalisdifferentthanthemarketthatyouarelosingmoneyonthesedealswithcashequity.Thankyou,that'sit.


Yes.Letmeaddressthatheadon,becausethisisoneIreallydon'tagreewith.So,let'sjusttakeastepback.Soherearetheeconomics,right?Ona--andwehavebeenextremelytransparentonwhereallthenumberscomefrom,allsidesofourGAAPfinancials,they'reallonthefinancials.Sothereisnodebateaboutthesenumbers.

So,wecanbuildtheseassets--2015webuilttheseassetsforabout$2.70perwatt.Sothatisabout[$1.90]ofconstructioncosts,someCOA,andthensomeoverhead.Butwearebuildingthemfor[$2.70]awatt.

AsLyndonsaid,inQ1,oursalescouldbehigher-than-expected,butoverallourbuildingswereout[$2.70]awatt.Now,inthat[$2.70]awatt,asPetesaid,thecostofpanels,thecostofinverters,isclearlygoingtocontinuecomingdown.Soitisacostperwattthatisdeclining.Thereisclearlythreeyearsofregulatoryrunwayhere,asestablished,asPeterandLyndontalkedabout.Sowhatthatgivesusisthatthetoplineeconomicsarenotgoingtochangetoomuchoverthenextthreeyears.

Whenyoucombineallthatwithanexquisitecashtrade,withaleading(inaudible)investor,weareclearingatleast$3.25awattforaportfoliothatissomewhat--reasonablyrepresentative,butarguablywithalittlebitlessCaliforniathanourcurrentmix,weareclearingatleast$3.25.Sotheworst-casescenarioweareclearing$3.25,less[$2.70],andyouareclearing$0.50awattontheresiasset.

Nowthatisamarginconcept.Thereturncapitalconceptiswhatisdoesittaketogrow?Andthisisakeypoint,whichiswhenwegrow,weaddwarehouses,weaddtrucks,wehadqualifiedinstallers.Butthereisnocapitalcostsassociatedwithgrowingthat.Andasyou'veseen,wehavedisclosedourspecificCapExforoursolarbusiness,oursolardevelopmentbusiness,whichisinthesingle-digitmillionsofdollarsaquarter.

Sotheideathattheresidentialbusinessdoesnotclearsuperattractivereturncapital,isjustwrong.Andhappytospendmoretimeonthat--


Areyoutakingshare?


I'msorry?





Areyoutakingshare?(multiplespeakers)Marketshare.Howisthatchanging?Andwhy?


So,asapercentageofinstalls,theQ1numbersarenotoutyettothebestofmyknowledge.IsawVividcameoutbeforethiscall,Ihaven'tgone--timetogothroughthenumbers.Butitfeelslikewearedoingprettygoodinthemarket,yes.


IthinklikeinQ4,itwentupfromQ3.IhavenotseentheQ1numbersyet,butitisprobablygoingtobelikeinthekindofmid-30s,Iwouldguess,andsomewhereinthere.Idon'tthinkthatthereisareductioninourshareofinstallationsoranything.


Yes,anditwaswiththenewloanproductandIthinkitshouldaccelerate.


Doesthatansweryourquestion?Itisreallyimportanttomethatweallagreethatthisreturnoncapitalconceptismeasuringthedifferenceinmarginovertheabilitytogrow.Onthatbasis,weareabsolutelyagreatbusiness.


Andso,whatisthedifferencebetweenyouandnumbertwo,three,andactuallynumber10?Andhowhasthemarketchangedwithsizeandscale?Becauseifyouguys--ifcapitalisconstrained,thendoesn'teveryoneelsehavethatissueandthenneedstobeabletotakeshare?OramIwrong?


So,capitalisnotaconstraint.Let'sreallyaddressthat.Ithasnotbeenaconstraint.Itisnotourcurrentconstraint,andit'snotcapital.Thisishighqualityassetsandpeoplewanttofinancethisasset.


I'vegotmassiverespectforourcompetitors.ButtheonethingIwouldsayisthatourkeycleardifferentiatorsarecoststructure.Ourcoststructureisbetterthaneverybodyelse's,andweareultimatelysellingwiththecommodityelectrics.Weareclearlyinabetterplacethere.

TheotherbigdifferentiatorIthinkisalltheinvestmentthatwe'remakingunderPete'sleadershiponthegridservices,theagreementthathascomeupwithbetweenusandsomeofourpeers,oneoftheEasternstates,inthestateofNewYork,Ithinkit'sablueprintforhowtheindustryisgoingtogofromforward.

So,we'vegotcleartechnologicalleadership.WeownourMountainHarborinvestingaroundthe,aclearavailabilityofcapital,andweareultimatelybuildingwhatisourbestinclasspowerplantsforthelowestcost.Thatfeelslikeprettystrongdifferentiators.


Yes,andTanguymentionedthis,butourdebtproductitselfonlaunchinghardwareallowsustostillfosterlessdisruptionforthecustomerwith--butatthesametime,itjustlooksbetterthananyothersystemoutthere,so,historically,it'sjustabetterlookingsystemthananyofourcompetitors.





So,I--Lyndon,Ithinkweshouldfocusonthatmoregoingforwardthantaxequityflipsanddepreciation,accelerateddepreciationoverfiveyears.Iamnottellingyouhowtorunyourbusiness,butWallStreetthinksit'swaytoocomplicatedandweneedtogetbacktobrasstacksofwhatyouguysdo,andthatisjustmytwocentsthere.


Hey,thatisgreatfeedback.Ithinkwewillmaybehavealittlemorein-depthproductreviewthenexttime.Ithinkthat'sgreatfeedback.Weareinvestingalothereandwehavemassivedifferentiation.


Thankyou,guys.

Operator :

VishalShah,DeutscheBank.

VishalShah (Analyst-DeutscheBank):

Thanksfortakingmyquestion.Youmentionedyourcustomeracquisitioncostswillcomebackinthenexttwoquarters.WheredoyouthinkcostswillbeinQ3,Q4timeframe?Andthenisthesecondhalfmixgoingtobemoreskewedtowardscommercial,giventhatyouaresortofpushingsomeoftheinstallationstoclosertothoseinterconnectiontimeframes?Anddoesthatimpactyourprojectvalueoreconomicsinthesecondhalf?


Sointermsofcustomeracquisitioncosts,Iexpectittocomeroughly20%-ishdownthisnextquarterandthenthefollowingquarterbacktonormalizedacquisitionlevels.Intermsofcommercialmix,roughlyitisgoingtobeabout20%.SoIdon'texpecttoomuchchangeinthetotalvalueofmegawattsdeploy.


Okay,great.AndthencanyoujusttalkaboutwhetheryouareraisingPPAratesinothermarketsoutsideofCalifornia,andhowthatisimpactingjustthecustomerbehavior?Itlooksliketheworldfinancingenvironment,whileitisgood,itisslightly,intermsofcosts,itisworsethanwhatyouwerepreviouslyexpecting.Sodoesthattranslateintohigherratesinindustryoverall?


Yes,IwouldsaythebiggestimpactinapricingincreasewastheflushingofthepipelineandacceleratingcustomersfromJanuarytoDecember.So,startingtheyearwithessentiallynopipelinewasthebiggestimpactintermsofthepricingincrease.Weincreasedslightly,soit'sabout[$0.005]to$0.01perkilowatthourdependingonthemarket,soit'sasmallincrease.Butthatdoesmakeadifferenceinadollarsperwattbasis.

Wedon'tseethisasareasonforlosingbusiness,atleastwedon'tseeyet.Andweactuallyseealotofourcompetitorsactuallyneedingtoincreasetheirpricingtoo--infact,wehaveactuallystartedtoincreaseourcommercialpricingaswell.


Okay,great,thankyou.




Operator :

GordonJohnson,AxiomCapitalManagement.

GordonJohnson (Analyst-AxiomCapitalManagement):

Thanksfortakingmyquestion.SoIguessfirstwithrespecttothecashequitydeal,Iguesswithrespecttothecashequityportion,the$345million,isthatcashthatisavailabletoinvestimmediatelyingrowthanddebtrepayment?

Andtheninadditionandwithrespecttothatdeal,willyouguyscontinuetorecognizerevenueandotherfinancialsontheprojects--ortheprojectcashflowsthatweresoldtoJohnHancock?ThenIhaveafollow-up.


Yes,andnotquitesureIamfollowingthenumber.So,thecashequitytradethatweannouncedwas$227millionofcashin.Withthat,werepaidinparttheaggregationfacilitiesandso--of$151million,andtherestwascashthatweclearedfortheCompany.Andsothatiscashsittingonourbalancesheetrightnow.


Right,butisthatcash--sorry,isthatcashassociatedwiththetaxequity--isthatcashthatyouhaveavailableinyourcofferstoimmediatelyextendtoapplytogrowthanddebtrepayment?Oristhatcashalreadyaccountedfor?Isaportionofthatcashalreadyaccountedfor?


Thecashisfungible,sowhenweexecuteatrade,cashcamein.Werepaidapart--$151millionofaggregationfacilitiesandtherestwascashthatwasabsolutelyavailableonourcashbalanceonadailycashbalance,yes.


Okay,andthenareyouguysgoingtorecognizetherevenuesandotherfinancialsassociatedwiththeprojects--theprojectcashflowsyousold?Willyoustillrecognizethoserevenuesinyourincomestatement,eventhoughthecashassociatedwiththoserevenuesisbeingpaidtoJohnHancock?


So,justtobeclear,thetradeisthatthereis--JohnHancocktakesabout95%ofthecashflows,butweretainaportionofthem.Andsoyes,absolutely,wewillcontinuerecurringthatthatway.


Okay,soyouwillrecognize100%ofrevenues.Andthenwithrespecttoyourguidancetobecashflowpositivethisyear,Ijustwanttobeclearhere.Soyouaresayingyou'regoingtobecashflowpositiveincludingfinancing,sodebtraisesandpotentialequityraisesaswellasmodulemanufacturinginvestment.Soyouarenotseeingyouaregoingtobecashflowpositivefromanoperatingcashflowperspectiveorafreecashflowperspective.Youaresayingyouaregoingtobecashflowpositivefromtheperspectiveofincludingfinancingsyoumaydoaswellasexcludinganymodulemanufacturinginvestment.AmIthinkingaboutthatcorrectly?





Wewillbecashflowpositive,butthatdoesnotinclude--thatincludesallthefinancingfortheassets--itincludesforthequarterforthecostofthemanufacturing.Butiftherewasadilutiveround,itwouldnotincludeanyofthat.Soitisonlyfocusedonallcashgeneratedfromfinancingtheassets.


Okay,okay.Andthenlastly,Inoticedlastquarter--ornotlastquarterbutthequarterbefore,youguidedyourQ4costto$245millionto$260million.Anditactuallycameinat$227million,theGAAPOpEx.SoisthehighercostthisquarterapotentialspilloverfromdelayedcostrecognitioninQ4?Andhowshouldwethinkaboutthattransitioningthrough,Iguess,therestoftheyear?Thanksforthequestions,guys.


Ididn'tfollowthatlastquestion.$240million?What'sthequestion?


Yes.SotheGAAPOpExguidanceforQ4,operatingexpenseguidancewas$245millionto$260million.Thenumberactuallycameinat$227million.SowethoughtthatyourcostcouldbeslightlyhigherthisyearastherewassomedelayedcostrecognitionfromQ4toQ1--notthisyear,I'msorry.ThisQ1,thefirstquarterof2016,itlookslikeyourcostwashigher.Iwantedtoknowifthecostisgoingtoremainatthatlevelorweshouldseesomeworkdownofthatgoingforward?


Sothe--inQ4,aswetalkedaboutlasttimearound,wearereducingthemarketingspendinQ4.Andso,asaconsequence,thosecostscamedownalittlebitonacashOpExbasis.Inthe--butthosecostsarenotlinkedtoQ1.SoinQ1,therunrateweareatrightnowisgoingtostayroughlywhereitiswithincreasedvolume,asLyndonmentioned.Soourunitcostswillcomedown.


Okay.Thanksagain,guys.


Thankyou.

Operator :

MichaelMorosi,AvondalePartners.

MichaelMorosi(Analyst-AvondalePartners):

Firstoff,ontheutilityservicessegment,longer-term,howmuchofafactordoyouthinkthiscouldplayintheoverallbusinessintermsofleveragingcostsoveralargerinstalledbase?Andalsofromamorestrategicstandpoint,asthebusinessbecomesmoreownershipagnostic,whetheritisloanproducts,presumablythatmeansthatthebusinessisincreasinglyagnosticwithrespecttowhetherutilitiesultimatelyowntheseassetsaswell.So,howdoesthissegmentkindofpositionSolarCityforthoselonger-termmarketdevelopments?


Yes.So,andIthinkthatifIlookatthenextdecade,Iwouldbesurprisedifweweren'tderiving,callit,




15%to30%ofourrevenuesfromutilities.Ithinkthatyouendupinasituationwhereyouhaveanenergycontractwiththecustomerandyouknowhowotherassetsfinancethemmaychange,anditseemstogetalotofairplay.Butlikethepaymentstouscomeinpartfromutilityandinpartfromthecustomer.

Butthevaluepropositiontothecustomerisstillcheaper,cleanerandprobablymorereliableenergy.Soagain,Ijustseethat,inthelongrun,2020andbeyond,thewaythatthegridisbasicallydesigned,andmaintained,isfundamentallydifferent,andutilitiesdon'tnecessarilyhavetolookonlytocapitalexpensesinordertobeabletomeetthegridneedsbutitcanlooktothesecustomercitedresourcesforalotofthesebenefits.


Imean,lookingatthattimeframe,tomethereisnodoubtthatallsystemsthatwewillbedeployingatthattimewillhavestoragecombinedwithsmartinverters.Andwhenyouhavethat,youcanprovideallthegoodservicesyouneedtotheutility,theideathatwewillbeinvestingintobigpowerplantsandatthattimehardlygotit.

Andwehaveanassetthatcangenerateenergyatthepacewhereitisneeded,andyouwillbeabletostoreit,andyouwillbeabletoprovideservicestothegrid.Thatisafarbetterwayofbuildingoutthegrid.Andleveragingexistingequipmentthatwewillbedeployinganyway.Sothisisjustoverandabovetheequipment--servicesoverabovetheequipmentwearedeployinganyway.


Intermsofutilityownershipofbehindthemetergeneration,Ijustthinkthatit's--andIthinkthisissharedwitheconomistsandmanyregulatorsthatextendingtheutilityasamonopolypositionshouldbeavoidedasmuchasitcanbe.Ithinkthatpeoplearemorelookingtowardswaystokindofinnovatewithintheutilitysector.

Andso,acoupleofinterestingideasarebeingadvancedintermsofbeingabletogivetheutilitiestheabilitytoearnincomeoffservicestheycanprocurefromaCompanylikeSolarCityratherthannecessarilyonlyearningincomeoffofcapitalexpensesorequipmentthattheyown.


Yes,ifthatutilityoncetogetintothisbusiness,Iactually--Iamveryencouragedbyit.Iwantutilitiestogetintothisbusiness.Iftheywanttogetdirectlyintothesamebusiness,theyshould,justnotundertheregulateddivisionsPetementioned.ItshouldbeunderadifferentpartoftheCompanywhichdoesn'thavetheprotectionofalltheratepayers.

Theycangothroughthesameprocess,makethesameinvestmentdecisionsthatwehavetomake.ButIthinkinthelongrun,itwouldjustbemoresimplistictopartnerinthatarea.


That'sgreat.Andthenwithrespecttotheassetmonetizations,oneofthebiggerquestionmarksaroundtheCompanyandthevaluethattheCompanycreatesishowtovaluetherenewalperiod.Publicequityinvestorshaveapparentlyalwaysveryheavilydiscountedit,oratleastinrecentquarters,theyhave.

TheABSmarketdoesnotattributemuchvaluetoitoranyvalue,yetthecashtheequitydealwithHancockdidn'treally--itwasa20-yearterm.Sowhatcanyoudotoproveoutthatrenewalvalueortomaybeevenchange--innovatearoundcontractstructuresandmaybeevenextendcontractterms,asthereismoreofatrackrecordwiththetechnologyinthefieldandpeoplegetmorecomfortablearoundthelonger-termproductionprofile?




Isthereanyopportunitytokindofpartiallyproveoutthatrenewalperiodbyactuallymakingitnotarenewalperiod,andinstead,makingitalongercontractedperiod?


Well,Ithinkthelongercontractedperiodforthecustomerwouldnotnecessarilybealittle(technicaldifficulty).Idon'tthinkthatwenecessarilywanttotrytoincreasethecontractterm.AndIdon't--Ican'timmediatelythinkofsomewaytoproveoutexactlywhatwillhappen20yearsfromnow.ButIthinkthatIcanjustextrapolateastowhatthevalueoftheenergywillbe.

Andthenalsojustthinkaboutwhatadditionaltechnologycanbedeployedalongsidethat,thatwouldbeparticularlyappealingtothecustomer?So,beingableto,20yearsfromnow,retrofitthesystemwiththetechnologythatcanallowthemtoparticipateinthiskindofgridserviceseconomy,orbeingabletoaddabatterytoaddadditionalreliability,aswellasadditionalincomestreams.

Ithinkwhatgivesmegreatcomfortinrenewalsistheabilitytosupplementtheproductthattheyhavewassomethingthatwillbeevenmoreappealingtothematthepoint,combinedwiththefactthatfundamentally,thevalueoftheenergyisexpectedtobequiteabitlowerthanwhattheyarepayingthefacility.


Yes.Imean,theassetlifeforthisis35,40years.Thedirectwarrantyis25years.So,thereistremendousvaluepasttherenewalperiod.


Andalso,justthevalueoftherelationshipwiththeircustomer,Ithink,isalittlelesstangible,butitispresent,andnotjustthecustomer,buttherelationshipthatwehavewiththehome,seeingasthecustomermaysellit--willlikelyselltheirhomeduringthatperiod.So,andthatisnotastangible,butIthinkinmyopinion,anyway,isincrediblyvaluable.


Allright,thanksalot,guys.

Operator :

SvenEenmaa,Stifel.

SvenEenmaa(Analyst-StifelNicolaus):

Thanksfortakingmyquestions.FirstIwantedtoaskintermsoftheHancocktypeofassetmonetizationtransactions,ifyouthinkofthemegawattsdeployingintheyears--duringtheyear,likehowbigpartofthemixyouwillexpecttofinancethosetypeoftransactionsgoingforward?


Appreciatethequestion.Thanks.Sowe--Ithinkitreallywilldependonwherethefinancingmarketsare.Soinavibrantsecuritizationmarket,youmightwanttodomoreinthesecuritizationmarkets.Butthiscreatesanothersignificantopportunity.

Italsodependson--thisisawaytoclearmoreliquidityupfrontthanwewouldonasecuritization.Italsodependsonspecificliquidityacrossthebusinessatthatmomentintime.So,Idon'twanttogiveamixedforecastbasis.Iwouldexpectwewoulddoallofourassetsovertime,goeitherintobankdebt,




securitization,orcashequity,andanice,healthymixofallthreeoverthecycle,butanygivenperiod,Idon'tknow.


Gotit.SecondquestionIwantedtoask,intermsofyoumentionedthecombinationofthecoststructureontheutilityprojectsyouaredoing,consistingoftraditionalutilityscaleplusstorage.Howshouldwethinkthatisimpactingyourkindofcostcurvehereasyougothroughtherestoftheyear?Imeanyourhigh-dollar-90'sinthecurrentquarter.Asthemixincreases,whatistheimplicationshere?


Ithinkthatinsubsequentquarters,wewillbeprovidingyouabetterframeworktounderstandthecostsandtheprofitassociatedwithsolarplusbatterysystems.SoitisunfortunateatthispointintimeIdon'tthinkwecanbreakitoutorgiveyouagoodindication.ButIthinkthat,generallyspeaking,wewillbeabletogiveyouagoodframeworktounderstandwhatthesolarcostsare,andthenseparately,whatisthecostofstorage.


ThelastquestionIwanttoask,intermsof--andIapologizeifyoumentioneditalready,butifIlookatyourfirst-quarterbookingsandsequentialkindof25%growthcommentaryhere,whatwillbethecatalysthereonbookingstodriveyouguysintothatgigawattlevelfor--or1.1gigawattfortheyeartobeabletomeetthattarget?


SoIdon'tunderstandthequestion.Yousaywhatcausedusto--?


Whatwouldbethecatalysttoincreasebookingsgoingforward?


Right.Sothesolarloanwouldbeagoodexampleofthis.


Sotheregulatoryissueshaveallbeenresolved,atleastmostofthemhave.That'sabigitem.Q1hadmanydecisionsthathavebeenmade.Californiamadeitsdecision,Massachusettsmadeitsdecision.NewHampshiremadeitsdecision.Sothatisallnowbeenaddressed.Thesolarloanproduct,thereisagrowingdemandforcustomerswhowanttoownnewequipment,sowethinkthatwillhaveanimpact.Seasonalitykicksin,sonowweareenteringintothesummer--andthenwearealsogoingtobeexpandingintonewstates,sothoseareotherareasthatwillhelpuswiththeadditionalbookings.


Gotit,thanksalot.

Operator :

SophieKarp,Guggenheim.

SophieKarp(Analyst-GuggenheimPartners):




Thankyoufortakingmyquestion,guys.Ijustwantedtogetyourperspectiveonhowmuchleveragedoyouthinkisappropriatefortheseassets?Andyourfundingmixhasbothquiteabit,ismoredebt-financedinthisquarter,lesstaxequities.So,whatdoyoukindofseeasanormalizedlevelintermsofwhetherornotyouwanttochoosethatthecashflowordebttoEBITDAforthisassetswithinthePowercore?Thankyou.


Yes,IthinkitismorepercentageofPV6--totakeithowthesecuritizationmarketslookatit,soyoulookatthepost-taxequitycashflows,youdiscountthatbackat6%,thatgivesyouadollarnumber.Andthenthesecuritizationmarket,we'llsayanywherebetween70%and80%ofthatnumberwouldbeavailableforasecuritizationprinciple.ThentherearesomeDSERrationsaroundthat,butthatiskindofthemetrictolookat.


Thankyou.Andthenjustasafollow-uponthemix,IguessIjustwanttomakesureIunderstoodyoucorrectly.Ithinkyousaidthatgoingforwardyouexpecttohave80%residential,20%C&I.ButthisquarterinparticularlysawahigherpercentageoftheC&I.Isthatright?


That'sright,yes.


Okay.Thankyou.Iwillgobackinthequeue.

Operator :

EdwinMok,Needham&Company.

EdwinMok(Analyst-Needham&Company):

Thanksfortakingmyquestion.SoIjustwanttoquicklyrevisitkindofyourOpExoryourcashOpEx.Ithinkthisquarteryousaidbecauseofthelowbookingvolume,yourOpEx(inaudible)andexpecttocomebackinthesecondquarterasyourbookingacceleratesrate.JusthowdoyouthinkonoverallOpExfortheCompany?

Ithinkpreviouslyyouguystalkedaboutthatnumberlikelytocontinuegrowingonasequentialandyear-over-yearbasis.JustwanttokindofgetasensewheredoyouthinkOpExorcashOpExwouldbefortheCompany,let'ssaybytowardsthesecondhalfoftheyear?And--orarewekindofatthelevelthatyouthinkyou'realreadygoodenoughtorampupyourbookinglevelsandthereforecankeepitatthislevel?Anykindofguidanceonthat?


Sowereallythinkaboutthecostonaunitbasis,andsothatiswhywedisclosethecostmemo,whichreallytiesallofourOpExnumberstoaper-unitbasis.SothepartsoftheOpExareincludinginoverheadandthecostofsales.Weexpecttheoverheadpieceonanabsolutedollarbasistoberoughlyflatandweexpectthesalesandmarketingpiecetoreflect,asLyndonsaid,adeclineinaper-unitbasisinQ2andQ3.

EdwinMok(Analyst-Needham&Company):




Isee.Andbeyondthisyear,right,asyoulooklonger-term,doyouthink--let'ssayyoucontinuetogrowandyouincreaseyoursizeofyourinstallationsperyear,doyouseeaneedtogrowthat?Or--Iwouldn'tthinkthatasyoubuildoutyourregions,youcankindof--basically,startinthoseregionsandstillcan'tgetmoreleverageofyoursalesteam.Doyounotseethatorcanyougiveussomecoloronthat?


Yes,soyoudefinitelyneedtocontinuetoinvestinsalesandmarketing.Wesawthatwhenwesloweddownourperformancemarketing,soalltheadvertisinginNovember/December,itgenerateslessleads.Soyoudoneedtocontinueinvestingintosalesandmarketing.

Wearelookingatdifferentsaleschannelstocontinuereducingouracquisitioncosts.Whenwelookatdifferentacquisitioncosts,someofthesaleschannelsisactuallyquitelow.Sowewillbescalingthoseoutmoreaggressively.So,butyouwillstillcontinueinvestmentinsalesandmarketing.Idon'tseethatchanging.EveninstateslikeCalifornia,westillonlyhave,callit3%,4%penetration.Soweneedtocontinuetoadvertise.

Operator :

PavelMolchanov,RaymondJames.

PavelMolchanov(Analyst-RaymondJames&Associates,Inc.):

Youmentionedatthebeginningthattheregulatoryclimateisthebestinyears,asyouputit,orinalongtime.Whataretheremainingquestionmarksin--atthestatelevelthatyouhaveyettogetclarityonandthatyouexpecttoberesolvedbytheendoftheyear?


Sothe--I'dsaythebiggestopenitemrightnowisArizona.Idon'texpectwewillgetclaritytheendoftheyear;probablygetclarityQ1nextyear,maybealittlelaterthanQ1nextyear.ButArizonaIwouldsayisthebiggestunansweredstate.Butfortherestofthestates,claritylooksreallygood.


Ithinkthatliketraditionallywhenpeoplehavetalkedaboutclarity,andthewaywetalkedaboutit,ithasbeenastrongfocusonnetmetering.Butthere'salotofdistributedresourceplansthatarecurrentlybeingevaluatedinCalifornia,NewYorkandotherplaces,whereliketheutilitybusinessmodelandthewaythatutilitiescanbecompensatedischanging.

Sothere'salotofinterestingstuffhappeninginNewYorkandCaliforniathisyearthatwearewatchingveryclosely.InCalifornia,wehavegoodnetmeteringrunway,butthere'salotofstuffgoingonastohowutilitiesinCaliforniacanincludethebenefitsofthesecustomer-sitedresourcesinthedistributionsystem.So,there'salotofstuffhappeningtherethathopefullywillcreatetheenvironmentforustobeabletoseegreaterincomesfromoursolarsystems.


Yes,andactuallyexpectedtogetclarityforNevadaintheFebruary-ishlegislation.Thelegislatorsdefinitelywanttodotherightthing.17,000peoplearetreatedreallyunfairlyandsonowthelegislatorswanttolookataddressingthat.AndIknowthatthestatewantstoseesolarcomeback.Thecommunitydefinitelywantsthistocomeback,sothat'sanotherareathatIthinkwherewewillseemoreclarityaroundtheFebruary/Marchtimeframe.





Andthenjustasmallkindoftechnicalquestion.Youintroducethenewlineitemontherevenuestatement,operatingleaseprepaymentsandupfrontincentives.Whatisthatgoingtocorrelatewith?Inotherwords,isthattiedtoyourcashsalesorthemegawattsinstalled?What'stheconnectionthere?


Yes,thanks.Sowhatwe'lltrytodoisreallybreakdowninthefinancialsthe--thereistotalrevenuefromperiodicbillings.Sothattiestotheamountofmegawattsthatwehaveundermanagementandtheirradiance,andthedollarscominginassociatedwiththosePPAs,leasesandlongercontracts.Wethenhaverevenuefromoperatingleaseprepaymentsandoperatingincentives,sothiswouldbecorrelatedtotheone-offdollarscominginfromspecificone-offprograms.Andsothatwillcorrelatetomegawattsinstalledordeployed.Deployedwouldprobablybeabettermetric.


Okay,appreciateit.

Operator :

Thankyou.Andladiesandgentlemen,thatdoesconcludetoday'sconference.Thankyouagainforyourparticipation.Youmaynowdisconnect.


Thankyousomuch.Haveagoodday.

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