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Executives

Aaron Chew - Vice President of Investor Relations

Lyndon Rive - Chief Executive Officer, Founder, Director

Peter Rive - Founder, Chief Operations Officer, Chief Technology Officer, Director

Bob Kelly - Chief Financial Officer

Analysts

Patrick Jobin - Credit Suisse

Phillip Shen - Roth Capital

Paul Coster - JPMorgan

Brian Lee - Goldman Sachs

Tyler Frank - Robert W. Baird

Edwin Mok - Needham & Company

Krish Sankar - Bank of America Merrill Lynch

Pavel Molchanov - Raymond James

SolarCity Corp (SCTY) Q3 2013 Earnings Call November 6, 2013 5:00 PM ET

Operator

Good afternoon and welcome to SolarCity's third quarter 2013 earnings conference call. Today's call is being recorded and we will begin with prepared remarks followed by Q&A. Management will be utilizing a slide presentation for this call which is available now for download on SolarCity's Investor Relations page at investors.solarcity.com. At this time, all participants are in a listen-only mode. (Operator Instructions).

At this time, I would like to turn the conference over to Aaron Chew, Vice President of Investor Relations for SolarCity. Thank you. Mr. Chew, you may begin.

Aaron Chew

(inaudible) SolarCity's third quarter 2013 earnings conference call. Heading the presentation today will be a discussion from our two founders, our Chief Executive Officer, Lyndon Rive and our Chief Operating Officer, Peter Rive followed by our Chief Financial Officer, Bob Kelly, after which point in time we will open up the call for questions.

First things first, though. As you may be aware by now, we issued a separate press release earlier this week on Monday, November 4, 2013 for the securitization. As SEC rules on this type of transaction are very, very strict, (inaudible). So I would strongly advise that the analysts will not give questions on this topic (inaudible).

Also, as a reminder, today's discussion will contain forward-looking statements that involve risks and (inaudible) forecasts regarding SolarCity's 2013 financial and operational results. Words such as believe, may, estimate, continue, anticipate, intend, expect, predict, potential and similar expressions as they relate to SolarCity, its business and its management are intended to identify forward-looking statements.

Forward-looking statements should not be considered a guarantee of future performance or results and will not necessarily be accurate indications of the time at or by which such performance or results will be achieved, if at all. Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed and/or suggested by the forward looking statements, including risks identified in SolarCity's earnings press release issued today as well as in the slides accompanying this presentation, as well as additional risks and uncertainties identified in the section entitled Risk Factors in our registration statement on Form S-1, which has been filed with the Securities and Exchange Commission.

We do not undertake any obligation to publicly update or revise any forward looking statement whether as a result of new information, future development or otherwise. In addition, during the course of this call, we will use a number of specially defined terms relating to our business metrics and financial results. We refer to definitions of these terms included in the slides accompanying this presentation, which are now available on our Investor Relations website at investors.solarcity.com.

With that finally behind us, I will introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Lyndon Rive

Thanks,, Aaron. Thank you everybody for your time today. We had a great quarter, very busy quarter, just this quarter. Before we get into the financial highlights, let me just cover some of the business highlights.

We announced two partnerships Direct Energy and Viridian. We are excited about these two partnerships because both, Direct Energy and Viridian sell electricity. We partnered with them to sell our solar electricity. The partnership is off to a good start. With Direct Energy we even went one step further and we co-invested into the assets and we created an investment fund with Direct Energy.

We also announced the acquisition of Paramount Solar. The goal of Paramount Solar is to bring the infrastructure into SolarCity, improve our remote selling capability and then adopt their processes to reduce our acquisition cost.

Paramount's primary shareholder was Guthy-Renker, and their expertise is in customer acquisition and building the technology to acquire customers at the lowest possible rate.

We are then excited to announce the Zep acquisition. The Zep acquisition is not complete, but we have announced that we are going to acquire Zep. We are excited about this as this reduces our installation costs, reduces the customer installation time. This is important. Customer don't want to take two days off work and then we also have the more superior stake when it comes to solar systems. No solar system will be better than ours. Then we increased our cash balance by $397 million with the converts and equity raise that we did.

Let's turn to slide 5. It's a big number here. We now have $1.7 billion of nominal contract payments coming to SolarCity. I will first spend a little bit on this. If you look at 2011, there was $500 million. 2012, a little over $1 billion and now at $1.7 billion, and when you are at this growth rate and you double small numbers, eventually small numbers become big numbers. So at this rate we should get really close to our $2 billion number by the end of the year.

If you look at the Q3 number, we added $328 million. One thing I want to mention here is that roughly a little over $30 million is from military housing. These are military housing projects, where we have booked the megawatts in previous quarters, but because these final contracted terms were not known or the payments were not known, we did not include it into a nominal contracted value. Now, we do know it and we have included it. So a little over $30 million was there. We also booked 91 megawatts of new bookings this quarter.

I am going to hand it over to Peter Rive.

Peter Rive

Hi. This is Peter Rive, Co-Founder, COO and CTO. Q3 was just a massive quarter for us in terms of building up our operational capacity. We deployed 78 megawatts which represents 109% growth overall and 151% growth in the Residential segment as compared to the same quarter last year.

With this new capacity, I feel really, really comfortable with our deployment targets in 2014. We are targeting 475 megawatts to 524 megawatts in 2014, and once that has been deployed, it will put us over 1 gigawatt of total solar under management which is a very, very exciting milestone.

Going to the next slide, which is slide 7. I want to talk a little bit about the market share numbers that we have achieved. If you look at the Q2 market share numbers, which are the only market share numbers that are out at this time, you see that we have increased our market share to just over 26% and to kind of put that in perspective, that is essentially as much market share or slightly more than the next eight competitors combined. So I am really excited to see what this number will look like in Q3 when you include our increased deployment numbers.

Going to the next slide. This is slide eight. I want to talk a little bit about our cost reductions. And if you look at the cost reductions relative to Q2 2012 which is where we are indexing our cost reductions over, you will see that we are way ahead of our forecast. We have achieved cost reductions that are in excess of 30% relative to that index. These cost reductions are coming from a variety of areas. We have spoken a lot about Zep but I just can't tell you how excited we are about the result that we are seeing deploying solar with Zep mounting system here.

We now have through Q2 and Q3 transitions almost completely and if we look at the future products that Zep engineers are working on, and I have spent some time with them and taken a look at some prototypes, so I have incredible safe in our ability to continue to innovate in this area, and not only continue to lower our cost through balance of the system technologies, but also provide other benefits to our customers. A lot of other areas of cost reductions also came in the area of essentially driving and significantly higher volumes through essentially fixed overhead. So very, very excited about the cost reductions that we have experienced over the past quarter.

And with that, I want to talk - hand it over to Bob to talk a little bit about financing.

Bob Kelly

Thanks, Pete. Bob Kelly, CFO. Turning to slide nine. We made excellent progress since we last talked on the development of our financial strategy. Our capital structure and our sources of capital continue to improve as we financially prepare for the anticipated volume growth over the next few years.

On October 15, we completed a follow-on common equity raise. We raised $182 million, 3.4 million shares at $46.54. Concurrently, we introduced SolarCity to the convertible debt market. We raised $230 million of five-year paper at a 2.75% interest rate and conversion rate of 32.5%. These transactions considerably strengthens the balance sheet. When you have a strong balance sheet and you are in the capital intensive business we are in, this will accrue to the other capital raising activity that we deploy on a regular basis. Pro forma cash for 9/30/13, taking into account the $397 million brought in was $528 million for 9/30/13.

Moving on to the second piece of paper in the business, is the tax equity financing. We had tax equity of $149 megawatt at the beginning of this month, November 1. We signed up our fourth new investor this year during the quarter. This bodes well for the supply over the next few years. Historically, we see a lot of repeat investments from an initial investor. A lot of our funds go in funds two, three, four, five, et cetera.

The third piece of paper in the business is the working capital side. We call it working capital or construction facility. We make the sale to the customer. We build the facility under our working capital and then we deploy it into the tax equity market and take it out in the long-term capital markets. On November 1, we redid our working capital facility. We more than doubled the size from $75 million to $160.5 million. We reduced the interest spread to 3.25% and we extended the maturity. It is now a three-year transaction which will mature at the end of 2016. This gives us a great runway for the construction working capital for the volume growth over the next three years.

Just wrapping up the financing. It is probably the most confident I have been entering the year. We will enter 2014 with all pieces of the financial strategy in place. A solid balance sheet, a flexible construction working capital facility, tax equity capacity and access to the longer term capital markets.

Let's go to slide 10 and talk a little bit about the numbers for the quarter, starting with the income statement. I want to as usual focus on the operating lease revenues at $24.8 million, 78% increase year-over-year.

From the charts that Lyndon showed, we now have over 72,000 energy contracts and 400-plus megawatts of installed capacity. When you have that amount of contracts and assets, you want to look at that number in the operating lease to see if they are performing as expected and they have been for this quarter and in the past.

Moving down to the gross margin for the operating leases that was 66%. As we have said in the past, the operating lease cost of revenue, this is simply the amortization of the installed cost over 30 years. There is no feedstock cost in this business with the price of the sun and so you should see margin in that business in the 65% range.

Moving below the gross profit line, I want to talk a little bit about the G&A. This is very much a volume business and you need to take a look at the operating leverage and G&A as one of those lines.

We had flat G&A, Q2 to Q3. If you look at the G&A over 2013, the first nine months, deployments, the megawatts that Pete talked about have grown 30% on a quarterly basis and the G&A has grown 15%. We are seeing the operating leverage that we expect with the volume. I also expect when we get to the 100-plus megawatts for Q4, this operating leverage will be even more visible.

Let's talk a little bit about the cash flow on slide 11. Operating cash for the quarter exceeded $100 million. I have the same comment here as I would have on the operating lease revenue; 400 megawatts and 72,000 contracts is a very predictable cash flow coming in.

We invested over $200 million in Q3 and financed around $86 million. The $86 million was probably a little lighter than you are used to seen, but financial strategy of deploying the megawatts to the tax equity and then dropping them into the aggregation facilities, aggregation facilities probably lagged the installations for about 30 days.

Our cash declined $31 million. You are seeing a build up for the Q4 deployment growth in the next quarter.

With that I will turn it back to Lyndon.

Lyndon Rive

Our retained value forecast has increased roughly a $180 million from last quarter. We are now at $846 million. Just to remind everybody what retained value is, this is the amount of cash coming to SolarCity, after we have paid back our tax equity investors and covered all maintenance cost. This means covering the insurance cost, covering the inverter cost, all services relating to maintaining the systems. Then we discounted into today's value, so that is $846 million. On a dollars per watt, it increased to $1.37.

Turning to slide 13 and looking at Q4 guidance and 2014. What I want to highlight on the Q4 guidance is that we still feel confident about our 101 megawatts for this quarter. On the operating lease revenue, you will see us between $22 million to $24 million. The reason for this is, we are an energy company and we sell solar electricity.

During the winter, there is less sun, so we produce a little less electricity and that's why it's roughly flat compared to the this quarter. Then we expect to be cash flow positive this quarter and to stay cash flow positive after this quarter. Then 2014, will be exciting year with our 475 megawatt, 475 megawatt to 525 megawatt.

Everyone is very excited where we are right now as a company. As Pete mentioned, we are bringing down our cost significantly. As Bob mentioned, we are bringing down our capital cost significantly. We add the two together, so that it is clear that solar is going to have a long-term position here in competing against traditional cost of [REIT] electricity.

With that said, we are going to open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Patrick Jobin from Credit Suisse. Please proceed with your question.

Patrick Jobin - Credit Suisse

Good evening and congrats on the strong quarter and thanks for taking the question. Just running some numbers here. It looks like the incremental retained value per watt really increased significantly to about $1.91. I guess how should we expect that to track and is it possible to breakup that improvement between the mix, financing rates or potentially any contracting terms going in your favor? Then I have a quick follow-up. Thanks.

Lyndon Rive

Sure. This is Lyndon. That is correct. If you do the incremental, it is about $1.91. There is a broad range between residential and commercial. So depending on the mix, it will influence that number. We also are weighing down some of our existing legacy stunts with the retained value as a lower rate, but I wouldn't assume too much more than the $1.90. Maybe slight increases, but not too much more.

Patrick Jobin - Credit Suisse

Great, and then just a question on operating leverage for Bob. You made a lot of progress and it looks like OpEx per watt deployed is going down to $0.59 from $0.80 in Q2. I guess how should we expect that to trend looking out into 2014? Thanks.

Bob Kelly

You are probably going to see when we get to the volume in Q4 and see, if you look back from Q2, Q3, Q4 as we have gone from, I think it was 50 plus megawatts to 78 megawatts to 100 megawatts, and as you get a run rate of 100 megawatts going into 2014, you should continue to see the improvement in operating leverage. We want to see that number coming down and we are seeing some, as Pete said in his comments, we are seeing some great metrics all across on the operating leverage.

Patrick Jobin - Credit Suisse

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Phillip Shen from Roth Capital. Please proceed with your question.

Phillip Shen - Roth Capital

Hi, guys. Thanks for taking my questions. The first one is on AB 327. Given the potential impact, the CPUC has a fair amount of control and a little bit like tier grid structures and measuring. How are you guys are interfacing with them as if they go through the implementation process and what, in your view, might be an ideal outcome?

Lyndon Rive

Sure. This is Lyndon. We are very happy about this outcome. As now the decision gets made with the CPUC instead of with the regulators - instead of the state centers. So the decision gets made with the utility regulators which is key because they understand the cost and benefit associated with solar. So we will be working actively with them to see whatever rate then comes out, how it effects or improves the solar industry.

Phillip Shen - Roth Capital

Okay, any color you can share with us in terms of what an ideal outcome might be or some potential scenarios of how this might play out?

Lyndon Rive

So it's a high likelihood that the like the higher tiers will drop down, but by doing that they probably will increase the lower tiers. Now this actually has happened in California before. They dropped down the Tier 5 and they brought it down to Tier 4 and then brought more customers into Tier three and two. So when that actually happens, it's potential that it will actually increase our market size. Others top tiers will see a slight lower saving, although market size will increase.

Phillip Shen - Roth Capital

Okay, great. And the second question here is for Bob. What is latest with the rating increase. We heard you have made some good progress there, and additionally with the recent securitization announced, I think you guys probably can't talk about that. In general, can you talk to us about what your sense is for when registered securitization may occur and perhaps what milestones may be required to get there?

Peter Rive

Unfortunately, I can't say anything. I have just refer you to the press release that we put out a couple of days ago.

Lyndon Rive

Yes. I know we had some phone difficulty. I got a text saying that the voice was low, quite soft in the beginning, but unfortunately based on the SEC rules, we are on a quiet period and we can't discuss it.

Operator

Our next question comes from the line of Paul Coster from JPMorgan. Please proceed with your question.

Paul Coster - JPMorgan

Yes. Thanks very much. I just want to go back to retained value per watt for a moment. If you could just talk us through some of the other variables that going into that calculation like the cost of the customer acquisition, what impact do you think that had on the cost of installation moving forward and I have a quick follow up.

Lyndon Rive

We don't break out the actual cost between installation or acquisition. We give you a blended cost reduction forecast and we feel very strong that (Inaudible) continued improvements there and we are significantly ahead of our current forecast.

Pete, would you like to add any color to it too?

Peter Rive

Well, I mean what we have seen with Zep. I mean, what we have typically seen with kind of efficiency is, you kind of see a down curve of distribution of efficiency amongst our different crew. Since we have gone with Zep, we simply doubled the productivity of any given crew, but what we just want to see which is really exciting, is that some of our kind of hero crews are getting systems installed in like three hours, so you kind of see that on one side of the distribution. Historically, the efficiency kind of gravitates to that side of the distribution over time, we have incredibly, let's say this we are feeling really, really good about the continued cost reduction in Zep.

It's also important to note that the innovation isn't stopping. I mean, a lot of innovation we are seeing is going be applied to products, products with different group membranes like a better a product on pile possibly.

We did a whole bunch of really kind of other things that the engineering team is still working on, but that will continue to improve over time. It's not like one of those things where we have the product and we have kind of utilized all the savings that we are going to get.

Another area of savings is just going to be essentially not having that kind of gross margin in our cost deck, which is actually quite significant as well, so I just want to say, this is the type of information I would love to have with my competitors like the exact kind of unit cost breakdown, but what we are really focusing on is the all-in cost and the reductions and like I said before we are way ahead of our originally created targets.

Paul Coster - JPMorgan

Okay. Then a quick follow-up for Bob, which is for those are new to this name. Talk to us about the 6% discount rate used in the retained value calculation and under what the circumstances that would change moving forward?

Bob Kelly

Yes. The origination of the 6% discount rate when we were going public in December of last year, we were looking at a long dated asset with the customer contract and we chose the three largest payments that our consumer would make from their mortgage to their energy payment and their call payment. We took, we evaluated the each one of those asset class using the default rates, and obviously default rates on car loans were x, a little higher than mortgages and compared to the default rates of the SolarCity portfolio which was the lowest of all three asset classes.

Car loans, at that time traded in the 6% range. Mortgages were in the 4% range and when we were going public, we chose - okay, it's a pretty good number at 6% at the top end of the range to mark-to-market portfolio to bring your 20-year asset back to today's value. I have said many times that when you take a look at the energy payment, the energy payment is made as an operating cost of the household as compared to the mortgage payment, the capital cost. It gets paid before the mortgage. Eventually, the discount rate on these assets will come down, right on top of upon mortgages or maybe even ahead depending on the interest rate environment et, cetera.

Paul Coster - JPMorgan

All right. Thank you.

Operator

Our next question comes from the line of Brian Lee from Goldman Sachs. Please proceed with your question.

Brian Lee - Goldman Sachs

Hi, guys. Thanks for taking the questions. I had a two real quick ones. First, again on the retained value per watt. I am a bit curious as to why you don't think that value would go higher from this $1.91 per watt this quarter, especially given some of your costs are moving lower. You talked about operating leverage but then also your cost of capital seems like it should go lower with securitization over time. So there seems to be leverage here in place to expand this metric. Can you give us any sense of the thought process around that here?

Lyndon Rive

Yes. There will be some movement on it. I only have said expectations that there is too high expectation on the $1.90. There will be some improvement but I don't want to go out on this yet.

Brian Lee - Goldman Sachs

Okay. Fair enough, and if we think about some of the moving pieces on the cost side of the equation, can you kind of for us, rank between cost to capital, operating leverage and maybe even just hardware and installation cost? What you think are the biggest levers to drive that metric higher?

Lyndon Rive

So I will just add one more there, which is kind of customer acquisition and then I would say that they are all kind of the about same. And okay, I wouldn't want to kind of say that one is all that much more important than the other.

Peter Rive

On the retained value itself, the tax equity market, I think, is holding flat for the most part but the cost itself will come down significantly.

Bob Kelly

Those four components that are all kind of moving in, although kind of equally weighted moving in the same direction. I do think though that maybe cost of capital has a slight advantage over all those other ones?

Brian Lee - Goldman Sachs

Okay. Got it, and my follow up was just probably on tax equity. I guess how are you guys thinking about the right level of tax equity capacity that you have in any given period, because when I look at your year bookings and shipment gross levels here which are pretty impressive but then the decline in your undeployed tax equity balance, I am wondering if you are becoming more hand to mouth here and if you see that creating any potential timing risk on volumes in the future?

Peter Rive

Yes. We see Q4 as a good quarter for us for new tech and funds that we are expecting to close. The tax equity is lumpy. So we will close big deals. So do expect that it will go down and then up again but the goal, of course, would be to have about three months of run rate at a minimum.

Brian Lee - Goldman Sachs

Okay. Thanks, guys.

Operator

Our next question comes from the line of Ben Kallo from Robert W. Baird. Please proceed with your question.

Tyler Frank - Robert W. Baird

Hi, guys. This Tyler Frank, on for Ben Kallo. Thanks for taking my question. A couple of questions. One just a follow up on the tax equity. Can you discuss what you are seeing out there in the marketplace in terms of demand?

Lyndon Rive

Yes. So our tax equity pipeline has never been stronger. So we have a very, very strong tax equity pipeline. The market itself are bringing new investors into the market. So we see expanding in the existing market and our existing investors continue to do repeat investments. So I don't know about the overall market or the rest of the solar companies but I know that on our side, we have a are very strong pipeline.

Peter Rive

Yes. I would probably add to that one color. When you look at the company with the stronger balance sheet, the public valuation, the vertically integrated nature of the business. When you talk to the tax equity folks, you can see all that accruing to tax equity accruing to SolarCity, as opposed to some of the different competitors.

Tyler Frank - Robert W. Baird

Okay. Great, and then as a follow-up, it looks like the megawatts for the quarter were 91. So higher than average capacity that were deployed which should indicate growth in your backlog. How should I look at that from a business standpoint? Are you guys having trouble scaling up fast enough to deploy the megawatts that you are booking or I guess how should we view that?

Bob Kelly

Well, I think the bookings are going to include some commercial systems as well, but generally you definitely want to be booking more than you are deploying in any kind of given quarter, because you know what you book in one quarter is what you will be able to deploy in the out quarters, but we are at the point now where we are very, very happy with our operational capacity and are able to dramatically lower our customers' lead time, so we are feeling very good about bookings versus deployment at this point.

Operator

Our next question comes from the line of Edwin Mok from Needham & Company. Please proceed with your question.

Edwin Mok - Needham & Company

Thanks for taking my question. First question on the 2014 target, where would you see any comp constrain to that? Is it the tax equity market or is it the capacity or are you pretty comfortable with everything that is lined up?

Lyndon Rive

When you are close to doubling, there is always challenges in close to doubling again and I would say the biggest area that we all have to focus on is in investing into the team, growing the team, hiring and training the team. Then it starts off with sales then operations. We have to make sure that financing Zep - so there is no easy yet everything set up, we feel confident about it but there is going to be hard work to get to the targets.

Peter Rive

Again, to put it in perspective, if you look at the Q4 targets that I put on annualized run rate of 400 megawatt, so that in part what gives us the incredible confidence around that target for the full year.

Edwin Mok - Needham & Company

Okay. Great. Then I guess the follow-up question on kind of the financing side. I think you guys have talked about (Inaudible) you have a high offering out there and some of your peers talk about your call as a way to kind of access to capital market. How do you decide which way do you access those markets or which way to get raised fund? Are you trying all different approaches? Is it looking at a cost of capital? Then the way you think [comp] about that?

Peter Rive

Well, I think the way to answer that is, since we went public, we put in place a financial strategy of building the balance sheet, building the capital structure, which would be a lowest of capital in this business for the long run.

Two objectives we have always had is to increase the cost of capital, or decrease the cost of capital and increase the sources of capital. As we put the strategy together of moving from construction/working capital revolvers into tax equity, into aggregation and into securitization or long-term capital markets, you are always moving forward of driving down the cost of capital, yet opening up many, many capital markets. So whether it's YieldCo or people talk MLPs or anything out there. If it's a lowest cost of capital, try to create the asset which is attracted to that source of capital and that has been the drivers of the building the capital structure over the last year or so.

Edwin Mok - Needham & Company

Great. Thank you. It was very helpful.

Operator

Our next question comes from the line of Krish Sankar from Bank of America Merrill Lynch. Please proceed with your question.

Krish Sankar - Bank of America Merrill Lynch

Yes. Hi. Thanks for taking my question. I had a couple of them. Number one, Q3 the upside for the operating lease revenue, was it a function of better contract sizing or was it a function of seasonality?

Lyndon Rive

It's a function of more PPAs, so higher production. Then also part about PPAs we also have PBIs, which is performance-based incentives, so you add those two together is what increased it?

Peter Rive

Then there are more systems that have been deployed in the prior quarter that are included in the revenue in the subsequent quarter.

Krish Sankar - Bank of America Merrill Lynch

Then you talk of the securitization note? What type of deals are there with notes and which credit?

Peter Rive

Krish, we really can't talk about securitization. I advice you use your next question on another topic.

Krish Sankar - Bank of America Merrill Lynch

All right. Got it. Let me ask another other questions then. The goal for next year, the mid-point of 500-megawatt installation. What are the split between resi and commercial on this?

Peter Rive

Yes. We expect about 80-20 split on the two.

Krish Sankar - Bank of America Merrill Lynch

Got it. Okay. Thanks, guys.

Peter Rive

Yes. Maybe I am kind of slightly off on it a bit but a bit reasonable number.

Operator

Our next question comes from the line of Pavel Molchanov (inaudible). Please proceed with your question.

Pavel Molchanov - Raymond James

Thanks for taking the question. First one on the policy front. Arizona, not California. I think the next major data point will come in later this month in relation to the net metering issue in the state. What are your expectations from the PUC? And if you can quantify your exposure to Arizona, that might be helpful too.

Lyndon Rive

Sure. So just so evidenced and right now the ACC staff has made three recommendations to the ACC members in Arizona. The first recommendation is to put this decision into a rate case redesign, which is for 2015. The second is a fixed fee of roughly $3. The third would be a larger fixed fee of roughly $16. We don't know what the commissioners will decide. In terms of concentration, we don't breakout our stake. So I don't think I can give you that answer.

Pavel Molchanov - Raymond James

Okay. On the geography, if you are, again, recognizing that you don't report it by state but are you noticing a shift in the geographic mix of where do the leases come from? Perhaps more growth coming outside California than within California? Is that a fair statement?

Lyndon Rive

No. We are investing in all states and almost every state is doubling, if not more. California will still be a high growth state for us and then the East Coast state will also be higher growth state for us. But New York, Massachusetts, we expect to see high volumes from them too.

Pavel Molchanov - Raymond James

All right. I appreciate it, guys.

Operator

There are no further questions in the queue. I would like to hand the call back over to management for closing comments.

Lyndon Rive

Well, thank you everybody once again for your time. And as mentioned, we couldn't be more excited than we are right now on the position that we are in. Cost is coming down. The demand is there. So we looking forward to finishing off the year with a great finish and entering a new year with a strong start. Thank you, everybody. And have a great day.

Operator

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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