SolarCity's (SCTY) CEO Lyndon Rive on Q4 2015 Results - Earnings Call Transcript

| About: Tesla Motors (TSLA)

SolarCity Corp. (SCTY) Q4 2015 Results Earnings Conference Call February 9, 2016 5:00 PM ET

Executives

Aaron Chew - VP of Investor Relations

Lyndon Rive - Chief Executive Officer

Peter Rive - Chief Technology Officer

Tanguy Serra - President and Chief Financial Officer

Analysts

Patrick Jobin - Credit Suisse

Vishal Shah - Deutsche Bank

Philip Shen - Roth Capital

Krish Sankar - Bank of America-Merrill Lynch

Colin Rusch - Oppenheimer & Company

Hugh Wynne - Bernstein

Brian Lee - Goldman Sachs

Michael Morosi - Avondale Partners

Pavel Molchanov - Raymond James

Edwin Mok - Needham & Company

Sven Eenmaa - Stifel

Gordon Johnson - Axiom Capital

Jeff Osborne - Cowen and Company

Operator

Greetings and welcome to the SolarCity Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to your host Aaron Chew, VP of Investor Relations. Thank you. You may begin.

Aaron Chew

Thank you and good afternoon to all of those joining us today for SolarCity's fourth quarter 2015 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive, as well as our Chief Technology Officer, Peter Rive, and our President and Chief Financial Officer, Tanguy Serra, after which point in time we will open up the call to questions.

As a reminder, today's discussion will contain forward-looking statements that involve our views as of today based on information currently available to us. Forward-looking statements should not be considered as guarantee of future performance or results and reflects information that may change over time.

Please refer to SolarCity's quarterly shareholder letter issued today, and the slides accompanying this presentation, as well our periodic reports filed with the Securities and Exchange Commission for a discussion of forward-looking statements and the factors and risks that could cause our actual results to differ from these forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statement.

In addition, during the course of this call, we'll use a number of specially defined terms relating to our business metrics and financial results, including non-GAAP financial metrics. We refer to the definitions of these terms and the required reconciliation between GAAP and non-GAAP financial metrics included in the shareholder letter issued today and the slides accompanying this presentation which are available on our Investor Relations website at investors.solarcity.com.

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

Lyndon Rive

Thanks, Aaron. As the same format as last time, we are not going to go through the slides, the slides are on the website. Feel free to ask any questions at the end. Before we get into questions, I just have a few comments to make regarding 2017 –2015.

Overall the year was a great year and we had 73% growth. We also reduced our cost to $2.71 a watt. We clearly now have the lowest cost in the industry. For the first time in the company's history, the asset financing that we get is higher than the actual cost of the developing end. So, intentionally the development cost is cash neutral and were developing this long return revenue.

For the year, this is the most important metric, we created $740 million of value, which is [indiscernible] tax and debt. In total we have over $2 billion. And once again, on that $2 billion number that’s the recurrent revenue [without] [ph] subtracting all the O&M, all the fees, that's the net amount.

For the guidance, we came in 8 megawatts short for Q4 at 272 megawatts. I'm disappointed in missing the guidance. This is primarily due to commercial delays and stopping installations in Nevada.

As many of you know, the PUC decided to change net metering rates in Nevada, which forced us to stop installations. Our volume in Nevada is about 20 megawatts a quarter. Now homeowners in Nevada want solar, want the freedom to choose where their energy comes from and I think this is going to be overturned by the public through a referendum, a ballot referendum by the end-of-the-year.

On a positive side regarding policy, the federal ITC’stax credit got extended for five years. This is a big one for the industry and expect to see good growth in 2017 and beyond.

California, our largest market was also a very positive outcome. The outcome is well designed outcome by the PUC. It allows the industry to continue to grow. At the same time, prompting the industry to provide more grid related services to the grid.

This will be things like, reactive power, voltage control. This will actually help us educate customers in higher load balance and [indiscernible] energy with peak loads.

This design by the PUC is a great design, as it will allow the industry to install lots of rooftop solar, and at the same time providing a good stability to the grid. In December, I went to Paris for the climate talks and it was cleared by all the world leaders that we have to transform our energy infrastructure and the majority of this is going to move on to renewable energy, which will be solar.

Overall, in terms of policy update the solar market looks very positive. For 2016, we expect to continue to grow at 40% and be cash flow positive in Q4. So, why don't we open up to your questions?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Patrick Jobin from Credit Suisse.

Patrick Jobin

Hi, thanks for taking the question. First question, just thinking about the volume miss in Q4 and more in the Q1 guide being about 18% year-over-year growth for Q1. I guess that includes the 15 megawatts of C&I slipping into Q1? It seems a little weaker than what we and I think the street was expecting. I guess what gives you confidence of a rebound in demand to hit that 40% for next year? That’s the first question. Thanks.

Lyndon Rive

Yes, a few things went into Q1. So we actually created a specific slide associated with this. If you go to slide 11, so Nevada had an impact. It was a little over 20 megawatts. We have the standard seasonality which is about 17%, if you look at our historic performance. We also are changing what we are doing with commercial. So this is a really key thing.

As you install commercial, specifically ground mounts, once we're done with the installation there's a lag from installation complete to when the utility may do the interconnection upgrade. So, it is not a normal interconnection. There may be some electrical component that they have to upgrade.

That electrical component can take six to nine months. And so what we are doing is we're shortening the time schedule, so we are delaying the installations, pushing it in closer to when their electric upgrade will be done, so that working capital of holding these assets will be reduced.

So what you can expect in terms of our commercial installations, they are going to be backend loaded. A lot of the bookings are ground mounts in the East Coast.

The other point is investment into sales and marketing. So in Q4, we were reducing the investment in sales and marketing. This is why our [COA] [ph] has come down.

When we look at our portfolio, leads that come in, there is expensive leads and we have less expensive leads, and essentially we stopped buying expensive leads in anticipation that there was no extension of the ITC.

Now of course with the ITC extension happening, we are now going to invest again to sales and marketing to make up that delta. But those are all the reasons why it is going from 272 to 180 in Q1.

Patrick Jobin

Got it and then I guess my second question relates to capital. So with the potential, I guess market fears of increases in capital costs or fears of capital availability, I guess a two-part question. One, how durable are the sources of capital that underpin your growth forecast for 2016? Do you need equity capital to fund that growth?

Then just broader, how do you think about taking projects on and what the minimum spread may be between formation returns and your cost of capital? Just how wide is that spread and do you think about the business in that way? Thanks.

Tanguy Serra

Hey, thanks, Patrick. So, the multipart question as you said, if you look at our last year, it is easier to talk about last year. We cleared $2.73 per watt on all the watts that we deployed. That's cash that came into the company for each watt that we deployed. That's taking the cash in from the cash flow statement divided by the watts that we deployed. That's a true financed number that's coming in.

That’s obviously about $1.70 of tax equity and $1 of debt, about 2.7. The debt as you know, the way we fund our business is, we originate these assets and then we put them into the aggregation facility, which are really long term maturities and don't have [indiscernible] repayments. Those feel pretty good.

Then what we do is, we take the assets out of those aggregation facilities and either secure tie these assets or what we are doing right now, as we disclosed in the Analyst Day, is monetizing full value of these cash flows. These are the two things we are working on.

Obviously, the SEC won't allow me talk about securitizations so we are not going to talk about it on this call. But the cash equity, we are positively surprised by the appetite in the market and I think there's been some press releases and research reports written about this asset class being generating significant appetite for not only us but for a number of solar players. We received multiple term sheets on that basis and we’re looking that through. That is a series of investors that are reasonably independent from day-to-day market movements.

The other point, Patrick, I want to make which I think is really, really important which is, what we are really focused on is our cost structures. So our cost structure right now is at 2.7, and as you know panel prices and inverter prices in Q1 and Q2 are going to decline.

So we're going see a decline in our cost and so what really matters is how much can you clear upfront to be able to finance that. And even if you assume higher cost, which we don't want, we will negotiate against. But even if you assume that higher cost, we're still clearing north of our costs, which is ultimately what matters here in this business to be cash flow positive.

Patrick Jobin

And we should expect that to be positive into 2016, raising more asset financing in the cost structure?

Tanguy Serra

Yes. Absolutely. Again, just look at 2015, it was 2.7 that we raised versus the cost of 2.7 going into 2016. We think our costs are going to continue decline, and we think that the 2.7 did not have any full monetization cash flows, it was just our debt and securitization. If we include [indiscernible] cash flow, that mix effect will drag that number up.

Patrick Jobin

Thank you.

Operator

Our next question comes from Vishal Shah from Deutsche Bank.

Vishal Shah

Yes, hi. Thanks for taking my question. Can you talk about where you are with the securitization? I know you talked about doing one a quarter, how that market is looking, especially given the recent ABS market volatility.

And also can you talk about your efforts in monetization, how should we should think about - what kind of assets you are looking at, how many megawatts are you looking to monetize those assets for? Thank you.

Tanguy Serra

Sure, Vishal, I really apologize. The lawyers in the room are looking at me shaking there heads saying we just cannot talk about the securitization market right now. [Indiscernible]. I really apologize. I really would want to, but we can't. The only point I would make is if you look at our past track record on securitization it should actually be very good and we expect that track record to continue going forward.

On the cash equity, look, obviously what we've done and I don't want to disclose too much here. But what we've done is - in the analyst presentation we laid out the full pro forma - the full actual cash flows that these assets generate on a unit basis. And the appetite that we are seeing in this market is for a diversified pool of assets, which includes a mix of states, totally typical of our portfolio, a mix of commercial, totally typical of our portfolio, and there's a real appetite for that exposure. And if you think about it, these are very, very high quality cash flows in US dollars.

The energy bill of a homeowner or the energy bill of a very high quality commercial establishment so these are really, really high quality cash flows. We've got track record around [indiscernible], we've got track record on people moving and what happens there, we have track record around billing. We've got massive amounts of data from this company over last seven years on these assets. When we talk to investors who are looking for yield in US dollars, this is an asset class that really generates interest. We have seen there has been rumored or actual transactions in the space which we think are pretty [indiscernible]. The other thing I want to point to is the yieldcos, which is not perfectly comparable, never the less. These dividend yields are in the ballpark of what we talked about here.

Vishal Shah

That's helpful. Can you just also maybe talk about timing of when you should be looking for monetization? It should be soon or maybe second half phenomenon. And also you talked about increasing your focus on the sales and marketing efforts. Are you still able to maintain your cash flow guidance for the end of this year that you outlined late last year? Thank you.

Tanguy Serra

Yes. So the first part of the question is, these are super candidly, these are, you know how it is, which is when you're figuring out a new form of monetization here the last thing you want to put on timing pressure. That is not just good for anyone. So right now, these asset are in aggregation facilities that have long term maturities.

So from a liquidity perspective there is no massive pressure to release these assets from there. As and when we like the pricing and we negotiate terms that we like and this is going to be a landmark deal for the industry, not just for us. We’ll let that happen.

Again, I really don't want to put any timing pressure on the company by announcing something here. We received term sheets. We like what we are seeing. We are making progress but that's all I will commit to. To your second part the question, I think Lyndon answered upfront, which is the answer is yes, and we are going to stick to that.

Vishal Shah

Thank you.

Tanguy Serra

Sure. Thank you, Vishal.

Operator

Our next question comes from Philip Shen of Roth Capital.

Philip Shen

Hey, guys. Thanks for taking the questions.

Tanguy Serra

Hi, Philip. How are you?

Philip Shen

I wanted to walk through your sources and uses of funds for 2016. So if we resume you guidance of 1.25 gigs and [250 watt] [ph], we get to about $3.1 billion in 2016. I'm guessing so later requires another $160 million for a total of $3.3 billion. Does this total number sound right and is there anything we're missing?

Tanguy Serra

Let me make sure that the, Lyndon do you want to talk about Silevo?

Lyndon Rive

Yes, Just a little update on Silevo. So the building should be completed at the end of this quarter probably early Q2. We'll then start moving in equipment. As some of the equipment has longer lead time than we originally expected and so that equipment is going to arriving around Q2, Q3 next year. Because of that it will actually – the effect of that then we can delay the purchasing of some of the other equipment and so a lot of the CapEx or probably about half the CapEx are actually moving to 2017.

Tanguy Serra

Yes, so that’s key, right, which is a significant portion of this [indiscernible] CapEx, so we've already incurred and you've can see in our financials to build out Fremont, a portion of [indiscernible] CapEx for New York can actually get pushed back. So it’s like you know, really important to recognize that and keep that in your mind.

The second point is, round numbers, your math feels right, and the way I think about it is tax equity, I don’t really talk about forecast, the lawyers in the room are not going to let me but if you look historically our cost are coming down, so our cost are 2.7 and they already continuing coming down in 2016. And if you look at what we received historically it’s 1.7 of tax equity and another $1 of debt. So if you assume that growth continues going forward and you assume some cash equity to the mix that’s how you get to your funding sources.

Lyndon Rive

And with increased pricing.

Tanguy Serra

And with increased pricing across the country. And the other thing to recognize Philip is that, we still have capacity available in our aggregation facilities. We have about $200 million and as you know, one you can upsize that and two, as you recycling away out of that aggregation and you're increasing the amount of capacity going over there. So the - your math is right, and we're highly, highly focused on making sure we have that.

The other point I'd say is that the – no, we didn’t say the solar bonds which have September maturity. There is a agreement to roll those over and so push that out in these two years in terms of maturity, which allows us to not have maturity in 2016.

Philip Shen

Great. One more if I may. You guys load the various adoption with solar and with no money down leasing model, their competitors – or competitors out there now with no money down and no payments for 12 months, can you talk about how these offerings by your competitors might be evolving and how they maybe impacting your ability to win customers?

Tanguy Serra

Yes, that’s a new one, I haven’t seen the one actually.

Lyndon Rive

We're not ready to do that. Let me just to be really, really clear we're not…

Philip Shen

Thanks…

Tanguy Serra

At least for that one, that offer was by Petersen Dean.

Philip Shen

Okay. And so I have to investigate exactly what offers, there is always and it sounds too good to be true then there's probably a big catch. So what we'll what it is, how it out there actually of unit financing, the probably offering a low interest, no principal from some bank and then…

Lyndon Rive

So you manifesting just off a lot.

Philip Shen

Yes. So, we'll look at it. And we'll of course react to it, but we won't finance that.

Lyndon Rive

Look, this is an industry which is – is always going to never – always remember right, if the price of power is given, the [indiscernible] kilowatt is given, so what really matters is your cost of financing and your cost to build. Right now we have the lowest cost to build and so when you break it all down that's what really matters and that's what we are focused on.

Philip Shen

Great. Lyndon and Tanguy, thank you very much.

Lyndon Rive

Thanks, Philip.

Operator

Our next question comes from Krish Sankar from Bank of America-Merrill Lynch.

Krish Sankar

Yes, hi. Thanks for taking my question, I had a few of them. First one you know, regards some turnaround your selling operating assets its 7.5% yield, is this more about price discovery or is it a price on a yield or IRR basis about which you choose not to sell an equity stake in your operating assets?

And also what you think is most likely buyers for these assets at your price or ideal price, then I had a follow-up question.

Lyndon Rive

Sure. Hey, Krish, thanks for the question. And really good question. So I don’t want to comment on pricing, specifically. One comment I would make is that I think we disclosed in the Analyst Day that some of these discount rates you talk about the assets would monetize up front somewhere about $3.2, $3.03 a watt, versus a cost structure of 2.7.

So that's at $0.50, $0.60 bread. Also back to Patrick’s question that's a $050, $0.70 spread and that's really how we think about cash and spreads here. It’s more in terms of day one financing versus cost. So that's a $0.50 spread. Now the question is would we take lower? It just not right to speculate at this moment, but as the price that you're mentioning its north of $0.50 spread.

Krish Sankar

Got it. All right. And then a follow up, kind of two-part question, I think this is the first time in what you guys have not provided a quarterly revenue guidance. What is the reason for that and along the path of Nevada the 20-megawatt per quarter head, your full year guidance is still impact ready to even make it to 80 megawatts for the full year?

Tanguy Serra

Lyndon, you want to take the second part of the question before first part.

Lyndon Rive

Yes, sure.

Tanguy Serra

So first part, so I this is my first call as CFO, I like one quarter to make sure that I understand the forecast and take ownership of the revenue numbers a particular which are hard to forecast. And will be – and that going forward. So my bad, but it’s my first earnings call as CFO and I will take ownership going forward.

Lyndon Rive

So in terms of the last one Nevada, yes, we'll have to make it up and primary be on the East Coast in California and the yes it’s a guess that we make up we feel confident that we can make it up.

Krish Sankar

Got it. Thanks.

Operator

Our next question comes from Colin Rusch from Oppenheimer & Company.

Colin Rusch

Thank you so much. With guidance keeping it maintaining it where you had it before and then also looking at buying some more expensive leads I'm just curious about your thought process and not raising the guidance because it would suggest this bigger opportunity that you can go after with that worrying about having to rationalize your OpEx as you move into 2017. So just can you walk us without thought process?

Tanguy Serra

Yes. I mean, really good point. I guess it wasn't for Nevada maybe we be in position that we could. I don't want to do it at the stage. We do have to make up that gap and still have growth. We are again investing into sales and marketing, so do sales and marketing cost to go up again in Q1, go but we are going to invest - to make up the gap.

Colin Rusch

Okay, great. And then as you look at the time between you’re the moment that you are deploying capital on these assets and then the time you can refinance the. Can you just walk us through what you are seeing in terms of shortening about cycle, because they would suggest that that is actually going to be really important piece for you from a cash flow standpoint?

Lyndon Rive

Yes, I agree with you. So The key constraint here is the first part of the capital structure is the tax equity fund, tax equity fund, the first part and we have to wait for the tax equity to be fully deploy and close before we are able to apply a permanent capital structure long-term on these that sets that are behind cash equity funds.

And so what we need to do is with our funding partners and tax equity partners to make smaller funds that can close and more regular basis and able to recycle the aggregation capital faster. That specifically the constraint right now around that and we're in active progress and active work going on that particular works team.

Tanguy Serra

The other thing we are actively looking at is our commercial. And commercial in the ways right now we get paid that inspection and we have to either change that or reduce the time for our insulation to inspection and that's going to push our commercial insulation into Q3, Q4 primarily because of that change.

We don't want to use working capital to wait for that interconnection. And once we are able to change that then of course then will bring it back in, but assuming the current funds don't change we are going to shorten the cycle and push more in Q3 and Q4.

Colin Rusch

Great. And then just so I can follow-up on real quickly on the smaller tax equity financing. What we're seeing in the securitization market is an outright for bigger deals rather than smaller more frequent deals.

How does that marry up with the strategy? Are you guys [indiscernible] to wait in aggregate things or in a little bit eager size or you feel like, the size you been issuing is about right still?

Lyndon Rive

Good question. We're obviously constantly working with our investment banks and working through optimal sizes. We've had really positive appetite from smaller and we've also had said feedback you got of bigger sizes. The problem thing which is – securitization you can put multiple tax equity funds like we have in our own [indiscernible] for example.

We have for our five funds. The program is same which you need to - three or four of these funds to close and not being deployed to be able to securitize themselves as opposed to having one - one particularly very large within very fund which you close at the end-of-the-year then you cycle the capital there, better off having a series of smaller funds that you close every quarter and then recycle the capital there.

Colin Rusch

Okay. Thanks guys.

Lyndon Rive

Its just technicality when a tax equity not a common on the securitization markets.

Operator

Thank you. Our next question comes from Hugh Wynne from Bernstein.

Hugh Wynne

Hi, thank you. Just wanted to follow-up on some of the data you provided on your pricing and escalators of the incremental sales in the quarter. It seems like pricing and new deployments dropped by a penny escalator declined on the other hand your abstract [ph] receipts have risen. I also notice the energy harvest has come down.

I wonder if you could talk about the causes and consequences of that, are you moving into different regions with the different economics and what are the occasions going forward?

Lyndon Rive

Yes, the two biggest reasons will be commercial as well as East Coast growth. So when we're looking at these coast growth, the East Coast has lower PPA rate, but lot higher [indiscernible] it is a big part of our value.

Tanguy Serra

So please look at page four, you got the residential versus commercial mid, and so the numbers we provide on the deployed inspected basis, so the commercial moves out a little bit. So intricate we had very little inspected the point commercial and is coming through in 4Q and so the consequence mix on both price escalator are lower.

On the like for like basic the residential is very, very similar and as Lyndon said earlier on a like for like it says on residential in Q1 this may find these pricing in Q1 which expect to see showing up in the numbers in 2Q, to Q3 as some of the systems get inspected.

Hugh Wynne

Got it, okay. Thank you very much.

Lyndon Rive

Remember the commercial process is significant, the ground mount [ph] in east coast that has some of these characteristics, the cost to build is significantly lower, so back to some of the questions about margins they are actually very, very similar.

Operator

Thank you. Our next question comes from Brian Lee from Goldman Sachs.

Brian Lee

Hey, guys, thanks for taking the questions. I just had just a few. First off on the megawatts or can you give us a sense of how many megawatts we have runway toward with the un-deployed tax equity at the end of Q4 and then from a broader perspective I know the question has been asked a few times, but just wondering if you have seen any shifts in the tax equity landscape? I think just recently we heard a law [ph] renewable tax equity players say they are funding would not grow year-over-year, so just trying to get a sense for what you are seeing broadly in that environment and then I had a follow-up

Lyndon Rive

Sure, a couple questions there. One is in our letter on page 4 we are suggesting that they are $650 million in committed tax equity cash available and as I said on average $1.07 a watt, that’s 3, 400 megawatt committed tax equity capacity as of right now.

And as you know, we are constantly into a beat business and we have two customers, we obviously have our customer [indiscernible] energy, as well as customers as we our customers to home sell deals and returns and we provide excellent customer service to both. And we've had repeat transactions with the bank the financial institutions and the corporate that provide us with tax equity.

We expect that to continue, the relations that we formed are very strong. The assets that we put in the partnerships are performing at or better than expectations. We provide high-quality information and we're continuing to be in the market for our tax would be but we are not seen that dynamic for ourselves.

Brian Lee

Okay, thanks, that's helpful. Then just around the economics of the business. I know there's been a long debate around this assumption around the 6% discount rate with the cash flows so just curious if you had any thoughts around portraying to that different lead and what you've traditionally done in the context of what seems like could be a rising cost to capital for you moving to the year and also in the context of any potential asset monetization what you think you could potentially complete a transaction that in terms of IRRs?

Lyndon Rive

That's a fair question. Here's my perspective which is what to want to make sure we do is we disclose the underlying cash flows of these assets. And so if you look at age five and the Analyst Day deck which then helped model these cash flows and then on page 5 we explicitly saying that we had [indiscernible] 22 megawatts of MyPower, the harvest [indiscernible] extracts that we are seeing for this particular asset classes, for this asset sorry, as well as the escalators and the specific economics of tax equity distribution, those specifics assets are in.

So my perspective here is I would rather provide the cash flows and ensure very clearly transparent the cash they were generating and then the market determine discount rate. I think it is too hard for us to impose a discount rate, we use 6% because that's what we've used to historically. I think it is fine discount rate, but we also the cash flows and will also show the number 6%. The other comment I'll make is one of the next slide, we're actually showing sensitivity there and go we showed four, we showed six, we should eight and we're letting people make the decisions here.

Brian Lee

Okay, fair enough. That makes sense. Last one for me and I will pass it along. Just strategically, has there been any updated not to run the commitment commercial it seems as though a lot of the execution invisible at issues have stemmed from the segment here recently. We've all know that returns are also lower in that segment so wondering if you have had any updated was around the approach to that specific and market? Thanks, guys.

Lyndon Rive

Yes, we had share going quite nicely and commercial. Now we are also learning with the growth one of the things we're learning and winning the hard and it seems to be too often is on forecasting when the projects will be completed. So we still committed to the space. We've got to improve our cycle time of capital on it but it generates value. Obviously -- cycle come down.

Tanguy Serra

Well, just one point with highlighting and on the right, commercial is very broad statement and the margins - on the right commercial securitization and attractive flat roof when it tied ground mount, we have some videos on website around how we can do these. To assume the price of panel, assume the price of inverters, a 10 man crew can do 200 kilowatt job two or three days.

So just assume the labor costs there, these numbers are very, very attractive. It is a segment we like. The issue would be as Lyndon said, forecasting these timeline that you have a five or 10-megawatt project that's one delayed, that’s moving hard for forecasting. But the fundamentally economics don't change.

Lyndon Rive

Yes, just to elaborate a little bit more on what Tanguy just mentioned, we are in a unique position to be able to do the installation work ourselves because of our residential infrastructure because of that infrastructure we then have a lower cost structure for commercial. So we don’t want to like having this unique advantage it gives us clear path to being a dominant player in rooftop commercial.

Operator

Thank you. Our next question comes from Michael Morosi from Avondale Partners.

Michael Morosi

Hi, guys. Thanks for taking the questions. First off, explicitly with respect to tax equity monetization a quarter, it looks like you came in at $1.55 per watt for the least systems. That compares to the size of the Analyst Day where it showed $1.73 of tax equity monetization. Is that -- does that reflect our monetization from CNI or what factors are in there that are pulling down that tax equity monetization?

Lyndon Rive

Yes, thank you for that Michael, good question, so there is two factors in there. One is the C&I by definition is lower in terms of dollars per watt. In terms of tax equity up from versus the residential business of that clearly drags it down.

The size THAT we showed with the 3q numbers were almost exclusively residential, our 3Q vintage, so we decided all for 4Q. The other thing it does is that, these the megawatts we are deployed as the denominator enumerator the dollars that came in. So if you have a funding period in the first week of January that would obviously offset is. So on a like for like basis our residential in Q4 is the same as a regimental in Q3 and our commercial is lower.

Michael Morosi

Okay. That's fair. Just looking at the asset monetization, the strategy seems to focus primarily on monetizing just the 20 year contracted portion. Is there a price at which you would sell the stake out right? Or essentially if you were paid with renewal value would you subsystem out right or if not, is that because would rub into maybe some of the fair market value issues with respect to how the systems are valued for tax equity purposes?

Lyndon Rive

I think there is massive value in renewals to be clear, if you provide excellent customer service to a homeowner or building through long period of time, that service will renew over time. So I think there is massive value in the backend of the yield.

Now, that said, having a yield focused investor understand that feels like something that might be a little bit more difficult or want to pay for that. And so we reserve full rights [indiscernible] we think the renew has massive value and at the same time we're saying that if your yield focused investor that when you really want to just cash your return it doesn’t feel like us – it feels right, separate out the ownership of the renewal from the ownership of the short term cash flow.

Michael Morosi

Okay. And then just kind of last picture and last question, this is bigger picture but what percentage of your installs longer-term do you envision being this asset equity monetization versus ABS? Where would you get efficiencies in a strategy where these long-term investors might even bring their own tax equity or bring their own debt financing to write you basically one check for the whole system?

Lyndon Rive

Yes, that’s super question, look my general sense here is that if you think about solar, right, so origination – originating significant volume solar is regard and we are really good at that. Building these assets for underlying energy contracts, lows cost, safe high quality is really hard and extraordinary and that is the puzzle.

The tax equity piece is a unique US legal complicated structure which is unique to solar and mostly unique to solar. In my mind best case scenario here is we offer white gloss to investors who is looking for cash yield and better that to with the complexity of tax equity. But my mind is where we of demise the returns, and our financing upfront.

That said, if there's a sophisticated tax overall investor that has tax appetite and is looking to invest cash yield we could clearly work them and structure something in. What we're really, really good at is originating energy contracts for homeowners and workers - extraordinary at that.

We are extraordinary in building this asset safe and low-cost and super high quality. The underlying coupon clipping ownership on a daily basis is something we don't think – but we think there is other people who are normally elected.

Michael Morosi

Thanks.

Operator

Your next question comes from Pavel Molchanov from Raymond James.

Pavel Molchanov

Thanks for taking the question, guys. Can we get a quick update on Mexico and the potential International entries that you talk about at the Analyst Day?

Tanguy Serra

Yes, absolutely. Mexico is still going. We are installing megawatts there, we plan to probably launch residential offering in the next two quarters. Once that going then machine will start producing real megawatts.

In terms of other international expansion we are still looking at the markets. We make sure that markets that we go into is a cash generating, high return and so maybe plan on one additional market at the end-of-the-year. It could be first into 2017.

Pavel Molchanov

Got it. And then second, in terms of the comment about raising prices. Last year according to the EIAs data, retail nationwide retail electric prices very, very modest increase, lowest in about 10 years. Is that affecting your pricing power at all?

Tanguy Serra

No. When we increased it we were very cautious in making sure we still have a value offering to the customer. So in most markets we still showing customers about 20% savings off the retail rates. So even with the increase still there we haven increase prices for a while, so there was a lot of movement. Just to set extension, its not - I don’t want people that think this is a massive increase, the blended rate is probably between have a $0.05 $0.75, $0.75 to the overall.

Lyndon Rive

Yes and be careful about looking at the EIAs data, I think, you just look at the data from the published rates and rate increases so at the analyst presentation went through the California rate increases in particular those are locked in and they are going to tier 1 to $0.15, $0.17 and that's - that's a real increase, just you know, significant.

Pavel Molchanov

All right. Appreciate it guys.

Operator

Your next question comes from Edwin Mok from Needham & Company.

Edwin Mok

Hi, guys. Thanks for taking my question. First is on the guidance, I guess I want some clarification on the commercial part you said that you comp the dilating installation because of the electrical connection by the utility. Does that affect the timing and had any impact on full-year guidance or was it just counter near term affect and for the full-year guidance what kind of commercial mix are you factoring into that 1.25 gigawatt?

Tanguy Serra

Yes, I expect about – it start to be about 80/20, you are probably seeing maybe 25, 30 and for commercial for this year. The closure on that is expect commercial to have fairly large volumes in Q3, Q4 as we want to reduce the cycle time.

So what happens is you kickoff utility, try to utility make that – that electrical upgrade, they didn’t do their process it takes them six or nine months to do that upgrade. As they are two months away this will be kickoff our installation to sync up with them, so that we can have better working capital on these assets. This is something we are now learning with a lot of the East Coast grant mount that we are deploying.

Edwin Mok

Okay. Thanks for clarifying that, thanks. And then on OpEx I noticed you came in real guidance on the fourth quarter guidance somewhat flattish. I think from the history of the company you guys have always been pretty aggressive in terms of ramming OpEx. So wondering any kind of color on how we should think about OpEx as we go through the year? Are we slowing the OpEx growth here any color you can provide there? Thanks.

Tanguy Serra

Yes, as Lyndon mentioned earlier, I think in Q4 remember the state of mind at the early part of Q4 was is unlikely will have the ICC experience and therefore that's make sure we rain in some of the stop site [indiscernible] and so we didn’t went through that and as a consequence the steel [ph] rate came to down $0.56 in Q4.

Then in 2015, look our - we've had a phenomenal track record of lowering cost in the operation side of the house. Our cost [indiscernible] proud of that. We think that over the course of 2016 we can continue reducing costs significantly in overhead we're excited by that. So no guidance, no commitment yet, but the Q1 numbers is an initial deposit.

Edwin Mok

Okay. Thanks. One last question if I may. I guess a question on funding side, right, so if I look at x in the year or how you guys are getting on the tax equity, I assume that your tax equity number will come in that below the $1.70 that you talked about for the plan for 2015, as you go through '16, right and while your costs is coming down that kind of imply your debt might have to be higher is that mix might be higher to give you the funding cost that you need to hit your target.

So just wondering, is that why you guys start to look at monetizing some of the operating asset because they put more pressure on getting that financing, can you kind of walk us through that again is our how we kind of think about that?

Tanguy Serra

Yes, fascinating topic. I agree. So if you look at the tax equity piece, the tax piece is – it’s a combination of what tax payers was monetize a tax credit for and with the tax credit were based on a fair market value. So you are saying that the 1.7 has been dropped, you're making implications on the fair market value going forward, which I don’t want to comment on that. But that's the driver there.

But if the tax equity piece goes down then the percentage of the cash flows the tax ex-with the provider is lower, and so the amount of leverage available is actually higher and its a balancing act where if you lower the amount of tax equity that you can actually increase the amount of debt or leverage get because more tax further available.

So that's the mechanics there. Some I think deal with asset monetization, those are two different concepts. For what its worth, yes monetization as the mechanics, as you [indiscernible] market which is if there's more cash available from the cash flows to that cash equity provider then for a given yield the upfront financing goes up.

Edwin Mok

I see. Okay, thanks.

Operator

Our next question comes from Sven Eenmaa from Stifel.

Sven Eenmaa

Yes, thanks for taking my questions. First wanted to ask in terms of your guidance on turning cash flow positive in the fourth quarter, what are the underlying assumptions in terms of tax equity per watt and debt per watt finance, as well as on the blended basis to asset sales, per watt and that is reference to the.2 gigawatts guidance?

Tanguy Serra

Yes, I don’t think we're ready to commit quite yet to the percentage mix, it could be high level numbers, right, which is – so in 2015 we got 1.7 for tax equity, I think you can make assumptions on where that goes on forward, the debt we were clearing about a $1 in 2015 from the securitization we put more in that, that’s get you to in 2015 2.73, so that is a ballpark. And then cash equity is going to be higher than that, so because you might have a full value of the cash flows.

Then our cost there are $271 a watt, and our cost are going to continue coming down in 2016, I think we provided some 2017 guidance of 225. And so cost continue coming down in 2016, so there is spread between what we monetize upfront and our costs thus far. And then as [indiscernible] we have some CapEx that if we can push on that on to 2017 and we're reducing our working capital cycle time associated with commercial, so when we put that altogether that’s how we get there.

Sven Eenmaa

Got it. Thank you.

Tanguy Serra

I apologize, I don’t want to commit too many percentages and numbers as you know, three quarters that’s very difficult to give, I can only give generic numbers. I apologize for that, I wish I could be more precise, I will be shortly.

Operator

Thank you. Our next question comes from Gordon Johnson from Axiom Capital Management.

Gordon Johnson

Thanks for taking my questions.

Lyndon Rive

Sure. Hey, Gordon.

Gordon Johnson

So, I guess, first I wanted to focus on I guess, the MyPower program. It specifically don't know exactly what the initial yield was on the program, I think it was 4.5% and the term is the duration is 30 years, but given California which is clearly the most nice solar state is say that grandfather period is 20 years and the first ABS on the MyPower loans was a blended 5.9% rate suggesting if the rate was 4.5% of those loans maybe being done on pennies on a dollar. Is there any potential that you guys make in the program, or am I thinking about this quickly and then I have a follow-up?

Lyndon Rive

So let me take step back. There's a large number's on MyPower, so let me take a step back. So the monetization of the MyPower portfolio as you said was 5.9%, blended yield. That cleared $2.7, $2.8 per watt upfront. So our costs were $2.7. So from a cost 2.7 and clear 2.7, 2.8 upfront with MyPower from a development company perspective were cash flow neutral there.

Now on top of that MyPower contracts is somewhere around $0.16, 1700 hours and so you're clearing $0.24, $0.25 per watt per year. And the 5.8% is not on - is only on the $2.8 we cleared and so that’s somewhere around $0.22, $0.22 per watt of interest and principal.

And so the economics on MyPower are we get to.2.7, 2.8 upfront and then still get cash to equity every year, so that's economics and MyPower for us. From a homeowners perspective its 1.5% of loan which we refinanced separately, so I would not mix and match those two interest rate.

Tanguy Serra

Yes, the second part of the question is on MyPower, we are in the process of looking at revamping that product.

Gordon Johnson

Okay, that’s helpful. And then with respect to a guess the net metering decision in California, I saw one of the more interesting pieces was the time of use and specifically rates for time of use being mandatory for all that energy metering successor tariff customers. And when I think of time I used it seems like people aren’t really focused on this, but this seems to be the most significant part of this and I want to get your thoughts on this and what I mean is under time of use rates clearly those rates are more sensitive to a lower than I guess and more so off-peak rates versus the peak rates before.

Is it that's is it fair to assume that the competition would decrease over time making solar leases and PPAs less economical under the new time of use rules and do you guys think this could potentially be a determent? And again, thanks for the question.

Peter Rive

This is Peter Rive, I'll take that one. So I think that, the last earning call I said that I think that net metering will kind of transform over the couple of years and that will be a good kind of give and take and I think this kind of views represent that for us.

When you look at California and having a customer going to mandatory fund of use, depending on these economics [indiscernible] rates will end up, will give the customer the ability to save maybe closer to around $350 a year, as compared to around 420, 450, but it also creates a really big opportunity for us to start monetizing our big technology investments that we've made in battery control systems, as well as general load control, the relationship we have with [indiscernible] and that was established basically compensating the time of use feature for California.

I'll say that, as we think about solar into the next decade, and you start looking at solar kind of becoming a massive part of electricity deliveries, it’s going to be really important that in general we move this high grid electricity to being closer to the middle of the day.

So again I think its reasonable give and take and it’s a side effect that even the off peak rates are particularly higher, than this all PPA rates, where the customers always kind of in the money right now, even if they kind of they are really bad outcomes and time of use. And at end of the day I think that it’s a reasonable give and take.

Gordon Johnson

Thanks, again.

Lyndon Rive

Thank you.

Operator

Our next question comes from Jeff Osborne with Cowen and Company.

Jeff Osborne

Great, thank you. I just want to follow-up on the Silevo [ph] comment, with approaching up to CapEx, can you just touch A, quantify what the amount that were pushed out was for 2016 then more specifically what reasons for the equipment are challenged from the recent perspective just given that therapy is not a lot of activity going on in terms of capital [indiscernible] solar cell manufacturer states?

Lyndon Rive

Yes, I don’t think it’s fair that we describe what – which equipment is being delayed, and it has long lead time then initially expected. And so in terms of the dollar amount, I would expect a little less than a half of that we're moving to 2017.

Jeff Osborne

That’s half of which, Lyndon, I apologize…

Lyndon Rive

It was half of our – so think on our last K we gave 180 forecast and we expensed a bit of that, so I'd say its about $65 million, $70 million it goes into the following year.

Jeff Osborne

Got it. And to be clear the overall solar module pricing environment doesn't have any factors there, the 100% into social, has to deal with just lead times from the equipment?

Lyndon Rive

Yes, the equipment are only arising in Q2.

Jeff Osborne

Got it. And then is there any impact as it relates to Q4 and now also Q1 with the guidance as a relates to the weather in California, figure what the range, I'm just trying to understand that variable and how you manage that?

Lyndon Rive

In terms of Q1 guidance for the range?

Jeff Osborne

Yes, over Q4 result, that’s coming in a little bit soft, you touched on commercial, but isn't seen that a very dry, so last year and very wet winter?

Lyndon Rive

Yes, it had some effect for sure, I mean, this one day, the installation California, but we did a little bit planning for weather, as that’s what the main reason, but definitely had an effect.

Jeff Osborne

Got it. Thank you.

Operator

Thank you. At this time, we have no further questions. I would turn the call back towards speakers for closing comments.

Lyndon Rive

Again, I think this is it. Thank you very much for your time today and look forward to the follow up.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Auto Manufacturers - Major,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.