Some Whoppers From The Tesla/SolarCity Blog Entry And Conference Call

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About: Tesla, Inc. (TSLA)
by: EnerTuition
Summary

The blog entry broke no new ground in terms of information and the financial case was made based on discredited metrics.

The conference call was filled with some jaw-dropping claims, which should make investors question the management.

The management failed to make a case why a rational investor should support this merger.

On Tuesday, Tesla (NASDAQ:TSLA) and SolarCity (SCTY) conducted a joint conference call to make a case for the Tesla/SolarCity merger. (See slides)

As a lead into the conference call, Tesla put forward a case for the merger in its website in a blog entry. Here are some of the highlights from the document.

Quote:

The transaction is expected to be additive to Tesla's cash balance.

Fact:

This would be true if SolarCity has even a penny of cash on hand at the time of the merger and a zillion dollars in debt. Not a convincing reason for a merger. Is it?

Quote:

SolarCity increased its cash from Q2 to Q3 2016 and expects to increase it further in Q4 2016.

Fact:

This statement puzzles us. Why selectively disclose SolarCity Q3? Why not release SolarCity earnings on time, if not early, and let investors see how the company performed in Q3 and what the Company's prospects look like? Why delay publishing results and simultaneously ask investors to vote early on the merger?

Quote:

We expect SolarCity to add more than half a billion dollars in cash to Tesla's balance sheet over the next 3 years.

Fact:

While it is difficult to disprove a future prediction, there is nothing in SolarCity history that indicates that this is a probable event. It is far more likely that Tesla will have to shut down SolarCity operations completely well before the quoted three-year timeframe.

Quote:

Continuing to transition to loans and cash transactions as opposed to leases will significantly improve SolarCity's GAAP revenue and profitability.

Fact:

While this is technically true, such a move fundamentally destroys the current SolarCity business model and this is also diametrically opposite to how SolarCity has been sold to investors for years. The likely scenario here is that SolarCity will have lower losses and this can also be framed as improvement in profitability.

Quote:

More than half of SolarCity's debt is project financing; this debt is non-recourse and is more than offset by the cash flows from customer payments.

Fact:

While this is technically true, SolarCity's debt investors, tax equity investors, and cash equity investors have various means of clawing back into the company's cash streams. Investors should not let the size of nonrecourse debt fool them. Any underperformance of the assets can lead to some very serious negative consequences for equity holders.

Quote:

SolarCity obtained about $1 billion in project financing since July 1, 2016, demonstrating the strength of its financial condition.

Fact:

Firstly, we note that this is more about the asset financing than about SolarCity. None of the money can be used for SolarCity corporate purposes. We also note that SolarCity has stopped disclosing the interest rates and terms they have been getting on financing. The terms, to the extent they have been disclosed lately, have been onerous and speak poorly about SolarCity and its assets.

The blog entry broke no new ground in terms of information and the financial case was made based on 30-year cash flows and a 6% discount rates, both of which are thoroughly discredited metrics for assessing SolarCity value.

The conference call that followed was a Q&A session buttressing the case for the merger. Unfortunately, much of the commentary used to justify the combination was either patently wrong or severely misguided. The conference call was filled with some jaw-dropping claims, and it is a puzzle what Tesla was aiming to accomplish with the call.

Here are some of the whoppers we captured from the conference call transcript that Tesla filed with the SEC.

Quote:

Ben Kallo - Robert W. Baird & Company, Inc. - Analyst

You have Panasonic with two big projects. Do you have another big partner? Or how has that affected the Panasonic working on both of those things? Thank you.

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

I'm not sure I understand that question, but Panasonic has been a great partner for Tesla for many years, for almost a decade, and things are going really well at the battery gigafactory. We believe quite strongly that the combination of the SolarCity's technology on the cellular front added to Panasonic's cell technology will make it the most efficient and ultimately cheapest solar cell in the world, just as it is with the battery cell. We have the best cell in the world, and also the cheapest cell."

Fact:

Panasonic (OTCPK:PCRFY) is not even in the top 10 solar cell/module suppliers in the world. From what is known in public domain, the cost structure of Panasonic cell/module and the cost structure of Silevo sell/module is not even competitive - let alone being the "cheapest cell." Given the companies also lack the scale that the big boys have, it is unlikely that they will get to a competitive cost structure for the foreseeable future.

Quote:

Lyndon Rive - SolarCity - Co-Founder and CEO

I actually see it as a massive upsell opportunity. We have 300,000 customers in (inaudible). Powerwall 2 is now out, and it's a actually very, very simple retrofit procedure for us to go back to the 300,000 customers and upsell them a Powerwall 2.

So as I actually see that (multiple speakers) -- I'm sorry? I as see it over time, it's to continue to innovate with other energy-related products, and as the customer count increases, we're able to derive additional economic value by providing additional energy products to our customers with Powerwall 2 being (inaudible) [comparable] to that.

Fact:

Vast majority, probably in excess of 95%, of SolarCity's customers are net metered. For them, the utility grid acts like a free battery. The possibility of selling batteries to these customers is close to "0."

Quote:

John Murphy - BofA Merrill Lynch - Analyst

And then just lastly, another simple question, as we look at the sales of all three products together, the roof, a Tesla car, and a Powerwall, how many of those triple plays do you think you'll be able to sell relative to what you are doing right now, and really, over time, will that be just be 100% of your sales?

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

I don't know about 100% bleeding over, but think over time, I think most customers are going to opt for all three. And even if they don't opt for all three all at once, they, over time, I think they will.

Fact:

"Most customers are going to opt for all three" is patent nonsense. Customers for whom solar is economical have already been moving to solar PV. Once bought, there is no reason for them to consider any other solution for many years to come. BEVs will increase energy consumption of users, but utilities have been offering very low cost EV charging options during late night and early morning hours. In vast majority of these situations, adding incremental solar PV to charge electric cars does not make sense.

Quote:

Lyndon Rive - SolarCity - Co-Founder and CEO

I think up front, the solar and storage will be opted in at a very high percentage, very high percentage.

Fact:

Again, patently inaccurate when it comes to storage. As long as there is net metering, storage makes very little sense.

Quote:

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

It's like if SolarCity has got 300,000 customers, in [installed and consult] customers, Tesla has around 170,000, approaching 180,000 customers all in, so there's a pretty significant base to cross sell product there.

Fact:

If cross-selling is the name of the game, we submit that the market share of these companies is tiny and each company could have gotten much better partner (or partners) without going vertical. Going vertical locks these companies out from gaining access to cross-selling opportunities with other larger players.

Quote:

Colin Rusch - Oppenheimer & Co. - Analyst

Given that you said much of the CapEx was spent in Buffalo, can you walk us through how much total has been spent in Buffalo, how much has been spent by the State of New York, and when you expect delivery on that equipment?

Lyndon Rive - SolarCity - Co-Founder and CEO

The State of New York that has, I think that's all (inaudible) if mentioned. They've allocated about $[770] million towards the building of new equipment, and the equipment is in progress, so a lot of that --

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

The majority of it should arrive by the end of next year.

Fact:

Note that Mr. Musk says "majority of it should arrive by the end of next year." Production does not ramp to full scale until all the equipment is in. As we have already pointed out, the fab is not going to be fully ramped by the end of 2017 as Tesla announced a few weeks back at the time Panasonic agreement was signed.

Quote:

Brian Johnson - Barclays Capital - Analyst

Yes. Good afternoon. Have a couple of questions on the debt side of the combined company. And understanding, of course, we will see more when SolarCity (inaudible). So the first, if we think about your statement that the recurring cash flows exceed nonrecourse debt by $2 billion with a 6% discount rate, how much of that $2 billion is from the renewal assumptions for after year 20, which seems to have a gross value of $4.8 billion?

Lyndon Rive - SolarCity - Co-Founder and CEO

So I'm looking at Q2 numbers. Your contracted number is $3.1 billion, and then your uncontracted number is $900 million, so total of $4 billion. Then your debt on that is $1.8 billion, which leaves us $2.2 billion.

Brian Johnson - Barclays Capital - Analyst

Okay so it would be about $1.1 billion excluding the rentals. Second, related to that, given what you've shown with the solar roof, how do you think that's going to affect the renewal rate on the SolarCity panel leases? I know it's 20 years out, but since we are dealing with MPVs going out 30 years --

Fact:

SolarCity continues to use blatantly discredited metrics like 6% discount rate and customers renewing after 20 years. The analyst here is not buying the pitch and saying that the $4.8B gross value is not real and neither is the discounted $2.2B, and the real number is $1.1B. However, analyst Brian Johnson is only half right. At the end of 20 years, SolarCity would have the liability of uninstalling the system which is a negative value. The real value of the stream, especially after considering the inevitable defaults, will be considerably less than $1.1B.

Quote:

Brian Johnson - Barclays Capital - Analyst

I'm just getting at, some of these customers, if -- it definitely takes a while, but if solar roof is successful, when the renewals come up in 20 years, that may be a better option for the customer than leaving the panels on an aging, leaking roof.

Lyndon Rive - SolarCity - Co-Founder and CEO

It certainly will be for some number of customers, but then we will take the panels and put them on, say, a commercial installation or put them on some other customer's roof, so essentially, you have a trade-in value of your roof.

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

It is sub zero. Like those panels still working fine.

Lyndon Rive - SolarCity - Co-Founder and CEO

The really key point, you understand, is it generates electricity, so there is real value in those panels.

Fact:

The statement here from Musk is jaw-dropping, and shows how disconnected from reality the management is. The management thinks it can uninstall 20-year old panels from an old rooftop and install them somewhere else. This, on a technology that is changing quickly with rapidly declining prices and where the biggest cost of the system is installation. Reinstall? Seriously?

Quote:

Brian Johnson - Barclays Capital - Analyst

And final question relating to debt, SolarCity has converts. My reading of those, which may be wrong, is they are payable in cash given where the stock price is and where the conversion comes out to.

A, is that right? B, will you downstream cash? C, can you actually convert that to settle with additional shares, and how should we think about as, from the Tesla level, the refinancing that SolarCity? And actually, as part of that, can you confirm that it's going to be a D sub and that Tesla is not going to be guaranteeing the debt of the new SolarCity sub post acquisition?

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

SolarCity, certainly on any of the debt obligation, of course. But I'm not sure what I mean.

Brian Johnson - Barclays Capital - Analyst

Well I guess, one, technically, will you still be -- is the plan to keep SolarCity as a bankruptcy remote subsidiary of Tesla as your current ABL seems to indicate?

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

No. This would be one company. But I think there's really -- I see zero chance of SolarCity going bankrupt. Zero.

Brian Johnson - Barclays Capital - Analyst

Right. So then will Tesla downstream money to pay to refinance, or will SolarCity be out refinancing the converts on its own?

Elon Musk - Tesla Motors, Inc. - Chairman, Product Architect & CEO

It is going to be one company.

Fact:

As fellow Seeking Alpha author Montana Skeptic has written extensively, disclosures to date indicate that Mr. Musk does not understand the question and gave a wrong answer.

Quote:

Jason Wheeler - Tesla Motors, Inc. - CFO

This is Jason. Just to add one point on top of that. So SolarCity has 2018 converts.

We also have 2018 converts. And our original issuance on our converts was $660 million. We've actually paid down more than $[415] million of that convert, and we've done that in the last 90 days, so we have significantly derisked 2018 in the capital structure (inaudible) over the last quarter.

Fact:

Tesla did not derisk the capital structure intentionally. It so happens that convert lenders saw the risk in their Tesla investment increasing and decided to cut and run.

Summary:

The Tesla/SolarCity joint conference call was an interesting exercise by Tesla to drum up support for the merger with SolarCity.

We believe the management not only failed miserably but came out looking inept from the conference call.

Other than insiders who obviously benefit from the merger, we see no reason a rational investor should support this merger.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.