The solar industry could use a large, successful IPO right now, on the heels of BrightSource's withdrawal and Enphase's good-but-not-great IPO result. (It's still too early to tell for Enphase -- and BrightSource is still soldiering on.)
Back in February, Reuters reported that San Mateo, Calif.-based solar installer and financier SolarCity was going to be filing its S-1 registration for IPO with the SEC.
The firm issued a press release on Monday saying:
SolarCity Corporation announced today that it plans to conduct a registered initial public offering of its common stock. The offering is expected to commence after the SEC completes the review process initiated by SolarCity’s confidential submission on Thursday April 26, 2012 of its draft registration statement.
The firm also mentioned that it would "not be providing additional comment."
Reports have suggested that the firm could be valued at $1.5 billion. As Jeff St. John observed, a $1.5 billion market valuation might be hard to achieve in a market where top-line publicly traded solar companies like SunPower are seeing market valuations fall to far less than that.
But these days you can't compare a downstream solar installer and financier with an upstream module player.
SolarCity has grown to more than 1,200 employees since its founding six years ago with a U.S. residential solar installation market share of approximately 13 percent, according to GTM Research. SolarCity did not invent, but has certainly pioneered the residential PPA, and has also won the confidence of banks and firms like Google to finance this new asset class. Additionally, SolarCity has moved into energy efficiency and has started to move into energystorage with presumably the same bank financing and lease model.
In June 2011, Google made its largest investment in renewable energy -- $280 million to fund SolarCity residential solar installations. The Google Fund is SolarCity's largest project financing fund and the largest residential solar fund created in the U.S.
While solar module manufacturers have suffered from plunging market prices, installers such as SolarCity as well as consumers have benefited from the more grid-competitive installation pricing.
SolarCity has won more than $200 million from VC investors such as Silver Lake Kraftwerk, DFJ, Mayfield Fund, Valor Equity Partners, Shea Ventures, and DBL Ventures and is helmed by the Rive Brothers and chaired by their cousin: Elon Musk, the CEO of Tesla Motors and co-founder of PayPal. The firm is leading the SolarStrong project, the nation's largest residential solar buildout, which could double the number of residential solar PV systems in the U.S. The company's growth has verged on phenomenal.
It all sounds like a potentially profitable company in a high-growth market that is scaling fast -- a recipe for a solid IPO and the goal of VC investors
So, what could go wrong?
Here are some potential issues that SolarCity will have to address in its S-1 and with its potential institutional investors:
We've learned from sources close to the company that the S-1 submission was delayed about a month ago because of "auditing issues." The delay occurred one day before the S-1 was due to be submitted to the SEC.
Price per watt for third-party solar installations tends to be significantly higher than the prices for non-leased solar roofs. Which makes sense because the lease itself has a cost. But there have been issues with the manner in which SolarCity arrives at Fair Market Value for its systems and the extent to which SolarCity increases the reported selling price of the solar system, suggesting that the leasing firm gets a higher tax benefit -- in contrast to what a regular solar customer might get.
A source very much involved in this business sector had this comment:
This IPO may be a disaster the second the underwriter's lockup agreement expires. While retailer buyers might be attached to a name brand and the word "solar," what institutional buyers want to own a part-installer, part-opaque financial services company? Publicly traded installers like Real Goods trade at sub 1.0 multiples of revenue. Complex financial services businesses have not had much institutional buy-side interest since the financial crisis. Given Solar City's previously reported-upon GAAP, Treasury, Internal Revenue, Franchise Tax Board and other state taxing authority issues, at best aggressive treatment and at worst fraud concerning stepping up the tax basis of their installed systems to claim ITC -- this is an IPO to avoid from the underwriter, retailer purchaser and institutional buy side purchaser.
Another source close to the company suggested that when it came to the SEC paperwork, the firm had an "aggressive" CFO and the leasing model would make SolarCity "cash-rich but earnings-poor" in a GAAP world.
And what happens to SolarCity's business model when the ITC expires in 2016 or if it is cut down sooner than that?
All these issues will have to be addressed once the S-1 is made public.