When the top finance guy at one of the U.S.’s leading solar power companies admits that he hadn’t been “a big fan of renewables,” it does take one aback.
Robert Kelly, the CFO of SolarCity Corp., a Silicon Valley company that designs and installs solar energy systems and provides the power they produce to homes and businesses, clarifies that his reservations were nothing against the industry’s mission of providing clean energy but purely economic. Five years ago, who wasn’t skeptical about the economics of solar?
Kelly changed his mind, joining the company in October 2011. Consumers and investors have begun to do the same.
“After talking to [SolarCity co-founders] Pete and Lyndon Rive [before I joined], I realized quickly that the dynamics of the business had changed,” says Kelly. “The retail price of power was continuing to increase, yet the cost of [solar] installation was decreasing. For the first time, I saw a renewable model that made sense, because they were delivering power to the consumer in a way that’s cheaper than the alternative.”
This is hardly the first time that Kelly has come around to a change in perspective. For one, at first glance he hardly fits the profile of the Silicon Valley technogeek upstart carved during the post–Web 1.0 dot-com bust, personified by the area’s alcohol- and DJ-fueled networking and codified by such pop culture vehicles as 2010 movie The Social Network and new HBO series Silicon Valley.
Kelly, 56, grew up in the largely rural Atlantic provinces of Canada, graduating from college at the Memorial University of Newfoundland. He then went on to get his MBA in the big city — in Halifax, Nova Scotia, that is — at Dalhousie University. His career started out on a decidedly well-trodden track for business graduates, working at financial institutions such as the Bank of Nova Scotia, Lloyds and Westinghouse Credit Corp. He made the leap to energy at independent power producer Calpine Corp., where he worked for 14 years, ultimately as CFO. Under his tutelage, Calpine launched its IPO and helped develop the firm’s capacity for electricity generation from less than 1 megawatt to in excess of 25,000 MW.
“He was always one of the first ones in,” says Adam Shore, who has known Kelly for 15 years and worked for him in the finance department at Calpine’s headquarters, which were then in San Jose, California (and moved to Houston in 2009). “He definitely cared about the company. He was always conscious of the dynamics and very aware of the need to take care of shareholders.”
Kelly’s respect for shareholders and his ability to clearly communicate complicated financial information made him quite effective at raising funds for Calpine, Shore says. “He was really able to break down the company and present it to investors,” he explains. In the ten years prior to his departure, Kelly helped Calpine bring in $48 billion from various capital markets to finance energy projects.
But Calpine was hit during the early 2000s with a one-two punch of declining electricity prices and the increasing cost of natural gas, which the company had touted as a cleaner fuel for power production. The expansion left the company with $17.6 billion in debt by September 2005. Calpine’s board, on the back of investor complaints over the bleeding on the company’s balance sheets, pushed out Kelly and CEO Peter Cartwright in November 2005. The following month, the energy producer filed for bankruptcy.
After working as an independent consultant to energy companies and power developers, Kelly signed on in September 2009 as CFO with Calera, a Los Gatos, California–based cleantech company that converts carbon dioxide emissions into calcium carbonate, which is used in cement and cement-based products such as pottery and decorative benches. Two years and a month afterward, he joined the Rive brothers and SolarCity chairman and Tesla Motors founder Elon Musk at the then privately held company.
Kelly has since made good use of the fundraising and investor relations skills honed at Calpine, educating investors about the solar industry and his company. He now has under his belt SolarCity’s hard-fought IPO — it raised $92 million in December 2012 — and this past November the securitization market’s first-ever issuance of sunshine bonds, bonds backed by inflows from the leasing of solar panels. In that offering, SolarCity issued $54.43 million of investment-grade Solar Asset Backed Notes, Series 2013-1, which priced with an interest rate coupon of 4.8 percent. And with the success of the company’s second securitization, the $70.2 million Solar Asset Backed Notes, Series 2014-1, which priced last month, it appears that life is almost easy.
Going public was anything but easy. Late 2012 was a tricky time for a solar company to approach the public markets. There was the infamous Solyndra bankruptcy just a year earlier, which became a political rallying cry for those against government subsidies for renewables. Then in 2012, numerous solar manufacturers — roughly 40 globally, according to Greentech Media — went bankrupt or closed their doors, largely because of rock bottom prices for solar cells. Even though SolarCity prides itself on being different from others in the industry — it installs and finances rooftop solar systems in exchange for long-term monthly payments from its customers and prefers to think of itself as an energy company — Wall Street was hesitant to support any type of solar IPO. As a result, during the road show the company had to drop its initial share price to $8 from its original target price of $13 to $15.
Still, the company took a leap of faith, with Musk and its other backers agreeing to buy a significant number of shares in the offering. SolarCity’s shares soared 40 percent the first day of trading, December 13, 2012, and have since trended upward. (They recently traded at about $55 a share.) That success has given the company the ability to approach the convertible and securitization markets.
“The strategy of introducing the company to multiple capital markets and being able to play each market off of each other, which drives down the cost of capital, has worked extremely well,” Kelly says. “The downside is, people smile at me here when stock is up. When it’s down, they just stare at me.”
SolarCity spokesman Jonathan Bass says that whereas the company’s IPO helped improve the industry’s image on Wall Street, there is still more to be done as far as educating the public.
“Most people have a dated idea of how expensive solar is and how difficult it is to incorporate,” Bass says, citing the company’s recent survey of 1,400 U.S. homeowners, which showed that 62 percent were interested in solar for their homes. Less than half, however, realized that solar is more affordable today than it was three years ago. “Prices have come down dramatically in that time,” points out Bass. “If we’re going to get beat up a few times, we’ll take that if we can get more people talking about solar and understanding the reality of how affordable it is.”
Beyond preaching the cost-effectiveness of solar, SolarCity sees itself as offering a one-stop shop for homeowners and businesses looking to convert to solar power. The company holds customers’ hands through assessing energy needs, handling permits, installing panels and maintenance and upkeep. Among its name-brand clients are more than 100 schools, including Stanford University; corporations such as eBay, Intel and Walmart; and the U.S. Armed Forces and the Department of Homeland Security. Presently, SolarCity offers service to 15 states — the newest addition being Nevada — plus the District of Columbia.
As for its financials, if its first-quarter earnings are any indication, the worst of the fight is over. On May 7 the company announced that its revenues for the first three months of 2014 were up 112 percent year-over-year, to $63.5 million, beating forecasts of $53.4 million. SolarCity also raised its full-year 2014 guidance to 500 to 550 MW deployed, versus a prior statement of 475 to 525. And the company expects essentially to double that, to 900 to 1,000 MW in 2015.
On the debt side, SolarCity’s capital structure also includes a revolving bank loan used for the construction of its rooftop facilities, tax equity funds that allow it to monetize the tax benefits that come from solar and, of course, the two securitizations backed by cash flows generated from a pool of photovoltaic systems leased to U.S. homeowners.
The securitization market had been daydreaming about a solar deal for years prior to SolarCity’s first transaction. After exploring various types of debt, Kelly and his team determined that a securitization was the cheapest and most logical choice. Still, as this sunshine bond issuance was the first of its kind, the company’s success depended on its efforts to educate not only investors but also Standard & Poor’s, the agency that would eventually rate the deal BBB+.
The rating process took roughly a year, says Trevor d’Olier-Lees, director of S&P’s U.S. utilities and infrastructure group in New York and part of the team that worked on rating the transaction. The agency faced challenges, including how to factor in the quality of the panels and the fact that the final maturity would be 20 years, a long while in terms of energy prices and longer than the average homeowner stays in a home.
“Over the long term, what will customers do — particularly retail customers — if the value proposition of the panels on their roofs isn’t working for them? That’s a big question mark,” he says.
In the end, SolarCity worked with S&P to develop a formula that heavily weights energy payments and vacancy and reassignment risk rather than hard assets, foreclosure and default risk. “Our approach was: People make their energy payments; here’s the revenue stream that’s coming in over the next 20 years. Evaluate that,” says Kelly. “To talk about foreclosure and recovery on a panel is kidding yourself. What’s valuable is the energy the panels produce.”
Compared with the first transaction, the second, slightly larger and with a slightly lower interest rate coupon of 4.59 percent, was a cinch, says Kelly. “The first one was long, the second one was easy, and the third one will be easier,” he says. The first one “was painful. I’m not exaggerating here. The first document to the second document — the changes took 20 minutes.”
Kelly reckons the company is on track to do securitizations every quarter as it continues to grow. SolarCity signs up a new customer every three minutes of the workday and passed the 110,000-customer mark by the end of the first quarter of 2014. The company has a stated goal of 1 million customers, or a 70 percent compounded annual growth rate, by 2018. As the company’s volume grows, so will the transactions. Kelly expects that future securitizations will eventually fall in the $150 million to $200 million range.
SolarCity has also paved the way for other solar companies to enter the securitization market. Although they have declined to comment, other California solar power companies, including Sungevity, SunPower Corp. and SunRun, may make similar investment moves. Federal and state tax incentives that helped fuel the growth in solar are expected to be reduced by 15 percent at the end of 2015.
“I do think that other companies, if they want to compete in the marketplace, they’ll have to do securitizations because it’s the lowest cost of capital,” says Kelly. “If they don’t get there, we’ll just increase our market share because we’ll have a more competitive product.”
Get more on corporations.
