Solar as an asset class

I’ve just installed a solar system at my home. If electricity prices escalate at 2.5% over the next 30 years this investment should generate an 11% return. Keep in mind that this is an after-tax return since I won’t be taxed on my savings. If electricity prices stay flat for 30 years I will have an 8% after-tax return.

I have a 25 year warranty on all of the components so there is not a lot of risk with maintenance costs. If the manufacturers go out of business I could be stuck with a bill if something breaks. If I move I should be able to recover the investment since the new owner will be receiving the benefits of no electric bill. All in all I think this is a fairly low risk investment for a double digit after-tax return.

Why are more people not looking at solar as an asset class given these returns?

Although improvements have been made, most solar panels are ugly and people care more about curb appeal than saving money.

Buy SolarCity or SunEdison if you like that idea as an investment, but hold your nose when you get to their cash flow statements.

Buying and installing solar panels requires a lot of upfront investment that hurts upside. To earn a return higher than your cost of capital, you’ll need (i) lots of lower cost debt and (ii) tax credits that offset the upfront capital cost. Without tax credits (I believe they’re scheduled to go away in 2017) and financial leverage (considerable debt), it’s tough to make it the economics work – IRR>WACC. The future cash flows (or benefits) you’ll get aren’t tremendously high, unless, as you mention, electricity prices appreciate considerably in the future.

I will say looking at companies that do this stuff is interesting. They are kind of like financial institutions – trying to source low cost capital and investing it in long-term assets that operate under long-term contracts that’ll provide relatively stable cash flows for the next 20+ years as long as panels are functioning.

saw solar securitization earlier this month

SUNE’s cash flow statement is not bad, there is a tremendous growth runway there too…

Whoa, are you serious? I’d argue its maybe one of the worst CF statements I’ve ever seen for a major company, and I look at a lot of oil and gas E&P’s and they typically suck.

SunEdison in 2014: Cash from Operations: Negative $770 million. Capex of $1.7 billion. They engage in some transactions to raise capital, such as IPO’ing some of their projects under TerraForm but that is just pulling future CF forward. If you just look at recurring operations and capex, its terrible.

SunEdison has never even generated positive cash flow from operations since they’ve been on this solar stuff, and they are investing like crazy on top of that. They’ve got incredible financing needs, and it sure as hell isn’t coming from internal operations.

The cash flows of individual solar panel projects aren’t bad, but when you look at the consolidated company as a whole, it’s no bueno. Eventually, they should generate some nice cash but that’s at least a few years into the future. Yes, CF growth should be good once all of this investment is over (hopefully) with but that’s quite a ways off.

If you look at oil and gas companies, then you should know that the important metric to focus on is DCF. What is their DCF guidance for the year?

^DCF of individual solar projects, just like new oil/gas wells, are fine (though not nearly the upside on the solar projects). A problem with oil and gas wells is they eventually deplete and you’ve got to invest heavily to keep up projection … you run recurring CF deficits just to keep the growth up which is really tough to do over time. It’s a tough industry.

I wasn’t originally talking about individual projects, though. I’m talking about the consolidated company’s cash flows. t’s is terrible. Try to do a DCF analysis of the total company of SUNE (of past years) – there’s no cash flows to discount!

I just want to make sure we are speaking the same language. DCF = distributable cash flow? Do you not feel they will make their guidance this year? Btw this TERP is going to have amazing upside for SUNE,

“Distributable Cash Flow” mainly applies to pipeline/gas processing companies (midstream), or E&P’s organized as MLP’s. I was thinking discounted cash flows when you brought up DCF

I agree there will be nice distributable cash flow eventually on these projects, but you must admit…looking at SUNE’s 2012-2014 cash flow statements there are no cash flows to distribute!

If all goes well years from now these will be cash flow machines, but there’s some work to be done to get there.

It isn’t about their 2012-2014 CF statements though, it’s really about the amount of projects they’re going to win in the future. They will have good economics, and these guys can buy them at bout 12-14x DCF. This is a nascent industry, and SUNE is one of the leading, if not the leading player. Their guidance this year is 275-325M, which puts it at an about 3% yield or so. It’s high, but in good company.

Their structure is more like an MLP, and they are studying actually becoming an MLP GP, with TERP as the LP.

That is what I was referencing when I said “hold your nose when you look at their cash flow statements”, so it is about those 2012-2014 statements :slight_smile: If you were referencing future CF statements in 2016 and beyond I agree with you.

I have no real disagreements with what you’re saying, though. There is some excitement about these companies. I personally just see a fair amount of leverage and IRR’s in the 10-11% range on these projects. Not a lot of room for error but if they execute this will be a valuable company.

How about China Singyes Solar? They’ve had positive cash flow from operations for years, trading around 11X in HK. I flipped these guys for a quick gain the other week, don’t really know enough about solar to feel comfortable staying the course. Seems like China is really serious about investing in this area.

Thanks for starting this thread - solar is a completely unknown territory for me. Very informative comments here

Aren’t there a lot of hippies and/or retail investors in this space betting on it being “the next big thing”? They could be right of course, but an investor base like that tends to make things volatile, yes?

I don’t really know this industry too well, but there are different types of solar companies…(i) the companies that manufacture the solar panels and (ii) the companies that buy the solar panels and collect the long-term payments from customers that use them. I think China Singyes Solar is a manufacturer, and is different from the companies that were discussed earlier.

The manufacturing companies (First Solar, Trina Solar, Canadian Solar, etc) are the ones that will show better cash flows. I don’t know China Singyes Solar at all, but I think they are a manufacturer of the panels. They generate profits and cash by selling the panels right now to asset owners like SunEdison, SolarCity, etc.

The original poster brought up, I believe, owning the solar panels which is a different business than manufacturing them. This is what SolarCity, SunEdison and SunPower do. They are like infrastructure plays. Invest a lot of money upfront to buy the solar panels, and save annually on no utility expenses (these would be your future cash flows in a DCF model – or the lack of making utility payments). I think in some cases you can even sell the excess power generated by your panels back into the grid, and not only not pay for utilities but receive payments for the excess electricity your panels generate.

I actually think these are cool companies and agree with what Palantir was saying. It’s just if you pull up their financial statements right now they look just terrible. Large operating losses, lots of debt, major funding gaps. It’s that way b/c they are building out their infrastructure right now that’ll hopefully, eventually, generate long-term, sustainable free cash flows in the same way tolls from a highway would, or natural gas pipelines.

The original poster viewed it as an asset class – it’s basically an infrastructure asset class. SunEdison even does wind farms through its TerraForm power business, and those are nice assets too.

These companies are an interesting case study for those interested. There’s a lot of finance stuff involved in these companies. For those interested just check out their financials, investor presentations, transcripts, etc – there’s lots of finance stuff (discounting future cash flows, capital structure, WACC, etc) involved with these companies. I imagine the finance guys that work for these companies are VERY busy right now.

Thanks, interesting.

Yeah, Singyes Solar does “design, fabrication and installation of convential curtain walls and solar projects…photovoltaic, roof top and ground mounted”. They are only around $1B market cap.

Did anyone actually read Chad’s post? He’s not talking about the stocks of solar companies. He’s talking about installing solar in your home as an investment.

What did they securitize? The income stream from the solar lease or the Solar Company’s debt?

Noted, but you can’t really scale that. It’s not really much of an asset class if you can only do it for your one home. That’s why I mentioned the public companies that do exactly what he mentioned on a much larger scale.