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Analyzing SolarCity’s Leverage and Liquidity Position

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SolarCity’s interest expenses

SolarCity’s interest expenses have increased more than fourfold in the last two years. The company reported an interest expense of $37.1 million for 2Q16 compared to $32.5 million in 1Q16. The rise in interest expenses was primarily due to an increase in book value of the company’s non-recourse debt.

SolarCity plans to monetize the value of its assets to decrease its dependence on external debt for upfront cash. The company monetizes cash flows of its underlying assets through tax equity transactions. However, the company retains the ownership of these assets.

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At the end of 2Q16, SCTY had about $5.2 billion in solar energy system assets on its balance sheet. On an NPV (net present value) basis, these assets are contracted to generate $3.1 billion in future payments. For 2Q16, SCTY reported its tax equity investment per watt at $1.52 compared to $1.31 during 1Q16.

Debt structure and liquidity

As of June 30, 2016, the company had about $3.2 billion in consolidated debt on its books. Of this, ~$1.5 billion is the total recourse debt, and the remaining amount is the total non-recourse debt.

According to company filings, the majority of SolarCity’s recourse debt is due to mature in November 2019. However, the majority of the non-recourse debt is due for maturity in December 2018.

At the end of 2Q16, SCTY had about $146 million in the form of cash and cash equivalents on its balance sheet compared to $362 million at the end of 1Q16. According to company filings, the decrease in cash position was mainly due to the delay in project financing on account of the proposed Tesla (TSLA) deal.

Why leverage and liquidity are important

The business models of downstream solar (TAN) players like Vivint Solar (VSLR), SolarCity (SCTY), Sunrun (RUN), and the downstream operations of SunPower (SPWR) generate income over the term of customer agreements. These agreements typically last 20 years.

This means that most of the capital required for these companies’ early expansion has to come from outside sources. As a result, it’s important for a company like SolarCity to maintain its liquidity position and the quality of its assets in order to raise capital at low costs.

Next, let’s look at the key operating metrics that investors should watch in SCTY’s 3Q16 earnings.

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