SolarCity’s cash crunch, which became more evident this week when merger partner Tesla Motors filed a report with federal regulators, might raise the level of anxiety in Buffalo, where the state has invested $750 million to build a manufacturing plant for the solar energy installer.
With lenders holding back while the merger plays out, business slowing and its own reserves dwindling, SolarCity needs the deeper pockets of Tesla to keep the cash flowing. As many as 15 other potential buyers and investors looked at the company in the last two months, and all decided to pass on making an acquisition or an investment.
“SolarCity’s short-term financing needs and lack of other buyers shows the urgency of closing quickly,” Barclays analyst Brian Johnson said in a research note about closing the merger deal.
Is it possible that the huge plant nearing completion at RiverBend could end up idle?
On Thursday, state officials downplayed doubts about the Buffalo project. They noted that Elon Musk, Tesla’s CEO and SolarCity’s chairman, recently said the high-efficiency solar panels that will be produced at the South Buffalo plant and the advanced manufacturing techniques there are an important part of his vision of creating a renewable-energy powerhouse that combines batteries with electric vehicles and solar energy systems.
Alain Kaloyeros, president and CEO of SUNY Polytechnic Institute, warned against “connecting dots that don’t exist … given the continued public statements by (SolarCity CEO Lyndon) Rive and Musk on the importance of the facility.” He noted that construction work on the factory is nearly complete and that orders have been placed for the facility’s production tools.
SolarCity executives last month said they believe that technology and efficiency improvements will allow them to produce more solar panels than originally planned at the factory, which was designed to be able to produce enough panels to generate 1,000 megawatts of electricity annually. Construction on the factory building is expected to be completed later this month.
“Tesla brings more financial capacity, engineering and manufacturing expertise,” said Howard Zemsky, the Buffalo developer who serves as president of Empire State Development.
The company also pushed up by about six months the opening date for the Buffalo factory. The plant at RiverBend is expected to start production by the end of June 2017. It initially will produce a yet-to-be unveiled new roofing product that is expected to have solar modules built in.
Both Tesla and SolarCity executives have said the merger would allow SolarCity, which has little manufacturing experience, to tap into Tesla’s production know-how. The initial production in Buffalo is expected to include photovoltaic cells that SolarCity purchases from suppliers and are used in the products that will be assembled in the South Park Avenue factory.
“Tesla may bring more of a manufacturing partnership model to the table,” Zemsky said. “I’m sure they are assessing where they can add value themselves and where experienced manufacturers can add value as part of their supply chain.”
But the electric vehicle maker faces its own cash crunch. A $442 million payment is coming due to its bondholders by the end of the month.
In addition, Tesla needs to raise additional financing of its own to support the SolarCity deal and its own cash-eating electric vehicle and battery making businesses, according to the filing with the federal Securities and Exchange Commission.
As Tesla moves closer to key shareholder votes on its merger bid, the focus on the cash crunch facing both SolarCity and Tesla were heightened when the regulatory filing detailed the financial pressures facing SolarCity.
Shortly after Tesla said that it was interested in buying SolarCity, the solar energy company noted that its lenders had started to pull back. That put SolarCity in a cash bind that threatened to delay projects and leave it short of the money it needed to fund a business built around a strategy that allows homeowners to install solar panels on their roofs with no upfront costs.
Around the same time, SolarCity was coming up on its early August earnings announcement, when it would lower its forecast on how many solar panels it expected to install this year and disclose that it had far less cash on hand than analysts expected. That weakened outlook would make raising money even more difficult.
And SolarCity needs a lot of capital. Getting the factory operating will be expensive, draining cash from SolarCity at a time when its financing costs have increased and the company is trying to make changes to its business so it only uses as much cash as its operations generate.
Late last month, Musk, cousin Rive and another cousin, Peter Rive, SolarCity’s chief technology officer, said they would buy $100 million of $124 million in solar bonds, yielding 6.5 percent over 18 months, that SolarCity was trying to sell.
Because SolarCity’s business model calls for it to front the cash for the rooftop solar panel systems that it installs for residential customers, the company needs to raise about $2.6 billion to fund its operations this year and is expected to need about $3.3 billion in 2017, the filing said.
“Of course, there are no certainties in business – any business,” Zemsky said. “But clean energy is obviously a megatrend.”