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SolarCity raises $227 million by selling its future cash flow

SolarCity’s never-ending quest to raise money to pay for the solar energy systems it installs has taken a new twist.

The company, which will occupy the biggest solar panel factory in the Western Hemisphere in South Buffalo, raised $227 million in new financing through John Hancock Financial to pay for installing 201 megawatts of solar energy generation capacity.

What’s unusual about the John Hancock deal is the way SolarCity went about raising the money.

SolarCity is using something called “cash equity” to raise the funding. Essentially, SolarCity is selling, in a single financing package, the cash flow and the tax benefits that it expects to generate over the next 20 years from those 201 megawatts in new residential and commercial solar projects.

The financing is important because SolarCity has built its business by installing solar power systems on the roofs of residential customers who don’t pay any upfront costs, sparing them from having to write a check for the $30,000 that a typical solar array costs. Instead, the consumers sign deals requiring them to make regular monthly payments to SolarCity for the power that those solar arrays generate. Those payments usually are for less than what the customer would pay their local utility.

That business model forces SolarCity to continually raise hundreds of millions of dollars from investors so it can front the costs of the 1,250 megawatts of solar generating capacity that the company expects to install this year. Analysts estimate that SolarCity will need upward of $1.2 billion in financing to meet its installation target this year.

The deal with John Hancock announced Tuesday is the first time the company has been able to raise money by packaging most of the various revenue streams associated with a typical solar installation

What SolarCity is doing is packaging the cash flow from those agreements and selling it to investors, who agreed to pay the company the equivalent of $3 for every watt of capacity included in the arrangement. In exchange, investors will receive not only the payments that the solar panel customers make, but the various tax credits, tax equity, rebates and prepayments that are associated with each installation.

SolarCity in the past has raised funds by packaging the tax equity from its solar energy systems into securities and selling them to wealthy investors and profitable companies that can take advantage of the solar tax breaks. It also has packaged the cash flow from projects into securities that it has sold to investors, although the interest rates it has been forced to pay investors in its securitizations this year have increased, raising the company’s financing costs.

SolarCity views cash equity financing as a way to tie financing to the entire stream of revenue generated from a solar installation.

“We believe the key will be the cash equity monetization of up to 100 percent of the contracted value of a portion of our new assets with no (or much lower) debt, the company said in a report to shareholders in February.

“Cash equity enables SolarCity to monetize a high percentage of cash flows to maximize upfront financing proceeds,” said Radford Small, SolarCity’s executive vice president of global capital markets in a statement. “This transaction is an exciting addition and diversification of our long-term financing options for solar assets.”