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Column: Other Tesla ventures put squeeze on SolarCity

Just a few months before Tesla Inc. plans to start making solar cells and solar panels at its Buffalo gigafactory, the electric vehicle maker is looking for ways to save cash in its solar energy business.

After all, Tesla already has its hands full, with opening its battery gigafactory in Nevada and preparing to start producing its more affordable Model 3 sedan – a $35,000 electric vehicle whose success or failure could have a huge impact on Tesla's future.

Both of those ventures will take billions of dollars to pull off in their entirety. The last thing Tesla needs right now is another drain on its bank account, which is what SolarCity would be.

"We're prioritizing cash preservation for that business," said Jason Wheeler, Tesla's chief financial officer, during a conference call Wednesday.

SolarCity plant to start production by summer, Tesla says

While the company still plans to begin production at its Buffalo factory this summer, it is pulling back on SolarCity spending. Tesla is trying to cut SolarCity's stubbornly high costs to sign up new customers. It's cutting advertising and starting to sell SolarCity products in Tesla stores.

The highly anticipated earnings report showed that Tesla has bigger challenges on its plate than SolarCity, the money-losing solar energy installer it acquired in November in a deal that skeptics viewed as a bailout of a renewable energy venture run by Tesla CEO Elon Musk's cousins.

Even though SolarCity is embarking on its own massive project as it prepares to open the biggest solar panel factory in the Western Hemisphere this summer in South Buffalo, the money that it takes to do that will pale in comparison to the billions Tesla will need for the Model 3 and the battery gigafactory.

Tesla gigafactory shows Musk can deliver on promises

"Insane numbers for Model 3 and the gigafactory," Musk said. The solar panel factory's capital requirements, in contrast, "look cute by comparison."

Tesla can thank New York state for that. It was the state that shelled out $750 million to build the 1 million-square-foot solar panel gigafactory and buy much of the equipment that will go inside it, freeing Tesla from a significant capital commitment.

"It's helpful that that facility already exists, so we don't have to invest in [capital spending] for a new factory or something like this," Wheeler said. "Frankly, a lot of the equipment already exists and is purchased, so it's minor."

As it stands, Tesla already has $3.4 billion in cash on its books, after spending only about half of the $1 billion that it had expected to spend during the fourth quarter to get ready for the Model 3 to begin production. But that cash balance is likely to drop quickly, since Tesla expects to spend up to $2.5 billion this year gearing up for the Model 3, and untold millions on battery cell, pack and energy storage production at its Nevada gigafactory.

Why Tesla wants to team up with Panasonic in Buffalo

That puts Tesla in a position where it has to decide how low it wants to draw down its cash balance before it goes out to raise additional money from investors. Analysts think the company will need to raise another $1 billion to $2 billion as it moves closer to the launch of the Model 3, its first mass-market vehicle.

"It's really a question of what's the risk tolerance of the company, or how close to the edge do we want to go," Musk said. "We are considering a number of options, but I think it probably makes sense to raise capital to reduce risk."

With Tesla's stock up by more than 40 percent since the beginning of December, Tesla's shares could be a powerful tool to bring in new capital. Barclays analyst Brian Johnson thinks Tesla could raise as much as $2.5 billion by selling more shares at its currently high prices.

"With a market cap approaching that of GM and Ford, arguably it could be done on amenable terms,” Ryan Brinkman, a JPMorgan Chase & Co. analyst, wrote in a report Thursday.

Five challenges facing Tesla after SolarCity merger

And the less money SolarCity's operations suck up, the farther away from the edge Tesla will be. Tesla said SolarCity generated $77 million in cash during the six weeks following the acquisition.

The SolarCity acquisition is "not as bad as feared," wrote Ben Kallo, a Baird & Co. analyst, in a report.

So Tesla is moving SolarCity away from its original business model, where customers could install rooftop solar systems at no upfront cost because the company paid all the initial expenses in return for 20 years of steady payments from the electricity the panels produced.

In its place, Tesla is pushing customers to buy the rooftop systems outright, which has the dual benefit to the company of bringing in more revenue while also allowing the company to avoid $20,000 to $30,000 in upfront system costs. Musk has said the purchase model has an added advantage for consumers, since they typically can finance the panels for a lower rate than SolarCity could by tapping into tax-subsidized borrowing sources, like home equity loans.

"That's going well," Wheeler said. In the fourth quarter, 28 percent of the generating capacity that SolarCity deployed was from outright purchases, up from just 13 percent during the summer and less than 4 percent a year ago.

But it also is causing SolarCity's business to slow. The solar installer deployed 26 percent less generating capacity in the fourth-quarter than it did a year ago. For all of last year, it deployed 845 megawatts of solar generating capacity, less than the 900 megawatts it predicted as recently as November and far less than the 1,200 megawatts it forecast a year ago.

While Tesla looks for ways to reduce the cost of signing up new customers, it is also cutting advertising and selling SolarCity products in Tesla stores.

"Tesla has a very strong global brand. We've got a great retail footprint," Wheeler said. "We've got the pieces in place to really drive customer acquisition costs down."

Even the Buffalo factory is getting a closer look. "On the manufacturing side, as well, we're rethinking through what that's going to do for us and how we can drive cost savings there," Wheeler said.

Because when you have big plans, you sometimes can't afford to do everything at once.

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