Redacted CIM - Word Format
Transcript of Redacted CIM - Word Format
Information Memorandum
November 2014
Prepared by:
CapTarget, LLC
Strictly Private and Confidential
NewCo, Inc.
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Table of Contents
1. EXECUTIVE SUMMARY ................................................................................................................... 4
1.1. Company at Glance .................................................................................................................... 4
1.2. Objectives .................................................................................................................................. 4
1.3. Strategic Considerations ............................................................................................................ 5
1.4. Market Opportunity ................................................................................................................... 6
1.5. Transaction Highlights ............................................................................................................... 7
2. DESCRIPTION OF BUSINESS ........................................................................................................... 7
2.1. Company Ownership/Legal Entity Details ................................................................................. 8
2.2. Products and Services ................................................................................................................ 8
2.3. Value Proposition ...................................................................................................................... 9
2.4. Location ................................................................................................................................... 10
2.5. Process Flow ............................................................................................................................ 11
2.6. Customer Engagement ............................................................................................................ 12
2.7. Management Profiles .............................................................................................................. 12
2.8. Future Plan and Strategy ......................................................................................................... 13
2.9. Financial Management and Investment Details ...................................................................... 15
3. TAX INCENTIVES ........................................................................................................................... 16
4. INDUSTRY OVERVIEW .................................................................................................................. 17
4.1. Industry in Numbers ................................................................................................................ 18
4.2. Solar Industry Trends ............................................................................................................... 19
4.3. Installation Costs ..................................................................................................................... 20
4.4. Geographical Landscape .......................................................................................................... 22
4.5. Industry Outlook ...................................................................................................................... 22
4.6. Key Competition ...................................................................................................................... 24
5. VALUATION .................................................................................................................................. 25
6. RISKS ............................................................................................................................................ 26
APPENDIX ............................................................................................................................................ 27
Profit and Loss Statement ................................................................................................................... 28
Balance Sheet ...................................................................................................................................... 29
Cash Flow Statement ........................................................................................................................... 29
How Solar Works ................................................................................................................................. 30
Miscellaneous ...................................................................................................................................... 31
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Disclaimer
This Confidential Memorandum (the “Memorandum”) has been prepared by CapTarget, LLC (“CapTarget”) solely for information purposes from materials supplied to CapTarget by NewCo, Inc. (“NewCo” or the “Company”), and is being furnished through CapTarget as the Company’s exclusive agent. It is to be used solely by interested parties in considering an investment in the Company. This Memorandum has been prepared to assist interested parties in making their own evaluations of the Company and does not purport to contain all of the information that an interested party may desire. In all cases, interested parties shall conduct their own investigation and analysis of the Company and not rely on the data set forth in this Memorandum. CapTarget and the Company make no representation or warranty as to the accuracy or completeness of the Memorandum and shall have no liability for any representations (expressed or implied) contained in, or for any omissions from, the Memorandum or any written or oral communications transmitted to the recipient in the course of recipient’s evaluation of the Company. This Memorandum includes certain statements, estimates and projections with respect to historical and future performance of the Company. Such statements, estimates and projections reflect various assumptions by the management of the Company, which assumptions may or may not prove to be correct. No representations are made as to the accuracy of such statements, estimates or projections. By accepting the Memorandum the recipient acknowledges and agrees that all of the information contained herein is subject to a confidentiality agreement previously executed by the recipient. Without limiting the generality of the foregoing: (1) the recipient will not reproduce this Memorandum, in whole or in part; (2) if the recipient does not wish to pursue this matter, it will return this Memorandum to CapTarget as soon as practicable, together with any other material relating to the Company which the recipient may have received from CapTarget or the Company; and (3) any proposed actions by the recipient which are inconsistent in any manner with the foregoing agreements will require the prior written consent of CapTarget. The Company reserves the right to negotiate with one or more interested parties at any time and to enter into a definitive agreement without prior notice to the recipient or other interested parties. The Company also reserves the right to terminate, at any time, the solicitation of indications of interest for the Company or the further participation in the investigation and proposal process by any party. Finally, Company reserves the right to modify, at any time, any procedures relating to such process without assigning any reason therefor. The Company intends to conduct business in the ordinary manner during the evaluation period; however, the Company reserves the right to take any action, whether in or out of the ordinary course of business, including, but not limited to the sale of any property, which it deems necessary, prudent or desirable in the conduct of such business. The recipient will not reveal, in whole or in part, any portion of the Memorandum to any person other than a limited number of recipient’s employees or representatives who have a clear need to know, and agrees to return all information, including the Memorandum, provided by CapTarget or the Company, as requested or if recipient does not wish to pursue this matter further.
THIS MEMORANDUM IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
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1. EXECUTIVE SUMMARY NewCo is a distributed residential solar installer in California that offers a complete array of energy saving home improvement products and services, as a general contractor. NewCo, incorporated in 2011, has outpaced GTM Research’s industry growth forecast of 28%, with revenue growth of 100% per year since inception, and is on track to grow 202% to $17 million, year ending 2014. NewCo has grown organically, and bootstrapped its capital needs primarily with the two founder’s original investment, and has since been cash flow positive.
1.1. Company at Glance
Founded 2011
Entity Type S Corporation
Founders Pete McCoy and John Smith
Primary Business Solar system installation and maintenance
Market Focus Residential and Commercial
Other Products / Services Energy efficient home improvement products such as solar thermal, insulation, HVAC, patios and car ports
Location California, Texas and Louisiana
Number of Employees 136
In-‐house Contractors Over 200
Installation Run Rate 70 installs per months / 5 MW per year
Expected 2014 Sales $17 million
1.2. Objectives
The Company’s primary objectives and near term goals are to: A. Expand its product offerings to include Power Purchase Agreement (PPA) B. To offer its own in-‐house financing to its purchase customers
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1.3. Strategic Considerations Some of the key Unique Selling Propositions (USPs) for NewCo are as follows:
Experience 25 years combined experience installing Solar Systems, with thousands of installations
Full Service All-‐in-‐one service provider, including custom design, financing, installation and ongoing system monitoring
Value Creation
Ability to recognize and drive out wasted costs and years of supplier relationships ensures cost effective execution and value creation
Trust NewCo strives for excellence in customer service to make sure they never have a complaint. Angie’s List, Trust link and thousands of happy customers
Custom Installers Patios, Carports, Window and Wall Insulations,
Execution Focus NewCo never subcontracts its work to other Solar companies. Instead, other Solar companies use NewCo for installation, because of its execution focus
Fast Turnaround Average installation time for NewCo is 2 to 12 weeks, compared to other notable companies taking 8 to 30 weeks
Stellar Reputation Great reputation on the BBB and number of positive online customer reviews
Quality Field Force All of NewCo’s installers work for the company, are qualified, experienced, licensed and speak excellent English
High Quality Provides highest quality service and best quality products from reputed brands
Latest Technology Builds systems only with latest technology products
Local Expertise
The Company serves over 100 communities and has working knowledge of local building and department codes and is regarded as the market leader in the solar industry in California, Texas and Louisiana
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1.4. Market Opportunity With less than 1% penetration, the solar market is estimated to grow from 459 megawatts in 2012 to 1,713 megawatts of capacity installed in 2017 representing at a CAGR of 28% according to GTM Research. This disruptive growth rate is expected to continue with some industry pundits like Elon Musk predicting that in 20 years from now, 50% of all US energy will be solar generated which translates into a market size of $1 trillion, according to Forbes.
Key Industry Growth Drivers:
! Plummeting Solar Panel Costs: According to Bloomberg, solar panel costs declined from $76.46/watt in 1977 to $0.76/watt in 2013 and are expected to continue to decline going forward.
! Declining Costs of Capital: Cost of capital for solar companies is declining as the secondary securitization market is evolving and becoming familiar with this asset class. Further, tax equity financing is also becoming increasingly accessible.
! Tax Credits: Federal tax credit of 30%, accelerated depreciation benefits and state tax
credits are expected to continue to fuel the growth in the sector.
! Increasing Utility Rates: Annual increase in utility rates currently averages at 6% in California and 3.3% nationwide.
! Net Metering: It allows a customer to pay the utility only for their power usage net of
production from the solar energy system. Net metering has been one of the key enabler for the solar revolution.
With the proposed capital raise, NewCo expects to install 57MW, capturing 2.9% market share of the projected 1,713 MW market in 2017.
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1.5. Transaction Highlights
Investment Considerations:
! Less than 1% penetration in what is developing into a $1 trillion market, growing at 28% per annum.
! On track to post $17 million sales in 2014. ! Projected growth over 2,000%, to 57 MW installed in 2017, while remaining cash flow
positive. ! To capture lost retained residual value by vertically integrating financing capabilities.
Transaction Details:
! Seeking $40M equity investment for a 20% stake. ! Will provide an exit route for the investor by way of partial liquidation to another private
equity investor or through public markets. ! Expected to deliver 7x value creation for the investors in three years by reaching $1.7
billion valuation.
Vivint Solar recently went public with a $1.68 billion valuation with 56 MW installed in the last 6 months of 2014.
2. DESCRIPTION OF BUSINESS
NewCo, Inc., “NewCo”, is a general contractor that markets, sells and installs residential and commercial photovoltaic solar systems whole of California, Texas and Louisiana.
As a general contractor the company also does other home improvement projects such as roofing, flooring, patios, windows, insulation, and thermal heating. NewCo operates out of two locations in Los Angeles, CA with 136 direct
employees and over 200 contractors. Installations are done 50% with in-‐house contractors and 50% with independent contractors. NewCo installs approximately 70 systems per month averaging a 5 kilowatt system size, resulting in 350 kilowatts installed per month and 4.8 megawatts per year. NewCo is California’s largest residential solar installer.
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2.1. Company Ownership/Legal Entity Details
Titan was incorporated as an S Corporation in 2011. The shareholding of the company is as follows:
S. No. Shareholder Name Shareholding
1 Pete McCoy 50.0%
2 John Smith 50.0%
2.2. Products and Services NewCo is an all-‐in-‐one service provider and its services include custom designing, financing, installation and ongoing system monitoring. NewCo offers a wide range of solar panels from most of the market-‐leading manufacturers. These solar panels can vary in terms of several parameters like their wattage, amperage, voltage, power tolerances, sizes, weight, and of course, price. NewCo offers a choice of two types of solar systems:
Grid Independent Grid-‐tied This is for completely off-‐grid applications, where the premises rely entirely on the solar system for the power supply.
Grid Tied System that generates electricity for home or business and route the excess power into the electric utility grid.
NewCo offers panels and inverters from many popular brands including:
Astronergy Kyocera Auo UPG TrinaSolar
Sunwize Sanyo CanadianSolar SolarWorld Sharp
PowerUp Uni-‐solar Conergy BP Solar ecoSolargyinc
GE Hyundai Mitsubishi REC
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Currently, NewCo installs approximately 70 systems per month averaging a 5 kilowatt system size. Average price at which NewCo sells these systems is approx. $5 / watt. Average cost, including customer acquisition comes out to be around $4 / watt, thereby resulting in approximately 20% margin.
2.3. Value Proposition
NewCo is uniquely positioned to exploit the surging solar market as a one stop shop for a complete array of solar and energy efficient home improvement products, services and financing, allowing it to penetrate the market even deeper than its competitors. Unlike most solar companies that
sell either a PPA/lease or a solar system purchase, NewCo not only offers both, but it also offers other energy efficient home improvement products such as solar thermal, insulation, HVAC, windows, doors, patios, and car ports. With one call, NewCo also arranges financing through third party finance companies.
NewCo expects to bring this financing in-‐house, in order improve the customer experience and remain price competitive.
3.23
4.00
5.00
1.13
0.45 0.19
1.31
0.15 0.77
1.00
0
1
2
3
4
5
6
$ / waa
Breakdown of Various Costs for System Sales
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NewCo’s ability to install is second to none, with average install times of 2 to 12 weeks, compared to other notable companies taking 8 to 30 weeks. NewCo’s customer service, and ability to fulfill on the back end in general, can be summarized by its stellar reputation on the BBB and various positive customer reviews online. This has been supported by a fully integrated proprietary, project management and CRM system. Further, as a general contractor first, NewCo is centrally managed so best practices transfer across various geographies, compared to other large residential solar installers that have disparate independent competing teams.
2.4. Location
The primary geography for installations has been southern California and the Company is now expanding into northern California. Most installs are in the Los Angeles, Ventura, Inland Empire and San Diego and surrounding cities. However there are some installs as far north as Bakersfield and as far inland as Victorville. The Company is currently expanding to northern California and after the capital raise, the company will expand into other states such as New York and Arizona.
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2.5. Process Flow
The typical product flow would be as follows:
Customer
Complementary Consultation
Enquiry
Custom Solar Design & Savings Analysis Graph
Signing of Agreement
Pre-‐assessment
Physical Assessment
Feed
back
Confirmed Order
Final Plan
City Authorities
Ordering Panels and Inverters
Installation
Installation Permit
Final Inspection
Utility Company
§ Roof Inspection § Solar shade analysis § Electric panel inspection § Measurements
Stamped Permit
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2.6. Customer Engagement NewCo takes pride in excellent service it provides to its customers. NewCo engages with the customer throughout the project and ensures that this a pparently complex process is made completely hassle-‐free for them. NewCo’s experts are process-‐oriented, efficient, and diligent and help customers understand every single detail of the process upfront, in order to ensure smooth execution.
2.7. Management Profiles
! McCoy is a successful serial entrepreneur who started
in the telecommunications industry by working his way up into twelve retail locations, and then to the third largest channel provider for Air Touch cellular, and the number two wholesale channel partner for WorldCom, second only to Herbalife.
! After his success in telecommunications, McCoy ventured into textile manufacturing, which business he developed into a preferred manufacturer for top industry brands such as Guess and Calvin Klein.
! McCoy sold that business for a respectable profit.
! McCoy currently oversees the day-‐to-‐day operations of NewCo.
! Smith is a founding partner of NewCo, and currently
serves as President.
! Smith’s experience includes service in the Israeli military, and driving sales growth over 200% for a general contractor.
! Smith was also founder of Referral Design, a construction company that earned a reputation as the contractor of choice for high-‐end custom design homes throughout Southern California.
! As President, Smith is responsible for overseeing all sales and construction.
Photo
John Smith
Director, Sales
Photo
Pete McCoy
CEO
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2.8. Future Plan and Strategy
The Company’s primary objectives and near term goals are to:
A. Expand its product offerings to include Power Purchase Agreement (PPA) and B. To offer its own in-‐house financing to its purchase customers.
Expanding the product mix to include PPAs increases the company’s addressable market and takes advantage of a higher margin business model which is driven by lower cost of capital, less sales friction and captures residual value that currently vests with the end customer. Likewise, PPAs appeal to a significant amount of customers that do not have a tax liability to offset tax credits.
This product offering also fills the need for the segment of the market that cannot pay cash and does not want the financing obligation, but does want a lower utility bill. Currently, the Company can offer a PPA or lease through a third party provider Clean Power Finance.
The ability for the Company to offer its own financing to its purchase customers that are currently financed by third parties is also an opportunity to capture lost margins. Third party financing currently charges the Company a contractor fee of 3% -‐ 18% of the total loan amount and charges the borrower rates from 7% -‐ 9% on average.
Both of these initiatives represent vertical financing integration that should translate to higher margins and higher valuation. This seismic shift in strategy also catapults the Company’s business model from a stodgy engineering, procurement and construction (EPC) company to a hyper growth, high-‐octane finance company.
The following graphic compares the existing System Sales model with the proposed PPA model.
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System Sales Model
Large upfront investment for the owner Owner responsible for system O&M
PPA Model
Small or no upfront
investment for the owner Cheaper power than utilities Titan responsible for system
O&M
In order to achieve these clearly defined strategic objectives, NewCo will take the following key measures:
! Drive solar sales growth of 1,300%+ to reach 57 MW by 2017: This will be achieved by deploying $10 million for sales and marketing, tracking an expected cost of acquisition per customer of $2,500.
Install
One Time Payment ($)
Expected System Life
30years 10 Years 20 Years
Install
Monthly Payments ($)
20 Year Contract
30years 10 Years 20 Years
10 Year Renewal Option
Investor
Tax
Benefits
Capital ($)
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! Capture lost retained residual value and expand EBITDA margins from 20% to 70%: NewCo will arrange non-‐dilutive tax equity partnership financing for the PPA/lease solar systems business, resulting in increased margins and value retention.
! Capture lost yield spread and points of 3% -‐ 12%: NewCo will arrange for a warehouse line of credit and/or term financing in order to offer in-‐house financing to solar system purchase customers that are currently financed by third parties. These third parties currently charge NewCo points worth 3% – 12% of the loan value, based on the amount.
! Expand into other states: NewCo will look to expand to other states like New Jersey and North Carolina, which are solar friendly and that offer incentives/credits for PPAs/leases.
! Develop and grow commercial: NewCo will focus on small commercial, which has been mostly overlooked by the large players and lacked financing options.
! Hire top talent: NewCo will hire top talent to continue build to build a durable business and create real value.
! Grow current, and develop new, sales and marketing channels: NewCo will focus on multi channel marketing strategy and will invest in digital media, geo-‐targeted direct marketing, affiliate marketing, inside sales, call center, direct mail, TV, and radio.
2.9. Financial Management and Investment Details
In order to execute the plan and strategy mentioned above and to provide some liquidity to the promoters, NewCo is looking to raise $40 million of equity capital.
Use of Funds
Item Fund Usage ($ million)
Secondary equity sale by Promoters 20
G&A expenses
(new hires, enhancing CRM, structured finance tax equity set up fees, etc.)
10
Marketing 10
Total 40
As money is fungible, the exact usage and corresponding cash flows have been detailed out in the model. However, as a rule of thumb, cost of acquisition per customer comes out to be around $3,000, which translates to around 3,333 new sales that can be achieved by utilizing $10 million.
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This $10 million budgeted for marketing will be used mainly for channel development, inside sales, referral program and for digital marketing including Search Engine Optimization, Pay per Click, affiliate marketing and mobile marketing.
3. TAX INCENTIVES
Tax incentives are the major reason behind tremendous growth that the sector has seen for the past few years. There are three categories of tax incentives – Investment Tax Credits (ITC), MACRS Depreciation and State Incentives. Based on the project, these incentives may cover more than 60% of the installed cost of residential systems.
Investment Tax Credits: The federal investment tax credits are the main reason behind the rapid growth of solar installations. The success of ITC demonstrates the value of stable and predictable federal tax and energy policies for sustained private sector growth. Under ITC, the owner of a solar system becomes eligible to claim 30% of the system installation costs as tax credits.
MACRS Depreciation: MACRS or modified accelerated cost recovery system is an accelerated depreciation method that is estimated to result in incentives worth 10% of the system cost. MACRS depreciation allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. The life of the solar equipment is considered as 6 years under MACRS and the depreciation takes place over a five-‐year period. The MACRS schedule is mentioned below.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
MACRS 20.0% 32.0% 19.2% 11.5% 11.5% 5.8%
State Tax Incentives: The State tax incentives act as additional benefits for solar system owners. These could generally be in the form of sales tax exemptions, property tax based reduction and/or tax rebates. Actual benefits for state tax incentives may not be a large proportion of the solar system value, but they provide system owners with additional benefits over and above the federal ITC and MACRS. These tax incentives are available to developers/owners and must be monetized. This is not straight forward as in order to take advantage of tax attributes, the entity must have tax liabilities. The solar installations are capex heavy yield generating assets and do not have high cash flows in the starting years, so as to take full benefit of tax incentives. To address this issue, developers, such as NewCo, tend to monetize the tax credits by partnering with other entities those have large tax liabilities.
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Broadly, three tax monetization structures are used – partnership flip, lease pass-‐through and sale lease-‐back. NewCo will primarily use the partnership flip structure, which is represented below.
4. INDUSTRY OVERVIEW
As per Bloomberg New Energy Finance, the private sector investment in the clean energy sector in the US exceeded $100 billion in 2013. Many industry watchers forecast this growth to continue, because of the increasing cost-‐competitiveness of clean energy with conventional generation. Further, technological advancements and growing acceptance by Americans to embrace clean and renewable technologies is expected to continue to fuel this growth. The impressive growth of renewable energy over the past decade is a signal that the state and federal policies work, when implemented properly. Further scale up requires innovative thinking and policy framework that could drive continued private-‐sector investment. The U.S. solar industry is the star of the clean energy sector and is rapidly growing to reach 16 GW in cumulative installations.
Partnership Flip Structure
Fund General Partner
2%
Investment Fund
Tax Credits Depreciation Deductions
Cash Flow
Loan Proceeds
Debt Service
Developer Fee
2%
98%
$
Solar 1, LLC
100%
Payments
Tax Credit Equity Investor
98%
Solar 4, LLC
Solar 3, LLC
Solar 2, LLC
Lender
Developer
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4.1. Industry in Numbers
4,751 MW of solar PV was installed in the US in 2013, up 41% over 2012 and nearly fifteen times the amount installed in 2008
15.9 GW was the cumulative solar installed capacity at the end of Q2 2014
0.5 million homes and businesses across the U.S. have a solar installation
3.2 million average American homes can be powered by current installed solar capacity
2.4 minutes is the estimated new solar system installation frequency in 2014
143,000 is the number of solar workers in the U.S.*
18 months is the time the solar industry took to install as much of capacity in the U.S. as was installed in 30 years prior to that
74% of all new electricity generation capacity in Q1 2014 was solar
482,000 individual systems were on-‐line as of the end of Q1 2014
30,000 is the number of solar water heating and cooling (SHC) systems that are being installed annually in the U.S., generating an estimated $435 million in annual revenue
36 is the US rank in the world in installed SHC capacity relative to its population
39% is the forecasted overall growth in the U.S. solar market for 2014
6.6 GW is the total expected fresh solar installations in 2014
*The Solar Foundation's Solar Job Census 2013
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4.2. Solar Industry Trends The Solar Industry showed yet another year of impressive growth in 2013. Photovoltaic (PV) installations continued to grow, increasing 41% over 2012 to reach 4,751 MW. Solar was the second-‐largest source (natural gas being the largest) of new electricity generating capacity in the U.S. in 2013. In fact, solar became the largest source of new electricity generating capacity in first half of 2014, with 53% of new capacity addition.
Source: GTM Research, FERC Energy Infrastructure Update, June 2014
Several factors have led to this rapid and sustainable growth. These include increasing customer adoption, grassroots support for solar and improved financing terms. The investment community is also seeing its belief reinforced by public market successes and they continue to seek attractive risk-‐adjusted opportunities in the market. In the distributed solar market, Q1 2014 was the first quarter in recent history in which residential PV installations exceeded commercial installations. This is because commercial market is relatively irregular in its growth.
3%
53% 30%
14%
New US Electric Generaeon Capacity, 1H 2014
Others Solar Natural Gas Wind
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Source: GTM Research, US Solar Market Insight,Q2 2014
4.3. Installation Costs The cost to install solar systems continued its fall throughout the year 2013, with average system prices ending the year 15% below the costs at the end of 2012. The trend of falling costs has been there for several years and fall in cost solar modules has been the major contributor.
0
300
600
900
1200
1500
1800
2100 Installaeo
ns (M
W)
US PV Installaeons by Quarter
Residenpal Non-‐Residenpal Uplity
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The solar panel manufacturing industry has faced pricing pressures due to oversupply in recent years. However, this has helped the downstream companies to pass on the benefit by reducing the system pricing and grow the volumes. To put the numbers in perspective, we can note that the solar module prices have fallen by over 80% since 2008. The global PV demand is expected to grow in a sustainable way in the next few years. It can therefore be inferred that although the module prices will continue to fall, the pace of fall may get moderated going forward.
Global PV Demand Forecast
Source: EPIA, Global Market Outlook, 2014 -‐ 2018
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4.4. Geographical Landscape
California is the bedrock of the residential market, with cumulative installed solar capacity of just under 8 GW. In Q1 2014, more than 55% of national installations came from the state. In fact, California has been experiencing unparalleled growth as California alone installed over half of all solar installations in the U.S. in 2013. This was more than what entire US installed in 2011.
Arizona and New Jersey are the distant second and third largest solar markets. North Carolina follows is next, but is among the fastest growing states.
Source: GTM Research, US Solar Market Insight,Q2 2014
4.5. Industry Outlook Year 2014 is expected to be yet another strong year for the U.S. PV market, with installations reaching 6.5 GW. This translates into a 36% increase over 2013. All three segments are expected to grow rapidly, though at varying magnitudes. Residential segment is expected to lead the way by growing at 55%, followed by the utility segment (37%) and the non-‐residential segment (21%).
Source: GTM Research, US Solar Market Insight,Q2 2014
0
2000
4000
6000
8000
10000
12000
14000
2010 2011 2012 2013 2014E 2015E 2016E
Installed Ca
pacity (M
W)
US PV Installaeon Forecast
Residenpal Non-‐Residenpal Uplity
0 2000 4000 6000 8000
New York
New Mexico
Colorado
Hawaii
Nevada
Massachuseqs
North Carolina
New Jersey
Arizona
California
Cumulaeve Solar Capacity (MW)
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Industry forecast suggests that the residential market will be larger than the non-‐residential market on an annual basis starting 2016.
Source: GTM Research, US Solar Market Insight,Q2 2014
Next few years in the solar industry will be about defining new solutions. Increasingly, solar is not limited by its cost, but rather by its role in the power sector. And as solar continues along its path toward the mainstream, its integration with the broader electricity market from a technical, market and regulatory perspective will be the key challenge for the industry.
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014E 2015E 2016E
Installaeo
ns (M
W)
US PV Installaeon Forecast by Segment
Residenpal Non-‐Residenpal Uplity
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4.6. Key Competition
Company Year Founded
Number of Employees
Total MW
Installed
Marketing and Selling Financing Installation
2011 136 5 ▪▪▪▪ ▪ ▪▪▪▪
2011 1600 100 ▪▪▪▪ ▪▪ ▪▪▪▪
2006 5000 567 ▪▪▪▪ ▪▪▪ ▪▪▪▪
2007 1000 220 ▪▪ ▪▪▪▪ ▪▪
2007 400 NA ▪▪ ▪▪▪▪ X
2006 90 NA ▪ ▪▪▪▪ X
1978 488 235 ▪▪▪ X ▪▪▪▪
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5. VALUATION NewCo has built tremendous value with a scant investment of less than a $1 million, catapulting installs from 0.2 MW in 2011 to 2.7 MW in 2014, reflecting a CAGR of 128%. Three year CAGR for MW installs by NewCo from 2011 to 2014 is estimated at 128%
2011A 2014E
Estimated MW Installs 0.2 2.7
Given the order of magnitude for NewCo’s original investment of $1 million which is expected to generate 2.7 MW in 2014, it can be argued that a $20 million investment for working capital could result in 70 MW in2017. However, we conservatively estimated 50MW in 2017. NewCo’s scrappy ability to pick more meat off the bone seems evident in comparison to Vivint Solar’s results of 56MW with a net loss of $76.1 million for first six months in year 2014, and approximately 85 MW installed for trailing 12 months ending June 2014, with a $70 million line of credit. Vivint Solar recently went public with a valuation of $1.68 billion. Three year CAGR for MW installs by Vivint Solar from 2011 to 2014 is estimated at 146%
2012 2013 6 months ending June 2014
Estimated MW Installs 14.4 58 56
Management believes that NewCo, with its current traction, in its current form, without investment, could command a pre-‐money Equity Value of $211.6 million based on the discounted cash flow valuation assuming a 9% discount rate and 3% terminal growth rate.
System Sales Valuation – Sensitivity Table
Equity Value ($ million)
Discount Rate 7.0% 8.0% 9.0% 10.0% 11.0%
Term
inal Growth Rate
2.0% 269.4 219.4 183.8 157.3 136.8
2.5% 297.4 237.7 196.6 166.7 143.9
3.0% 332.3 259.8 211.6 177.4 151.8
3.5% 377.3 286.7 229.3 189.8 160.9
4.0% 437.2 320.4 250.6 204.2 171.2
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With the proposed capital raise, assuming future non-‐dilutive tax equity raises for PPAs/leases, and debt raises for captive financing, NewCo believes it can drive significant shareholder value in just its PPA/lease business of $1.2 billion, assuming a 9% discount rate and 3% terminal growth rate.
PPA/Lease Valuation – Sensitivity Table
Equity Value ($ million)
Discount Rate 7.0% 8.0% 9.0% 10.0% 11.0%
Term
inal Growth Rate
2.0% 1560.7 1263.7 1052.8 895.7 774.5
2.5% 1727.1 1373.0 1129.2 951.6 816.7
3.0% 1935.1 1504.1 1218.3 1015.4 864.3
3.5% 2202.5 1664.4 1323.7 1089.1 918.1
4.0% 2559.0 1864.8 1450.1 1175.0 979.7
Management believes that the combination of the systems sales, PPA/lease and the captive finance business could culminate in a total future valuation of $1.7 billion.
6. RISKS
There are numerous risks associated with the business, industry and company, which include but are not limited to the following:
! The federal 30% tax credit is scheduled to decline to 10% at the end of year 2016, which may have a significant impact on NewCo’s ability to sell solar systems and to finance tax-‐equity partnerships for PPAs/leases
! Negative net metering state regulations may dissuade new customers or stall new installations. Specifically in California, net metering policy is currently under review and may be changed on installations starting in 2017.
! Traditional utility rates may decline sufficiently, below parity to solar costs that customers may not see the value in solar.
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APPENDIX
APPENDIX
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Profit and Loss Statement
(USD million) Historic Estimated Projected
2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Revenue 1.4 2.8 5.6 16.8 32.8 84.0 111.7 183.3 297.8 %ge growth
200.3% 95.0% 156.1% 32.9% 64.2% 62.5%
Material Cost
5.8 12.4 29.5 42.0 59.8 85.3 Sub-‐contractor Expense
1.8 4.2 10.7 16.4 25.1 38.4
Other COGS
1.5 3.3 8.0 11.7 17.1 25.1
Total COGS 9.1 19.9 48.2 70.1 102.1 148.8 %ge of Net Revenue
54.2% 60.6% 57.4% 62.8% 55.7% 50.0%
Gross Profit 7.7 12.9 35.8 41.6 81.3 149.0
%ge of Net Revenue
45.8% 39.4% 42.6% 37.2% 44.3% 50.0%
System Sales SG&A
4.1 5.7 10.2 11.7 15.1 19.6 PPA SG&A
0.0 4.8 11.2 22.1 42.8 71.3
Captive Financing SG&A
0.0 0.3 0.5 0.9 1.4 2.0
Total SG&A 4.1 10.8 22.0 34.6 59.2 92.8 %ge of Net Revenue
24.2% 33.1% 26.1% 31.0% 32.3% 31.2%
EBIT 3.6 2.1 13.9 6.9 22.0 56.2
%ge of Net Revenue
21.7% 6.3% 16.5% 6.2% 12.0% 18.9%
Interest Expense
0.0 0.0 0.6 2.0 4.4 9.1
PBT 3.6 2.1 13.2 5.0 17.6 47.1 %ge of Net Revenue
21.7% 6.3% 15.8% 4.5% 9.6% 15.8%
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Balance Sheet
(USD million) Estimated Projected
Dec-‐14 Dec-‐15 Dec-‐16 Dec-‐17 Dec-‐18 Dec-‐19
Equity and Liabilities
Owners' Equity 26.3 34.0 66.6 121.4 229.2 410.4 Non Current Liabilities 0.0 31.8 107.8 211.4 387.7 659.2 Current Liabilities 1.4 3.9 9.0 13.4 20.7 30.3
Total Equity and Liabilities 27.7 69.8 183.4 346.3 637.5 1099.9
Assets
Non Current Assets 0.1 24.8 95.4 241.2 484.4 867.3
Current Assets Cash and Bank Balance 24.3 18.8 19.5 21.8 27.2 43.6
Other Current Assets 3.3 26.2 68.4 83.2 125.9 189.0 Total Current Assets 27.6 45.0 88.0 105.1 153.1 232.6
Total Assets 27.7 69.8 183.4 346.3 637.5 1099.9
Cash Flow Statement
(USD million) Estimated Projected 2014 2015 2016 2017 2018 2019
Cash Flow From Operations
PAT (Developer Tax Credit Adjusted) 1.5 0.5 7.0 1.9 10.9 34.5 Less: Increase in Non Cash Working Capital 0.3 0.9 4.2 -‐0.2 4.0 6.2
Net Cash Flow from Operations 1.2 -‐0.4 2.9 2.0 6.9 28.4
Cash Flow From Investing Capex 0.0 24.7 54.1 101.8 191.3 305.7
Net Loans Given 0.0 19.5 49.5 54.5 83.4 124.5
Net Cash Flow from Investing 0.0 -‐44.2 -‐103.6 -‐156.3 -‐274.7 -‐430.2
Cash Flow From Financing
Increase in Debt 0.0 31.8 76.0 103.6 176.2 271.5 Increase in Share Capital 23.0 6.0 0.0 0.0 0.0 0.0 Increase in Tax Equity Net of Tax Credits 0.0 1.3 25.5 52.9 96.9 146.7
Net Cash Flow from Financing 23.0 39.1 101.5 156.5 273.1 418.2
Net Cash Flow 24.2 -‐5.5 0.7 2.3 5.4 16.4
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How Solar Works
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Miscellaneous
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References
! California Solar Statistics, 2014, [Online]: www.californiasolarstatistics.ca.gov/ [Accessed 04 November 2014]
! Solar Industry Data, 2014, [Online]: http://www.seia.org/research-‐resources/solar-‐industry-‐data [Accessed 04 November 2014]
! GTM Research, US Solar Market Insight Report, Q1 2014
! GTM Research, US Solar Market Insight Report, Q2 2014
! American Council On Renewable Energy (ACORE), The Outlook for Renewable Energy in America, 2014
! European Photovoltaic Industry Association(EPIA), Global Market Outlook for Photovoltaics, 2014-‐2018