Harried US cleantech sector seeks turning point in SolarCity IPO

Nichola Groom

* Most promising cleantech IPO since Tesla Motors

* Low panel prices hurt manufacturers but help SolarCity

* Government probe concerns could dampen IPO enthusiasm

LOS ANGELES, Oct 26 (Reuters) - The last thing the downtrodden U.S. cleantech industry needs is another startup going up in flames, so it has a lot riding on the initial public offering of SolarCity.

The top U.S. installer of residential solar systems has grown rapidly, largely because it allows customers to lease its costly product by paying a monthly fee, avoiding hefty upfront costs of an outright purchase. SolarCity, which is expected to go public before year end, is also benefiting from the sliding price of solar panels that has walloped their manufacturers.

As a result, SolarCity is being hailed as the alternative energy industry's most promising IPO candidate since electric car company Tesla Motors Inc's 2010 debut.

Like Tesla, which is widely regarded as the sector's sole public markets success story, SolarCity was founded by Paypal billionaire Elon Musk.

``If SolarCity's IPO does well it could potentially mark a big transition point,'' said Rob Day, a partner with cleantech private equity firm Black Coral Capital in Boston. ``SolarCity represents the next wave of cleantech that people should be much more excited about.''

With the high-profile flameouts of solar company Solyndra and battery maker A123 Systems still fresh in the market's mind, the cleantech industry has never had more at stake. A successful SolarCity IPO would help rekindle venture capital interest in the sector, which has ``vaporized'' in recent years, Day said.

A sizeable dose of regulatory risk, however, has some worried about the IPO's prospects. U.S. Treasury officials have subpoenaed SolarCity in a probe related to solar energy cash grants under the stimulus program. These grants have underpinned its fast expansion, and the company has warned that an unfavorable outcome in the probe could cost millions of dollars.

A successful IPO could open the door for SolarCity's rivals, which include Silicon Valley startups Clean Power Finance and SunRun Inc, to tap public markets as well.

``If this is a successful IPO it will be great for the company's peers,'' said Pacific Crest Securities solar industry analyst Ben Schuman. ``That could help the U.S. market because these companies will be better capitalized and less constrained in terms of their own growth.''


Until now, the list of publicly traded renewable energy companies has been dominated by solar manufacturers that are struggling with slumping prices due to a global glut of panels. The MAC Global Solar Energy index has lost about 80 percent of its value since the start of 2011, and only a handful of companies have dared go public in that time.

BrightSource Energy, a builder of solar thermal power plants once considered a hot IPO prospect, canceled its offering at the last minute in April. Shares of the most recent U.S. solar company to go public, inverter maker Enphase Energy, are down 40 percent since their March debut.

``I've never seen a sector as unloved as the cleantech sector, and solar is the ugly sister of the cleantech sector,'' said Edward Guinness, co-manager of the Guinness Atkinson Alternative Energy Fund.

SolarCity, founded six years ago by Musk and his cousins, Lyndon and Peter Rive, has grown rapidly. Its share of the U.S. residential solar market was more than double its next-largest competitor, Trinity Solar, in the first six months of this year, according to industry research firm GTM Research. SolarCity's revenue more than tripled in the first six months of this year to $71.4 million.

``A good company with a sound and growing business can always go public,'' Musk said in an email last month before SolarCity's IPO filing. ``If anything, I would err on the side of going public when the appetite for a particular sector is a bit low, so that we can be sure of making a good return for investors over the long term.''

Musk's Tesla has gained more than 60 percent since debuting in 2010.

SolarCity's venture capital backers include Draper Fisher Jurvetson, DBL Investors, Mayfield Fund, Shea Ventures and Valor Equity Partners.


SolarCity's success is largely due to the explosion in the popularity of solar leases. The likes of U.S. Bancorp and Google Inc have put up large funds that allow SolarCity to finance its installations. In the second quarter of this year, nearly three-quarters of residential solar systems in top solar market California were leased, compared with less than 11 percent just three years earlier, according to GTM Research.

The companies that put up the financing funds are able to collect a tax credit worth 30 percent of the value of the system. Until earlier this year, that tax credit was available as a cash grant through a popular stimulus program.

But SolarCity disclosed in a regulatory filing this month that the Treasury Department's inspector general is investigating ``possible misrepresentations'' in the value of solar systems that received the federal cash grants. As part of the probe, SolarCity and others have received subpoenas.

The San Mateo, California company said it had submitted $325 million in cash grant applications as of Aug. 31. If it were required to adjust the value of those applications by a hypothetical 5 percent, it would be required to repay $16 million to its fund investors, SolarCity said in the filing.

Also, the U.S. Internal Revenue Service is auditing two of its investment funds. The company would not offer any additional comment.

The probe and the audits have some in the market concerned, especially given the dismal track record of cleantech stocks, broadly, and the high-profile flops of recent IPOs like Facebook Inc, Zynga Inc and Groupon Inc.

``I don't think the IPO market can really take these types of risks these days,'' said a cleantech banker who asked not to be named.

As a potential investor, fund manager Guinness said the probes ``will be too big a problem for me to deal with.''

Others worried that SolarCity's accounting for leases was too complex for potential investors to grasp, as revenue for the projects is recognized over the term of the lease and fund investors collect the grants and tax credits.

``It is not easy to model how much cash will remain after the fund investors take their share of the pie,'' said Xavier Chollet, co-manager of the $400 million Pictet Clean Energy Fund.

Chollet added, however, that the solar installation business is ``the most interesting place to be from an investor standpoint'' because of the drop in panel prices.

Time will tell if investors like Chollet weigh SolarCity's growth prospects more heavily than its risks. If its IPO flops however, so will the hopes of many in an industry that is struggling to regain its footing.

``The status quo is very unhealthy,'' Day said. ``The longer it gets prolonged, the harder it's going to be for the next generation to get into the marketplace.''