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Solarcity Fourth Quarter 2015 Shareholder Letter

The following excerpt is from the company's SEC filing.

Record 272 MW Installed for a Cumulative Total of 1.9 GW

253 MW Deployed with Forecasted Value of $3.64/W at a 6% Discount Rate

Record Low Cost of $2.71/Watt as $1.90/Watt Installation Costs Achieve Initial 2017 Goal

Adjusted Asset Financing in 2015 of $2.73/Watt, above Q4 2015 Costs

2016 Guidance Remains 1.25 GW Installed with Positive Cash Generation by Q4

Dear Fellow Shareholders:

In 2015, SolarCity delivered record results in both residential and commercial MW Installed, Cost per Watt, and value creation. Moreover, we exited the year with a por tfolio of 1.7 GW Deployed under Energy Contracts, generating an annualized run rate of ~2.4 TWh of energy, and operations deploying Energy Contracts at an annualized run rate over 1 GW with a Pre-Tax Unlevered NPV at a 6% discount rate of $3.64 per watt ($3.32 per watt contracted) at a cost of $2.71 per watt. We entered 2016 as the clear volume and relative cost leader of the U.S. distributed solar industry.

Solar Deployments Reach New Highs, as Costs Decline to Record Lows

MW Installed:

272 MW, up 54% year-over-year

MW Deployed:

253 MW, up 44% year-over-year

Value of MW Deployed under Energy Contracts:

$3.64 per watt at a 6% discount rate ($3.32 per watt contracted and $0.32 per watt estimated renewal)

Cost per Watt:

$2.71 per watt, down 5% year-over-year

With new highs in both residential and commercial installations, we installed a record 272 MW in the fourth quarter of 2015, up 54% year-over-year. For the full year 2015, we installed 870 MW, growing 73% from 503 MW in 2014. Based on GTM Research/SEIA’s most recent estimate for 2015 U.S. solar installations, SolarCity accounted for 35% of U.S. residential solar, 28% of U.S. distributed solar, and 12% of total U.S. solar capacity installed in 2015.

The 272 MW we installed in Q4 2015 compared to guidance of 280-300 MW,


had incorporated 15 MW of projects that were not completed by year-end

largely attributable to three large ground-mount projects in the East Coast tha

t encountered greater challenges

with terrain conditions than we had anticipated from our initial survey. All

of these projects are under construction and

expected to be installed in Q1 2016.

Even with this delay, commercial installations grew 82% year-over-year to 51 MW in the fourth quarter (and 139 MW for the full year).

Our residential installations were also impacted by the closure of our Nevada operations in December.

Residential installations grew 49% year-over-year to 221 MW (731 MW for the full year).

Our top crews—


Horseshoe Crabs


over 400 kW and 350 kW, respectively, in the final month of the year

As we discussed in detail in our 2015 Analyst Day presentation, the Value of MW Deployed is derived from (1) the

upfront proceeds

from Tax Equity Investment as well as Upfront Cash Rebates and Prepayments, plus (2) the

of Unlevered Project Cash Flow from customers and solar renewable energy credits (SRECs)


tax equity distributions, and (3) excluding the payment of income and other taxes. The Value of MW Deployed in Q4 2015 was $3.64 per watt at a 6% discount rate ($3.32 per watt contracted and $0.32 per watt from estimated renewal). Of this, $1.56 per watt was generated upfront with $2.08 per watt in forecasted NPV of Unlevered Project Cash Flow remaining. Value of MW Deployed discount rate sensitivities are provided at the end of this letter.

Cost per Watt declined to a new record low of $2.71 per watt in the fourth quarter of 2015. Benefiting from greater residential efficiencies and a larger portion of vertically-integrated commercial installations, our blended installation cost declined 9% as compared to Q4 2014 and 1% as compared to Q3 2015 to $1.90 per watt. Sales costs declined 2% as compared to Q4 2014 and 13% as compared to Q3 2015 to $0.56 per watt, as we invested less in sales and marketing. G&A costs were $0.25 per watt, declining 7% quarter-over-quarter on cost controls and scale benefits. We remain on target for our cost goal of $2.25 per watt in 2017. The reconciliation of our cost per watt to our GAAP financial statements is available on our investor relations website (at

Asset Financing of $2.40 per Watt Captured 66% of the Value of MW Deployed Upfront

Asset Financing in Q4 2015:

$2.40 per watt

Tax Equity Investment in Q4 2015:

$1.55 per watt (or $1.38 per watt blended with MyPower)

Asset Financing in 2015:

$2.73 per watt (after adjustment for net non-recourse debt proceeds received in Jan. 2016 for MW Deployed in 2015)

Out of the total $3.64 per watt Value of MW Deployed under Energy Contract in the fourth quarter, we monetized $2.40 per watt upfront. Tax Equity Investment totaled $1.38 per watt on a blended basis including all MW Deployed under Energy Contracts (or $1.55 per watt solely on the lease and PPA MW that utilize tax equity). Upfront Cash Rebates and Prepayments contributed an additional $0.07 per watt. Non-recourse Debt Proceeds provided $0.95 per watt, representing only aggregation facility debt drawn down as we issued no asset-backed securitization (ABS) debt in the fourth quarter. Total Asset Financing of $2.40 per watt, or $586 million, in the fourth quarter compared to $3.20 per watt, or $633 million, in the third quarter of 2015, which included the incremental proceeds of our $124 million LMC4 securitization. For the full year, Asset Financing was $2.58 per watt in 2015.

In January 2016, we issued our fifth ABS debt issuance

for $185 million, the first secured by the unlevered cash flows of a 64 MW portfolio of MyPower loans and closed on a $160 million five-year non-recourse debt facility secured by the unlevered cash flows of a 195 MW lease/PPA portfolio. Including the proceeds of these financings in early 2016, Asset Financing in 2015 would have been $2.7

per watt, higher than our Q4 2015 cost of $2.71 per watt. The r

asset financing in period

Continued Investment in Technology Focused on Improving Our Competitive Edge

Capital Expenditures in Q4 2015

: $29 million

R&D Expense in Q4 2015

: $23 million including $3.4 million in stock compensation

Beyond the upfront investment in new installations, the other primary cash expenditures we incur—which are not captured in our Cost Per Watt—are (1)

Research and Development Operating Expenses (R&D)

and (2) corporate-level

Capital Expenditures

. Both largely represent investment in our technology platform to improve our differentiated product offering and best-in-class cost structure.

R&D expenses of $23 million (including $3.4 million of non-cash stock compensation) were focused on the development of (a) high-efficiency cell/module production, (b) mounting hardware design and development (c) software, (d) storage, and (e) grid services. Corporate Capital Expenditures were $29 million with investment in our module manufacturing operations accounting for the bulk of it—$17 million—as we began production from our 100-MW R&D line at our Fab2 in Fremont, CA and continued purchasing for our 1-GW Fab3 manufacturing facility in Buffalo, NY.

Following the grand opening of our Fab2 in November 2015, our first operational 100-MW cell-module manufacturing line is up and running, producing modules with average efficiencies exceeding 20% today and expected to surpass 21% by the end of the year. In addition, we continue to innovate in our Zep mounting hardware with our latest technological development reducing part count from 8 to 3 and enabling the installation of 16 modules (~4 kW) in 20 minutes, all while reducing risk of roof damage. We expect even greater innovation in the years ahead.

$394 Million in Cash and Investments and $879 Million in Committed Project Financing

: $394 million

Change in Working Capital

: ($38 million)

Following the installation of 272 MW in the quarter and $49 million in

technology investment (excluding stock compensation), we closed out 2015 with a strong position of cash and available financing. As of December 31, 2015, unrestricted Cash and Investments totaled $394 million, as compared to $418 million on September 30, 2015. The quarterly decline in cash of $137 million (net of $113 million in net proceeds from convertible debt issued to Silver Lake, our Chairman and our Chief Executive Officer in December 2015) was driven largely by (1) $687 million of development investment in Energy Contracts deployed in the quarter (Installation, Sales, and G&A costs)—offset by (2) Asset Financing in Period of $586 million—as well as (3) $49 million in cash R&D (excluding stock compensation) and corporate capital expenditures, (4) $81 million in cash expenditures on systems under construction, (5) $87 million in recourse debt


(6) $13 million in corporate cash interest,

million in other (including PowerCo cash flows, cash

taxes, and other changes in working capital and timing differences.

As of December 31, 2015, total recourse debt was $1.5 billion, including convertible debt of $909 million (and total debt was $2.8 billion including non-recourse debt of $1.2 billion). In addition, we ended the year with $658 million in undeployed tax equity capacity, $194 million in unused aggregation facility capacity and $27 million in MyPower facility debt capacity.

GAAP Q4 2015 Operating Results

GAAP revenue was $115 million in the fourth quarter of 2015, up 61% year-over-year, with Operating Lease and Solar Energy Incentive Revenue of $75 million (up 53% year-over-year) and Solar Energy Systems Sale Revenue of $40 million (up 77% year-over-year). Operating Lease Gross Margins were 34% (or 40% excluding non-cash amortization of intangibles). Solar Energy System Sale Gross Margins were 7%. Operating expenses were $227 million, up 68% year-over-year. Non-GAAP EPS was ($2.37) per share.

Predictable Performance of 1.7 GW PowerCo Portfolio

Cumulative MW Deployed under Energy Contract:

1,742 MW, up 76% year-over-year

Energy Production

: 1.6 terawatt-hours (TWh) in 2015

Unlevered Pre-Tax NPV (Less Non-Recourse Debt)

: $2.0 billion at a 6% discount rate

Following significant investment and development in Q4 2015, our PowerCo portfolio stood at 1.7 GW (net of 0.2 GW of system sales) as of the end of the year with ~56% PPAs, ~38% leases, and ~6% MyPower loans. For the full year 2015, PowerCo’s deployed portfolio produced 1.6 Terawatt-Hour (TWh) of energy, up 76% as compared to 2014. Energy Production continues to come in largely within forecast.

Delinquencies of 180+ days remain comfortably below 1%. Average FICO score for PowerCo’s residential customers as of the end of 2015 was 747.

As of the end of 2015, the Pre-Tax Unlevered NPV of the Unlevered Project Cash Flow underlying our PowerCo portfolio is forecast at $3.2 billion at a 6% discount rate. Though we have historically highlighted Gross Retained Value to measure our estimated value of our unlevered cash flow stream, Retained Value represents the forecasted value of our total Energy Contract bookings, and thus includes backlog not yet deployed. Due to the difficulty in accurately forecasting costs and financing of the backlog, we will focus solely on the Project Cash Flows and NPVs of MW Deployed going forward.

Supportive U.S. Distributed Solar Policies Largely Maintained—though Nevada Falls Off Track

The outlook for distributed solar growth in the years to come not only remains bright but has dramatically improved following a series of supportive regulatory and policy developments last quarter that evolved out of the hard work and dedication of our policy team and that of key forward-looking legislators, regulators, and utility executives seeking to ensure the true benefits of cleaner, lower cost distributed solar energy are recognized.

Thanks to the support of key Democrat and Republican lawmakers, a five-year extension of the federal investment tax credit (ITC) was passed in December, ensuring that solar will not be excluded from the supportive policies/tax incentives that aid fossil fuel energy sources. In addition, California approved a new net metering regime that was largely supportive of continued distributed solar growth, keeping net metering intact and requiring future customers to go on time-of-use (TOU) rates. We look forward to participating in upcoming California regulatory dockets to precisely determine the best TOU periods to

advance solar deployment while assisting with grid needs. Finally, in a disappointing decision, the Nevada Public Utilities Commission eliminated favorable tariffs relied upon to deploy solar. Despite this interim setback, we remain convinced that the decision will be reversed.

Outlook and Q1 2016 Guidance

We closed out a strong 2015 with installations growing 73% to a record 870 MW and costs falling to new lows, though we fell short of our installation goals more than once. We are not happy with these results, and recognize our need to revamp our guidance methodology to avoid any potential shortfalls going forward. Notably, residential has consistently performed above our expectations over the last year, and...