SolarCity Corp. Director Donald R Jr Kendall bought 25,000 shares on 12-18-2012 at $ 8.
We sell renewable energy to our customers at prices below utility rates. Our long-term agreements generate recurring customer payments and position us to provide our growing base of customers with other energy products and services that further lower their energy costs. We call this â€śBetter Energy.â€ť
The demand for Better Energy is allowing us to install more solar energy systems than any other company in the United States. We believe this significant demand for our energy solutions results from the following value propositions:
We lower energy costs . Our customers buy renewable energy from us for less than they currently pay for electricity from utilities with little to no up-front cost. They are also able to lock in their energy costs for the long term and insulate themselves from rising energy costs.
We build long-term customer relationships . Most of our customers agree to a 20-year contract term, positioning us to provide them with additional energy-related solutions during this relationship to further lower their energy costs. At the end of the original contract term, we intend to offer our customers renewal contracts.
We make it easy . We perform the entire process, from permitting through installation, and make it simple for customers to switch to renewable energy.
We focus on quality . Our top priority is to provide value and quality service to our customers. We have assembled a highly skilled team of in-house professionals dedicated to the highest engineering standards, overall quality and customer service.
We currently serve customers in 14 states, and we intend to expand our footprint internationally, operating in every market where distributed solar energy generation is a viable economic alternative to utility generation. We generate revenue from a mix of residential customers, commercial entities such as Walmart, eBay and Intel, and government entities such as the U.S. Military. Since our founding in 2006, we have provided or contracted to provide systems or services to more than 50,000 customers. Every five minutes of the working day a new customer makes the switch to Better Energy. In addition, aggregate contractual cash payments that our customers are obligated to pay over the term of our long-term customer agreements have grown at a compounded annual rate of 117% since 2009. We structure these customer agreements as either leases or power purchase agreements. Our lease customers pay a fixed monthly fee with an electricity production guarantee. Our power purchase agreement customers pay a rate based on the amount of electricity the solar energy system actually produces.
Our long-term lease and power purchase agreements create high-quality recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives. Our financial strategy is to monetize these assets at the lowest cost of capital. We share the economic benefit of this lower cost of capital with our customers by lowering the price they pay for energy. Historically, we have monetized the assets created by substantially all of our leases and power purchase agreements via financing funds we have formed with fund investors. In general, we contribute the assets to the financing fund and receive upfront cash and retain a residual interest. The allocation among us and the fund investors of the economic benefits as well as the timing of receipt of such economic benefits varies depending on the structure of the financing fund. We use a portion of the cash received from the financing fund to cover our variable and fixed costs associated with installing the related solar energy systems. We invest the excess cash in the growth of our business. In the future, in addition to or in lieu of monetizing the value through financing funds, we may use debt, equity or other financing strategies to fund our operations.
To date, we have raised $1.7 billion through 24 financing funds and related financing facilities established with banks and other large companies such as Credit Suisse, Google, PG&E Corporation and U.S. Bancorp, and we continue to create additional financing funds.
Most of our customer relationships begin when we enter into long-term energy contracts. These long-term energy contracts serve as a gateway for us to engage our residential customers in performing energy efficiency evaluations and energy efficiency upgrades. During an energy efficiency evaluation, our proprietary software enables us to capture, catalog and analyze all of the energy loads in a home to identify the most valuable and actionable solutions to lower energy costs. We then offer to perform the appropriate upgrades to improve the homeâ€™s energy efficiency. We also offer energy-related products such as electric vehicle charging stations and proprietary advanced monitoring software, and are expanding our product portfolio to include additional products such as on-site battery storage solutions. Approximately 48% of our new residential solar energy system customers in 2012 purchased additional energy products or services from us, and as our customersâ€™ energy needs evolve over time, we believe we are well-positioned to be their provider of choice.
We have developed an integrated approach that allows our customers to lower their energy costs in a simple and efficient manner. We have disrupted the industry status quo by providing renewable energy directly to customers for less than they are currently paying for utility-generated energy. Unlike utilities, we sell energy with a predictable cost structure that does not rely on limited fossil fuels and is insulated from rising retail electricity prices. We also guarantee the electricity production of our solar energy systems to our customers. Our strategy is to focus on that portion of the solar energy value chain with the most potential: the energy consumer and the customer relationship. We believe we are the only distributed energy company that offers integrated sales, financing, engineering, installation, monitoring, maintenance and efficiency services without involving the services of multiple third-party participants.
The key elements of our integrated approach are illustrated below:
Sales . We market and sell our products and services through a national sales organization that includes a direct outside sales force, a call center, a channel partner network and a robust customer referral program. We have structured our sales organization to efficiently engage prospective customers, from initial interest through customized proposals and, ultimately, signed contracts.
Financing . Financing makes it possible to install our solar energy systems for little or no upfront cost. Through a streamlined process, we provide multiple pricing options to our customers to help make renewable, distributed energy accessible and affordable, either on a fixed monthly fee basis or a fee based on the amount of energy produced.
Engineering . Our in-house engineering team custom designs a solar energy system for each of our customers. We have developed software that simplifies and expedites the design process and optimizes the design to maximize the energy production of each system. Our engineers complete a structural analysis of each building and produce a full set of structural design and electrical blueprints that contain the specifications for all system components.
Installation . Once we complete the design, we obtain all necessary building permits. Our customer care representatives coordinate the SolarCity team and keep our customers apprised of the project status every step of the way. We are a licensed contractor in every community we service, and we are responsible for every customer installation. For substantially all of our residential projects, we are the general contractor, construction manager and installer. For our commercial projects, we are the general contractor and construction manager. Once we complete installing the system, we schedule inspections with the local building department and arrange for interconnection to the power grid with the utility. By handling these logistics, we make the installation process simple for our customers.
Monitoring and Maintenance . Our proprietary monitoring software provides our customers with a real-time view of their energy generation and consumption. Through an easy-to-read graphical display available on smartphones and any device with a web browser, our monitoring systems collect, monitor and display critical performance data from our solar energy systems, including production levels, local weather, electricity usage and environmental impacts. These monitoring systems allow us to confirm the continuing proper operation of our solar energy systems, identify maintenance issues and provide our customers with a better understanding of their energy usage, allowing them the opportunity to modify their usage accordingly.
Complementary Products and Services . Through our comprehensive energy efficiency evaluations, we analyze our customersâ€™ energy usage and identify opportunities for energy efficiency improvements. Using our proprietary software, our home energy evaluation consists of a detailed in-home diagnosis that identifies energy use and loss. After the evaluation is completed, we review the results with the customer and recommend current and future opportunities to improve energy efficiency and home comfort. We then offer to perform these upgrades.
We believe the following strengths enable us to deliver Better Energy to a diversified customer base that includes residential home owners, large and small businesses, and government entities:
Lower cost energy . We sell energy to our customers at prices below utility rates. Our solar energy systems rely solely on the free energy produced by the sun, allowing our customers to generate their own energy and reduce the amount they purchase from utilities. We help put solar energy generation within the reach of our customers by providing a variety of pricing options that minimize or eliminate upfront costs. Our customers typically achieve a lower overall electricity bill immediately upon installation. As retail utility rates rise, our customersâ€™ savings increase.
Easy to switch . We have developed an integrated approach that allows our customers to access distributed renewable energy generation simply and efficiently. By providing the sales, financing, engineering, installation, monitoring and maintenance ourselves, we are able to control and oversee the entire process while providing a superior experience to our customers.
Long-term customer relationships . Our business model enables us to develop long-term relationships with our customers. Under our standard customer agreements, our solar energy customers purchase energy from us for 20 years. This approach allows us to maintain an ongoing relationship with our solar energy customers through our receipt of payments and our real-time monitoring. We leverage these relationships to offer complementary energy efficiency services
tailored to our customersâ€™ needs, which we believe further reinforces our relationship, brand and value to the customer, and reduces our customer acquisition costs. Because our 20-year contracts with our customers exceed the average useful life of most major appliances (such as water heaters and furnaces), we believe we are well-positioned to assist them with future replacements and upgrades. In addition, because our solar energy systems have an estimated life of 30 years, we intend to offer our customers renewal contracts at the end of the original contract term.
Significant size and scale . Our size enables us to achieve economies of scale in both installation and capital costs, enabling us to offer our customers electricity at rates lower than the retail rate offered by the utility. We believe that our size provides our customers with confidence in our continuing ability to service their system and guarantee its performance over the duration of their long-term contract.
Innovative technology . We continually innovate and develop new technologies to facilitate our growth and to enhance the delivery of our products and services. For example, we have developed proprietary software that significantly reduces design time, speeds the permitting process and allows us to efficiently manage the installation of every project.
Brand recognition . Our ability to provide high-quality services, our dedication to best-in-class engineering efforts and our exceptional customer service have helped us establish a recognized and trusted national brand. For example, approximately 23% of our new residential projects in 2012 originated from existing customer referrals. We believe our brand is a meaningful factor for customers as they consider their energy alternatives.
Strong leadership team . We are led by a strong management team with demonstrated execution capabilities and an ability to adapt to rapidly changing market environments. Our senior leadership team, consisting of our co-founders, Lyndon R. Rive and Peter J. Rive, and our chairman, Elon Musk, are widely recognized entrepreneurs and thought leaders with track records of building successful businesses. Additionally, to support our integrated business model, we have developed in-house expertise through strong senior leadership on our engineering, structured finance, legal and government affairs teams.
Our Innovative Products, Services and Technology
We deliver Better Energy to our customers through a portfolio of complementary products and services that enable more cost effective generation and reduced energy consumption. We have developed enabling technologies that allow us to simplify our customersâ€™ experience and enhance our ability to deliver our products and services.
Solar Energy Product
Solar Energy Systems . The major components of our solar energy systems include solar panels that convert sunlight into electrical current, inverters that convert the electrical output from the panels to a usable current compatible with the electric grid, racking that attaches the solar panels to the roof or ground and electrical hardware that connects the solar energy system to the electric grid and our monitoring device. We purchase our components from vendors, maintaining multiple sources for each major component to ensure competitive pricing and an adequate supply of materials. Though we typically install poly-crystalline silicon panels and string inverters, we have installed a wide variety of other technologies, including thin film panels and panel-level power optimizers.
SolarLease and Power Purchase Agreement Finance Products . Most of our solar energy customers choose to purchase energy from us pursuant to one of two payment structures: a SolarLease or a power purchase agreement. In both structures, we charge customers a monthly fee for the power produced by our solar energy systems. In the lease structure, this monthly payment is pre-determined and includes a production guarantee. In the power purchase agreement structure, we charge customers a fee per kilowatt hour, or kWh, based on the amount of electricity actually produced by the solar energy system. Under both the SolarLease and power purchase agreement, our customers also have the option to pay little or no upfront costs or to reduce the aggregate amount of their future payments by pre-paying a portion of their future payments. Over the term of the agreement, we own and operate the system and guarantee its performance. Our current standard SolarLeases and power purchase agreements have 20-year terms. Prior to 2010, our standard lease term was 15 years. In a limited number of utility districts, we continue to offer lease terms of less than 20 years to comply with applicable incentive programs. In addition, a limited number of our commercial customers have entered into power purchase agreements with terms of between 10 and 20 years.
Energy Efficiency Products and Services
Our energy efficiency products and services enable our customers to save money on their energy bills by reducing their energy consumption. To date, we have completed over 16,000 home energy evaluations and performed more than 2,500 energy efficiency upgrades.
Home Energy Evaluation . Our home energy evaluation is the threshold to the broad set of energy efficiency products and services we offer. We sell home energy efficiency evaluations to new solar energy system customers, existing customers, prospective solar energy system customers who are unable to adopt solar energy because of site conditions or credit, and to customers who want to start with energy efficiency improvements. Using our proprietary software, our home energy evaluation consists of a detailed in-home diagnosis that identifies energy use and loss. During the evaluation, we record details of the homeâ€™s construction and energy use, measurements of every major building surface, model numbers of appliances and other energy consuming equipment, and measure combustion efficiency and air leakage in the ducts and building envelope. We create a database of this information and review a report of the results with the customer outlining current and future opportunities to improve energy efficiency and home comfort. We then offer to perform these upgrades.
Energy Efficiency Upgrades . Based on the detailed analysis from the home energy evaluation, we work with customers to identify their priorities to improve the cost effectiveness, efficiency, health and comfort of their home by implementing appropriate upgrades. We generally handle every aspect of an energy efficiency improvement project for our customers including sales, engineering, permitting, procurement, installation, inspections and any supporting rebate or utility documentation. Our core energy efficiency upgrade products and services address heating and cooling, air sealing, duct sealing, water heating, insulation, high efficiency furnaces, weatherization, pool pumps and lighting.
MANAGEMENT DISCUSSION FROM LATEST 10K
We integrate the sales, engineering, installation, monitoring, maintenance and financing of our distributed solar energy systems with our energy efficiency products and services. This allows us to offer long-term energy solutions to residential, commercial and government customers. Our customers buy renewable energy from us for less than they currently pay for electricity from utilities with little to no up-front cost. Our long-term contractual arrangements typically generate recurring customer payments and enable our customers to have visibility into their future electricity costs and to minimize their exposure to rising retail electricity rates. Our customer relationships also position us to continue to grow our business through energy efficiency products and services offerings including energy efficiency evaluations, appliance upgrades, energy storage solutions and electric vehicle charging stations.
We offer our customers the option to either purchase and own solar energy systems or to purchase the energy that our solar energy systems produce through various financed arrangements. These financed arrangements include long-term contracts that we structure as leases and power purchase agreements. In both financed structures we install our solar energy system at our customerâ€™s premises and charge the customer a monthly fee for the power that our system produces. In the lease structure, this monthly payment is fixed with a production guarantee. In the power purchase agreement structure, we charge customers a fee per kWh based on the amount of electricity the solar energy system actually produces. The leases and power purchase agreements are typically for 20 years, and generally when there is no upfront fee the specified fees are subject to annual escalations.
Our solar energy systems serve as a gateway for us to perform energy efficiency evaluations and energy efficiency upgrades for our residential customers. During an energy efficiency evaluation, we capture, catalog and analyze all of the energy loads in the home to specifically identify the most valuable and actionable solutions to lower energy cost. We then offer to perform the appropriate upgrades to improve the homeâ€™s energy efficiency. We offer our energy efficiency products and services to our solar energy systems customers and on a stand-alone basis. We launched our energy efficiency business in the second quarter of 2010. To date, revenue attributable to our energy efficiency products and services has not been material compared to revenue attributable to our solar energy systems.
Initially, we only offered our solar energy systems on an outright purchase basis. In mid-2008, we began offering leases and power purchase agreements. Our ability to offer leases and power purchase agreements depends in part on our ability to finance the installation of the solar energy systems by monetizing the resulting customer receivable and related investment tax credits, accelerated tax depreciation and other incentives. Currently, the majority of our residential energy customers enter into leasing arrangements, and the majority of our commercial customers and government organizations enter into power purchase agreements. We expect customers to continue to favor leases and power purchase agreements.
We compete mainly with the retail electricity rate charged by the utilities in the markets we serve, and our strategy is to price the energy we sell slightly below that rate. As a result, the price our customers pay to buy energy from us varies depending on the state where the customer is located and the local utility. The price we charge also depends on customer price sensitivity, the need to offer a compelling financial benefit and the price other solar energy companies charge in the region. Our commercial rates in a given region are also typically lower than our residential rates in that region because utilitiesâ€™ commercial retail rates are generally lower than their residential retail rates.
We generally recognize revenue from solar energy systems sold to our customers when we install the solar energy system and it passes inspection by the utility or the authority having jurisdiction. We account for our leases and power purchase agreements as operating leases. We recognize the revenue these arrangements generate on a straight-line basis over the term for leases, or as we generate and deliver energy for power purchase agreements. We recognize revenue from our energy efficiency business when we complete the services. Substantially all of our revenue is attributable to customers located in the United States.
The amount of operating leases revenue that we recognize in a given period is dependent in part on the amount of energy generated by solar energy systems under power purchase agreements and by systems with energy output performance incentives, which in turn is dependent in part on the amount of sunlight. As a result, operating leases revenue has in the past been impacted by seasonally shorter daylight hours in winter months. As the relative percentage of our revenue attributable to power purchase agreements or performance-based incentives increases, this seasonality may become more significant.
Various state and local agencies offer incentive rebates for the installation and operation of solar energy systems. For solar energy systems we sell, we typically have the customer assign the incentive rebate to us. We record the incentive rebates as a component of proceeds from the system sale. For incentive rebates associated with solar energy systems under leases or power purchase agreements, we initially record the rebate as deferred revenue and recognize the deferred revenue as revenue over the term of the lease or power purchase agreement.
Component materials, third-party appliances and direct labor comprise the substantial majority of the costs of our solar energy systems and energy efficiency products and services. Under U.S. generally accepted accounting principles, or GAAP, the cost of revenue from our leases and power purchase agreements are primarily comprised of the depreciation of the cost of the solar energy systems, which are depreciated over the estimated useful life of 30 years, and the amortization of initial direct costs, which is amortized over the term of the lease or power purchase agreement.
Prior to our initial public offering, we classified our outstanding preferred stock warrants as a liability on our consolidated balance sheet. These warrants were subject to remeasurement to fair value at each reporting date, with any changes in fair value being recognized as a component of other income or expense, net, in our consolidated statement of operations. Any warrants that were not exercised and did not expire in connection with the closing of our initial public offering of common stock converted into warrants to purchase common stock. These common stock warrants are not classified as a liability but as a component of additional paid-in capital and accordingly are not subject to further remeasurement.
We have structured different types of financing funds to implement our asset monetization strategy. One such structure is a joint venture structure where we and our fund investors both contribute funds or assets into the joint venture. Under GAAP, we are required to present the impact of a hypothetical liquidation of these joint ventures on our income statement. Therefore, after we determine our consolidated net income (loss) for a given period, we are required to allocate a portion of our consolidated net income (loss) to the fund investors in our joint ventures (referred to as the â€śnoncontrolling interestsâ€ť in our consolidated financial statements) and allocate the remainder of the consolidated net income (loss) to our stockholders. These income or loss allocations, reflected on our consolidated statement of operations, can have a significant impact on our reported results of operations. For example, for the year ended December 31, 2012 and 2011, our consolidated net loss was $91.6 million and $73.7 million, respectively. However, after applying the required allocations, the net income (loss) attributable to our stockholders, the result was a loss of $64.2 million and income of $43.5 million in 2012 and 2011, respectively. For a more detailed discussion of this accounting treatment, see â€śâ€”Components of Results of Operationsâ€”Net Income (Loss) Attributable to Stockholders.â€ť
Our long-term lease and power purchase agreements create recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives. Our financial strategy is to monetize these assets at the lowest cost of capital. We share the economic benefit of this lower cost of capital with our customers by lowering the price they pay for energy. Historically, we have monetized the assets created by substantially all of our leases and power purchase agreements via financing funds we have formed with fund investors. We contribute the assets to the financing fund and receive upfront cash and retain a residual interest. We use a portion of the cash received from the financing fund to cover our variable and fixed costs associated with installing the related solar energy systems. Because these recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives are either paid by government agencies or individuals or commercial businesses with high credit scores, and because electricity is a necessity, our fund investors perceive these as high-quality assets with a relatively low loss rate. We invest the excess cash in the growth of our business. In the future, in addition to or in lieu of monetizing the value through financing funds, we may use debt, equity or other financing strategies to fund our operations.
We have established different types of financing funds to implement our asset monetization strategy, including joint ventures, lease pass-through and sale-leaseback structures, any of which may utilize debt that is non-recourse to us. We call these arrangements our financing funds. The allocation of the economic benefits among us and the fund investors and related accounting varies depending on the structure.
Joint Ventures. Under joint venture structures, we and our fund investors contribute funds into a joint venture. Then, the joint venture acquires solar energy systems from us and leases the solar energy systems to customers. Prior to the fund investor receiving its contractual rate of return, the fund investors receive substantially all of the value attributable to the long-term recurring customer payments, investment tax credits, accelerated tax depreciation and, in some cases, other incentives. After the fund investor receives its contractual rate of return, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives.
We have determined that we are the primary beneficiary in these joint venture structures. Accordingly, we consolidate the assets and liabilities and operating results of these joint ventures, including the solar energy systems and operating lease revenue, in our consolidated financial statements. We recognize the fund investorsâ€™ share of the net assets of the joint ventures as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statement of convertible redeemable preferred stock and equity. Our consolidated statement of cash flows reflects cash received from these fund investors as proceeds from investments by noncontrolling interests in subsidiaries. Our consolidated statement of cash flows also reflects cash paid to these fund investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these fund investors as distributions payable to noncontrolling interests in subsidiaries in our consolidated balance sheet.
Lease Pass-Through. Under lease pass-through structures, we lease solar energy systems to fund investors under a master lease agreement, and these investors in turn sublease the solar energy systems to customers. Depending upon the structure, we receive some or all of the value attributable to the accelerated tax depreciation and other incentives. The fund investors receive the value attributable to the investment tax credits and, for the duration of the master lease term, the long-term recurring customer payments. After the lease term, we receive the customer payments, if any. We record the solar energy systems on our consolidated balance sheet as a component of solar energy systems, leased and to be leasedâ€”net. The fund investors typically make significant upfront cash payments that we record on our consolidated balance sheet as lease pass-through financing obligations. We reduce these obligations by amounts received by the fund investors from U.S. Treasury Department grants, customer payments and the associated incentive rebates. We in turn recognize the incentive rebates and customer payments as revenue over the customer lease term and amortize U.S. Treasury Department grants as a reduction to depreciation of the associated solar energy systems over the estimated life of these systems.
Sale-Leaseback. Under sale-leaseback structures, we generate cash through the sale of solar energy systems to our fund investors, and we then lease these systems back from the investors and sublease them to our customers. For the duration of the lease term, we may, for some of the structures, receive the value attributable to the incentives and the long-term recurring customer payments, and we make leaseback payments to the fund investors. The fund investors receive the customer payments after the lease term. They also receive the value attributable to the investment tax credits, accelerated depreciation and other incentives. At the end of the lease term, we have an option to purchase the solar energy systems from the fund investors. Typically, our customers make monthly lease payments that we recognize as revenue over the term of the subleases on a straight-line basis. Depending on the design, size and construction of the individual systems and the leaseback terms, we may recognize a portion of the revenue from the sale of the systems or we may treat the cash received from the sale as financing received from the fund investors and reflect the cash received as a sale-leaseback financing obligation on our consolidated balance sheet.
Key Operating Metrics
We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
We track the number of residential, commercial and government buildings where we have installed or contracted to install a solar energy system, or performed or contracted to perform an energy efficiency evaluation or other energy efficiency services. We have previously referred to the foregoing as â€śbuildingsâ€ť and have chosen to redefine these as â€ścustomers,â€ť as we believe this is a more appropriate descriptor. We believe that the relationship we establish with building owners, together with energy-related information we obtain about the building, position us to provide the owner with additional energy-related solutions to further lower their energy costs. Our total number of customers increased 158% to 50,532 as of December 31, 2012 from 19,582 as of December 31, 2011, which in turn represented an 82% increase from 10,779 as of December 31, 2010.
We define an energy contract as a residential, commercial or government lease or power purchase agreement pursuant to which consumers use or will use energy generated by a solar energy system that we have installed or contracted to install. We previously referred to the foregoing as â€śsolar energy system customersâ€ť who entered into leases or power purchase agreements and have chosen to redefine as we believe â€śenergy contractsâ€ť is a more appropriate descriptor. For landlord-tenant structures, such as the Davis-Monthan Air Force Base, in which we contract with the landlord or development company, we maintain a direct relationship with the individual tenants and include each residence as an individual contract. For commercial customers with multiple locations, each location is deemed a contract if we maintain a separate contract for that location. For example, we view each Walmart store to be an individual contract as we maintain a contractual relationship for the individual store and have a direct relationship with the store manager. We track the number of energy contracts as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of growth from period to period.
Megawatts Deployed and Cumulative Megawatts Deployed
We track the electricity-generating production capacity of our solar energy systems as measured in megawatts. Because the size of solar energy systems varies greatly, we believe that tracking the aggregate megawatt production capacity of the systems is an indicator of the growth rate of our solar energy systems business. We track megawatts deployed in a given period as an indicator of asset growth in the period. We track cumulative megawatts deployed as of the end of a given period as an indicator of our historical growth and our future opportunity to provide customers with additional energy-related solutions to further lower their energy costs.
Megawatts deployed represents the aggregate megawatt production capacity of solar energy systems that have had all required inspections completed during the applicable period. Cumulative megawatts deployed represents the aggregate megawatt production capacity of operating solar energy systems subject to leases and power purchase agreements and solar energy systems we have sold to customers. Until we have begun the design process, the customer may terminate these contracts with little or no penalty.
Transactions for Other Energy Products and Services
We use the number of transactions for energy products and services other than the installation of solar energy systems as a key operating metric to evaluate our ability to generate incremental sales from our installed customer base and to expand our business to new customers. Our solar energy systems serve as a gateway for us to perform energy efficiency evaluations and energy efficiency upgrades for our residential customers. We also offer our energy efficiency products and services on a stand-alone basis. Our strategy is to expand our energy efficiency business to our commercial customers and to continue to invest in and develop complementary energy products and services.
Transactions for other energy products and services includes all transactions during the period when we perform or contract to perform a service or provide, install or contract to install a product. It excludes the outright sale or installation of a solar energy system under a lease or power purchase agreement and any related monitoring. For the years ended December 31, 2012, 2011 and 2010, we completed 15,425, 3,716 and 400 transactions for other energy products and services, respectively.
Jonathan Bass - IR
Thanks everyone for joining the call today. As a reminder, this discussion will contain forward looking statements that involve risks and uncertainties, including forecasts regarding SolarCityâ€™s 2013 financial and operational results. Words such as believe, may, estimate, continue, anticipate, intend, expect, predict, potential and similar expressions as they relate to SolarCity, its business and its management are intended to identify forward looking statements. Forward looking statements should not be considered as a guarantee of future performance or results, and will not necessarily be accurate indications of the time that apply which such performance or results will be achieved if at all. Forward looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed and/or suggested by the forward looking statements, including risks identified in SolarCityâ€™s earnings press release issued today and in the slides accompanying this presentation, as well as additional risks and uncertainties identified in the section entitled Risk Factors in our registration statement on Form S-1 which has been filed with the Securities and Exchange Commission. We do not undertake any obligation to publicly update or revise any forward looking statement whether as a result of new information, future development or otherwise.
In addition, during the course of this call we will use a number of especially defined terms relating to our business metrics and financial results, the first definitions of these terms included in the slides accompanying this presentation which are available on our investor relations website at investors.solarcity.com. Weâ€™re going to try to keep todayâ€™s presentation including questions and answers to 45 minutes.
And with that, Iâ€™d like to introduce SolarCity CEO Lyndon Rive.
Lyndon Rive - CEO
Thank you everybody for joining our first earnings call. Weâ€™re very excited to share our Q4 and 2012 results. We could not have offered better yet. When we review the business metrics you would see that key business metrics had at least 100% growth, some as high as 300%. This is not a small numbers, this is a big number.
We are clearly on our way to building the most compelling energy company in the 21st century. 2013 is off to a great start with our partnership with Honda. The demand for cheaper, cleaner energy is high and the market potential is massive, solar is still less than 1% of our energy needs.
Turn to slide four, in order to achieve our vision, there may be massive investment into deploying solar energy system. With each new customers, we create a predictable recurring SOC. Our financial strategy is to maximize the retained value for our shareholders by covering the investment activities with tax generated from financing and operating activities. In short, as we invest into solar system with operating and financing assets (inaudible) weâ€™re going to have three main activities, operating activity, investing activity and financing activities.
Peter Rive, our COO will cover the operating activities, includes the contractual payments, acquiring customers, operating and maintaining the solar systems, the technology development, additional solar system we offer direct sales, we are starting to see significant uptick in our upsells. This includes energy efficiency, storage, electric vehicle charging stations. He will also cover our investment activities. The investments that we are making to become the next generation clean energy company.
Bob Kelly, our CFO will describe our financing activities. He will describe to you what we are doing to lower our cost of capital and what we are doing to expand our capital sources. With that I would like to move into page five and hand over to Peter Rive, our chief operating officer.
Peter Rive - COO
Thanks. So Q4 deployments came in at 48 megawatts which is the largest quarter on record, so that was a very, very, exciting quarter for us. The 48 megawatts was in part as a result of a handful of commercial projects that were completed in Q4 result. The 48 megawatts as a whole reflects a 129% growth over Q4 2011 and the year end total of 157 megawatts reflect a great growth of 118% over the full year 2011.
Itâ€™s important to note though that commercial projects canâ€™t sway some of our megawatts deployed numbers on a quarter on quarter basis, as that volume is little more spiky than our residential business. But the record Q4 deployments brings our accumulative megawatts deployed to 287 megawatts. Now what was also a massive amounts on for us in 2012 is that all of our systems collectively had their first 1 gigawatt hour day of production. So in other words, all of our systems in one day produced 1 gigawatt hour which was a big amount for us.
There is a number of customers added in Q4 2012 was 8557 which is a 192% increase over Q4 2011. This brings a total SolarCity customer count as of the end of 2012 to 50,532. The number of energy contracts, in other words, leases or PPAs that we added in Q4 2012 was 6,810 which represents 190% increase over Q4 2011, to bring the total energy contracts to 40,456. Just you know there is a definition action of this presentation where we in more detail define many of the measurements that we are discussing, including the difference between customers and energy contracts and so on. But briefly the difference between customer and energy contract is customers are those that have bought some of our product as a direct cash bill and energy contracts are the leases or PPAs.
So then transactions from other energy products and services continued to see incredible growth. We had a 350% increase from Q4, 2011 to Q4 2012. So even though energy efficiency, storage and electric vehicle services are still a relative minor component of our overall revenue, itâ€™s really encouraging for us to see the growth rate and the successful execution of our upsell strategy.
Another massive milestone for us in 2012 was that our contracted payments surpassed the $1 billion milestone, so a 124% growth compared to the prior year. The current backlog of our signed contracted customers is 194 megawatts. Now itâ€™s important to note that some of this backlog includes some projects with multiyear deployment schedule, and that part of that 194 megawatts (inaudible) beyond 2013, regardless we are in amazing position to meet our 2013 targets. And just to be in the position we are right now the different portion of our targeted deployments for 2013 already signed up and contracted put us in a perfect position to meet our 2013 targets.
Now I want to go to the next slide which is slide six, our investing activities. So investing activities are essentially the investments we are making in deploying the solar systems and the accompanying infrastructure that is necessary in order for us to realize our vision of a distributed generation energy company.
In 2012 we invested $449 million into building solar energy systems and this brings a cumulative investments we have made to over $1 billion. So itâ€™s also important to note that we expect the investments that we need to make on a per megawatt basis to decrease as our costs decrease. And with that, I am going to hand it over to our CFO Bob Kelly to talk about financing activities.
Robert Kelly - CFO
Thanks Pete. Turning to slide seven on the financing activities. Thereâ€™s a couple of themes I am going to touch on here and you will hear this on this call as well as the future calls regarding financing. Itâ€™s lowering the cost of capital, decreasing the cost of capital, increasing the sources of capital.
On lower the cost of capital we recently completed our first recapitalization of three early financing funds that we had on the books. These funds are about three, three and a half years old and the cost of capital was a little over 8%. We refinanced these funds in the marketplace at 3.45%. I think a couple of things youâ€™re seeing here is the maturing of the asset class. What weâ€™re financing with these assets are 20-year contractual cash flows. Itâ€™s a very high quality predictable cash recurring and with the low operating cost structure. When you bring that asset to the marketplace it will achieve a very attractive cost of capital and that's what happened with these three funds which we restructured.
Weâ€™ve also recently started talking with the rating agencies in our efforts to position the company to drive down the cost of capital. Weâ€™ve got probably a two-stage approach with the agencies. First, we want to educate them on the asset class, talking about the FICO scores of our portfolio, the long-term nature of the portfolio, the recurring predictable cash flow and the fact that what weâ€™re financing in the marketplace is an energy payment. An energy payment is an operating cost of the house sold. It is paid before the mortgage and if you need heat air-conditioning you will have to pay your energy bill. We want to bring the agencies up to speed, have them understand the quality of cash and the asset that we have on our books.
The second part of their first stage is related to the production side. We produce kilowatt hours, the customer pays for kilowatt hours. We did a very predictable kilowatt hour production in this business and finally there is no feedstock, this one is free. When you combine the revenue streams with the no feedstock costs you're educating the agencies on a very attractive asset class.
What we want to do with the agencies is have them to rate the asset class of what weâ€™re bringing to the table. And then that will allow us to go out into multiple capital markets, the securitization market, there is a lot of talk about that in the solar industry, pension fund market, the project finance, bond market, the bank market. If we can get and we will get all these capital markets competing for the rated asset that will allow us to drive down the cost of capital and also increase the sources of capital.
Moving on to the sources of capital, in 2012 we financed $323 million of our investments. Thatâ€™s on a historical basis looking to the future, we have 115 megawatts of finance available, financing funds, tax equity funds available as of February 28. This represents about six months of target deployment. Youâ€™d like to keep the tax equity funds in the three to nine-month range. The tax equity market is a one year market, people understand their tax bills, itâ€™s a constant business of raising capital for our company.
When you look at the commitments that we have on the books the 115 and the term sheets that are in progress, we do not anticipate financing to constrain that growth in 2013. In fact, our financing fund pipeline has never been stronger and when I look at the cost of capital and the direction it's headed, we feel pretty good about the financing activities for the business.
Turning to the GAAP income statement on slide number eight, there is three basic concepts I want to walk you through relating to the GAAP statements. The first one is the operating lease revenue. This is perhaps one of the most important metrics or financial indicators to look at for the health of the SolarCity business. In 2012 roughly $48 million, thatâ€™s a doubling from 2011. This represents the recurring contractual cash flow, that contracts that we have on the books which are generally recognized over 20 years. When you look at the business and the health of the business this is the number you should see increasing every single quarter as we add more and more contracts to the portfolio and install systems. So thatâ€™s the first and perhaps the most important GAAP metric to take a look at for our business.
The second one to take a look is the cost of revenues and the operating leases, the number in 2012 of $13 million. This represents the installed cost of the systems. We amortize that number over 30 years, thatâ€™s what the cost of revenues for operating leases represent. The company is focused, obviously what you want to do is lower the cost of installation. When you drive down the cost of installation you have a lower depreciation over 30 years, so your gross profit between the operating leases and the cost of revenues will expand. Take a look at the gross profit of $51 million, you will always see a pretty good gross profit in the business based on the concepts of the 20-year cash flow minus the depreciation of the asset over 30 years.
The third and final area to look for the GAAP statement and analyze is related to the operating expenses, the sales and marketing and the G&A. The sales and marketing are parts which are related primarily associated with acquiring new customers. This is your gross capital. This is the money you invest to bring in new assets and new customers in the future.
When the operating lease revenues build up over time and exceed your gross capital, you will achieve GAAP profitability as the volume increases on our books. In fact, the profitability if we slow down our growth, the GAAP profitability would incur much faster quicker.
Letâ€™s turn to slide nine on the statement of cash flows. This is a cash related business given how the GAAP numbers on the income statements represents themselves and itâ€™s -- when you look at the health of the business this is probably the most important chart to take a look at. This brings together the financial strategy, which Lyndon talked about in the opening where we want the net cash provided by operating activities and our financing activities to exceed the investment activities.
Iâ€™d point you to the fourth quarter here, three months ended December 31, 2012. Operating activities generated almost $65 million of net cash and financing activities was $104.5 million, some of those too exceeded the investment activities of $151 million and generated net cash provided was $18 million.
When you take a look at the financial strategy and the evolution of SolarCity itâ€™s important to look in probably three stages. Historically what we did on the financial side was monetize or sold most of our contracts off to raise cash which allows us over the last six years or so to develop the infrastructure of the business. When we went public in December of last year itâ€™s probably the second stage where we utilized the operating cash flow and the financing cash flow to cover our investments. This will go on for a considerable period of time as we build out and grow the business, and the final stage when you look out into the future is when you build up significant operating lease revenues, your volume of business allows you to click coupons and that you won't need financing to invest in the business.
The last number on this slide to take a look at is the on the right-hand side December 31, 2012 $175 million of equity capital that we raised last year. When you look at that number and forecast out the business we should be in pretty good shape to grow the business with the capital that we have on our plate today. As the point being is it's unlikely it will be necessary you go back to the equity markets given what we see here for the next couple of years.
With that, I will turn it back to Lyndon.
Lyndon Rive - CEO
So we are deploying hundreds of megawatts in building out a distributing energy company. Bob talked about the financing new raising to cover that infrastructure costs. And then we look at, one is left, whatâ€™s the retained value of the financing funds? The retained is a minus effect that comes to SolarCity, also to pay the financing partners, cover the operating and maintenance costs, discounted at 6%. We feel strongly this is one of the most important metrics when valuing a solar energy contract.
Today our retained value is over $500 million, this includes our backlog. To make the math easy, itâ€™s roughly a $1.18 per watt. The $500 million includes our legacy systems that we sold off to the financing partners, and we gave up most of the cash flows as Bob mentioned. We did that to add additional cash to operating activities to build out the business.
As we improve our cost of capital and we reduce our cost of installation, the retained value will increase. Now via open funds weâ€™re only expecting things to move aggressively quarter on quarter but over a year you will definitely see movement on retained value increasing.
If you go to slide 11, discuss these 2013 forecasts. Looking at 2013 we think this is another great year for SolarCity. Every quarter weâ€™re going to give you the next quarterâ€™s forecasts. So for Q1 our forecast is 41 MW. This is lower than our Q4 2012 mainly due to the commercial sequential swings. Peter describe that the commercial can swing quarter on quarter.
With the IPO proceeds, we are investing heavily into growth. These investments will yield gradual increases in Q2 that most of our volume is going to come in, in Q3 and Q4. With our 195 MW in backlog the growth rate that we are seeing, the investments we are making we feel extremely confident in meeting our 250 MW target for 2013.
As Bob described, we were net cash flow positive in Q4, 2012. Weâ€™re now making big investments into our growth and we expect to see that again and maintain net cash flow in Q4, 2013 and onwards at the same time increasing our retained value. Thatâ€™s the end of the presentation.
With that, we will now open it up to questions.