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Is the Sun Rising or Setting on Citizenre Solar?
Company that intends to rent out solar power at rates competitive with
local utilities has announced its financial team, though it has not yet secured
financing, and may not be able to given the present credit crunch.
by Sterling
D. Allan
Pure Energy Systems News
Copyright © 2007
Citizenre Corporation has embarked on a project that would be wonderful if they
could pull it off, but which thus far has been plagued with delays and
credibility issues. They intend to rent solar electricity for residential
and commercial applications at a rate that competes with local utility prices.
Citizenre would own, install, maintain, and decommission the panels, while the
customer paid them for the electricity generated at or below local utility
costs. The contracts would be limited to those areas that have net
metering, and where the utility costs are sufficiently high.
With this idea, over a thousand associates have signed up, and nearly 20,000
potential customers have signed up; but as of yet, Citizenre has not secured
funding, nor a proven technology with a low enough operation cost that they
could plug into this model.
They were initially scheduled to announce their funding partner and have their
groundbreaking in January of this year. The problem is, they didn't have a
funding partner. They still don't. And some would argue that with
today's credit crunch, they are not likely to find a funding partner.
Yesterday, Citizenre published their first press
release in more than half a year. In it, they announced their finance
team, but that doesn't include a finance partner (someone who actually has
the money). This is apparently the first of several announcements slated
through September.
This press release announced the involvement of a major legal firm, Brown
Rudnick Berlack Israels LLP, to assist
Citizenre in developing the Companys corporate finance, real estate, vendor
finance and banking relationships. "Brown Rudnick's Structured Finance Group provides legal services in all types of structured finance and securitization transactions. This group has special expertise recognized internationally in developing innovative structured finance products, derivatives and financing programs in the renewable energy and climate change space that are both cutting edge and commercially viable."
The press release also announced the involvement of Structured Growth Parners,
who will "work in close
collaboration with Citizenre and Brown Rudnick to raise finance for
Citizenres manufacturing activities and in the structuring of power purchase
agreements with creditworthy large customers."
Jim Dunn, who is
an expert in the Solar industry, and an advisor for the New Energy Congress,
said of Citizenre, "They are experiencing many delays but making
progress." The inside information he has about the company spurs him
to hope.
A former top referring agent with Citizenre, Richard
P. George, who left the company in protest in February, and who no longer
has access to inside information, remains skeptical about Citizenre's
prospects. In response to Monday's press release, he provided a critical
assessment (below), which Citizenre
reviewed but then informed us that they would not be responding.
# # #
SOURCES:
- Citizenre Press
Release, Aug. 20, 2007
- Phone call to Brown Rudnick, Aug. 21, 2007
- Phone conversation with Citizenre Media Contact, Erika Morgan, Aug. 21,
2007
- email correspondence with James Dunn, Aug. 21, 2007.
On Aug. 21, 2007, New Energy Congress member, and former Citizenre
associate, Richard
P. George wrote:
1) Citizenre does not have any funding. You don't make this announcement if you have already closed financing. If you have funding, this is not news.
2) My analysis from six months ago that Citizenre is a highly unethical attempt to prove that there is sufficient demand (e.g. FRAs) to justify financing remains valid. Unfortunately, Citizenre's timing is lousy and they are
extremely vulnerable because they tried to sell first and only after the succeeded in selling, finance and build long-lead time infrastructure (PV and inverter manufacturing plant; thousands of installations dependent on equipment made in the plant).
We are several weeks into the worst credit crunch since 1973 and possibly 1929/1930. Lending has largely
stopped - particularly for sub-prime and alt-a mortgages, jumbo mortgages, asset-backed securities, junk bonds, commercial paper, M&A takeovers, and pretty much all lending below AA or AAA. Major banks and investment banks have several hundred billion worth of loans made in the last couple of months (mostly for M&A deals and asset securitization deals) that they are unable to sell to investors without taking major losses. Everyone is scared and pulling back right now. For the little bit of lending that is available, credit spreads have increased by several hundred basis points. This means that if you were expecting a 5% interest rate in July, you may be paying 7% or 7.5% in August if you can still get the loan. Any assumptions about financing that are more than two weeks old have to be revisited. A month ago, GE Money was willing to finance PV systems for single family homes at rates between 7.5% and 14+%, but wanted 5 to 7 year terms. However, even then, they were more interested in commercial PV loans than residential loans. GE is still trying to value the collateral value of home PV systems - there are a lot of technical challenges and costs associated with removing PV systems and a used system may only have value for the first five years.
For Citizenre, they have the assumption that they can essentially give low interest, no documentation, 25 year loans to their customers (a lender's view of the FRA
cash flows). This is essentially a sub-prime, unsecured loan, and any asset-backed security based on a pool of these FRAs would be extremely hard to value right now. The default rate on
FRAs is unknown. Likewise, the cancellation rate and the effective duration of the FRA stream (e.g. how long the average customer has the system on their roof given the easy cancellation terms) are also unknown. Right now, investors do not trust the investment bank valuations of asset-backed securities because 1) there is really no liquid market for these, 2) everything is marked-to-model (where the model is an investment bank spreadsheet) based on investment bank assumptions that may be questionable and overly optimistic, 3) there are major conflicts of interest by the rating agencies and investment banks, and 4) there has been way too much fraud in this space (as much as 50% of all sub-prime loans may have been tainted by frauds committed by one or more of the parties involved - the borrower, the broker, the originator, the rating agency, the investment bank, the appraiser).
If you change the assumptions, Citizenre's model will break down. There are four major vulnerabilities to Citizenre in this credit crunch:
A) Customer Credit Worthiness Risk: Since no customers have completed credit checks, we don't know what percentage of them have prime credit. A significant portion of the 19,700+ customers may not have acceptable credit scores and their FRAs may not be financeable.
B) Interest Rate Risk: If Citizenre has to pay higher interest rates, their margins will decrease, making the service uneconomic for them to offer in some locations. This means that they either a) have to raise the rates they charge (which could make the KWH cost of electricity higher for their customers than they pay their utilities) and/or b) have to exit certain markets - particularly those with low interest rates. Again, a large percentage of customers could be lost if entire states have to be abandoned or if Citizenre is forced to change the rates promised.
C) Geographic Risk: Lenders may avoid investing in asset-backed security loans from certain regions that are particularly hard hit by real estate mortgage foreclosures. 50% of the sub-prime mortgages in the past three years were issued in California and Florida. Unfortunately, California is the most attractive solar market in the country (~80% of the US solar market).
D) Contract Language Risk: Lenders may object to certain terms in the FRA contract and require changes. The financing term has the greatest impact on the economics of FRAs. If lenders require shorter terms (e.g. 5 to 7 years, instead of 25 years), Citizenre cannot offer FRAs at their current rates.
Even if we assume that this deal was fundable in the second quarter of this year, today it is toxic and unfundable given the credit crunch. When one adds the other risks in the deal (execution, inexperienced management team, technology risks, manufacturing risks, MLM marketing scheme), it becomes even less likely to get funded.
Structured Growth Partners is a no-name, two-person fundraising company with no history or verifiable information. It is unlikely that they are registered with the SEC as a broker-dealer (legally required if they take commissions or success fees from Citizenre on any funds raised). If you are trying to raise hundreds of millions or billions of dollars, you don't use a no-name firm, you use either a major investment bank or specialty boutique (energy) investment bank with a proven track record in the field. The little advisors are typically used by startups and small businesses to help them get between several hundred thousand and several million dollars. They also frequently want excessive fees that scare away legitimate investors - particularly venture capital firms.
The law firm is probably the least important player in the funding team because the vast majority of their work comes in the final stage of the funding process - the period between when the investment bank secures the term sheet commitment from investors and when the round closes. In addition, given the current collapse of the asset-backed securities market, I doubt any law firm is going to have much influence in the negotiation process or ability to get better terms for its borrower client. In this environment, the borrower has no negotiating power and pretty much has to accept the terms offered by investors.
On Aug. 22, Richard added:
Interesting how Citizenre consistently never responds to criticisms and provide tangible evidence that they are real. The credit crunch is a major threat to Citizenre even if they manage to get the plant and the first tranche of FRA-backed securities sold. Their business model needs massive amounts of cash to continue to operate and is in many ways (from a financing point of view) very comparable to a mortgage originator. Mortgage originators are doing very poorly right now (100+ bankrupt thus far with all segments, including prime lending, being hit).
They should be making some progress in the past 6-8 months. Their model could work in 3-4 states, especially if they picked one small geographic area (e.g. Southern California in territories served by PG&E, SoCal Edison, and San Diego Gas & Electric) where their program could be economic, purchased several MW worth of equipment from existing vendors, and tried to put together a $10 million or $20 million asset backed security pool to demonstrate the feasibility of the business model. The fundamental problem with Citizenre is their business plan is too complicated, too broad, and too hard to execute with too many potential failure points.
BTW - the credit crunch is a major threat to the entire alternative energy industry. We will see multiple companies with promising technologies wither and die because they are unable to get capital and/or their target customers cannot get the capital to invest in alternative energy infrastructure. Likewise, if we have any major drop in the dollar (quite possible and almost certainly probable), imported alternative energy components (e.g. PV modules imported from China, Japan, or Germany) will become substantially more expensive per watt in dollar terms.
Feedback
Booth Next to Ours
On Aug. 22, 2007, Kevin Weinberg <pureenergy {at} kevinhes.endjunk.com>
wrote:
It's interesting that you mentioned this company. The company I work for (a local solar electric installation contractor) had a booth at EarthFair in San Diego. CitizenRe also had a booth there. A couple of local major players in the solar industry grilled them at their booth, trying to figure out exactly what they were doing. According to the people I spoke with, they made it fairly clear that they didn't have a viable business plan and it was purely speculation as you described in your article.
In addition, we just took on a new employee who was 'working with' CitizenRe and is considering turning them in. Apparently they promise their salespeople/promoters that they will be reimbursed for marketing costs (flyers, multimedia, etc.) and, according to her, no one has been paid or reimbursed.
In addition, they have apparently been moderating their forums to pull out negative posts and suspending accounts for people who speak out against what they're doing.
* * * *
A Moving Corpse is Still Dead
On Aug. 23, 2007, Jeff Wolfe, CEO of GroSolar
wrote:
I'm the guy who wrote the CitizenRE critique that was published on RenewableEnergyAccess.com
I can't add anything new other than what's on your
site. After looking at a dead thing long enough, one tends to believe it's dead, even if it moves a little. (Favorite trick, I've heard, is to send new hospital orderlies to the morgue and have them open a drawer for some reason. Often the dead body will groan, releasing gas, petrifying most orderlies.
Just because the body moved a little does not mean it's alive.)
See also
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Page composed by Sterling
D. Allan August 8, 2007
Last updated August 27, 2007
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