Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

As you know, elections breed a fair amount of cognitive dissonance.

Which brings us, naturally, to the other vote taking place this month: the decision on Tesla Motors Inc.'s acquisition of SolarCity Corp., scheduled for Nov. 17.

The latest ¯\_(ツ)_/¯ episode came on Friday morning. International Shareholder Services Inc. issued a report urging investors to vote for the deal and containing this gem of a line:

Tesla has -- within the confines of its suboptimal governance structure -- taken the requisite steps to reassure its shareholders...

Taking steps within confines is, of course, a ticklish task. Even Elon Musk seemed surprised at the outcome. Later that day, though, rival proxy-advisory firm Glass, Lewis & Co. took a somewhat different view:

Stripped from the pretense of creating a fully-integrated renewables retailer serving a loosely framed end-market, we believe non-affiliated Tesla investors should be concerned the proposed tie-up of Tesla and SolarCity mostly amounts to thinly veiled bailout plan (sic).

I have tended to hew more to that view (see here and here). The idea that SolarCity is a vital, healthy, must-have target is belied by the fact that it agreed to sell itself for a low-ball, all-stock offer that, as of early Monday afternoon, barely provides a premium to the undisturbed price:

Things That Make You Go Hmmmm...
As Tesla's own stock has dropped in price, SolarCity's initial takeover premium has virtually disappeared
Source: Bloomberg
Note: Implied premium to SolarCity's undisturbed closing share price on June 21st, 2016. Data before August 1st based on the mid-point of Tesla's initial offer range.

The reports came a few days after the two companies hosted a Q&A call to reiterate the deal's merits.

In the opening question, an analyst wanted clarification on this statement in the accompanying press release:

We also expect SolarCity to ... add more than half a billion dollars in cash to Tesla’s balance sheet over the next 3 years.

Is that free cash flow, traditionally operating cash flow less capital expenditure? On that measure, SolarCity has burned through about $250 million, on average, in the past four quarters, according to figures compiled by Bloomberg. So that would be a remarkable turnaround.

The thing is, though, like, what does "cash flow" even mean, really? This was SolarCity CEO Lyndon Rive's response:

The first part of your question, the $500 million that we mentioned there, that's our forecast, that does not include any of the synergies, it's just our direct forecast that was in the S4. That is essentially a cash generation. Free cash flow, however, when you're looking at GAAP and lease accounting, is a term that doesn't quite apply there. So it'd just be straight off cash generation from the business.

A pretty wide-ranging definition of cash flow there (see below for more on this.) It's worth remembering at this point that SolarCity hasn't reported even positive operating cash flow since the third quarter of 2013.

This struggle to understand SolarCity isn't new. On an earnings call back in May, one analyst asked bluntly: "What is SolarCity?"

Regulators have also had some difficulty. On Oct. 19, SolarCity filed correspondence exchanged with the SEC earlier this year regarding clarification of some things in its financial filings. Among other things, it wanted more detail on the company's indebtedness and, continuing the theme above, communication about cash flow.

The first letter from the SEC is dated May 23 -- a few months after Tesla's board initially rejected the idea of buying a solar company, but eight days before Musk raised the topic again.

The SEC asked why the company kept referring to "generating positive cash before manufacturing-related investments" in its shareholder letter, despite reporting negative cash from operations in its accounts. SolarCity replied in a letter dated June 8 that these weren't the same thing:

The Company refers to the sum of its operating cash flow, investing cash flow and financing cash flow (exclusive of any cash flows derived from issuances of equity securities from the sale of SolarCity equity securities, or securities convertible into SolarCity equity securities, for capital raising purposes) as its "cash generation," rather than solely based on cash flows from operations. 

SolarCity pointed out that its use of project financing to fund new installations meant cash flow, traditionally defined, didn't capture the true state of its business, but also agreed to clarify this.

The SEC, though, was still a bit hung up on it, per this June 16 missive:

Based on your Form 10-Q for the period ended March 31, 2016, you reported net cash used in operating activities of $193 million, net cash used in investing activities of $466 million, and net cash provided by financing activities before equity and convertible notes issuances of $635 million. We note that you do not appear to have had any convertible notes issuances during this period. We also note that the sum of these three amounts represents net cash used rather than generated of $24 million. 

About a month later, SolarCity replied:

During the first quarter of 2016, we also invested $42 million into our manufacturing operations (which is captured in the $466.1 million used in investing activities).  Excluding this investment into our manufacturing operations, our core solar asset origination, deployment and monetization operations would have generated $18 million towards our working capital. In addition, during the quarter we also received $3 million from option exercises and liquidated $11 million in marketable securities, resulting in total first quarter cash generation of approximately $10 million. In our First Quarter 2016 Shareholder Letter, we noted in the heading and described this in the body of the letter by stating that “we generated positive cash before the investment in the build-out of our module manufacturing operations.”

SolarCity laid out these various pluses and minuses in its calculation of what it regards as positive cash flow in its first-quarter earnings presentation (see slide 12). At this point in the correspondence, the SEC appeared satisfied; the subject didn't arise again. But I for one marvel at SolarCity's definition, especially that inclusion of $11 million in cash generation from  selling (cash-like) marketable securities.

In later letters, the SEC also pushed for more disclosure on SolarCity's debt covenants. The company, in a reply dated Sept. 12, committed to revise its wording thus:

In particular, under the terms of our secured revolving credit facility, our failure to pay any indebtedness (including both recourse and non-recourse indebtedness) or occurrence of an event of default with respect to a credit facility having an aggregate principal amount of more than $10 million could trigger a cross-default which could result in the acceleration or taking of other remedies under our secured revolving credit facility. 

SolarCity hasn't defaulted on any debt. But non-recourse debt accounts for more than half of its borrowings. So it's probably worth knowing that even a default on non-recourse debt could force SolarCity to repay its revolver immediately -- which somewhat undercuts this statement from last week's announcement:

This debt is non-recourse to the company, meaning that even if SolarCity were to default on it, only the secured collateral is at risk and SolarCity would not have any additional liability.

Granted, it is worth pointing out that non-recourse is backed by specific collateral only and I suppose you can debate whether a cross-default provision creates an additional liability rather than an accelerated liability. But I'm guessing most investors care more about whether a default on non-recourse debt could lead to a cash call at the corporate level. Which, as the SEC established, it could.

Auto analysts faced with the prospect of having to fold all this into their Tesla models must feel some trepidation. Exhibit A: BofA Merrill Lynch's John Murphy on the Q&A call: 

Good afternoon, guys, and I apologize, a simple auto analyst, so I'm going to ask some basic questions maybe here, they might seem kind of basic.

Murphy's humility is commendable. And he certainly has the right approach. Getting a handle on even the basics is no easy task when it comes to this deal.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at

To contact the editor responsible for this story:
Beth Williams at