SUNE - Sunedison Inc.

[Palantir]

Do you like investing in speculative companies with leverage up the wazoo, complex financial engineering, downside exposure to rising interest rates, backlog that may not materialize, uncertain returns, crazy execution risk and high valuations?

 

I do! So I have recently started a position in Sunedison Inc. This situation is complex, but my take is pretty simple, I'm investing in a security with about a 5-6% CAFD yield that I expect to grow at minimum 20%/year for many, many years. The YieldCo transactions with TERP and GLBL I expect to yield plenty of upside due to IDRs.

 

To some extent I may be late as all the smart money like Leon Cooperman, Dan Loeb, Stephen Mandel, David Einhorn, Glenview and Fir Tree have been in it for a while, but with today's 25% drop, I feel the situation is more compelling than ever.

 

Here is David Einhorn's presentation:

http://www.businessinsider.com/david-einhorn-robin-hood-presentation-2014-10?op=1

[jschembs]

I had to google CAFD yield - how does that differ from FCF?

[shhughes1116]

I had to google CAFD yield - how does that differ from FCF?

 

I assume CAFD is the same as the more commonly used term "FAD - Funds Available for Distribution".  Essentially FAD = FCF minus maintenance Capex

[Phaceliacapital]

FCF is already subtracting maintenance capex, no?

[jschembs]

Correct, he probably meant CFO - capex or NOI - capex.

 

So if CAFD is essentially FCF, how do you arrive at the 5-6% CAFD yield? I see nothing but operating cash outflows (even moreso when factoring in capex) going back to 2010.

 

I certainly can get behind LT growth in solar, and obviously there are very smart folks already in the name at higher prices (dangerous rationale I know), so I must be missing something about how the economics are changing.

[no_free_lunch]

Just to catch other newbies like myself up to speed.  The basis of Einhorn's presentation seems to be a SOTP valuation:

 

"As we sum up the parts:  SunEdison’s core development business is worth $15 per share, the Terraform stake is worth $4.50, the IDRs are worth around $9 and a couple other assets are worth another $3. This sums to about $32 per share, which is a good distance from where the stock is trading"

 

[johnny]

Does anybody have any idea what the narrative is that has driven TERP and SUNE down so hard over the past month? I assume a big part of SUNE's decline would just be following TERPs, given the IDRs...but TERP seemed to have perfectly fine results in the last quarter...

 

Not a follower of this stock, but I remember appreciating Einhorn's overview last year. Will have to take a closer look.

[no_free_lunch]

This is an interesting one.  Does anyone have a good reference for the ownership of the terra subs?  I am trying to figure out whether terraform global is owned through terraform power or separately?  Basically if you do sum of the parts, are you double-counting pulling in their stake in terraform global and teraform power?

[cmlber]

I looked at SUNE about a year ago and passed on it, and hadn't looked at it since, so this analysis is admittedly based on a very quick 24 hour review of the most recent presentations and transcripts, so it may be premature, but this looks VERY interesting so I wanted to see if anyone has any thoughts while I continue working on it.

 

Slide 38 of the Q2 deck Mgt. walks through the value created for each Watt produced.  They show $1.07 and $1.29, but they are using a 40x GP cash flow multiple, which supposedly is based on a median multiple for peers.  If you say it should be 14x instead, which results in cutting Mgt's value per Watt almost in half, the value of the ~5GW to be produced in the next 1.5 years if they just hit their guidance would be $3.6 billion.

 

If the YieldCo never grows (despite projecting 21%/yr growth) beyond the $1.75 DPS that Mgt. is VERY confident in and has clear visibility towards for 2016, SUNE's ownership in TERP's existing assets would be worth $1.7 billion.

 

The services business is worth about $1 billion.

 

Net debt is only $150 million when you only account for recourse debt, the majority of the debt is project level non recourse debt.

 

So if Mgt. executes on 2015/2016 guidance and then never does another project again, SUNE would be worth ~$6.1 billion and the current market cap is $4.7 billion. 

 

But based on historical conversion rates of leads, qualified leads, pipeline and backlog, Mgt. has visibility towards 13.7 GW of completions, while I only assumed they execute on 5 GW in the next 1.5 years.  So if they converted the whole 15.7 GW at the value per Watt that I assumed, which is way below Mgt's estimate, they'd create another $6.2 billion in value so SUNE would be worth $13.9 billion.

 

And if you believe Mgt is right on the value created per Watt, that $13.9 billion would be worth $21.8 billion. 

 

Am I missing something???

[no_free_lunch]

cmlber,

 

It looks rosy in the presentation but can you make TERP work from the cash flow statement?

[Palantir]

TERP's CF statement looks fine to me, especially if you add in the incremental CF from acquisitions. The economics on those things are good, at about 8-10% CAFD.

[Pelagic]

Any thoughts on their recent convertible offering?

 

650K shares are being sold at $1,000 apiece, and carry an interest rate of 6.75% (payable in either cash or stock). The shares have an initial conversion price of $17.62

http://seekingalpha.com/news/2734086-sunedison-upsizes-convertible-offering-to-650m-sets-pricing

 

I went ahead and added more to my common position today, it seems the market is really overstating the correlation between solar and oil.

[rayfinkle]

Does anybody have any idea what the narrative is that has driven TERP and SUNE down so hard over the past month? I assume a big part of SUNE's decline would just be following TERPs, given the IDRs...but TERP seemed to have perfectly fine results in the last quarter...

 

Not a follower of this stock, but I remember appreciating Einhorn's overview last year. Will have to take a closer look.

 

Market is spooked by the amount of capital they have / need to raise. TERP + GLBL means a lot of capital flowing into a relatively small market...

 

On top of the SUNE is incentivized to buy assets at high prices to drive CAFD growth in their YieldCo's. It's this circular thing where if they have the capital they are super valuable, but if they can't get the capital for any number of reasons (e.g., investors are spooked by capital needs, capital markets dislocation, people think required purchase price for assets is too high, etc.), the machine sputters.

[CONeal]

Hoping someone can fill in the blanks for me as I'm trying to understand how the business operates.

 

Sunedison takes a 50%stake in a project to build it out and then once complete are they leasing the ownership to TerraForm for 20years or are they selling it outright to TerraForm?

 

If they are leasing the ownership for 20 years, 20 years from now will they just sign another lease or will the useful life of the project be depleted and major upgrades needed in order to lease it again?

[stahleyp]

Just to catch other newbies like myself up to speed.  The basis of Einhorn's presentation seems to be a SOTP valuation:

 

"As we sum up the parts:  SunEdison’s core development business is worth $15 per share, the Terraform stake is worth $4.50, the IDRs are worth around $9 and a couple other assets are worth another $3. This sums to about $32 per share, which is a good distance from where the stock is trading"

 

If he feels it's worth $32, I wonder why he didn't sell in June of this year. only a very small piece was sold in the second quarter.

[no_free_lunch]

CONeal, I think they might hope to re-lease in 20 years but it is questionable if that would succeed because solar prices will decline substantially over that period.  If they do re-lease it would probably either require some type of upgrade or else a much lower rate.

[sys]

panels would almost certainly need to be replaced in 20-30 years.  wiring might as well, depending on how well it holds up to weathering.

[Palantir]

I need a hug.  :'( :'( :'(

[jawn619]

I need a hug.  :'( :'( :'(

 

Palantir can you explain the stock price movement? What has changed in the last week?

[CONeal]

I need a hug.  :'( :'( :'(

 

Palantir can you explain the stock price movement? What has changed in the last week?

 

I'll throw in my 10 cents.  Taking on more debt, introducing the perpetual convertible preferred, lousy market in general, solar stocks getting hammered in general, the global vehicle not gaining alot of ipo interest, the concessions for the Global Shares to be more attractive,  timing of the vivant acquisition.  It all adds up to what your seeing. 

 

I'm interested in buying a few shares but it's not at my price yet.  Still needs to drop a bit before it's attractive in my eyes.

[Packer16]

How do folks get comfortable the technological obsolescence here.  Solar appears different than other large renewables like wind because the underlying efficiency of the cells is continuing to increase.  I know these guys have long-term contracts but is there are real possibility that these either (1) do not get renewed or (2) get renegotiated to a lower rate over there term (as in other situations like this in shipping)?

 

Packer

[LounginMKL]

My nickle...

 

The biggest risk for SUNE is the need to "feed the beast" that is TERP. All these acquisitions happen under the assumption that the DevCo (SUNE) can flip completed projects to TERP, at commercial operation, with an attractive valuation. With 6 YieldCo in the market and many more in the cooker, there is much capital chasing limited number of projects, resulting in high likelihood of "winner's curse," in my opinion.

 

For YieldCo like TERP, it has to keep growing to prop up the stock price for future equity issuance to absorb completed projects from SUNE. I've read that YieldCo cost of capital is around 13%, so with 5% dividend yield, I'd assume TERP's existing investors are expecting growth. This has to be done while YieldCo raises fresh capital. As soon as YieldCo fails to raise take-out capital at previously assumed valuation (when SUNE acquired the projects), SUNE will have to sell its completed projects to those presumably with higher cost of capital than the YieldCo... We saw some financing weakness when SUNE's GLBL wants to sell 56.6M shares @ $19-21/sh but ended up selling 45M shares @$15/sh. I think the market has finally awakened to the risks that are inherent in SUNE's ambition. With that said, these projects are in high demand and SUNE shouldn't have trouble raise financing at distressed level.

 

@Packer- In utility-scale projects, most people take the conservative route by assigning little to no values after PPA duration (These are 20-25 yr PPA), even though most project has land lease of 25-30 years. Without a PPA, solar project has to sell at merchant rate, which is a lot lower than the PPA stated rate. The post-PPA cash flow is so far out that when you discount it back to present value, it doesn’t move the needle by that much.

 

[CONeal]

Since TERP and GLBL will need to constantly need to raise money to purchase the projects I am viewing this as SUNE will need to eventually convert into a MLP (and they are already considering this).  When one of the YieldCo's have problems with financing from outside sources the Yieldco's can issue shares to the MLP to cover the cost of a project moved to the YieldCo's book.

 

 

[sys]

How do folks get comfortable the technological obsolescence here.  Solar appears different than other large renewables like wind because the underlying efficiency of the cells is continuing to increase.  I know these guys have long-term contracts but is there are real possibility that these either (1) do not get renewed or (2) get renegotiated to a lower rate over there term (as in other situations like this in shipping)?

 

Packer

 

no comment on sune or their contracts, but in general - efficiency of the panels is likely to improve quite a bit, but installation costs are not likely to fall (and may rise).  if panels become obsolete, the value of the supporting infrastructure would dictate that the panels be replaced with new panels, rather than projects being shut down.

 

this figure is good for showing how panel costs are falling rapidly, but other costs have fallen much more slowly.  it does not appear to show transmission costs (unless i'm missing it), but those are significant.

 

http://www.energy.gov/maps/falling-price-utility-scale-solar-photovoltaic-pv-projects

 

 

[Pelagic]

How do folks get comfortable the technological obsolescence here.  Solar appears different than other large renewables like wind because the underlying efficiency of the cells is continuing to increase.  I know these guys have long-term contracts but is there are real possibility that these either (1) do not get renewed or (2) get renegotiated to a lower rate over there term (as in other situations like this in shipping)?

 

Packer

 

Wouldn't the flip side of increasing efficiency be an increased market for solar projects. As efficiency increases costs per installed watt decrease. We're likely to see a point of diminishing returns eventually since costs like labor and installation hardware aren't decreasing in price as quickly as the panels themselves. Still, as efficiency increases and costs fall, solar's share of power generation should increase as it becomes a more competitive option for power generation. Whether SUNE itself can achieve economies of scale to make themselves the most competitive player in the industry remains to be seen. However, as an industry solar should gain market share relative to other sources of power generation as it becomes more efficient and costs fall.