SUNE - Sunedison Inc.

[no_free_lunch]

This is related to solar city's new plant, however the basic concept is relevant to the entire industry.

 

"Silevo produces solar panels that are roughly 15 to 20 percent more efficient than conventional ones. They incorporate thin films of silicon, which increase efficiency by helping electrons flow more freely out of the material, and they use copper rather than silver electrodes to save costs. Higher efficiency can yield big savings on installation costs, which often exceed the cost of the panels themselves, because fewer panels are needed to generate a given amount of power."

 

http://www.technologyreview.com/news/528466/elon-musk-needs-a-very-big-factory-for-his-new-solar-technology/

 

There should also be decreases in the cost of marketing (which is a surprising large amount of the cost) as the technology becomes more mainstream.

[cmlber]

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

 

My 2 cents on the two risks you identified...

 

(1) For the utility projects, I don't believe SUNE includes a renewal assumption in it's underwriting despite having the land leased for longer than the PPA as others have noted.  And for residential projects, I think rapid technology improvement actually could create a long term advantage for the first movers.  A homeowner only has one roof, and SUNE essentially owns it (at least for twenty years).  15 years into the term, SUNE is the only player that can come to the homeowner and offer to replace the whole system and substantially reduce the rate charged to the homeowner in exchange for a contract extension.  They can keep doing this every 15 years if the technology keeps improving.

 

(2) I don't see this as a big risk, it's a contract, what leverage would the payer have to negotiate a reduction?  Not familiar with shipping, what's the connection?

 

I think there is a lot of uncertainty in how the business model plays out in the long run but it's so cheap that it really doesn't matter.

 

Based on todays depressed value of TERP, SUNE's stake is worth ~$1.4 billion. 

 

SUNE's services business generates about $.008 million per MW serviced in gross profit.  I think they'll be servicing about 12,000 MW's in 2016 (and growing rapidly), which would be $96 million in gross profit.  I think the services business is worth at least $1 billion.

 

That leaves you with the DevCo for $1 billion (maybe free if you think TERP is cheap and I'm undervaluing the services business). 

 

And based on managements guidance the DevCo will install 4,350 MW's in 2016, which they'll sell at a $0.27/watt (13%) operating margin, for $1.2 billion in operating profit.  And, if you believe management, they'll install more MW at a higher margin ($0.45/watt) in 2017.

 

So you're buying a DevCo that will generate a growing $1.2 billion/year (at least if you believe management) for $1 billion (maybe less), plus you get the IDRs for free (which I'm a bit skeptical of, but hey, Einhorn thought they were worth $9/share last year and I get them for free!).

 

Looks like a no brainer at this price. 

[Packer16]

How this related to shipping is in shipping you had a number of above market long term contracts that were re-negotiated when the leaser got into financial trouble.  Could not the same happen to the folks that are issuing the PPAs?  If you have a PPA at a multiple of current market prices this could cause some stress on the leasor.  If this is a small portion of the market and some how other projects could subsidize the above market PPA then you could be OK.  However, if this becomes a widespread practice you could have a lot of stranded costs that regulators could stick to the yieldcos under the assumption that they assumed a risk knowingly.

 

Packer

[jawn619]

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

 

My 2 cents on the two risks you identified...

 

(1) For the utility projects, I don't believe SUNE includes a renewal assumption in it's underwriting despite having the land leased for longer than the PPA as others have noted.  And for residential projects, I think rapid technology improvement actually could create a long term advantage for the first movers.  A homeowner only has one roof, and SUNE essentially owns it (at least for twenty years).  15 years into the term, SUNE is the only player that can come to the homeowner and offer to replace the whole system and substantially reduce the rate charged to the homeowner in exchange for a contract extension.  They can keep doing this every 15 years if the technology keeps improving.

 

(2) I don't see this as a big risk, it's a contract, what leverage would the payer have to negotiate a reduction?  Not familiar with shipping, what's the connection?

 

I think there is a lot of uncertainty in how the business model plays out in the long run but it's so cheap that it really doesn't matter.

 

Based on todays depressed value of TERP, SUNE's stake is worth ~$1.4 billion. 

 

SUNE's services business generates about $.008 million per MW serviced in gross profit.  I think they'll be servicing about 12,000 MW's in 2016 (and growing rapidly), which would be $96 million in gross profit.  I think the services business is worth at least $1 billion.

 

That leaves you with the DevCo for $1 billion (maybe free if you think TERP is cheap and I'm undervaluing the services business). 

 

And based on managements guidance the DevCo will install 4,350 MW's in 2016, which they'll sell at a $0.27/watt (13%) operating margin, for $1.2 billion in operating profit.  And, if you believe management, they'll install more MW at a higher margin ($0.45/watt) in 2017.

 

So you're buying a DevCo that will generate a growing $1.2 billion/year (at least if you believe management) for $1 billion (maybe less), plus you get the IDRs for free (which I'm a bit skeptical of, but hey, Einhorn thought they were worth $9/share last year and I get them for free!).

 

Looks like a no brainer at this price.

 

just a few questions on your valuation

1. For Devco, I understand that their net margins are around $0.25/watt but on their most recent quarterly statements for their solar segment they have $600M in sales and operating loss of $400M as well as almost $1B in capex. Any help deciphering their statements would be appreciated.

2. Tell me if this is the right way to think about it.

TERP is valued at around $3B. If SUNE has a 60% stake, then then backing out it's stake in TERP, the rest of SUNE is worth around $1.3B. So for $1.3B you get IDRs, the Devco, and the service's business.  A lot of the value for each of those businesses rests on the future revenue growth and ramp of it's solar segment.

[mcmaaaaath]

Would anyone care to explain the difference between the value so many see in SUNE and the red ink of the income statement? The stake in TERP seems easy enough to value, given that its publicly traded.

 

But the Solar Energy segment lost over $400m last year (before interest expense), and I'm struggling to figure out why this segment has any value. This appears to be largely what drove the 550m of EBITDA losses generated last year.

 

I also haven't been able to find a bridge between the CAFD number they guide to and their actual results. Did anyone else notice that their $275-325m CAFD guidance for 2015 is Unlevered? Given that interest expense was $302m in the H1 of 2015 alone, I don't see what the value is here.

 

So yeah I'd love some help on why the parts other than the TERP stake have any value. Bridges between the actual numbers and metrics people are using above to value the company would be amazing.

 

 

[awindenberger]

Would anyone care to explain the difference between the value so many see in SUNE and the red ink of the income statement? The stake in TERP seems easy enough to value, given that its publicly traded.

 

But the Solar Energy segment lost over $400m last year (before interest expense), and I'm struggling to figure out why this segment has any value. This appears to be largely what drove the 550m of EBITDA losses generated last year.

 

I also haven't been able to find a bridge between the CAFD number they guide to and their actual results. Did anyone else notice that their $275-325m CAFD guidance for 2015 is Unlevered? Given that interest expense was $302m in the H1 of 2015 alone, I don't see what the value is here.

 

So yeah I'd love some help on why the parts other than the TERP stake have any value. Bridges between the actual numbers and metrics people are using above to value the company would be amazing.

 

I second this. SUNE seems so cheap today based on certain metrics (such as Einhorns) that I feel there is something big that these metrics are missing. Obviously interest costs and marketing costs are very high. How will these come down on a margin basis over time?

[johnny]

Still don't feel like I have any understanding of what is going on with this company. But this post is interesting.

 

https://nemoincognito.wordpress.com/2015/08/25/the-great-yieldco-stshow-of-2015/

 

Thoughts?

[Wilson-TPC]

Wow. This looks like forced liquidation. Thoughts?

[intothebreach]

Still don't feel like I have any understanding of what is going on with this company. But this post is interesting.

 

https://nemoincognito.wordpress.com/2015/08/25/the-great-yieldco-stshow-of-2015/

 

Thoughts?

 

Especially this portion, at the very end of the post (before the extract from the 8-K):

 

"While the stock has now sold off way above and beyond any justifiable level even assuming this boneheaded transaction is consummated"

 

 

[CONeal]

Wow. This looks like forced liquidation. Thoughts?

 

SUNE is dependent on two companies to pass their projects onto.  The Global company had issues with demand right out the gate.  Think people are realizing the risk associated with this company and the need for the markets to be open for both TARP companies.  With the doors closed to the TARP companies raising money people are finally assessing the real risk involved with this growth company and a backlog that might not materialize.  Add to it the recent dilution and takeover and people are reassessing their risk tolerance.  With a complicated company and financials it not hard to see the price where it is right now (at least in my view).

 

I'm still interested in the company but it will have to get below $5 before I reassess and pull the trigger.  Of the companies on my watch list the is the very last one so I'm in no rush one way or the other.

[jawn619]

directors and insiders buying shares

[stahleyp]

directors and insiders buying shares

 

are you sure those aren't just options being exercised?

[rayfinkle]

Same thing in this case... Putting capital at risk!

[mateo999]

directors and insiders buying shares

 

are you sure those aren't just options being exercised?

 

Open market purchases. Code P on form 4.  $960k worth.

[cmlber]

Wow. This looks like forced liquidation. Thoughts?

 

SUNE is dependent on two companies to pass their projects onto.  The Global company had issues with demand right out the gate.  Think people are realizing the risk associated with this company and the need for the markets to be open for both TARP companies.  With the doors closed to the TARP companies raising money people are finally assessing the real risk involved with this growth company and a backlog that might not materialize.  Add to it the recent dilution and takeover and people are reassessing their risk tolerance.  With a complicated company and financials it not hard to see the price where it is right now (at least in my view).

 

I'm still interested in the company but it will have to get below $5 before I reassess and pull the trigger.  Of the companies on my watch list the is the very last one so I'm in no rush one way or the other.

 

I think you'll be waiting a long time for $5.  The stake in TERP at a 10% dividend yield would be worth close to $4/share in a year.  The services business is probably worth another $2-3/share.  What's the DevCo worth?  Who knows, I'd guess not a negative number though.

[no_free_lunch]

Some stuff by Bronte Capital on SUNE.  Interesting that the short-seller is long. 

 

And that is the case for buying.  The old projects are good and they should run off at something more than the current share price. [Our guess – and it is very back

-of-the-envelope –

is about double the current share price.] Wall Street has a fantasy about

the company “blowing up” and we

think the fantasy is wrong. And whilst it is not

certain that the company will be able to generate substantial value with future

projects it is also not certain that the company won’t. Profitable future projects offer

considerable upside.

..

This month we swapped the relatively low risk position in Terraform Power (the yield

co) for a higher risk position in the parent (Sun Edison).

Sun Edison is cheap and the reasons it is cheap are manageable. However we now have a position to rival

Herbalife and Senomyx for day-to-day volatility.

On many days a smallposition is either our biggest winneror biggest loser.

 

http://www.valuewalk.com/2015/09/bronte-capital-sun-edison-sune/

[johnny]

Really wish he'd shown his work on that run-off claim...

[Palantir]

So my take on recent events, especially after today's conference call:

 

The investment thesis for this company has changed. Originally the plan was - build assets aggressively and pump those assets aggressively into the yieldcos: TERP and GLBL. As long as TERP and GLBL have high stock prices, they can be used as currency for acquisitions. This format basically made this firm a hedge fund hotel.

 

A few things have happened that have upended this thesis:

1) Disappointing GLBL IPO -  This weakens the business model as noted above, if you cannot issue equity at high prices, then its impossible to finance growth through this route.

2) General energy downturn - This is not the whole reason, but it plays a role, plus there is the ever present risk of rising interest rates, obviously bad for a company that is leveraged up the wazoo.

3) Vivint solar acquisition - Most don't like the economics here. Think solarcity.

 

In today's call, management stated their intent to either sell their solar assets or hold them in a warehouse facility, sort of a debt-funded vehicle. I like this idea  lot better than using yieldco equity. Basically they are slowing growth down, not dropping assets to yieldco as much as before, and cutting costs. So the end result is a company that won't have the breakneck growth expected, but will show a lot more OCF on its financial statements. Now what this means for TERP and GLBL....I have no idea.

 

 

I added to my position in the last few days.

 

 

[dbuch]

If TERP or GLBL are never able to raise equity or debt again then they are essentially in run off. It seems TERP is expected to have about a $2 dividend next year. If the average length of their projects are 16 years that is about a 7% yield in perpetuity. In my mind TERP is a low risk situation in which you will earn 7% a year if they never grow again with substantial upside if the market comes back.

 

GLBL is riskier but same idea. If they have a $1 dividend in perpetuity then you earn 10% a year as a floor with optionality if the market comes back.

 

TERP and GLBL equity should be worth at least $4.50 and $0.50 to SUNE meaning you are paying $4 for Devco and zero for and upside or IDRs.

[johnny]

Einhorn is still in, he provided a little more analysis on the company, including ranging his (historical) exit point. I've bolded the interesting claims that I'd love to hear your guys' opinion on. (See attachment for his EPS estimate)

 

For the first part of the year SUNE was by far the fund’s biggest winner. The shares rallied from $19.51 to a peak of $32.13 on June 23 before collapsing to $7.18 by September 30. SUNE’s business is to develop solar and wind projects for major utilities and commercial customers that agree to buy the power over a very long term, often 20 years. These projects have purchase contracts from highly creditworthy counterparties and produce an average unlevered return on capital of 10% and 13% in developed and emerging markets, respectively. SUNE makes money by selling the projects at a premium to investors seeking safe, long-term income.

 

Given the low-rate environment, SUNE thought it could make even more money if it created its own related yield vehicles to buy the projects and dividend the income to shareholders. It created TerraForm Power (TERP) for its developed markets projects and TerraForm Global (GLBL) for its emerging markets projects. Initially this worked very well, and in July 2014, SUNE successfully brought TERP public. This July it brought GLBL public with much less success.

 

In the weeks before the GLBL initial public offering, SUNE was at its highs and we contemplated trimming the position. Since we expected the IPO would trigger a further advance in the shares, we decided against it. Around this same time, oil and gas prices renewed their declines, causing the values of energy master limited partnerships to  justifiably fall. We believed that TERP and GLBL would not be impacted, as neither is subject to commodity risk. We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other energy dividend flow-through structures. In mid-July, TERP began falling along with the rest of the sector, taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket.

 

As GLBL and TERP continued to fall they effectively lost access to the capital markets, and SUNE collapsed as the market became worried that SUNE would not be able to sell its projects and could even run out of money. Ironically, the market judged SUNE’s rapidly growing and massive backlog of attractive projects to be a liability.

 

SUNE’s hard-to-decipher financial statements fed the stock collapse. SUNE consolidates both TERP and GLBL on its GAAP statements. The complicating result is two-fold: First, when SUNE sells a project to TERP or GLBL it bears the operating costs but doesn’t get to book the revenue from the sale. The result is the appearance of an operating loss. Second, TERP and GLBL use non-recourse project finance debt to fund the purchases and the debt appears on SUNE’s balance sheet. The result is that SUNE appears to be heavily levered and losing money. From a GAAP perspective that’s true, but from an economic perspective it is not. Nonetheless, this hasn’t stopped some wise guys from dubbing it “SunEnron”.

 

SUNE responded to the deteriorating environment by raising additional equity, finding third parties to buy its projects, and slowing its development pipeline. All of these actions have marginally lowered the company’s value, but have stabilized the situation. Taking into account the more conservative business plan, when we look through the complicated financials we believe that SUNE’s development business is poised to have economic earnings in 2016 of about $1.34 per share, assuming that TERP and GLBL do not regain access to the capital markets.

 

SUNE has additional value from its ownership of TERP and GLBL shares. During the panic, the market has fixated on the question of whether TERP and GLBL can access money cheaply enough to buy projects and grow their dividends. This is relevant insofar as it will determine whether they can be long-term buyers of SUNE’s projects, but we believe the market’s focus is too narrow.

 

The better question is: Do TERP and GLBL have the opportunity to buy projects at returns that exceed the risk? If they do, the capital markets would be wise to fund them. We believe the answer is a resounding “Yes.” A power plant with a long-term power purchase agreement is roughly equivalent to a secured lender. As the customers are strong credits, the ability to buy a portfolio of these projects at a 7% unlevered yield in developed markets and a 10% yield in emerging markets should be very attractive in the current income-starved environment, where 7-year A-rated corporate bonds yield less than 3.5%. We believe that once the market sorts through the mess, TERP and GLBL should recover and regain access to the capital markets. This would allow SUNE to realize substantial additional value.

[johnny]

Two big questions I have here (telegraphed by what I bolded)

 

1. Project Pricing

 

Last October, Einhorn presented a Project Price of $2.75/watt, with a cost of $2.20 and a margin of $.55

 

Now, merely a year later,we’re talking about a Project Price of $1.80, a cost of $1.45, and a margin of $.35

 

This is a great triumph for humanity, but doesn’t it suggest that the pricing here is pretty much out of SunEdison’s control? If their margin per watt has dropped from 55 to 35 cents, is there a predictable floor? If all of the cost-savings on equipment are flowing directly through to the buyers, then isn’t the winner here going to be whoever has the lowest costs? Are we confident that this is SunEdison, and not one of the more integrated players?

 

2. PPA Pricing/Yields

 

The claim that the PPA contracts have 10% unlevered returns from “highly creditworthy counterparties” is starting to bother me. Why are these counterparties cutting such bad financing deals? Why aren’t these towns doing <10MW projects financing the builds with their own debt. Where are Muni 30 year yields? 3.2%?

 

Anyway, just some thoughts. Neither long nor short, but very interested in the company and would love to get convinced. So if any of you wants to do my work for me... ;)

 

[Pelagic]

I find this comment by Einhorn pretty interesting

 

We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other energy dividend flow-through structures. In mid-July, TERP began falling along with the rest of the sector, taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket.

 

Is it really that simple? I can see some confusion but after the beating SUNE has taken this seems like a simplistic explanation on Einhorn's part.

 

As to project pricing for renewables. I look at it as if there are basically two components, the hardware and the labor. I think we can safely say solar hardware, that is the panels themselves and to a lesser degree ancillary equipment that it takes to get a facility online, is rapidly decreasing in cost. However, the labor needed to install them isn't. Historically, the hardware was the most expensive component so savings there directly translated to lower costs. I think we're approaching the point where the labor involved in installing the panels accounts for a meaningful fraction of the cost so the decline in overall project costs is going to slow down even while the hardware itself gets cheaper. I'm not confident SUNE is on track to be the lowest cost player but I wouldn't take them out of the race just yet and I think the solar market is probably big enough for a couple players. I'd be curious to hear what other factors besides price SUNE could compete on, they'd probably make an argument for their scale and existing relationships leading to more business but at the end of the day you have to be in the ballpark on price to compete.

[kab60]

I find this comment by Einhorn pretty interesting

 

We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other energy dividend flow-through structures. In mid-July, TERP began falling along with the rest of the sector, taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket.

 

Is it really that simple? I can see some confusion but after the beating SUNE has taken this seems like a simplistic explanation on Einhorn's part.

Agreed. I absolutely hate it when investors try to explain markets movements in hindsight. It always fits the narrative. I'm pretty sure SUNE also announced a not-so-well-received acquisition, but maybe he missed that... I'm not sure whether or not SUNE might be a good idea at these levels, the financing is too complex to make me comfortable, but I really don't like the business model. I don't think there's much to compete on except price and the investment is all upfront. Developing renewables can be decent business but it really depends on specific projects and a lot of details that nobody except insiders can know so at least I'd look for very high insider ownership (I believe SUNE har that, but the CEO doesn't exactly strike me as genius).

[Pelagic]

Looks like David Tepper is joining the party too.

 

http://seekingalpha.com/news/2874986-sunedison-closes-up-6_8-percent-on-rumor-of-tepper-stake

[johnny]

As to project pricing for renewables. I look at it as if there are basically two components, the hardware and the labor. I think we can safely say solar hardware, that is the panels themselves and to a lesser degree ancillary equipment that it takes to get a facility online, is rapidly decreasing in cost. However, the labor needed to install them isn't. Historically, the hardware was the most expensive component so savings there directly translated to lower costs. I think we're approaching the point where the labor involved in installing the panels accounts for a meaningful fraction of the cost so the decline in overall project costs is going to slow down even while the hardware itself gets cheaper. I'm not confident SUNE is on track to be the lowest cost player but I wouldn't take them out of the race just yet and I think the solar market is probably big enough for a couple players. I'd be curious to hear what other factors besides price SUNE could compete on, they'd probably make an argument for their scale and existing relationships leading to more business but at the end of the day you have to be in the ballpark on price to compete.

 

Hmm. I sort of like this simplification. SunEdison probably doesn't have an edge in hardware cost, and they probably also don't have an edge in installation cost (this whatever sub-contractor they are using is probably bidding the same to their competing GCs). So it seems like what SunEdison is bringing expertise in site selection/design tradeoffs, jumping through all the permitting hoops, and maybe handling the monetization/conversion of whatever the relevant subsidies/incentives. This isn't a terrible business...it is definitely the sort of thing where you have a real edge when you're doing your 500th project versus your first. At the same time, I assume a lot of that regulatory/permitting stuff doesn't have very much consistency from jurisdiction to jurisdiction.

 

Just thinking out loud here and really trying to come up with a model to understand what the barriers to entry actually are.

 

I suspect that somebody willing to dig around can get a lot of insight into the business since they are probably very frequently engaging various city councils, county supervisors, and all sorts of other partners that are throwing a lot of deal details online.