SUNE - Sunedison Inc.

[KJP]

Downgraded to sell with a price target of $2 by Axiom Capital. http://www.streetinsider.com/Analyst+Comments/SunEdison+%28SUNE%29+Managements+Credibility+Impaired%2C+Says+Analyst%3B+Axiom+Capital+Cuts+Rating+to+Sell/11064450.html

 

Seems like they also can't connect management's gross margin guidance and disclosures to what's actually being reported in the GAAP financials.

 

I can only read what's posted online and not his full note, but it's very disingenuous.  He says they guided to 50-70MWs sold to 3rd parties and only sold 41MW, well that's not true they contracted to sell 106MW, they just won't recognize those MWs until Q4 because they aren't completed.  He says they guided to 18-19% margins on 10/7, I looked through the transcript and can't find anywhere where they said 18-19% gross margins.  All they said was $0.35/MW gross margin (maybe he was assuming that meant 18-19%) and they hit that on the 15MW that they sold. 

 

Idk about his claims on TERP, if the runoff claim is true, it's concerning, but shouldn't really matter for SUNE here.

 

I also only have access to the online article.  I agree the distinction he's drawing between guidance on MWs sold and GAAP recognition of MWs sold may be dubious.  But isn't the concern about gross margins legitimate?  Put another way, management wants to focus on the margins for 15 of the sold MWs reported in GAAP.  Why are the (apparently very low) margins on the other 26MW not relevant?  What is different about those 26MW that allows them to be ignored? 

 

 

 

The other 26MW are equipment only sales, so I assume those are just commodity sales.  System sales I believe are fully completed and operating/cash flowing systems installed by SUNE where there is a PPA.  So it's entirely different, I don't know why they sell any equipment but there must be some reason.  Management reiterated guidance for 2016 though of 35 cents gross margins 18 cents operating margin.  We'll find out they are liars in 12 months if they are lying, so why would they lie about that?  What would that get them besides shareholder lawsuits?

 

I agree that the footnote suggests the distinction you make between system and equipment sales.  As for why lie, there are strong short-term incentives to do so.  That may be just digging a bigger hole for themselves, but it wouldn't be the first time.

 

Agreed, it's possible they are lying, but if they are, they'll both be fired and sued in short order, there's no way to cover it up.  It's more likely for a management to lie in a case where they are making acquisitions and can cover up lies (VRX) with acquisitions (more ponzi scheme like, lie because you can always cover it up with more lies), but SUNE management is intentionally slowing down to show the cash they can create when growth slows, so there's no way to hide that lie for more than a few quarters so it just wouldn't make any sense.

 

I generally agree with your view.  But one thing I'd really like to understand, but currently do not, is the economics of using the warehouse lines versus management's projected margins on third party sales.  if the economics of the warehouse lines are worse, then that would be a big red flag for me.  The article about the Axiom report hints at this, but doesn't offer any detail.

[KJP]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

[cmlber]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt. 

[KJP]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

[cmlber]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

 

I'm not sure exactly how he gets to $190m, but the reason it seems low is a lot of the recourse debt is convertible (struck at prices that made sense when the stock was at $30) so the interest rates they actually pay are very low (ex, 2.375% for 2022 maturity).  Also, all the debt & interest in TERP/GLBL that gets consolidated should be ignored in valuing SUNE.  And the warehouse facility debt should also be ignored, since it's non-recourse and the only way SUNE will ever pay it is if they drop the projects down to TERP (which they would only do if it made economic sense and if it ever did make economic sense it would mean TERP has recovered and SUNE would be worth way more than the current price). 

[KJP]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

 

I'm not sure exactly how he gets to $190m, but the reason it seems low is a lot of the recourse debt is convertible (struck at prices that made sense when the stock was at $30) so the interest rates they actually pay are very low (ex, 2.375% for 2022 maturity).  Also, all the debt & interest in TERP/GLBL that gets consolidated should be ignored in valuing SUNE.  And the warehouse facility debt should also be ignored, since it's non-recourse and the only way SUNE will ever pay it is if they drop the projects down to TERP (which they would only do if it made economic sense and if it ever did make economic sense it would mean TERP has recovered and SUNE would be worth way more than the current price).

 

You're right that the converts have a low rate, but other DevCo debt is 5 - 6 %.  The breakdown is on page 22 of the latest 10-Q.  According to that document, the DevCo currently has around $8 billion in debt.  I don't see how there's any way to square that figure with an annual interest bill of $180 million.  Also, it seems to me that if you're going to include the full projected margin on 3700 MWs, you've got to include the full capital cost of constructing those watts.

 

I can understand the following calculation: 

 

Gross Margin = 1.3 billion

OpEx = 600MM

EBIT = 700MM

 

But I think you need to also subtract at least the interest on the construction debt to get a true pre-tax earnings number.  I'm still trying to figure out what that interest number should be.

[cmlber]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

 

I'm not sure exactly how he gets to $190m, but the reason it seems low is a lot of the recourse debt is convertible (struck at prices that made sense when the stock was at $30) so the interest rates they actually pay are very low (ex, 2.375% for 2022 maturity).  Also, all the debt & interest in TERP/GLBL that gets consolidated should be ignored in valuing SUNE.  And the warehouse facility debt should also be ignored, since it's non-recourse and the only way SUNE will ever pay it is if they drop the projects down to TERP (which they would only do if it made economic sense and if it ever did make economic sense it would mean TERP has recovered and SUNE would be worth way more than the current price).

 

You're right that the converts have a low rate, but other DevCo debt is 5 - 6 %.  The breakdown is on page 22 of the latest 10-Q.  According to that document, the DevCo currently has around $8 billion in debt.  I don't see how there's any way to square that figure with an annual interest bill of $180 million.  Also, it seems to me that if you're going to include the full projected margin on 3700 MWs, you've got to include the full capital cost of constructing those watts.

 

I can understand the following calculation: 

 

Gross Margin = 1.3 billion

OpEx = 600MM

EBIT = 700MM

 

But I think you need to also subtract at least the interest on the construction debt to get a true pre-tax earnings number.  I'm still trying to figure out what that interest number should be.

 

KJP, good point and I agree.  Here's my estimate (slightly higher than Einhorn's), let me know what you think...

 

Looking at page 22 in the 10-Q:

 

1) I don't think the SMP Ltd credit facility for $334m should be counted, as it is secured by SUNE's interest in the SMP Ltd joint venture which is not contributing to DevCo profitability.

 

2) I don't think the margin loan for $404m should be counted, as it is secured by TERP which pays dividends in excess of the 6.25% interest rate and isn't included in Einhorn's DevCo EPS calculation.

 

3) I don't think the financing leaseback obligations for $1,468m should be counted, since this is secured by projects on SUNE's balance sheet that will cash flow more than the interest.  If you look at slide 21 in the Q3 presentation, they show 697MW of sale leaseback & prepaid operating projects owned by SUNE that generated $40m in revenue in Q3.

 

4) I don't think the TerraForm Private warehouse term loan for $280m should be counted, as this is non-recourse and secured by operating assets which are cash flowing (not counted in the DevCo revenue in Einhorn's calc); not used for construction.

 

So that leaves you with $5,398m in debt that is really "DevCo" debt at an average interest rate of 3.9% (just using what's on page 22) for $210m in interest expense. 

[Palantir]

Hey cmlber, how are you estimating the projected CAFD from the MW sold? Are you simply putting a $/MW margin on the MW sold per year?

[johnny]

Has anybody listened to the February Capital Markets presentation the company did? It is embarrassing how flippant and arrogant they are in this thing. Every single slide when they provide some bit of information, they add some snide remark about how they've been annoyed so much being asked about it that they're FINALLY going to give you guys something and this better make the emails stop.

 

Then, Brian Wuebbels literally says, capping off slide 57, "And, because we were bored, we decided to do two acquisitions," referring to Silver Ridge and First Wind. Obviously as a joke, but considering what they were about to do, pretty oblivious.

 

I still don't have a strong opinion on the company, but something about the tone of this webcast is really offputting; I'd like to think I'd feel this way if the stock was up 85% instead of down 85%.

[Palantir]

Indeed, they were far more humble in the latest CC. Also their convertible prefs are yielding like 17% now?

[KJP]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

 

I'm not sure exactly how he gets to $190m, but the reason it seems low is a lot of the recourse debt is convertible (struck at prices that made sense when the stock was at $30) so the interest rates they actually pay are very low (ex, 2.375% for 2022 maturity).  Also, all the debt & interest in TERP/GLBL that gets consolidated should be ignored in valuing SUNE.  And the warehouse facility debt should also be ignored, since it's non-recourse and the only way SUNE will ever pay it is if they drop the projects down to TERP (which they would only do if it made economic sense and if it ever did make economic sense it would mean TERP has recovered and SUNE would be worth way more than the current price).

 

You're right that the converts have a low rate, but other DevCo debt is 5 - 6 %.  The breakdown is on page 22 of the latest 10-Q.  According to that document, the DevCo currently has around $8 billion in debt.  I don't see how there's any way to square that figure with an annual interest bill of $180 million.  Also, it seems to me that if you're going to include the full projected margin on 3700 MWs, you've got to include the full capital cost of constructing those watts.

 

I can understand the following calculation: 

 

Gross Margin = 1.3 billion

OpEx = 600MM

EBIT = 700MM

 

But I think you need to also subtract at least the interest on the construction debt to get a true pre-tax earnings number.  I'm still trying to figure out what that interest number should be.

 

KJP, good point and I agree.  Here's my estimate (slightly higher than Einhorn's), let me know what you think...

 

Looking at page 22 in the 10-Q:

 

1) I don't think the SMP Ltd credit facility for $334m should be counted, as it is secured by SUNE's interest in the SMP Ltd joint venture which is not contributing to DevCo profitability.

 

2) I don't think the margin loan for $404m should be counted, as it is secured by TERP which pays dividends in excess of the 6.25% interest rate and isn't included in Einhorn's DevCo EPS calculation.

 

3) I don't think the financing leaseback obligations for $1,468m should be counted, since this is secured by projects on SUNE's balance sheet that will cash flow more than the interest.  If you look at slide 21 in the Q3 presentation, they show 697MW of sale leaseback & prepaid operating projects owned by SUNE that generated $40m in revenue in Q3.

 

4) I don't think the TerraForm Private warehouse term loan for $280m should be counted, as this is non-recourse and secured by operating assets which are cash flowing (not counted in the DevCo revenue in Einhorn's calc); not used for construction.

 

So that leaves you with $5,398m in debt that is really "DevCo" debt at an average interest rate of 3.9% (just using what's on page 22) for $210m in interest expense.

 

I get to a similar place, but by a different route.  Rather than work backwards from the existing capital structure, I tried to imagine what a pure DevCo would look like if it built and sold to third parties 3700MW at Einhorn's assumed numbers.  That DevCo would have COGS of $5.4 billion (3700MW * 1.45/watt).  From page 22 of the 10-Q, it looks like the DevCo can obtain pure construction financing at less than 5%, and on the most recent call management said they weren't seeing any changes in this.  But to be a bit conservative, I'll assume they get construction financing at 5.25%.  If SunEdison turned its "inventory" once per year and financed all of it, it would have to pay about $280 million annually in interest (5.4 billion * .0525). 

 

I think that number is too high for at least two reasons.  First, the construction time for SunEdison's projects typically ranges from 6-12 months (see slide 19 of 2015 3Q presentation).  So, it should turn "inventory" more than once per year.  Second, the DevCo typically can only finance 80% of construction costs, rather than 100% (see same slide).  So, if we assume inventory turns 1.25 times per year, that makes total required capital only $4.2 billion, rather than $5.4 billion (5.4/1.25).  If 80% of that is financed by debt, that's about $3.4 billion in debt.  At 5.25%, that's annual interest of around $180 million. 

 

I made alot of assumptions to get to $180 million, and there's probably some slippage related to financing fees, etc.  But I suspect that the true interest number is closer to $180 million than $280 million.  So, at the end of the day, I'm in the same range as you and Einhorn and see pre-tax DevCo earnings around $450 - $500 million at 3700MW and management's margins. 

 

My second approach would imply that a pure DevCo would also need to find at least $800 million, and maybe $1 billion, to fund "inventory" that's not covered by construction financing.  It would also need additional operating capital, but it's hard to say how much.  If we assume total necessary, non-inventory capital is $300 million, and that all that capital is funded by equity, the implied pre-tax return on equity is at least 35% (450/1300 would be about 35%).  Pre-tax return on invested capital would be around 15% (700/4500).  To me, at least, those numbers seem plausible on their face, which suggests our interest numbers shouldn't be too far off.  Any thoughts on this approach?

 

What I've written above relates only to the DevCo.  My next task is to try to understand all of the other stuff.   

[cmlber]

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.

 

A question about Einhorn's numbers:  Where does he get his interest number from?  Is he saying that the interest on all of SunEdison's debt, or is that simply the interest attributable to financing the construction of the assumed 3700 MW?

 

I believe he's referring to all interest on SUNE debt.

 

If that's right, how does he get to only $190 million in interest?

 

I'm not sure exactly how he gets to $190m, but the reason it seems low is a lot of the recourse debt is convertible (struck at prices that made sense when the stock was at $30) so the interest rates they actually pay are very low (ex, 2.375% for 2022 maturity).  Also, all the debt & interest in TERP/GLBL that gets consolidated should be ignored in valuing SUNE.  And the warehouse facility debt should also be ignored, since it's non-recourse and the only way SUNE will ever pay it is if they drop the projects down to TERP (which they would only do if it made economic sense and if it ever did make economic sense it would mean TERP has recovered and SUNE would be worth way more than the current price).

 

You're right that the converts have a low rate, but other DevCo debt is 5 - 6 %.  The breakdown is on page 22 of the latest 10-Q.  According to that document, the DevCo currently has around $8 billion in debt.  I don't see how there's any way to square that figure with an annual interest bill of $180 million.  Also, it seems to me that if you're going to include the full projected margin on 3700 MWs, you've got to include the full capital cost of constructing those watts.

 

I can understand the following calculation: 

 

Gross Margin = 1.3 billion

OpEx = 600MM

EBIT = 700MM

 

But I think you need to also subtract at least the interest on the construction debt to get a true pre-tax earnings number.  I'm still trying to figure out what that interest number should be.

 

KJP, good point and I agree.  Here's my estimate (slightly higher than Einhorn's), let me know what you think...

 

Looking at page 22 in the 10-Q:

 

1) I don't think the SMP Ltd credit facility for $334m should be counted, as it is secured by SUNE's interest in the SMP Ltd joint venture which is not contributing to DevCo profitability.

 

2) I don't think the margin loan for $404m should be counted, as it is secured by TERP which pays dividends in excess of the 6.25% interest rate and isn't included in Einhorn's DevCo EPS calculation.

 

3) I don't think the financing leaseback obligations for $1,468m should be counted, since this is secured by projects on SUNE's balance sheet that will cash flow more than the interest.  If you look at slide 21 in the Q3 presentation, they show 697MW of sale leaseback & prepaid operating projects owned by SUNE that generated $40m in revenue in Q3.

 

4) I don't think the TerraForm Private warehouse term loan for $280m should be counted, as this is non-recourse and secured by operating assets which are cash flowing (not counted in the DevCo revenue in Einhorn's calc); not used for construction.

 

So that leaves you with $5,398m in debt that is really "DevCo" debt at an average interest rate of 3.9% (just using what's on page 22) for $210m in interest expense.

 

I get to a similar place, but by a different route.  Rather than work backwards from the existing capital structure, I tried to imagine what a pure DevCo would look like if it built and sold to third parties 3700MW at Einhorn's assumed numbers.  That DevCo would have COGS of $5.4 billion (3700MW * 1.45/watt).  From page 22 of the 10-Q, it looks like the DevCo can obtain pure construction financing at less than 5%, and on the most recent call management said they weren't seeing any changes in this.  But to be a bit conservative, I'll assume they get construction financing at 5.25%.  If SunEdison turned its "inventory" once per year and financed all of it, it would have to pay about $280 million annually in interest (5.4 billion * .0525). 

 

I think that number is too high for at least two reasons.  First, the construction time for SunEdison's projects typically ranges from 6-12 months (see slide 19 of 2015 3Q presentation).  So, it should turn "inventory" more than once per year.  Second, the DevCo typically can only finance 80% of construction costs, rather than 100% (see same slide).  So, if we assume inventory turns 1.25 times per year, that makes total required capital only $4.2 billion, rather than $5.4 billion (5.4/1.25).  If 80% of that is financed by debt, that's about $3.4 billion in debt.  At 5.25%, that's annual interest of around $180 million. 

 

I made alot of assumptions to get to $180 million, and there's probably some slippage related to financing fees, etc.  But I suspect that the true interest number is closer to $180 million than $280 million.  So, at the end of the day, I'm in the same range as you and Einhorn and see pre-tax DevCo earnings around $450 - $500 million at 3700MW and management's margins. 

 

My second approach would imply that a pure DevCo would also need to find at least $800 million, and maybe $1 billion, to fund "inventory" that's not covered by construction financing.  It would also need additional operating capital, but it's hard to say how much.  If we assume total necessary, non-inventory capital is $300 million, and that all that capital is funded by equity, the implied pre-tax return on equity is at least 35% (450/1300 would be about 35%).  Pre-tax return on invested capital would be around 15% (700/4500).  To me, at least, those numbers seem plausible on their face, which suggests our interest numbers shouldn't be too far off.  Any thoughts on this approach?

 

What I've written above relates only to the DevCo.  My next task is to try to understand all of the other stuff. 

 

That analysis makes sense.  I think Einhorns # is a safe bet since we both got pretty close using different approaches.

 

For the other stuff, there's basically the operating assets (and associated debts) on SUNEs balance sheet, TERP/GLBL stakes, option value of what sits in warehouses, and the services business.  They'll be servicing about 10,500 MW's in 2016.  I'd be curious to hear what you think all the other stuff nets out too.

[KJP]

That analysis makes sense.  I think Einhorns # is a safe bet since we both got pretty close using different approaches.

 

For the other stuff, there's basically the operating assets (and associated debts) on SUNEs balance sheet, TERP/GLBL stakes, option value of what sits in warehouses, and the services business.  They'll be servicing about 10,500 MW's in 2016.  I'd be curious to hear what you think all the other stuff nets out too.

 

Slide 17 of SunEdison's Q2 2015 earnings presentation provides information about inventory turns and the debt/equity mix for construction financing.  It looks like I underestimated inventory turns, but that's counterbalanced by using the First Reserve warehouse line to fund some of the assumed 20% "equity" portion of the construction phase.  I think that slide provides further support for our interest estimates. 

 

What I don't understand is why this interest number doesn't seem to appear anywhere in the company's presentations.  Even the 2/24/15 Capital Markets Day presentation seems to ignore it, even though the presentation walks through the accounting entries for a pro forma standalone DevCo.  (See slides 88-95; I assume slide 94 has a typo and that the construction debt should be 104 (80% of cost) rather than 134 (80% of selling price)).  The failure to account for this interest anywhere in these presentations makes me think I'm missing something.  It's obviously a real expense that affects margins and profitability. 

 

Turning to the rest of the company, I'm starting with the servicing business.  The most recent VIC writeup claims that the servicing business has 40% profit margins, but can you support that from the disclosures?  The presentations I've seen appear to report gross margins (not net or operating margins) for services and energy together.  See, e.g., slide 86 of the 2/24/15 presentation, slide 15 of the Q1 '15 presentation, and slide 14 of the Q3 '15 presentation.  Do you know a source that reports just the margins for servicing?

[cmlber]

That analysis makes sense.  I think Einhorns # is a safe bet since we both got pretty close using different approaches.

 

For the other stuff, there's basically the operating assets (and associated debts) on SUNEs balance sheet, TERP/GLBL stakes, option value of what sits in warehouses, and the services business.  They'll be servicing about 10,500 MW's in 2016.  I'd be curious to hear what you think all the other stuff nets out too.

 

Slide 17 of SunEdison's Q2 2015 earnings presentation provides information about inventory turns and the debt/equity mix for construction financing.  It looks like I underestimated inventory turns, but that's counterbalanced by using the First Reserve warehouse line to fund some of the assumed 20% "equity" portion of the construction phase.  I think that slide provides further support for our interest estimates. 

 

What I don't understand is why this interest number doesn't seem to appear anywhere in the company's presentations.  Even the 2/24/15 Capital Markets Day presentation seems to ignore it, even though the presentation walks through the accounting entries for a pro forma standalone DevCo.  (See slides 88-95; I assume slide 94 has a typo and that the construction debt should be 104 (80% of cost) rather than 134 (80% of selling price)).  The failure to account for this interest anywhere in these presentations makes me think I'm missing something.  It's obviously a real expense that affects margins and profitability. 

 

Turning to the rest of the company, I'm starting with the servicing business.  The most recent VIC writeup claims that the servicing business has 40% profit margins, but can you support that from the disclosures?  The presentations I've seen appear to report gross margins (not net or operating margins) for services and energy together.  See, e.g., slide 86 of the 2/24/15 presentation, slide 15 of the Q1 '15 presentation, and slide 14 of the Q3 '15 presentation.  Do you know a source that reports just the margins for servicing?

 

I just noticed on the business update call they include the services gross margin in the $0.35/MW gross profit for the DevCo.  They call it "Dev/Services Gross Margin."  So really they're forecasting more like $0.33/MW gross margin on sold projects.  So that just leaves TERP/GLBL stakes and technology licensing...  I'd value the technology licensing at $0, but management claims 1-2 license agreements in the future could make the technology worth $1 billion.  And somehow they claim the Materials/Poly segment that loses money and will make $0/yr in the future is worth $1.5 billion.

[awindenberger]

That analysis makes sense.  I think Einhorns # is a safe bet since we both got pretty close using different approaches.

 

For the other stuff, there's basically the operating assets (and associated debts) on SUNEs balance sheet, TERP/GLBL stakes, option value of what sits in warehouses, and the services business.  They'll be servicing about 10,500 MW's in 2016.  I'd be curious to hear what you think all the other stuff nets out too.

 

Slide 17 of SunEdison's Q2 2015 earnings presentation provides information about inventory turns and the debt/equity mix for construction financing.  It looks like I underestimated inventory turns, but that's counterbalanced by using the First Reserve warehouse line to fund some of the assumed 20% "equity" portion of the construction phase.  I think that slide provides further support for our interest estimates. 

 

What I don't understand is why this interest number doesn't seem to appear anywhere in the company's presentations.  Even the 2/24/15 Capital Markets Day presentation seems to ignore it, even though the presentation walks through the accounting entries for a pro forma standalone DevCo.  (See slides 88-95; I assume slide 94 has a typo and that the construction debt should be 104 (80% of cost) rather than 134 (80% of selling price)).  The failure to account for this interest anywhere in these presentations makes me think I'm missing something.  It's obviously a real expense that affects margins and profitability. 

 

Turning to the rest of the company, I'm starting with the servicing business.  The most recent VIC writeup claims that the servicing business has 40% profit margins, but can you support that from the disclosures?  The presentations I've seen appear to report gross margins (not net or operating margins) for services and energy together.  See, e.g., slide 86 of the 2/24/15 presentation, slide 15 of the Q1 '15 presentation, and slide 14 of the Q3 '15 presentation.  Do you know a source that reports just the margins for servicing?

 

I just noticed on the business update call they include the services gross margin in the $0.35/MW gross profit for the DevCo.  They call it "Dev/Services Gross Margin."  So really they're forecasting more like $0.33/MW gross margin on sold projects.  So that just leaves TERP/GLBL stakes and technology licensing...  I'd value the technology licensing at $0, but management claims 1-2 license agreements in the future could make the technology worth $1 billion.  And somehow they claim the Materials/Poly segment that loses money and will make $0/yr in the future is worth $1.5 billion.

 

Wouldn't the Materials/Poly segment be worth $1.5bil because of the potential license agreements?

 

Regardless, TERP and GLBL stakes are worth between 75-80% of SUNE total current market value. I would also argue that both are a steal at current yields, so the potential for future declines is minimal.

[jrallen81]

still still under tons of pressure, down almost -10%. If this is an overreaction it's massive, but it's trading like there are going concern issues.

[KJP]

 

Regardless, TERP and GLBL stakes are worth between 75-80% of SUNE total current market value. I would also argue that both are a steal at current yields, so the potential for future declines is minimal.

 

By "total current market value" I assume you mean market cap.  What about the very substantial debt at SunEdison?

[cmlber]

 

Regardless, TERP and GLBL stakes are worth between 75-80% of SUNE total current market value. I would also argue that both are a steal at current yields, so the potential for future declines is minimal.

 

By "total current market value" I assume you mean market cap.  What about the very substantial debt at SunEdison?

 

Ya, I'm long but this is not good logic.  There is debt in front of those stakes.

[awindenberger]

 

Regardless, TERP and GLBL stakes are worth between 75-80% of SUNE total current market value. I would also argue that both are a steal at current yields, so the potential for future declines is minimal.

 

By "total current market value" I assume you mean market cap.  What about the very substantial debt at SunEdison?

 

I believe that the debt is well covered by future cashflow, but I'm still in the process of fully analyzing this.

 

Ya, I'm long but this is not good logic.  There is debt in front of those stakes.

[KJP]

 

I believe that the debt is well covered by future cashflow, but I'm still in the process of fully analyzing this.

 

 

I look forward to seeing your analysis when you're done.  Trying to untangle this mess is quite a task, and I'm on the verge of giving up. 

[dbuch]

If SUNE drops assets into the warehouses does it receive cash?

[KJP]

If SUNE drops assets into the warehouses does it receive cash?

 

I think that's complicated question and depends on what warehouse you're talking about and when the drop occurs.  One datapoint on this issue is slide 19 of the 3Q 2015 presentation, available here:  file:///C:/Users/pkreher/Desktop/SUNE%203Q15%20Results%20Finalv2.pdf

 

The way I interpret this slide and other information provided by the company is that at least some of the warehouses (including the First Reserve warehouse) can be used to fund the full construction costs, relieving SUNE from providing the 20% equity required in more typical construction financing in which the lenders will only lend 80% of construction costs.  SUNE refers to this as lowering its "working capital" requirements.  So, in this scenario, SUNE wouldn't have to make a cash outflow to fund construction, but it appears that it doesn't get its margin until after the project is sold by the warehouse.  So, it's not clear where the cash would come from in the meantime to fund OpEx. 

[KJP]

That analysis makes sense.  I think Einhorns # is a safe bet since we both got pretty close using different approaches.

 

For the other stuff, there's basically the operating assets (and associated debts) on SUNEs balance sheet, TERP/GLBL stakes, option value of what sits in warehouses, and the services business.  They'll be servicing about 10,500 MW's in 2016.  I'd be curious to hear what you think all the other stuff nets out too.

 

Slide 17 of SunEdison's Q2 2015 earnings presentation provides information about inventory turns and the debt/equity mix for construction financing.  It looks like I underestimated inventory turns, but that's counterbalanced by using the First Reserve warehouse line to fund some of the assumed 20% "equity" portion of the construction phase.  I think that slide provides further support for our interest estimates. 

 

What I don't understand is why this interest number doesn't seem to appear anywhere in the company's presentations.  Even the 2/24/15 Capital Markets Day presentation seems to ignore it, even though the presentation walks through the accounting entries for a pro forma standalone DevCo.  (See slides 88-95; I assume slide 94 has a typo and that the construction debt should be 104 (80% of cost) rather than 134 (80% of selling price)).  The failure to account for this interest anywhere in these presentations makes me think I'm missing something.  It's obviously a real expense that affects margins and profitability. 

 

Turning to the rest of the company, I'm starting with the servicing business.  The most recent VIC writeup claims that the servicing business has 40% profit margins, but can you support that from the disclosures?  The presentations I've seen appear to report gross margins (not net or operating margins) for services and energy together.  See, e.g., slide 86 of the 2/24/15 presentation, slide 15 of the Q1 '15 presentation, and slide 14 of the Q3 '15 presentation.  Do you know a source that reports just the margins for servicing?

 

I just noticed on the business update call they include the services gross margin in the $0.35/MW gross profit for the DevCo.  They call it "Dev/Services Gross Margin."  So really they're forecasting more like $0.33/MW gross margin on sold projects.  So that just leaves TERP/GLBL stakes and technology licensing...  I'd value the technology licensing at $0, but management claims 1-2 license agreements in the future could make the technology worth $1 billion.  And somehow they claim the Materials/Poly segment that loses money and will make $0/yr in the future is worth $1.5 billion.

 

I understood servicing to be an recurring revenue stream.  Is that wrong?  If it's recurring, why mix one-time and recurring revenue streams? 

[dbuch]

Regarding slide 19, it appears SUNE gets their development equity back once they drop it to the warehouse but don't receive any more cash until after it is sold out of the Construction warehouse.

 

Just a very rough liquidity calculation: If I assume $250M in total interest cost over next 6 quarters. 2nd lien obligation of $169M in Q3 2016, Firstwind earnout of $510M, Renova obligations of $100M, $404M margin loan gets to $1433M in cash needs.  Add in 17c/w for 875MW per quarter in OpEx (slightly more for Q4 2015 and Q1 2016) for $930M more in OpEx.

 

So all in Cash needs are $2.4B over next 6 quarters, subtract 850MW at $0.35W cash margin each quarter = $1.785B and your left with about $600M shortfall of cash.

 

You have a 3Q 2015 ending cash balance of $1.380B so you have enough to fund any shortfall. Or at least that's how it appears.

[Picasso]

I just bought shares. Curious to know who is getting margin called here.

 

Altai Capital must be crapping their pants.