SUNE - Sunedison Inc.

[CorpRaider]

I think I'm just evolving an "agency problems" point, to encompass disincentives to act in the interests of long term shareholders, including because of ibank churning, maintaining strong buys so your options will be worth something, and even including government regulation and organized labor concerns.

[blainehodder]

This is my new checklist, tell me what you think:

 

a) does the company rely on cheap financing?

b) does it generate big fees for Wall St?

c) does it have a semi-plausible story that is appealingly counterintuitive or complex?

d) is the stock promoted by a famous investor?

e) does it benefit from gov't subsidies, without which the product would be uneconomic or far less profitable?

 

Then again, you'd have missed the Tesla and Solar City boat with that checklist.

 

I missed that boat without the checklist.

 

[awindenberger]

Here's a link to my latest article on GLBL. I can understand the liquidity concerns around SUNE, and maybe a bit on TERP as well, considering that they are supposed to purchase $2bil in additional assets, but GLBL is trading at 24% yield now even though they don't have the same liquidity concerns.

 

http://seekingalpha.com/article/3699656-terraform-globals-best-current-investment-option-could-be-to-buy-back-its-own-shares

 

Looking at the most recent Q3 results of GLBL, the assets generated $24mm of EBITDA and the company claimed that CAFD is $24mm. 

 

GLBL is subscale and needs to get bigger.  Interest expenses during the quarter is $40mm due to its high cost Notes paying interest at 9.75%

 

Debt schedule looks like this

 

Senior Notes Due 2022 - $800mm, 9.75% interest

Project Debt - $439mm

South Africa - $200mm  8-13%

India - $21.8mm

Others

 

Interest payment for the quarter totaled $40mm.  The interest payment alone is more than EBITDA

 

The company can replace project debt with cash on hand of $1.1bn and revolver of $485.  On Pg 10 of the presentation

 

They intend to use $485 of the revolver which has an interest rate that is likely 5-7% and additional cash to pay for $759mm of acquisition leaving the company with $701mm of liquidity in cash form after the deal. 

 

Run Rate interest for Sr Note and Revolver will likely be

$19.5mm per quarter for the Sr Note

$6-8.5mm per quarter for the revolver

Total 25.5-28mm in interest expense per quarter

 

In the investor presentation, the company has projected $139mm in run rate CAFD which would include additional acquisitions. 

 

These financials are a mess

 

At $139mm per year, less $102-$112mm in interest rate, the cash available to Yieldco unitholders is $27-37mm. 

 

GLBL is not as safe as the 20% dividend and cash implies.  I still don't know what's the cash-on-cash return on acquiring the assets.  If they are financing with 9.75% sr notes, then the debt is likely higher yielding than the asset. 

 

I'm kind of lost for thought here...

 

BG,

 

You are missing a couple important things.

 

1. The $139mil CAFD run rate for 2106 only includes currently owned projects; the 779MW.

 

2. The new projects will increase CAFD to over $200mil for 2016, depending on their final close dates.

 

3. SUNE is on the hook for covering GLBL's entire 2016 interest bill, along with $40mil in 2017, decreasing by $10mil per year after that.

 

4. SUNEs $61mil B shares don't get paid at all in 2016, and are subordinated for a minimum of 3 years, which provides ample protection for the A shares minimum dividend of $1.10/share.

 

Depending on the environment at the time, covering the entire dividend may get a bit more challenging after the help goes away, but they do have additional liquidity with which to add more projects.

 

I'm somewhat well versed with GP/MLP, Yieldco structures.  It was not lost on me about point 3 and 4. Sune's subsidies is a negative in my opinion. 

 

I'm curious how you get to $139mm CAFD run for 779MW.  You do know that the winds don't always blow and the sun don't always shine.  Then you have to take into consideration that they hedge currency risk on a 3 year rolling basis.  Right now the USD is much stronger than the rest of the world. 

 

But mainly, I hope you can point out the $139mm CAFD.  I've read the footnote in the presentation, but it is unclear.  Is there a way to think about $/MW of annual revenue/CAFD. 

 

The G&A of the affiliate is very confusing. 

 

What do you have for total interest cost when they get to $200mm in CAFD?  How do the capital structure look like when they get there?  Help me bridge the current balance sheet to when they get to $20mm in CAFD.

 

The $139mil CAFD figure can be seen on page 11 of Terraform Global's Q3 Presentation. Here they show the CAFD run-rate from their current plants, with note 1 saying: This includes 779MW of producing assets. They do note the need to delever a couple assets to achieve this figure, which is built into their liquidity model on page 10.

[Palantir]

Hello there...anything come out late in the day?

[awindenberger]

Hello there...anything come out late in the day?

 

I bet some of the shorts are having to cover now that SUNE's short term liquidity issues seem to be covered.

[plato1976]

Is it fair to say that if the business is not durable (no significant and profitable projects after 2017, and basically the whole thing goes into runoff mode), this one is a zero after all its debt load?

 

Did anyone calculate its "runoff" value at this moment?

 

Hello there...anything come out late in the day?

[johnny]

Well Hempton indicated he was buying at what he believed to be below run-off value in October when the thing was around $9/share.

 

New information since then, of course. I have no idea how he was coming up with that estimate so confidently.

[plato1976]

exactly, I was reading his letter this afternoon

he was claiming that the run-off value should be greater than twice his purchase price which is above $10

I don't know how he came up with the run-off value

 

Well Hempton indicated he was buying at what he believed to be below run-off value in October when the thing was around $9/share.

 

New information since then, of course. I have no idea how he was coming up with that estimate so confidently.

[ccplz]

Why are people still investing in this name..

[Palantir]

So TERP and GLBL together have about $1.735B, prior to the latest India transaction, and given that SUNE has paid off the margin loan obligation, are there still any uncovered obligations for 2016 that can't be covered by dropping things into the yieldcos? Putting Wuebbels in the CEO seat is a way to enforce the use of TERP and GLBL as piggybanks I presume...

[KJP]

So TERP and GLBL together have about $1.735B, prior to the latest India transaction, and given that SUNE has paid off the margin loan obligation, are there still any uncovered obligations for 2016 that can't be covered by dropping things into the yieldcos? Putting Wuebbels in the CEO seat is a way to enforce the use of TERP and GLBL as piggybanks I presume...

 

Where is TERP getting the capital to buy anything from SUNE beyond TERP's current commitments related to First Wind and Vivint?

[johnny]

Kinda funny trying to predict how the Tepper jump in TERP should effect SUNE...not exactly a straightforward case.

[johnny]

Gentlemen:

 

We write in respect of Appaloosa Management LP's ("AMLP") holdings of TerraForm Power, Inc. ("TERP") common equity and senior notes. We note with interest this week's announced changes to the TERP management team and Board of Directors. Notwithstanding your explanation in the release, we find that "aligning the company's strategic focus around acquiring projects from its Sponsor" offers little apparent benefit for TERP stakeholders and raises concern for obvious conflicts between the interests of TERP and its "Sponsor", SunEdison ("SUNE").

 

Until recently, TERP's business purpose was to act as a vehicle to hold and finance a high quality portfolio of fully-developed wind and solar power assets that were supported by long-term power purchase agreements with large, investment-grade corporate counterparties. Isolating these projects within a ring-fenced vehicle made sense for both TERP and SUNE, as the most efficient cost of capital could be obtained by segregating them from the operational, developmental and construction risks of SUNE's main operating businesses.

 

The July announcement of the acquisition of the Vivint Solar ("VSLR") portfolio of residential rooftop assets marks an unfortunate departure from this business model and appears to serve the sole purpose of promoting SUNE's desire to acquire VSLR's development and operating assets, rather than enhancing the quality and value of TERP's holdings. Indeed, the shift to weaker counterparties (homeowners) and the higher risk profile inherent in these assets (small rooftop panels) also appears to disproportionately benefit the "Sponsor's" incentive distribution right ("lOR") at the expense of significant downside financial risk to TERP. Worse yet, is SUNE's stated intention (revealed through the release of an Interim Agreement between SUNE and TERP) to place 500MW per year of these inferior assets in TERP for the next 5 years.

 

Disclosure of the precise details of this acquisition plan is long overdue, as well. So too, are the details surrounding the distinct possibility that TERP will be forced to accept a note from SUNE (which is of dubious credit quality and market value) due to a shortfall in the market value of the assets to be delivered in the first leg of the VSLR portfolio transaction relative to the $922 million purchase price (i.e., the "Advanced Amount" mandated under the Summary of the Note Terms in Exhibit E to the Purchase Agreement between SUNE and TERP). Given the erosion in the market value of comparable rooftop operators to VSLR (SunRun and Solar City, for example) the face value of that note will likely need to be considerable (but of suspect worth given the obligor).

 

The reconfiguration of the lnvenergy transaction announced November 9th is no better for TERP stakeholders and is obviously intended for the sole benefit of SUNE. These modifications will hand­ off SUNE's responsibility for a $388 million equity warehouse commitment to TERP -- yet another departure from TERP's traditional role of owning permanently-financed, income-producing assets. The investment also strains TERP'S resources and significantly raises its leverage and financial risk profile. In downgrading TERP's debt to a highly-speculative rating of B2, Moody's cited the change in operating arrangement brought about from both the Vivint and lnvenergy transactions, and the inherent financial strain thereof. Greater linkage to the "Sponsor" also figured significantly in Moody's analysis.

 

Thus, it is obvious that the deterioration in TERP's security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its "Sponsor's" ambitious growth objectives and over-extended financial commitments; and (2) TERP's incomplete and selective disclosures. TERP's "reliance on third party acquisitions" has little bearing on either of those factors. We note the advertised increase in the number of independent directors on TERP's board and trust that the Corporate Governance and Conflicts Committee (the "Conflicts Committee") will appropriately investigate these and any other related-party transactions to ensure that they are conducted for the benefit of TERP stakeholders. Recent rumors of discussions between SUNE and VSLR regarding "strategic options" for the proposed merger transaction, if true, may represent an opportunity for the Committee to exercise its independence and relieve the financial pressures on both TERP and its "Sponsor" from this harmful transaction. Such efforts would be strongly supported by Appaloosa.

 

As previously suggested, substantial further disclosures are incumbent on TERP so that investors can assess the full impact of the pending transactions, the relationship between TERP and its "Sponsor", and the circumstances surrounding the changes in TERP's management and Board. We look forward to such disclosures and stand ready to meet and discuss any of the issues raised by this letter. In the meantime, we expect the Board and the Conflicts Committee to respect and defend the integrity of TERP's corporate identity and the interests of its stakeholders. We reserve all rights accordingly.

 

Sincerely,

 

David A. Tepper, President

 

[jay21]

How is the Tepper post the last one in this thread? It finally makes me interested (well at least in TERP).

 

Anyone have thoughts on TERP or SUNE now?

[Picasso]

I just sold out of the shares I purchased fairly close to the lows.  Lot of bag holders in this price range and I'm not sure the Tepper involvement changes the situation very much.  It helps out TERP shareholders more than SUNE shareholders.

[jay21]

I just sold out of the shares I purchased fairly close to the lows.  Lot of bag holders in this price range and I'm not sure the Tepper involvement changes the situation very much.  It helps out TERP shareholders more than SUNE shareholders.

 

Yes - I was asking about both because I didnt see a TERP thread. I would think its bullish for TERP and bearish for SUNE because SUNE just rips off TERP a la most YieldCo structures. But I just started looking.

[dbuch]

Updated liquidity picture expects $1.1B of cash end of 2016 (pg 15)

 

http://investors.sunedison.com/phoenix.zhtml?c=106680&p=irol-EventDetails&EventId=5213695

[Pelagic]

An interesting study on the solar industry. The relevant economics of the industry start on pg. 103 I skipped to there but will probably chew through the rest when I have time.

 

https://mitei.mit.edu/system/files/MIT%20Future%20of%20Solar%20Energy%20Study_compressed.pdf

 

For utility scale solar PV

 

At current and expected natural gas prices, using solar energy to generate electricity at most locations in the United States is considerably more expensive than using natural gas combined cycle technology, even if natural gas plants are subject

to a carbon tax equal to the “social cost

of carbon,” as determined by the U.S. government, and even giving credit for the current value of solar electricity. Under these conditions, a further 50% reduction in module costs would make utility-scale PV competitive in California, but not

in Massachusetts.

 

For residential rooftop

 

Because retail prices per kWh exceed wholesale prices, it is possible for a residential PV system to make economic sense for a homeowner even if its levelized cost for electricity is well above the wholesale price paid to utility-scale generators.

 

For Concentrated Solar Thermal

 

Currently CSP generation is slightly more expensive than utility-scale PV in regions like California that have good direct insolation. It is much more expensive, however, in cloudy or hazy areas that experience relatively little direct solar irradiance, like Massachusetts. Adding energy storage and optimally deploying this capability reduces the LCOE of CSP plants and enables CSP generators to focus production on periods when electricity is most valuable.

 

[Liberty]

An interesting study on the solar industry. The relevant economics of the industry start on pg. 103 I skipped to there but will probably chew through the rest when I have time.

 

https://mitei.mit.edu/system/files/MIT%20Future%20of%20Solar%20Energy%20Study_compressed.pdf

 

For utility scale solar PV

 

At current and expected natural gas prices, using solar energy to generate electricity at most locations in the United States is considerably more expensive than using natural gas combined cycle technology, even if natural gas plants are subject

to a carbon tax equal to the “social cost

of carbon,” as determined by the U.S. government, and even giving credit for the current value of solar electricity. Under these conditions, a further 50% reduction in module costs would make utility-scale PV competitive in California, but not

in Massachusetts.

 

For residential rooftop

 

Because retail prices per kWh exceed wholesale prices, it is possible for a residential PV system to make economic sense for a homeowner even if its levelized cost for electricity is well above the wholesale price paid to utility-scale generators.

 

For Concentrated Solar Thermal

 

Currently CSP generation is slightly more expensive than utility-scale PV in regions like California that have good direct insolation. It is much more expensive, however, in cloudy or hazy areas that experience relatively little direct solar irradiance, like Massachusetts. Adding energy storage and optimally deploying this capability reduces the LCOE of CSP plants and enables CSP generators to focus production on periods when electricity is most valuable.

 

The difference is that over time natural gas can do anything, while solar is on a pretty clear trajectory:

 

https://en.wikipedia.org/wiki/Price_per_watt#/media/File:Price_history_of_silicon_PV_cells_since_1977.svg

[Pelagic]

 

The difference is that over time natural gas can do anything, while solar is on a pretty clear trajectory:

https://en.wikipedia.org/wiki/Price_per_watt#/media/File:Price_history_of_silicon_PV_cells_since_1977.svg

 

I was more interested in the price disparity between utility scale and rooftop/CSP. Utility PV comes in at about half the LCOE of rooftop PV and 2/3 of CSP. While I agree solar is going to get cheaper, I don't think we will see the same rate of decline since labor and other costs now represent a higher percentage of the cost of solar generation meaning advances in the panels themselves will have less impact on the total cost than in years past. Of course, natural gas has been coming down significantly too in recent years.

[dbuch]

Going through the 8k, looks like they just reduced debt by about $737M and diluted shareholders by at least 100M shares. I don't know what the conversion price is on the new 2018 convertible but assume it's near $5.

 

Attached a quick and dirty spreadsheet to try and calculate the dilution.

SUNE_dilution_1-7-16.xlsx

[jrallen81]

The dilution does look bad. But given reduced debt should the stock be down -18.5%, or is the market thinking the signalling effect of what they had to give up implies desperation?

[dbuch]

okay they just posted an updated transaction summary. Share dilution is 69M shares increasing share count from 326M to 395M.

 

This doesn't seem to include the A3 debt which is convertible at 7.5 which adds another 30M shares (although replacing old converts worth about 11M shares).

 

So according to my calculations

28M shares for various converts 2018-2025 (replaces about 6.6M share dilution)

11.8M shares for preferred (replaces about 4M share dilution)

20M shares for A1 Lien $500M

9M shares for A2 Lien $225M

30M shares for A3 Lien $225M (replaces 11M share dilution)

 

So 326M shares + 77M share dilution = 404M shares

 

$737M of debt was exchanged for 68M shares so exchange price is 10.77 but I don't think that includes the A3 2nd lien notes

[jay21]

This was a good post: https://medium.com/@Nemo_Incognito_35979/six-misconceptions-and-sixhard-facts-about-the-solar-sector-278c89ac4068#.lrf6qdtsq

 

On residual values:

 

Misconception 2. The panels degrade and will be useless in a few years.

This is one of the more ridiculous arguments against solar. Extensive data from NREL indicates that panel degradation runs about 0.5% per year — so in 20 years, the life of a standard solar PPA, the plant will have 90% of its rated output at the date of construction. If my house or car had that rate of degradation I would be ecstatic but there is no way that is going to happen. To that end, solar should be looked at as a long life, low maintenance asset. Operation and maintenance data from NREL and others indicates that solar O&M runs at about $10,000 per MW of capacity per annum for utility scale installations and $20,000 for residential. If you take residential installation costs around $2.50 per Watt and utility scale of ~$1.50 per Watt, the running opex is about 1% or less of capital cost per annum. Solar degrades slower than a car park.

 

When it comes to residual values this math makes it pretty clear that there is life at the end of the initial power purchase agreement. Of the typical ~$1.50 for construction of a utility scale solar site only ~$0.50 is the cost of the panels. The land grading, clearing and steel frame racking does not suddenly vanish after twenty years and, assuming wage inflation does not go backwards over that time frame probably has more value in twenty years than it does today. That means that at the end of the PPA or even before it the plant can buy newer, cheaper panels at whatever the prevailing price is and continue running with a new PPA or as a merchant plant having depreciated down all its capital to zero. Those incremental returns are pretty amazing, and are an almost free option. For this reason there are good reasons to build now, get a good IRR and preserve the option to “repower” later.Think about it in real estate terms: even if a car park is twenty years old and depreciated to zero, is it worth zero today?

[jay21]

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?

 

This guy wrote the post I quoted above. However, his blog looks to be private. Anyone know how to get access?