Friday, October 2, 2015

Sun Edison - some comments and a way forward

Bronte has taken a long position in Sun Edison. We did this after the first and indeed second stages of the collapse in that stock. The stock decline here is spectacular. First Solar and Solar City have had issues - but nothing like this.

Until about a week ago we were showing (small) profits on the position. Then it took yet another leg down. I know the cliche about trying to catch falling knives - but we think this is a quite good bet - and would be a better bet if the board took decisive action to fix immediate and pressing problems.

Background

Sun Edison develops huge and highly capital intensive solar and wind project where the power is largely pre-sold and where separate financing is developed for each project. These projects are then sold to [“dropped down to”] semi-captive yield companies sold to mostly to yield sensitive investors.

There are several issues. Big solar projects are massively capital intensive – think of utility scale power generation where you have to pay for the next 25 years of fuel upfront. The projects have huge debt but also reliable high margin cash flow.

Secondly there is a pretty obvious conflict of interest in the “yield co” drop-downs. We have successfully shorted a few companies where we think that overpriced assets were being sold to captive vehicles. In the end they these were good shorts - if you can't treat the investors in the drop-down vehicle fairly you will eventually wind up with fewer investors, less access to capital and less underlying profitability.

Thirdly, because of the related parties and the copious amounts of different types of debt these companies have complex and even scary accounts. At Bronte we are quite good at getting to the bottom of complex accounts. But we have a problem with these.

In a meaningful fashion Sun Edison is a “trust me” story.

Whatever, the problems Sun Edison and its yield cos have been smashed. Once fairly obscure solar developers have become a major topic of discussion on Wall Street.

It took us a while to understand why they have fallen so hard. The argument comes down to complex accounts, lots of debt and a peculiar acquisition of door to door marketing company(Vivint).

But there is also more than the usual amount of rumour and innuendo. On Twitter there are arguments we know to be wrong and arguments that are simple fear-mongering (calling Sun Edison “Sun Enron” is one such appeal). Sure the company is highly levered and complex but it is almost certain that the past deals have been good deals. Any solar farm deal you put in place 3-5 years ago has worked out. Both solar panel prices and interest rates are lower than you would have baked into your cash flow models. We would be enormously surprised if the past deals of Sun Edison did not work out.

Whether the future deals work out is however an open question. Low solar panel prices and low interest rates are not exactly a secret – and the funding cost for solar panel farms has risen with this panic. Bluntly we think unless the company repairs its relationship with capital markets it is unlikely to be able to generate good deals in the future and it will wind up in run-off.

There is a deeper problem with the way these companies [yield cos and their parents] see themselves and communicate with investors. That comes down to the fact that many have their roots in semiconductors where operating leverage is everything. You disclose your costs, your variable versus fixed, capacity expansion and so forth because if you make solar modules, wafers or chips that stuff matters a very great deal to your business. Investors use and demand that information because simply put, it matters and drives the profitability of the business.

A yield-co is a completely different business – it is a non-bank financial company.

Non-bank financials “blow up” for one of three reasons, (i) credit risk, (ii) duration mismatches and (iii) and unstable funding. If you want to assess TerraForm Power (Sun Edison’s yield co) you need to assess whether the credit risk on the projects (the counter-party) is okay, how the contract and funding is (eg floating/fixed etc) and all the ways in which project development funding is able
to roll into long-dated funding.

A friend put this to a yieldco and the management balked at providing that level of project detail. My friend's response: “well, are you Northern Rock?”

And that is the guts of the issue and the market fear. We have gone to considerable effort to convince ourselves Sun Edison is not Northern Rock with solar panels. We have talked to several people who have organised funding for these things and it seems okay to us. Specifically all construction finance automatically can be termed out as project finance (over the life of the project and linked to the project) when the construction is done.

If this is true the market fear for this company cannot cause insolvency. Given that the company is priced as if insolvency is likely this stock should produce a good return from here.

Alas we could be wrong here. We can’t see all the funding (the disclosure is complex) but the bits we have seen have this character. We checked through several sources and we don't think the company can have a “run on the bank”. The Northern Rock outcome is unlikely.

Now of course we have not seen and understood all of the finance deals. Only the ones we can find. But that is sufficient to know we are probably right. And that is the case for buying. The old projects are good and they should run off at an attractive clip.

The Vivint Acquisition

That said this company does not behave like a financial institution, they have been rash and callous in their treatment of capital markets. This is dumb. Capital (not solar equipment) is the main input in this business. And capital is cheaper if people trust you.

Moreover management did a really foolhardy acquisition and explained it badly.

Vivint (the target) is a door to door marketing scheme selling solar systems. Some suggest multi-level marketing scheme characteristics but I cannot find the contractual terms that indicate it is an MLM. [Contra: friends have done research on the numbers of complaints at State agencies concerning Vivint.]

Moreover the product it is selling door-to-door (financed solar systems) is not a bad deal for customers. Customers put the solar panels on their roof and their power bills go down. Whether the solar system is owned by the household or some corporate structure what is effectively going on is a loan to the householder where the householder will repay the loan by splitting the utility bill saving with the solar company. Things can go wrong in this deal – but those things are not very likely.

That said, there are good reasons why roof top solar is less attractive than utility scale solar farms. The main one is that rooftop solar gets under-priced use of the grid. The grid is essential here – unwanted solar is sold to the grid and the grid provides electricity when the sun doesn’t shine. My business partner was once a utility CEO. He has an instinctive skepticism of rooftop solar. He thinks – correctly – that people with rooftop solar underpay for grid services.

In Northern California this is becoming explicit. Pacific Gas and Electric is proposing changes which explicitly charge households with solar panels more to access the grid. Whilst we have no view on the size of the charge the direction is probably right. This will become a trend and make roof top solar less attractive in the future.

The Vivint acquisition - which looks strange - was poorly explained and was bundled with a few details that indicated that the margins on projects dropped down to the captive yeild-cos are declining caused a run on the stock. Moreover there were lots of hedge funds who had oversized positions in Sun Edison before the collapse. There clearly was a rush to the exits.

And in capital market terms those can be self-fulfilling. The equity and debt cost for Sun Edison has risen substantially and this seriously impedes the economics of the company. Its that strange thing about financials that lower prices for equity and debt reduce the future cash flows.

The current situation and the way forward

Sun Edison has lost about 80 percent of its value without the slightest hint from the management team that there is a problem. The credit default swaps have moved against them and it will be far more difficult to grow whilst the situation is like this.

There really is one issue here. Can they find and develop new solar plants and drop them down into project financed bankruptcy remote vehicles and (a) make a profit and (b) ensure the new owners of those vehicles make enough return to keep them coming back for the next vehicle? [At the moment there is a fairly strong private market for solar projects - people like large pension plans - but the same concern applies to them too. They got to trust you.]

If they can't develop and sell either growth stops dead or the company becomes a ponzi.

Alas with market distrust it becomes unlikely that future projects can meet the required return hurdles. The private market for completed projects will also have the same concerns about the management.

The best case here is that the company has become a melting ice-cube. It is worth something (I think a fair bit more than the current price) but every drip of cash that comes off in the end goes either for debt repayment or is returned to shareholders.

The whole project development team - the raison d'ĂȘtre of the company - ceases to have any use. They should all be fired. Yes - all of them. [If you work for Sun Edison it is your job too. And that will eventually include the board. Them are the stakes. If the current board doesn't do something about this it is eventually your job.]

There is an alternative - an alternative I think the company should take. They should pay their contrition to the market - and give the market what the market wants.

What the market wants here is a clear vision of financial control and responsibility. They want to know that Sun Edison is not Sun Enron.

Stocks don't just fall 80 percent in a vacuum. Someone has to be held responsible - and the board needs to ensure that happens to ensure Sun Edison has a future.

That person is the CEO.

Ahmad R. Chatila

Ahmad R. Chatila (Sun Edison's CEO) is a visionary. Indeed Mr Chatila is the reason for Sun Edison's success to date. I have heard managers describe him in glowing terms - amongst the best CEOs in America.

And I don't disagree.

Except that he should be fired. Pronto. Now.

Sun Edison - through the vision and drive of Mr Chatila has become a financial institution. One with a lot of run-off value. One which I think has improved the world a great deal.

Vision, drive and competence are usually great things for a CEO.

Not in this case.

I am an old fashioned kind of guy. I do not think visionaries should run financial institutions.

Visionaries running financial institutions end in disaster.

Mr Chatila has built an institution for which he is profoundly unsuitable to run. The market has made that abundantly clear.

Pay him out

I have mostly been unsympathetic to firing executives and leaving them with a big payout. Mr Chatila is an exception.

Mr Chatila has not done much that is wrong. He has created - from very little - a worthwhile, valid and large business. He has achieved much.

He has not done very much that is wrong except create a business which he personally is a woefully inadequate CEO for. For this he should be rewarded: as recognition of (a) what he has truly created and (b) for going quietly and constructively.

Calculate his payout, add thirty percent and fire him.

Who to appoint?

There is a core criteria on picking the new CEO.

They need to be boring and from a control culture. The idea CEO would be someone from (say) the risk management department of Goldman Sachs. What you want is a dull suit occupied by someone whose job it is to pull wings off butterflies. Someone whose job it is to ensure - and be seen to ensure - that bad projects are not funded.

The market wants someone who will get on an earnings call and talk about asset liability matching, FX risk mitigation and basically sounds like the CEO of a mortgage REIT, not a semiconductor visionary.

You want risk aversion above all other things.

And you want it for another reason. Mr Chatila has populated the senior ranks of Sun Edison with people like himself. Ambitious go-getters - people who get things done. It is notable that all of the ex Goldman hires at Sun Edison come from the banking and advisory side. They are deal people. Deal people do deals and are not happy if they are not doing deals.

The people Mr Chatila have hired have got things done. Alas if you are going to have people like this in a financial institution (and Goldman Sachs is full of such people) then you need a counter-balance. Someone who stops you doing silly things and has the intellectual horsepower to work out what is silly and what is not. There are plenty of such people around and if Sunedison can poach deal centric Goldmanites then perhaps it can pick up a few slighly more salty risk managers too.

There is an alternative of course. But that is harder. You could keep Mr Chatila. Have a visionary running your financial institution - but then you need to beef up the risk management culture of the place to an extraordinary degree. You need to sack the CFO, half the board need to resign (and be replaced by hard-headed financial types) and you need to remove about half the go-getters that Mr Chatila has installed.

Easy and difficult routes to dullness

This company has got to become dull and predictable and it has to get there fast. Anything short of dull and predictable will end badly.

There is a fast route to dull and predictable (the one I prefer). Start at the top. Sack Mr Chatila. Appoint someone who will embody the new (and boring) Sun Edison. And this guy is going to give the market the sort of information they need - that is

(a). Power purchase agreements and their counter-parties (the analog of credit risk for a non-bank financial institution),

(b). Contract terms for the above PPAs - eg fixed, floating, renewal terms and also for the debt for the projects (the analog of whether there are mismatches in funding), and

(c). The funding details (to ensure that there are not mismatches in the duration of funding).

There is the second route to dull and predictable. That is to leave Mr Chatila in place but sack half the people around him and replace them with people who will control his ambition. This is - in this case - a worthwhile option as Mr Chatila really is a visionary - someone who really has created value.

Whether you can keep the good parts of Mr Chatila (vision, drive) and also keep the market happy has yet to be seen. I have my doubts.

The third way to dull and predictable - and one which will be forced upon the company shortly if the board does not react sensibly is just to put this into a form of run-off. Fire everyone in project development. Just do it. My guess is that they have to start firing now - but a few is not going to do. In runoff they have to fire all the interesting people, leave a skeleton maintenance staff and send us (now suffering) shareholders lots of cash.

My guess is that the board will settle on the first option or Carl Icahn or some equivalently effective activist investor will buy a big stake and force the third option on them.





John

45 comments:

Jonathan S said...

There is another possible resolution which would be sale of the company. SUNE would seem an attractive candidate for a PE firm which could incubate it for a few years. A semi-honorable sale is probably a happier outcome for management/board than a forced purge.

Anonymous said...

John,
Do you read Casual Analyst on Seeking Alpha? He writes a lot about this topic. That may help. This guys is a parttimer but easily the best solar analyst anywhere and free to the boot.

Anonymous said...

Hi John,

Surely the issue is not just whether the company can turn debt into project debt (though where's the equity coming from?), but how the price compares to the IRR on the PPAs it has signed. The problem was Terraform provided them unrealistically cheap capital resulting from disingenuous stock pumping by management. I would want to know how much contracted volume SUNE signed based on the expectation that Terraform would buy the projects from them at above market prices. It is quite possible that a significant portion of the equity in their development will barely break even and perhaps even result in a loss.

Then we need to ask whether their development business is competitive without the yieldco. How do they compare on cost and execution? One of the risks is surely that their business shrinks massively. They may simply be unable to continue winning as many bids as they did before. In other words, Terraform might have been their only advantage. They might have become fat and lazy off their financing advantage. The utility-scale solar market already has razor thin margins anyway, so what is the development business really worth?

After that we need to consider the run-off value of the yieldco. For that I'd want to know the potential tax liability. These tax equity structures take away most of the depreciation from the sponsor, which means Terraform may be paying tax on profits before depreciation. That is a horrible place to be when half of your capital structure is debt, which needs to be paid back within the PPA time period. Whatever the case, be wary of analyst run-off estimates that don't consider tax.

Vivint might actually be the smartest thing SunEdison did. I'd personally be cautious of listening to a utility exec about the "cost of the grid". There's two sides to the argument, and the one the market currently focusses on is the utility point of view.

Anonymous said...

It's a difficult company to value so I am not sure if your thesis is correct but I will say that as an industry participant, SunEdison has paid crazy premiums for the following acquisitions
First Wind $2.4 Billion
Invenergy $2.0 Billion
Atlantic Power $525 Million
That is nearly $5 Billion SunEdison spent acquiring wind assets in the most overheated market for infrastructure assets in recent memory. In other words, they outbid all the PE Funds, Pension Funds, Strategics (NRG Yield etc) in the market clamoring for these assets. Perhaps they bid crazy terminal values or something. I still don't understand how the warehouse facilities make sense at 9.5%-10% preferred yields to investors based on the return profiles of the acquisitions. Perhaps SunEd has been suitably punished for spending money freely.

Anonymous said...


All of the green energy companies are run by 'visionaries' just like the frackers. They will meet the same fate too.



Anonymous said...

John,

To what extent do you feel like the reduction in the US federal investment tax credit declining from 30% to 10% at the end of 2016 has impacted SUNE's stock? You didn't mention it in your analysis, but surely it must have some substantial impact as the deadline moves closer and ~70% of their development to date has been within the US market.

Phil said...

It seems that even if a PE firm was to purchase, they would still implement the listed suggestions. PE firms are generally the dull boring types listed in points 1 and 2, and would likely re-list the firm once 3 is attained.

Anonymous said...

I don´t know about SunEdison, but I have been looking what I think is a similar situation between Abengoa SA and Abengoa Yield.

From Abengoa 20F:

" Purpose of Abengoa:
...create a vehicle with a competitive source of equity capital to benefit from the acquisition of long-term contracted assets developed by Abengoa and other third-party assets"

Competitive Strenghts
...Abengoa usually targets an internal rate of return for its projects that is higher than
the expected cost of our equity, thus both parties could benefit from the sale of assets by Abengoa to us. "


In my opinion the Parent-Yieldco sistem is absurd. As you mention there is not a funding problem, but there is a problem in a business model that relies on a cheap source of equity that will finance the parent´s growth. In my opinion is similar to bank-securitization vehicle relationship but this time with equity instead of debt.

In the case of Abengoa Yield in their presentations (not in their 20F) they mention CAFD and cash yield but you never hear to talk about Return of equity or IRR of their projects, or you don´t see reconciliations between CAFD and ebitda or as you mention you don´t see an asset-liability detail as banks do.

The cash yield in dropdown assets (20y) is according to their presentation around 9%, that translates at best (not including all the parent service fees) into an IRR of 6%, the cost of corporate debt is 7%-8% and they are financing 15% debt-85% equity, that result on expected return of equity at around 6.2% . And who would invest in shares of a company where the return on equity (at book value) is capped at 6% for 20 years, because you know that if the stock goes up the yieldco is going to raise capital in order to finance parent´s growth and fees. So you have all the disadvantages of debt (fixed return) and equity (volatility and risk).

Ken Orji, Esq. said...

The Fourth option would be for Mr. Hempton and activist investors to buy whatever stocks they want like everyone else but let these companies run their business.

Bohdan Tashchuk said...

I love this post, but please fix one typo. The following sentence has too many negatives. I think what you said is the opposite of what you wanted to say:

We checked through several sources and we don't think the company can’t have a “run on the bank”.

WannaBeValueInvestor said...

John - thanks for the post. In a worse case scenario, why couldn't SunEdison just revert to the old model and sell solar projects to third parties?

It seems to me that if you took SunEdison'stake in $TERP (43% of $2b) and $GLBL (33% of 1.08b), added $200MM of Poly JV, $60MM of retained CAFD on B/S valued at say $600MM, that's worth some $2b alone. SunEdison's entire market cap is now $2.3b. Now if SunEdison is carrying a net cash position of $600MM after the perpetual convertible issuance, then you are getting DevCo for -$300MM.

Also, you haven't placed much emphasis on the general sell off in YieldCos and MLPs. If you argue that TERP gets back to a 8% dividend yield and GLBL trades at 10% dividend yield, SunEdison's stake in those businesses alone are worth $2 billion, which leads to a valuation of DevCo at -$1.1 billion.

Is there a flaw in this logic? Seems like the market has completely discounted SunEdison as a viable company, let alone a potentially profitable and viable one.

Thanks again.

Anonymous said...

Rookie opinion. Only avenue left is for a utility to pick this up and maintain VAR control. This article has great foresight, one thing that lots of people discount is the amount of experience that really exists in the old utility industry that deals with risk on a day to day basis. Utilities are sleeping giants ready to take advantage of lame ducks at solvency prices, especially if they are already the offtakers.

abee crombie said...

Why not fire TERP CEO, Zornoza as well! Fix TERP first then worry about the stock value of SUNE. If TERP needs to trade at 9% yield SUNE and its IDR valuation is done

for me, I'd rather buy terp at these prices. SUNE shot themselves in the foot at exactly the wrong time. Oil prices falling, HY market drying up, electricity prices in the dumps. Botched Vivent, GLBL etc.

The stock will be a great buy, just not sure if its current prices or closer to $2!

Anonymous said...

Awesome article. Also indeed a solid verdict on the CEO. He needs to be ousted for the good of the Company. So does the CFO / CAO, Brian, for his moronic short-sightedness, at not raising lots of equity when the going was great.

The biggest culprits though are the folks in Bethesda .... Carlos Domenech and his cronies, i.e. Kevin Lapidus, Pancho Perez, Alex Hernandez, and their friends in Asia, i.e. Ismael Guerroro (the ex-GSF Capital guy of the securities fraud fame) and Casper Jpohansen (who paid 2x market price for a wind acquisition in India). These are folks who are responsible for the culture of greed that drove the Company into the deepest end. The less said about them the better. I am sure shareholders would want to "see their blood".

Rahul Deodhar said...

Great article about a Long position!

Many High Capex cos seem to have similar problems. My problem is most of these companies try to be asset managers rather than pure energy companies - probably thats why Enron is thrown up. You are spot on about Sun needing boring suits. Healthy dose of cost cutting should also be order of the day.

These companies should be about operations (energy asset building and contract negotiations) rather than financial asset managers. When they buy a company the Goldman-types think of it as investments rather than possible operational advantage by improving the target or by acquiring tech from target. From the comments it seems this is financial asset management. Some of these assets may need to be sold off.

Seems good risk-reward bet. Best of luck.



Anonymous said...

I had similar thoughts. Utilities are very risk averse and generally stay out of the unregulated power space. While a few rate regarding utils have dabbled in unregulated renewable development projects(Nextera comes to mind) most have not and will not. But, they are the natural owners for some of these assets, especially in the U.S. as the Clean Power Plan starts requiring more renewable generation. If the price is right for these assets, they become attractive for utilities to try to roll into their rate bases.

I've been thinking about the difference in risk between the TERP and GLBL portfolios ftom a PPA/credit qualit perspective. TERP is much more North American focused where I belive there is greater trust in the rate based utility structure. I'm not sure I'd place the same confidence in regulated structure in India/Brazil, etc.


Nemo Incognito said...

Anon at 12:37am you sound like you know the dynamics pretty well. Feel free to get in touch.

Anonymous said...

John

If management truly has no credibility, can't you find some way of perhaps lending them yours!

Oh!,

Anonymous said...

What about the margin call at SUNE due to the decline in TERP stock?

Anonymous said...

This is a comment from 5000 feet up. Oil is down by half. Why doesn't a producer of alternative energy have quite a lot of stranded investment? If the model is build, finance, rinse and repeat - it may be that the earlier deals are OK if the contracts on what may be stranded investment are tight enough, but isn't the act of repetition much more difficult due to lower competing energy prices?

To take this to the utterly mundane, I just bought two LED floodlights-65 watt- for $6.50 US.
They last 20-25 years, and use a great deal less electric than incandescent bulbs. Won't this availability of energy savings, writ large, have a huge effect on the aftermarket for electricity? BTW, I sure wouldn't want to be a light bulb maker in a few years after the replacement cycle is done!

Anonymous said...

@ WannaBeValueInvestor

Not sure how much a DevCo is worth if there's only cats and dogs to build. No one is building merchant solar. Wind is mostly cheaper in the Midwest (i.e. MISO/SPP). California is worried about oversupply (search "CAISO duck graph"), not sure the future PPA pipeline is going to be as sunny for solar. There's plenty of oddball solar programs (e.g. MASS SREC) but those can't sustain a large DevCo. So where is the development coming from in the US?

@ Anon 10/3 5:49:

Not all utilities are risk averse. Midamerican (BRK) is aggressively building a west portfolio. Long-term, large utilities will dominate thanks to lower cost of capital. Any RFO with a self procurement offer will be won by the incumbent.


@ Anon 10/5 12:39:

Oil is immaterial to US power prices. Natural gas prices matter a great deal and have been horrific -- the worse since 2012.

Rjackson said...

In its first act, Vivint sold its security/home automation business to Blackstone. A key component of the home automation pitch was remote thermostat control for energy savings. Does anyone know how those 3 year contracts have performed under Blackstone? I know that Vivint was very aggressive in signing up lower credit consumers to those deals.

In Vivint Solar's S-1, they cite the following risks:

"Estimated retained value and estimated retained value per watt amounts do not consider the impact of other events that could adversely affect the cash flows generated by the solar energy system during the contract term and anticipated renewal period. These events could include, but are not limited to, non-payment of obligated amounts by the customer, declines in utility rates for residential electricity or early contract termination by the customer as a result of the customer purchasing the solar energy system in connection with the sale of the home on which the solar energy system is installed. To date, such early terminations have been immaterial to our business."

Do we know how any of the above risks are likely to play out?

SeekingAlpha.co.uk said...

why you prefer SunEdison to the big Chinese panel makers: Jinko (claims to be the lowest cost producer), JA Solar (take-over target from it's own Chairman-CEO)

Anonymous said...

Re: Anon 10/6 2:48

I agree not all utilities are risk averse, but most are. Many got burned dabbling in unregulated and have exited those higher risk businesses. Mid American is a bit of an exception. Their renewables biz is actually separated from the utility under a larger holdco in BKH. Being under BKH, they do have benefits of capital cost and lack of individual shareholder concerns. However, most publicly traded utils are frowning upon unregulated activities in general. Longer term however, a lot of them would be natural buyers for some of the assets that SUNE/TERP are developing/holding if they can get favorable rate treatment.

--------

Separately, I've been digging a little bit on the GLBL situation. Shares have not bounced nearly as hard as TERP. Looking at the 9/23 SEC filing, it appears there is a somewhat complicated arrangement with Banco de Brasil regarding liens on the 20m shares that Renova received in the transaction. If the line is not resolved by 1/31/16, GLBL can liquidate shares and deliver proceeds to Banco de Brasil. Given the collapsed pricing for GLBL I'm wondering what sort of hedging might be taking place behind the scenes? Is it feasible to assume that Renova or Banco de Brasil may have been selling down shares in anticipation? I'd be interested to hear opinions from those with more insight into these types of arrangements......

Anonymous said...

Will they ever generate GAAP profits? I don't think so. In that case, there is no value in the equity, however much time you spend on qualitative analysis. And if you think they will become profitable, how will that happen? I don't see a path from huge losses to big profits.

Anonymous said...

@ Anon:

Strip out MA/BRK. Bulk system solar still looks like a balance sheet game where everyone is selling the same commodity and the only differentiation is lowest cost of capital. Natural monopoly, albeit with low returns. Maybe SunEdison wins that game against the EDF/Iberdrolas.

Anonymous said...

Yield cos are ponzi schemes. Thought you'd realize that John. They incorrectly sell investors on the belief that these projects are perpetuities when they are annuities. One day they will be worthless and the company will have repaid none of the debt used to finance the project.

admin said...

John,

What is your view about the company after the earnings report?

John Hempton said...

Unchanged but my confidence level is lower (alas).

Anonymous said...

Could you expand on the reasons for your lower confidence? Yes the market price has moved lower but its very unclear what new data in the release actually shifts expected value. Many thanks.

Anonymous said...

Lets say management remains in place and there are no new deals to be had. SUNE turns into the solar equivalent of a private label subprime MREIT. The old deals still spit off residual distributions for a very long time. The key to what the value becomes is the G&A level.

If SUNE doesn't do some staff redundancies soon, those residuals end up belonging to creditors. Then the issue becomes what is the fulcrum security to whom the benefit of the residuals accrues?

To the readers of this blog, which is your favorite security in the capital structure and why?

clarence schwab said...

John,

My name is Clarence. Enjoyed reading your thoughts. One positive I noticed on TERP earnings call is that after consummation of Invenergy warehouse transaction for 665 MW and Vivint transaction for 523 MW, the company will have $500 MM of unused availability on its expanded facility. That implies, at about $2/watt, an ability to purchase up to about 1,000 MW using tax equity and project debt. Assuming the company consummate expected purchases of 124MW of DG from SUNE and 265 MW of Invenergy assets, implies TERP still can purchase approximately about an additional 600MW. Assuming about a $0.06/watt incremental CAFD results in incremental $36MM of CAFD. Subtracting 25 pct for idr results in about $27MM of incremental CAFD after idr. That offsets the approx $20MM reduction in CAFD due to UK portfolio refinancing. (Timing of acquisitions may not result in full amount being earned in 2016.) Therefore, these additional MWs help support the 2016 dps guidance. Separately, and in addition, TERP will also generate about $40MM of CAFD in 2016 which it will retain, and which can be used to purchase an additional eg. 80 MW, to generate incremental CAFD after idrs. Furthermore, the company can still, according to management, (but subject to ratings constraints) also add project debt to its First Wind Portfolio and portfolio of Canadian assets. Those portfolios include, in total, over 1.5x the MWs of the U.K. portfolio. And at interest rates even lower than 4 pct its U.K. portfolio received. Proceeds from additional project debt could help purchase additional MWs, with incremental positive net additions to cafd. In sum, 2016 dps appears secure, and perhaps could be exceeded on an annualized run-rate basis. And If invenergy and Vivint transactions do not close, TERP can replace those MWs by purchasing others, perhaps with even better economics (subject to timing of substitute transactions for results in first year).

Anonymous said...

We hear a lot that Sunedison should walk away from the aquisition of Vivint Solar but what would be the cost? Vivint is owned by Blackstone and as such the deal was probably structured so that walking away for Sunedison would be Very costly. I can not find information on this (only thing I found was that Vivint would have to pay Sunedison usd 62 mio. if it walked away. Someone knows?

clarence schwab said...

One other point, the company could instead also buy back some of its shares at current prices and earn about a 12 pct yield on 2016 dps guidance.

clarence schwab said...

I made (at least) one error. TERP already figures the 265 MW invenergy asset acquisition into its remaining liquidity of $500mm, which means the company can acquire up to about 865MW, not 600mw, which provides further incremental upside to CAFD

Anonymous said...

Hi John,

Can you share why you think SunEdison has significant run-off value if it were to stop its project development business?

Purely from an accounting perspective, SUNE has balance sheet equity of $590m as at Q3'15 once you remove TERP and GLBL.

Thinking it through, The DevCo has taken on significant debt for acquisitions and needs to operate to pay these off. Encumbered net debt is $2.5bn (incl First Wind earn-out) and will be $3.8bn if the Vivisint acquisition closes (net of TerraForm drop down). Thats 6x their projected DevCo EBITDA.

If you remove the DevCo, you'd need the projects on their books to be able to cover this debt. As at Q3'15 they had $6.2bn of PP&E at SUNE (again de-consolidating TERP and GLBL). Assuming they can sell this at a 15% margin, it could be monetized for $7.3bn. Against this, there was $4.8bn of non-recourse debt for a net asset value of $2.5bn

This barely covers the DevCo debt. And that is before more leverage is taken on in the Vivisint deal. On top you have the equity stakes in TERP and GLBL but its tight just to break even. If you're entry was $9 and you saw significant value above this, I guess you think there is $5-10bn of value in run-off that I am missing in the above.

What am I missing?

Anonymous said...

Hi John,

I'd love to read an update over the Sunedison case.

Are you still bullish on the stock?

Dario

Anonymous said...

Insightful, concise, with good detail thxs for sharing. BTW I have entered with a small investment @ $1.50.

Disclaimer, the views are my own, My comments are un-related to my position and actions on the stock.

John Hampton quote from his article:

"That said this company does not behave like a financial institution, they have been rash and callous in their treatment of capital markets. This is dumb. Capital (not solar equipment) is the main input in this business. And capital is cheaper if people trust you"

I really do not get why such experienced CEO's VP's, etc don´t get it:. Until Solar both residential but also distributed generation (micro-grid from 100Kw to 2-1= Mw microgrids) and utility scale (mainly in regulator friendly countries in developing and merging markets) the Solar industry is not in the Energy business yet.....

It is the financial business, using FIT's in non US markets and PPA'sin the US, So the core product and business is financial, energy for the moment is simply a by product.

So a down stream play should have vision led team for the distributed generation (non-roof top) market, but into residential outside the US) as the tendency of regulators is to favour, promote & encourage Distributed generation, having said that the regulator has to implement this with a power sector lobby. In spain the government approved a law basically crippling Distribted generation, actually taxing the sun!!! to protect the utilities, which of course outside of spain are heavily into distributed generation.

Anonymous said...

the stock will rebound. reputation takes life time t build and in one action it's lost. Mr Chatila cannot b the CEO there is a trust issue. In te Abengoa chapter 11, the family office which owns a majority stock an voting rights (third generation) has been forced to fire the CEO, the President to no longer have an executive role. bring in new management.

admin said...

John,

What is your view on SunEdison? Does it make sense to hold it till the end or better sell it to get what is left from the equity value?

John Hempton said...

I gave up.

J

DBG said...

Alright John... Just throw in the towel and f*ck the analysis. You can't paddle up shit's creek but not Niagara Falls.

Anonymous said...

"I know the cliche about trying to catch falling knives - but we think this is a quite good bet"

I guess all of the time you spent on Twitter proclaiming that VRX was "a zero" should actually have been spent looking in the mirror asking yourself why SUNE was NOT a zero. Ironically, you now claim that SUNE was merely a "small position" for Bronte. Yet, you spent time drafting numerous bullish blog posts about the company, so intelligent readers/followers of yours should take "small position" claim with a large grain of salt.

You constantly pound your chest about VRX (which, as a short, certainly cannot have ever been a large position for you, likely 1% or less), whereas you try to minimize your SUNE losses and only talk about it when directly asked (via Twitter). Where's the SUNE post-mortem blog post / mea culpa? You seem to lack humility, especially considering how abysmally and laughably wrong your SUNE analysis has been.

Hope you have the courage not to censor this comment...

Anonymous said...

'Hope you have the courage not to censor' says the man who doesn't have the courage to not post his rant anonymously :)

That said - bad call. Glad I jumped off the ride at $9, with a small gain! #rarewin

Be the one said...

Moreover the product it is selling door-to-door (financed solar systems) is not a bad deal for customers.

splendid group review

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.