The impending insolvency of SunEdison (NYSE: SUNE) is a unique-to-the-company event unrelated to conditions in the solar industry. In fact, everything that has happened to SunEdison is a result of its operational failure to deliver profitability in most of its core operations. The media frenzy over unsatisfied hunger for acquisitions and that being a cause of its collapse is certainly true, but not in a just too-big-too-fast conclusion. Most of those acquisitions and expansions never happened. However, the detrimental aspect of acquisitions and particularly extremely overpriced objective to buy Vivint destroyed the company’s stock and with it, one source of the cash flows, ability to sell equity.
The permanent inability to produce operating profitability had one resolution, SunEdison sold debt and equity to cover its cash flow needs. As a second one, SUNE planned to sell solar projects to own yieldcos. The last objective while the only legit way for long-term sustainability, was done hastily by buying third party projects instead of focusing on drop-downs of projects held on own balance sheet. SunEdison’s stock selloff caused by the pursuit of Vivint merger, pressured prices of both yieldcos, TerraForm Power (NASDAQ: TERP) and Global (NASDAQ: GLBL), complicating conditions for them to sell equity and pay for drop-downs. The alternative, selling projects to third parties delivered no results, due to weak gross margins, and the company ran out of cash.
I think it is critical to state again that SunEdison’s potential bankruptcy has nothing to do with the solar or wind being the company's business objectives. The company has failed as a business model because it never produced operating profit to support its financial costs. There are companies, which every day engage in the wind and solar, whether be manufacturing or sale of energy, and deliver profit, not only as an operating profit but also as net income. Further, that failure of the model has nothing to do with yieldcos. For the record, the developer model was probably the only viable business the company had, besides a collection of revenue from sales of energy produced by plants on its balance sheet. In the end, SunEdison was a just too costly as a developer and it held all that cost on its balance sheet, unable to drop it to own yieldcos. If I accounted for“one-offs” which happened every quarter, impacting operating expenses, this company just could not last.
Having to observe non-profitability and the cycle of cash flow funded from debt and sale of equity, as early as April of last year, I do not see how SUNE restructuring could lead to a revival of the company under those conditions. In my opinion, I see dissolution because those inherit disorders preventing the company to operate efficiently cannot be cured with deleveraging of the balance sheet. If SUNE was dissolved, the yieldcos could undergo severe devaluation, in a more negative form than I have suspected previously.
I think there will be a lot of interest in getting hands on yieldcos’ equity by creditors as a form of compensation. B class shares and ownership in operating subsidies reflected by them offer the most apparent liquid value in SunEdison’s asset book. Under insolvency, both yieldcos are considered independent entities from SunEdison. While that independence is legally upheld, the relationship with SunEdison adds few concerns. First, based on legal interpretation of that independence on a granular level of each asset in their portfolio, and how commitments made by SUNE alone or in conjunction with yieldcos will impact yieldcos now handling them without SUNE. Lastly, how financial interconnection of SUNE with yieldcos will be restated by receivership and how fast any yieldco's obligations to SUNE will be in need of monetization.
Events to date are already remarkably uncomfortable for yieldcos. The full administrative dependency, which has become the most obvious in the failure of reporting of financial results is one of the most ludicrous factors affecting them today. Secondly, the paper-thin independence offered by legal structure has absolutely no representation in the physical organization structure. Yieldcos lack a managerial body of real people to represent their interests when now facing creditors.
Still, I expect both Terraform Power (TERP) and Terraform Global (GLBL) to survive, but I am concerned with the conditions of the bankruptcy of SUNE, and many, potential surprises which are awaiting us during the proceedings. One such a concern is around the First Wind’s acquisition and outstanding amounts of $500M being owed by SunEdison. All of the assets are currently in TERP portfolio and some being under the development by SUNE. Further, there are of course conditions in PPAs having SunEdison as guarantor and obligations by TERP to buy assets when they are completed. In my opinion, all legal agreements will remain binding even after SunEdison is under receivership. This particular situation can put a bill for $580M in front of TERP, thankfully reduced to this amount by asset sales to JPM joint venture. As of Q3, TERP owed $91M to SUNE for solar projects in construction, money not shown on the balance sheet. SUNE was going to finance $60M in current debt for some of the construction loans for those projects on behalf of TERP. It will be highly unlikely to see such payment while the $91M obligation will be called up. I think for both companies, paying own bills will have to become the new reality.
TERP has also paid $42M for projects yet to be constructed and as stated in 8-K filed by GLBL about $231M paid for Indian projects, may require legal proceedings to extract them. Just looking at some of those activities when rethinking the shape of the pro forma balance sheet after Invenergy transaction, TERP cash resources, hence its liquidity will be dramatically different. I would also suspect that dividend payments could be suspended for GLBL and continue to be suspended for TERP until all the obligations to sponsor are reviewed, and the creditors have fully exploited underlying conditions. Of course, I cannot begin fully understand all of those considerations without seeing financial statements, but depending on the type of the bankruptcy executed by SUNE, each will have quite a range of outcomes. While there are no changes to past financial statements, confirmed by SEC filings of each yieldco, I suspect future financials are more than enigma and cannot be extrapolated based on existing data.
The fact there is not a person in any of the yieldcos to speak on behalf of the companies to protect their interests is severely discomforting. The only thing which will do the speaking will be the legal framework and perhaps David Tepper protecting his investment in TERP. Both yieldcos do not have own operating management, outside of figureheads constituting its board of directors, now without a leadership of the CEO. Those are the same people who in words of Tepper had failed their fiduciary duty. Faced with the banks demanding money, I do not expect heroism from the same group. Finally, the timeline to clear the dust could take months and will exhaust both companies.
Those conditions are unfortunate, certainly a lot of good money has been put to work in both yieldcos, based on the hope of independence, still I hope that independence will save both of them at the end.
Outside of these two companies, I consider everything else in solar to get stronger not weaker when SunEdison is no more. The industry has own weak points like current fear of glut and potential reductions of FiT in Japan and China, but those are under very controllable conditions. The existing leadership has never been associated with SunEdison. Leaders of the industry are First Solar (FSLR), JinkoSolar (JKS), Canadian Solar (CSIQ) looking at the profitability levels of 2015. There are also yieldcos which are renewable, with a lot of strength, one particular I like is Pattern Energy (PEGI), but there are few more choices for consideration for those who would like diversification.
SunEdison not being around will probably create more work for others, and opportunity may knock to take over some of its projects by the companies mentioned above. Since the pipeline for SunEdison was extensive, project development may get some higher ASP depending on the party involved in the bidding. I imagine that credit rating, bankability and global status of the developer may become an important part of the development process, in a similar way module manufacturing has transitioned, based on the glut of 2012/2013. Today fewer companies represent top manufacturers as a direct result of bankruptcies due to glut. Fewer companies will offer more concentration for current and future renewable investors. Those companies will be certainly more capable. The greater public will have a lot more understanding what to avoid if the similar scenario was to repeat elsewhere adding a caution for those companies that would consider SunEdsion’s path.
Edited by odyd