SunEdison published its consolidated results on February 18th. The company has lost $0.89 per share according to GAAP (generally accepted accounting principles) and lost $0.16 non-GAAP during Q4. SunEdison Inc. (NYSE:SUNE) has 271M shares outstanding. Current market capitalization is $6.5B. TerraForm Power (NASDAQ:TERP) is worth $1.9B (showing 54M shares). In total, SunEdison’s solar business is worth about $7.8B in the market capitalization. SUNE’s solar segment was responsible for $1.6B in revenues, having $462M in operating losses during 2014. In 2013, that segment had an operating loss of $299M on sales of 1.2B. Essentially, $400M in new revenues resulted in additional operating losses of $163M. TERP had $125M in revenues in 2014, and had operating profit of $7M. That profit was $5.1M in 2013 on $17.5M revenues.
The revenue recorded by the company for the solar segment in Q4 is broken down on page 86 of SunEdison’s Capital Market presentation, and it is accessible from the company’s website. We see that out of $380M in revenue, $239M was generated by third-party system sales, $84M by materials sales, and $54M by energy and services. The company had $32M gross profit, showing third-party system sales’ gross profit of $54M and a loss of $36M in materials/poly.
On the same page, TERP shows $43M in revenue from energy sales and $11M in gross margin. Q4 operating loss for SUNE was $132.7M and 23.8M for TERP. Therefore, operating costs for SUNE were $164.7M, and $34.8M for TERP. In Q4, TERP’s net income was a loss of $57.7M and SUNE lost $224M, including non-controlling interest.
The company points to one-time transactions affecting operations, listing $16M in residential ramp, $48M in impairments and stock compensation, and $23M in one-time transaction fees, for a total of $87M. To arrive at “normalized” operating costs, we will remove them from SUNE’s operating expenses. This action reduced Opex to $77.7M. In the “normalized condition,” SUNE would have a $45.7M operating loss. SUNE’s operations did not generate cash from the income statement, and SUNE did not have positive cash flow from operating activities on the cash flow statement.
In Q4, two companies paid $134M in interest expense, costing SUNE $100M. The “normalized” loss before income taxes would be $145.7M.
In order to pay for the $2.4B purchase of First Wind, both companies offered a mix of debt and equity. SUNE’s portion was $1.5B, including a $510M earn-out, while TERP’s was $862M. To cover for the $1B up-front payment, SUNE issued a $400M convertible note at 2.28%, sold $190M of equity in SEMI, and secured $400M from lenders. Terra Form added $350M from the sale of equity in November, and another $350M in equity in January. TERP also sold $800M in “green” bonds at an interest rate of 5.87% in January.
Without details of First Wind’s borrowings, we can see that SUNE will add $800M of debt to the $3.2B it has on the balance sheet. With $100M in cash outflows just for the interest expense and $387M in cash as SUNE’s portion, there is a concern about the company’s ability to finance its operations.
On page 72 of the same presentation, the company shows “future” quarterly exit run rate for the development company, the business we just described. There is a $300M gross profit and drop-down of 750MW sold to TERP at $0.40/watt gross profit. Then we see a $7M gross margin from services. Opex shown for the quarter is $165M, and the gross profit is $142M. On the next page, the money-losing poly business takes $30M away, but investment income from dividends and IDRs compensates to end at $111M in operating profit, including $25M paid in non-recourse interest – a $243.7M turnaround in one year.
The page raises some immediate questions:
- In 2015, SUNE plans to sell 300MW of plants to third parties and drop 425MW to TERP. How is $300M in gross margin generated in a single quarter at $0.40 per watt profit, while accepting escalation with the last quarter of the year?
- How does Q4 2015 have $165M in Opex based on $300M GM, if Q4 2014 had $164.7M Opex selling /dropping 164MW and $54M gross profit? After we removed $87M of transactions, the remaining $77M breaks at $0.47 per watt. Q4 2015 shows $0.22 per watt – a 53% reduction?
SUNE desires to add, net of drop-downs/sales and completions, 792MW to its balance sheet in 2015, of course by adding debt and spending cash. At 20% cash requirement and COGS of $1.50 ($1.71 in Q4 2014) per watt, this is $237M. Where does the money come from for this? Adding 792MW will also add $950M in construction loans, on top of the $4B expected on the Q1 2015 balance sheet.
To conclude, SUNE has $387M in cash and is expected to pay $400M of interest expense in 2015. This expense is also bound to increase as the company adds $800M to debt for the First Wind Acquisition, and $950M for the additional 792MW (80% of financing at $1.50 COGS). It needs $237M for 20% of project costs, and $510M to pay for earn-out. SUNE sold 88MW in Q4 2014, at a “normalized” operating loss of $45.7M. “Normalized” means free of one-time transactions. This is an operating loss of $180M on 300MW sold, using what we learned about the company in Q4 2014. The Q4 2014 drop-down of 76MW based on page 71 produced a cash injection of $43M. Extrapolated over 425MW, this will add $240M in cash. I am going to add $23M in dividends and IDRs from TERP for the last two quarters. This is how it adds up, with outflows in parentheses:
Q4 Cash: $387M
300MW sales, poly losses, and service losses plus Opex costs, my scenario: ($180M)
Drop-downs: $240M
Dividends: $46M
Sources of cash =$387M-$180M+$240M+$46M= $493M
Interest expense: ($400M)
20% equity in new projects (to be kept): ($237M)
Earn-out owed to the seller of First Wind: ($510M)
Total cash spend: ($1147M)
Cash shortage of $654M with earn-out, and $144M without it
It is apparent that SUNE needs to sell equity to operate, and that spoils the investment thesis. Investment banking does not have a problem with it. They continue to set price targets higher and fuel the momentum, precisely what they and the company need. For the benefit of the industry, I need SunEdison to succeed and the investment bankers to make money. Unfortunately, retail never knows when money making starts and as a result, it gets left behind. Holding equity in the company with operating losses may not be as bad, but SUNE’s market capitalization makes it uncomfortable. I am avoiding it for now, but I am curious if I can see shifts in the second and third quarters, and possibly after potential equity is raised.
