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SunEdison ‘On Life Support’ After TerraForm Yieldco Bubble Blast

Bankruptcy clouds shadow SunEdison ( SUNE ) this week, ahead of a Wednesday deadline to file its annual 10-K or, say analysts, default on $725 million in second-lien loans — an inferno, at least two analyst say, that ties back to its yieldcos TerraForm Power ( TERP ) and TerraForm Global ( GLBL ). Late Tuesday, reports surfaced that the U.S. Securities and Exchange Commission might be probing SunEdison’s liquidity stance. The Wall Street Journal reported that SEC investigators are examining how much cash SunEd had on hand last year. In early trading on the stock market today , SunEdison stock plunged more than 40% on the investigation rumor, dipping below 1 to an all-time low. “I’d say (SunEdison is) kind of on life support as we speak,” S&P Global Market Intelligence analyst Angelo Zino told IBD on Monday. “We have absolutely no visibility into the financial outlook of the company. It’s obviously very worrisome.” SunEd’s Lacking Financials SunEdison last held an earnings call in November, about two weeks before it fired Carlos Domenech, SunEd executive vice president and CEO of both TerraForms. According to TerraForm Power’s proxy statement, Domenech first initiated communications with Vivint Solar ( VSLR ). On July 20, SunEdison announced its plan to acquire residential solar installer Vivint. The deal briefly got a warm embrace on Wall Street, but shares of SunEdison and Vivint Solar have plummeted a respective 96% and 83% since then. In December, SunEd cut its bid on Vivint to reflect the drop in stock price, and this month Vivint scrapped its sale to SunEdison, citing financial concerns about the acquirer. A major TerraForm Power investor had been angling to block the deal as well. The transaction would have dropped Vivint Solar’s 523-megawatt rooftop assets down to TerraForm Power. Since then, SunEdison delayed its annual 10-K financial statement on Feb. 29 and March 16, citing an ongoing investigation into its liquidity stance . The investigation arose from allegations by former and current executives of financial misconduct. Yield company TerraForm Power blamed SunEd for its own late 10-K. TerraForm Power is facing Nasdaq delisting as well as a potential slew of investor class action lawsuits related to the insider trading and fraud portions of the Securities and Exchange Act of 1934. TerraForm Power stock was down nearly 8% early Tuesday, below 8. Zino maintains his hold rating on SunEdison stock, but over the past week investment banks Cowen and Stifel Nicolaus have dropped their coverage on SunEdison stock. ‘Overpaying For Assets’ Nine months ago, SunEdison was a different company, Zino says. In June, SunEdison’s assets were valuable, the company had ready access to the debt financing and equity markets, and could tap its healthy TerraForm yieldcos. A yieldco is created to house assets, generate on-tap cash flow and yield tax-free dividends. TerraForm Power filed its IPO in June 2014. NRG Energy ( NRG ) followed in May 2015 with a superior strategy, T-Rex Group CEO Benjamin Cohen told IBD. T-Rex Group is an analytics-based advisory group for renewable stocks. NRG Yield ( NYLD ) held 71% non-renewable assets in conjunction with 29% renewable assets — balancing older profitable assets with newer and more quickly-depreciating renewable assets. By appearing less profitable overall, the yieldco can pay less in taxes, Cohen explained. It’s a completely legal strategy — and investors ate it up. Soon, the yieldcos were producing more cash than the parent company could invest. “So they had to invest in unsecured assets,” namely the pre-development stages of projects already dropped into the yieldcos. “They were overpaying for assets . . . and that risk drove up the price of the assets.” The bubble burst. Days after announcing its plan to acquire Vivint Solar, SunEdison’s TerraForm Global filed its IPO and launched on Wall Street at 12.44, 17% below its 15 IPO price. Shares were down 20% early Tuesday, below 2. ‘Public Poster Child’ SunEdison may be the “public poster child” for the yieldco bubble burst, but SunEd’s downfall isn’t indicative of the broader solar market and asset class, Cohen says. “This is the failure of a capital market vehicle, as opposed to the failure of an asset class or the failure of one particular company,” he said. But, he acknowledged, SunEd was slugged particularly hard in the yieldco blast and investors are leery of ongoing financial storms. “Equity investors are discounting the value of SunEdison because management hasn’t proved its ability to execute on its strategy,” he said. “It seems overdone.” NRG Yield stock is down more than 50% since its peak near 28 last June. The First Solar ( FSLR )– SunPower ( SPWR ) jointly-owned yieldco, 8point3 Energy Partners ( CAFD ), went public last June at 21 and is trading below 14, down 4.5% early Tuesday. July 20 proved to be SunEdison stock’s recent high point, at 33.45. Shares have traded around 1 since February. SunEdison was targeting aggressive growth via M&A and aiming to use yieldcos TerraForm Power and TerraForm Global to help pay for its investments, Zino says. Debt financing was available but more difficult, he says, considering SunEd’s heavily-leveraged balance sheet. ‘SunEdison Didn’t Have A Fallback’ Investors worried that SunEdison’s Vivint Solar acquisition was too much, too fast. Then, TerraForm Global opened far below its IPO price. “The fact SunEdison didn’t have a fallback, the fact they were getting too aggressive with these M&A deals was part of the reason we saw the investment community sell off on these yieldco vehicles,” Zino said. He added: “Once they weren’t able to tap the yieldcos anymore, that’s what really put SunEdison in the situation it’s in today.” Now, SunEdison is struggling to shop its assets around to third-party developers. In June, SunEd’s yieldcos would have bought those assets. Not now. And lacking newer financial statements, no bank will touch SunEd, Zino said. “Until they are able to get a resolution to the 10-K filing, we wouldn’t expect to see anything come out of the debt market, and it becomes problematic for the third-party market as well,” he said. “It becomes difficult for utilities to invest in SunEdison if they have no idea of the type of financial situation SunEdison is in.” And SunEd certainly can’t tap the equity market. Said Zino, “a precipitous decline in the yieldco prices had a direct impact on SunEdison stock and, as a result, we saw billions and billions (of dollars) in equity value wiped out from the yieldcos and SunEdison together.”

First Solar Rockets On Q4, Delays 2016 Projects To Milk ITC Extension

No. 1 solar installer First Solar ( FSLR ) is “firing on all cylinders” after reiterating 2016 earnings guidance late Tuesday despite pushing 200-250 megawatts in projects out to 2017, a Deutsche Bank analyst wrote Wednesday. Both Cuyama and Switch projects will be recognized entirely in 2017, and First Solar plans to delay the latter piece of its 280-MW California Flats project until 2017. Apple ( AAPL ) is a partner in the Monterey County, Calif., project. The lowered guidance followed First Solar’s “solid” Q4 and 2015 sales and earnings beats, Deutsche Bank analyst Vishal Shah wrote in a research report. Shah reiterated his buy rating and 86 price target on First Solar stock. In early trading on the stock market today , First Solar stock rocketed 13% to around 70. SunPower ( SPWR ) stock lifted about 9%, leading shares of jointly-owned yield company 8point3 Energy Partners ( CAFD ), up 3.5%. For Q4 ended Dec. 31, First Solar reported $1.60 earnings per share on $942 million in sales, down 15% and 6.5%, respectively, vs. the year-earlier quarter, but leading analyst expectations for 76 cents and $929 million. First Solar’s 2015 sales and EPS came in at $3.6 billion and $5.37, up a respective 37% and 6%, and leading Wall Street projections for $3.56 billion and $4.51. Delayed Projects Slug Guidance But First Solar lowered 2016 sales guidance to $3.8 billion to $4 billion vs. earlier guidance for $3.9 billion to $4.1 billion. CFO Mark Widmar credited the ITC extension for more flexibility. At the midpoint, sales would be up 8% and EPS down 21% vs. 2015 metrics. The new outlook topped the consensus of 19 analysts polled by Thomson Reuters for $3.8 billion and $4.11. For 2016, First Solar expects to drop the Kingbird, Stateline and Moapa projects (about 440 MW) down to 8point3. Cuyama was originally slated to drop to 8point3 in 2016, but won’t complete until 2017 to leverage the ITC benefits, Widmar said on the call. Congress’ ITC extension shed visibility on sector, CFO Jim Hughes told analysts on the call. First Solar now sees a 20.3 GW potential booking pipeline, up 18% quarter over quarter. The United States represents about 40% of that opportunity vs. 25% in Q3. “The ability to push projects out has given us a little more flexibility in terms of available supply,” Hughes said. Credit Suisse analyst Patrick Jobin retained his neutral rating and 65 price target on First Solar stock, noting component gross margins exceeded 26% in Q4 vs. his expectations for 19.2%. Total gross margins were 24.6% vs. his model for 19.7%. “Importantly, the shipment guidance of 2.9 GW to 3 GW (for 2016) was retained, implying project push-outs are replaced with increased mix of third-party module sales,” he wrote in a report. S&P Capital analyst Angelo Zino continued his buy rating and 75 price target on First Solar stock, noting the greater 2016 visibility. “We believe First Solar is executing well on efficiency and cost reduction efforts aiding higher margins,” he wrote in a report. “We see higher U.S. bookings are more projects are viable post-ITC extension and see competitor struggles as an opportunity.”

First Solar Tops Wall Street Q4 Views, But Lowers 2016 Sales Guide

No. 1 solar installer First Solar ( FSLR ) topped Wall Street’s Q4 and 2015 views late Tuesday but lowered its 2016 sales guidance by $100 million, largely as a result of the late-2015 extension of a key solar tax credit. First Solar’s Q4 earnings, released after the close Tuesday, came hours after the company announced it had surpassed 6 gigawatts in cumulative installed capacity in its power plant segment globally. Worldwide, First Solar is installing about 30 to 40 megawatts per week on 2 GW of active projects, the company says. First Solar stock was up 3% in after-hours trading following the release of its earnings, and No. 2 installer SunPower ( SPWR ) was up 1.5%. First Solar stock fell 3.8% in Tuesday’s regular session, and SunPower shares lost 6.1%. Yield company 8point3 Energy Partners ( CAFD ), a First Solar-SunPower partnership, plunged 6.8% in Tuesday’s regular session. EPS Shatters Expectations For Q4, First Solar reported $942 million in sales and $1.60 earnings per share, down 6.5% and 15%, respectively, vs. the year-earlier quarter. Both measures beat the consensus expectations of 19 analysts polled by Thomson Reuters for $929 million and just 76 cents. During Q4, First Solar saw 761 MW in solar rooftop production, up 50% vs. the year-earlier quarter, CFO Mark Widmar told analysts during the company’s earnings conference call. In all of 2015, the company produced 2.5 GW, up 36%. First Solar wrapped up 2015 with $3.6 billion in sales and a record-smashing $5.37 EPS, up a respective 6% and 37% and topping the consensus for $3.56 billion and $4.51. Three months earlier, First Solar guided to $3.5 billion-$3.6 billion in sales and $4.30-$4.50 in EPS. Bookings hit the 3.4 GW mark in 2015, Widmar said. But First Solar lowered its 2016 sales guidance to $3.8 billion-$4 billion — which would be down 8% at the midpoint — from its previous guidance of $3.9 billion-$4.1 billion. First Solar maintained its $4-$4.50 EPS guidance, which would be down 21% at the midpoint. Prior Guidance Discounted ITC First Solar CEO Jim Hughes, speaking on the call, described 2015 as an “outstanding” year. First Solar delivered on its promise circa-2014 to reach 22% cell conversion efficiency within its solar modules, with a record 22.1% announced Tuesday. CFO Widmar noted First Solar’s earlier 2016 guidance didn’t include the possibility of an extension to the Investment Tax Credit on solar power. Congress extended the ITC, a key subsidy underpinning the solar industry, in late December. Wall Street previously saw a cliff for 2017 installations, with the ITC scheduled to sunset Dec. 31, 2016. Now, some projects planned to have been completed in 2016 — to benefit from the outgoing ITC — have been extended into 2017, Widmar told analysts. “The outlook we provided at the time did not incorporate the extension of the ITC,” he said. “Some projects could be extended into 2017 to achieve lower installation cost per watt on the construction of these plans.” He added: “While our guidance anticipates we will recognize a significant portion of California Flats in 2016,” two other big projects will be recognized entirely in 2017. California Flats is a 280 MW project in Monterey County, Calif., about 100 miles south of San Francisco. Apple ( AAPL ) is a partner in the project and will be using much of the energy generated. 8point3 Drop-Downs Hit Sales First Solar’s 2016 sales outlook was also impacted by project drop-downs to the 8point3 yieldco. SunPower experienced the same shifted revenue conundrum when issuing Q1 guidance that halved analyst projections earlier this month. First Solar isn’t leaving much business on the table in 2016, Widmar said. But the ability to push projects out to 2017 “gives us a little bit more flexibility in terms of supply.” Hughes said the ITC extension removed some of the uncertainty shadowing the U.S. solar market. First Solar is now seeing utilities embrace solar and new developers in new territories seeking greener energy. The ITC extension “allowed us to advance some of our own projects, it allows our customers to advance some of their projects, and it’s firmed up what the financial environment looks like,” he said. “The competitive environment has improved a little bit vs. the past 18 months or so.”