David Einhorn Comments on SunEdison

Guru stock highlight

Author's Avatar
Nov 19, 2015

For the first part of the year SunEdison (SUNE, Financial) was by far the fund’s biggest winner. The shares rallied from $19.51 to a peak of $32.13 on June 23 before collapsing to $7.18 by Sept. 30. SunEdison’s business is to develop solar and wind projects for major utilities and commercial customers that agree to buy the power over a very long term, often 20 years. These projects have purchase contracts from highly creditworthy counterparties and produce an average unlevered return on capital of 10% and 13% in developed and emerging markets, respectively. SunEdison makes money by selling the projects at a premium to investors seeking safe, long-term income.

Given the low-rate environment, SunEdison thought it could make even more money if it created its own related yield vehicles to buy the projects and dividend the income to shareholders. It createdTerraForm Power (NASDAQ:TERP) for its developed markets projects and TerraForm Global(NASDAQ:GLBL) for its emerging markets projects. Initially this worked very well, and in July 2014SunEdison successfully brought TerraForm Power public. This July it brought TerraForm Global public with much less success.

In the weeks before the TerraForm Global initial public offering, SunEdison was at its highs and we contemplated trimming the position. Since we expected the IPO would trigger a further advance in the shares, we decided against it. Around this same time, oil and gas prices renewed their declines, causing the values of energy master limited partnerships to justifiably fall. We believed that TerraForm Power and TerraForm Global would not be impacted, as neither is subject to commodity risk. We were wrong. Because the SunEdison yield vehicles were relatively new to investors, the market did not distinguish them from other energy dividend flow-through structures.

In mid-July, TerraForm Power began falling along with the rest of the sector, taking SunEdison with it. TerraForm Global IPO’d at a big discount a week later and traded poorly in the aftermarket.

As TerraForm Global and TerraForm Power continued to fall they effectively lost access to the capital markets, and SunEdison collapsed as the market became worried that SunEdison would not be able to sell its projects and could even run out of money. Ironically, the market judgedSunEdison’s rapidly growing and massive backlog of attractive projects to be a liability.

SunEdison’s hard-to-decipher financial statements fed the stock collapse. SunEdison consolidates both TerraForm Power and TerraForm Global on its GAAP statements. The complicating result is two-fold: First, when SunEdison sells a project to TerraForm Power or TerraForm Global it bears the operating costs but doesn’t get to book the revenue from the sale. The result is the appearance of an operating loss. Second, TerraForm Power and TerraForm Global use nonrecourse project finance debt to fund the purchases and the debt appears on SunEdison’s balance sheet. The result is that SunEdison appears to be heavily levered and losing money. From a GAAP perspective that’s true, but from an economic perspective it is not. Nonetheless, this hasn’t stopped some wise guys from dubbing it “SunEnron.”

responded to the deteriorating environment by raising additional equity, finding third parties to buy its projects, and slowing its development pipeline. All of these actions have marginally lowSunEdisonered the company’s value but have stabilized the situation. Taking into account the more conservative business plan, when we look through the complicated financials we believe that SunEdison’s development business is poised to have economic earnings in 2016 of about $1.34 per share, assuming that TerraForm Power and TerraForm Global do not regain access to the capital markets.

SunEdison has additional value from its ownership of TerraForm Power and TerraForm Globalshares. During the panic, the market has fixated on the question of whether TerraForm Power andTerraForm Global can access money cheaply enough to buy projects and grow their dividends. This is relevant insofar as it will determine whether they can be long-term buyers of SunEdison’s projects, but we believe the market’s focus is too narrow.

The better question is: Do TerraForm Power and TerraForm Global have the opportunity to buy projects at returns that exceed the risk? If they do, the capital markets would be wise to fund them. We believe the answer is a resounding “Yes.” A power plant with a long-term power purchase agreement is roughly equivalent to a secured lender. As the customers are strong credits, the ability to buy a portfolio of these projects at a 7% unlevered yield in developed markets and a 10% yield in emerging markets should be very attractive in the current income-starved environment, where seven-year A-rated corporate bonds yield less than 3.5%. We believe that once the market sorts through the mess, TerraForm Power and TerraForm Global should recover and regain access to the capital markets. This would allow SunEdison to realize substantial additional value.

From David Einhorn (Trades, Portfolio)'s third quarter 2015 Greenlight Capital shareholder commentary.