SunEdison Responds Following Hawaiian Electric Contract Cancellation

According to a report by Bloomberg, Sunedison Inc SUNE fell "so far behind" on some of its solar farms that its client Hawaiin Electric Co. (HECO) canceled its contract for 148 megawatts of solar power. Shares of Sunedison were trading unchanged at $1.51 after Friday's opening bell. HECO noted in a regulatory filing dated February 12 that Sunedison "had been in default" and "had not cured important missed milestones" even though it "made many accommodations" such as extensions and deferrals of milestones. As such, the company reserves its right to terminate the power purchase agreements (PPAs). HECO even stated in its filing that "SunEdison appears to be in financial distress." Sunedison planned to transfer the projects to its creditors including DE Shaw & Co. when completed but HECO wrote that the proposed transfer "would not have itself cured the defaults." Sunedison responded to HECO's contract termination in a letter dated February 16. Sunedison said in its letter that it "emphatically disagree with the analysis presented in HECO's filings, as well as HECO's conclusion that it has a right to terminate the PPAs" "Despite the statements in HECO's report, If the Projects are transferred to D.E. Shaw as proposed, we do not believe the risks facing HECO and the ratepayers are material and in any way justify terminating these Projects," the company added. "The Project Companies have Invested $42 million in development and construction, which Is well underway. In order to complete the Projects by December 31, 2016. In fact, the greatest risk to ratepayers is If HECO is allowed to terminate these PPAs and start the process over with a new RFP, which could take three to four years until such facilities are operational, with no guaranty of lower or even comparable pricing." Sunedison concluded that "HECO has not presented a complete and fully accurate account of the event." Janney Downgrades To Neutral Michael Gaugler of Janney downgraded shares of Sunedison to Neutral from Buy with a Fair Value estimate lowered to $5.50 from a previous $17 Fair Value. Gaugler cited HECO's withdrawal as the "primary determinant" in his re-rating of the stock. The analyst added that this event adds to his belief that a "lack of project execution could be indicative of more serious cash flow concerns than we previously anticipated." Gaugler also added that HECO's withdrawal of diminishes the likelihood that the company could achieve its aggregate cash walk guidance that the company outlined in its business update on January 7. Related Link: Sunedison Crashes After 'Expensive' Restructuring, Now 90% Off 52-Week High "We continue to see a worsening risk profile for SunEdison, given recent lawsuits and potential execution issues in the development business, and we caution investors that if SunEdison is (or were to become) unable to complete projects in a timely manner, its future as a going concern is jeopardized, in our opinion," the analyst argued. Finally, Gaugler explained that his Fair Value of Sunedison's stock of $5.50 is based on a multiple of 5x our 2016 EBITDA estimate of $568 million.