SunEdison Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.19.14 | About: SunEdison (SUNEQ)

SunEdison (SUNE) Q4 2013 Earnings Call February 19, 2014 8:00 AM ET

Executives

Chris Chaney - Director of Investor Relations

Ahmad R. Chatila - Chief Executive Officer, President and Director

Brian Wuebbels - Chief Financial Officer and Executive Vice President

Analysts

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Shahriar Pourreza - Citigroup Inc, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Y. Edwin Mok - Needham & Company, LLC, Research Division

Nimal Vallipuram - Gilford Securities Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SunEdison Fourth Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'd now like to turn the conference over to Chris Chaney, Director of Investor Relations. Please go ahead.

Chris Chaney

Thank you, Gail. Good morning, and thank you for joining SunEdison's Fourth Quarter 2013 Results Conference Call. I'm Chris Chaney, Director of Investor Relations. And with me today are: Ahmad Chatila, our President and Chief Executive Officer; and Brian Wuebbels, our Chief Financial Officer. After my remarks, Ahmad will provide an overview of the significant events and commentary on the company's fourth quarter performance and Brian will then give a review of the financial results. Brian's discussion will reference slides we have made available in Investor Relations section of our website at www.sunedison.com.

Our discussion today will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures has been provided in our earnings press release financials published earlier this morning. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the press release and the slides published today for a more complete description.

And now I'd like to turn the call over to Ahmad.

Ahmad R. Chatila

Thanks, Chris. Good morning, everyone. Overall, our results were in line with our updated guidance metrics. Brian will walk through the quarter in more detail in a few minutes. But first, I would like to revisit the value creation discussion we had last quarter and give you an update since it is critical to understand how we continue to position ourselves for future growth.

Last quarter, we said we wanted to provide you with a better understanding of how we think about the solar business and our potential for long-term value creation, especially as it relates to our mission of being the most respected and profitable platform in the industry and hence, the most valuable. To be the most valuable, our megawatt growth rate must be healthy, the value per watt extracted from our installation must be high and we must have a balance sheet that supports making the transition from building and selling projects to building and operating them.

So first, our growth rate. We have grown our annual megawatt completions at a compound growth greater than 90% since 2009. In the fourth quarter, we completed a record 333 megawatts. A couple of years ago, that number of megawatts would have represented a full year's worth of completions, not a quarter. And while we installed a large amount of megawatts in Q4 similar to last quarter, we still have over 500 megawatts under construction at the end of the quarter. And there continues to be a significant demand in the market for our projects. Our diversified pipeline now stands at 3.4 gigawatts, up by about 270 megawatts from last quarter even after completing 333 megawatts.

As a leading brand in a high-growth industry with a fragmented market, we are optimistic about our continued long-term megawatt growth. Our growth is not only fueled by project demand based on our experience and track record but also by strategic initiatives such as the one we recently announced regarding our activities in Saudi Arabia. These initiatives are enabled by our vertically-integrated position and significant IT portfolio in areas such as FBR polysilicon and CCZ crystal technology. We are very excited about the initiative, and we'll talk more about it in the future as it gets finalized and moves forward.

Second, retained value per watt. Last quarter, we said that at a significantly higher quarterly megawatt run rate in the 200 to 250 megawatt per quarter range that we are projecting for this year, we would have new opportunities to optimize value per watt we create and retain that value for the shareholders. We said we would capture that additional value by retaining certain high-value projects on the balance sheet and by using public vehicles, such as the yield vehicle. I'm pleased to report that we have made progress on both fronts.

During the fourth quarter, we retained 127 megawatts on our balance sheet. We create more value when we hold projects, whether outright or for use of a yield vehicle. So we took the opportunity during the quarter to retain some incremental megawatts above our guidance. Retaining these projects during the quarter captured roughly an additional $160 million of value versus what we would have received had we sold them in Q4. So while we forgo higher short-term profitability, giving up about $100 million in Q4 gross margins, we drive higher value, higher long-term value of almost $260 million on the same projects. Brian will walk through the details in a few minutes.

And as previously announced, we filed a confidential draft S-1 with the SEC for the proposed IPO of a yield vehicle subject to SEC review process and market conditions. As a reminder, the significant benefits to SunEdison from utilizing public vehicles like this, including lower our cost of capital, capturing the tail of the project and eliminating much of the friction loss due to the negotiating output and degradation rates with a single buyer. This represents the evolution of our business model that we discussed during our Capital Markets Day last year. Because of our growth driven by global development engine and our balance sheet, we are in a position to increasingly deliver on that promise going forward.

In total, through the end of 2013, we had retained 165 megawatts on our balance sheet, amounting to retained value of approximately $300 million. In addition, we had about 1.9 gigawatts under management in our services business exiting the year, which represents a more than doubling of the year-ago level, continuing the growth of one of our flow business that we increasingly value in the future.

The third and last component that will enable us to build greater value is a strong balance sheet. We continue to take actions to strengthen our balance sheet and ensure that we have appropriate levels of cash and liquidity to support our growth. During the quarter, we significantly increased our megawatt completions, maintained a strong construction rate and still ended the quarter with a higher cash balance. We successfully completed a $1.2 billion convertible notes offering, allowing us to pay off our higher interest debt. Finally, the semiconductor IPO will further reinforce the strength of our balance sheet. That process continues to move forward, and we're currently in the review process with the SEC.

So in summary, we continue to drive the business elements that will enable us to become the most valuable platform in the industry: our rapid growth rate, high value per watt and strong balance sheet. We are excited about where we stand as a company and the opportunities ahead. I'll now turn the call over to Brian to discuss the quarter and provide additional insights. Brian?

Brian Wuebbels

Yes. Thank you, Ahmad, and good morning, everyone. My comments today reflect information found in the press release and financial tables distributed earlier this morning and will reference the fourth quarter 2013 results conference call presentation posted in the Investor Relations site on our -- section on our website.

Let's begin with Slide 3 in the presentation titled Quarter Overview. Our final quarter of 2014 was characterized by a strong ramp in Solar Energy segment and a market-driven slowdown in our Semiconductor Materials segment. Solar Energy project demand remains robust and we completed 333 megawatts in the fourth quarter, our strongest quarter ever. Despite more than doubling our completions quarter-over-quarter, we continue to have over 500 megawatts of new projects under construction at year end. We continue to focus on creating greater retained value through building and holding projects. In the quarter, we retained 127 megawatts of projects on the balance sheet, representing close to $260 million of retained value, which is over $150 million in excess of the forgone gross margin from those projects, had we sold them. Also on February 18, we announced that we filed a confidential S-1 for the IPO of a yield vehicle with the SEC.

The semiconductor wafer market continues to be challenging with volumes weaker due to slow conditions in the industry. Despite this, the Semiconductor Materials segment again generated positive cash flow. In addition, we also were awarded the Supplier Excellence Award from TSMC and year-over-year, we gained revenue and unit volume share. The semiconductor business is well positioned from a share, customer and capability perspective to participate when the market again begins to grow. Until then, our focus remains on lowering cost while providing excellent products and support to our top tier customer base. We continue to move forward and are on track with the semiconductor IPO and are currently in the review process with the SEC.

Now let's move on to a more detailed discussion of our fourth quarter results. On Slide 4, here you will see a summary of the guidance we gave on December 11. Semiconductor Materials revenue was $207 million in the fourth quarter. Orders for the near-term deliveries dipped late in the quarter amid soft industry demand. Despite the dip in quarterly revenue, cash flow was positive. The industry still faces overcapacity and generally weak pricing. We continued our efforts to drive down cost. We announced 2 weeks ago that we would indefinitely closed our shuttered polysilicon facility in Merano, Italy after spending over 2 years working with stakeholders to find an economic solution. We also announced that we would consolidate our crystal activities, which will further improve plant utilization. With a strong list of customers, a broad spectrum of products and key technologies like epi and SOI driving future potential, we believe we are well positioned to participate when the semiconductor market recovers.

We sold 206 megawatts of solar projects in the quarter and we held 127 megawatts on the balance sheet, exceeding the high end of our guidance range by 17 megawatts. We chose to retain additional megawatts on the balance sheet to drive greater value and will discuss this more later in the presentation. Our total megawatt completions for the quarter, which is the sum of the projects sold and the projects retained was 333 megawatts and again was on the high end of our guidance range. Fully developed project ASPs were $3.15. As a reminder, ASPs can vary widely from quarter-to-quarter depending on project geography and mix. And our capital spend was in line at $32 million. And our CapEx continues to be -- our CapEx strategy remains asset-light in solar and focused on our strategic spend in our semiconductor business.

On to the full year. We are very proud of our accomplishments during the past year. We achieved record highs for total revenue and megawatt completions. Our 3.4 gigawatt of pipeline and 1.9 gigawatt of O&M assets under management also set record highs. And our growth engine remains strong. Gross additions to the pipeline were 1.3 gigawatts during the year. And after taking into account our completions for the year, the net pipeline was up over 800 megawatts for the year. And our net backlog grew over 200 megawatts year-over-year, demonstrating the strength of our growth engine.

In summary, 2013 was a tremendous year of growth and change for SunEdison, and we are well positioned for the next phase of our evolution, one that will be characterized by significant events, such as our planned IPOs of the semiconductor business and the yield vehicle. During the upcoming year, our business model will begin to transition to one which will be driven by building and selling some projects while retaining more projects, which will provide us with consistent cash flows over the long-term.

Now let's turn to the financial discussion of the fourth quarter. On Slide 6, we show our GAAP and non-GAAP summary P&Ls. As a reminder, the only difference between our GAAP and non-GAAP P&L is related to direct sale and financing sale-leaseback solar projects. Fourth quarter 2013 non-GAAP revenue was $960.7 million, of which 78% was generated from our Solar Energy segment and the Semiconductor Materials segment represented the remaining 22%.

On Slide 7, we show the period comparisons. Total non-GAAP sales grew 43% sequentially, reflecting higher Solar Energy segment sales, offset partially by lower solar and Semiconductor Materials sales. Total gross profit declined sequentially, primarily due to weaker semiconductor wafer margins, lower external sales in our solar materials business and the incurrence of intangibles related to our FRV acquisition. Operating expense was higher year-over-year and sequentially due to onetime expense related to a VIE, the announced impairment of the Merano facility and investments in growth initiatives, especially DG and our flow businesses.

Also included in our interest expense was $75 million in charges, related to the debt extinguishment and convertible bond offering in December. In total, the nonoperating expenses for the quarter were $142 million, which include the above interest expense plus $37 million related to the Merano impairment, $15 million in intangibles and $15 million related to the OpEx in that VIE I mentioned. Also if you include the previously mentioned forgone margin for projects we retained, our reported EPS would have been significantly higher but not nearly as high as the retained value that we discussed earlier.

Now on to semiconductor. Business in our Semiconductor Materials segment remained challenging in the fourth quarter. Although price has flattened, volume declined due to the soft industry-wide demand. Revenue was down 10% quarter-over-quarter, driven by 11% lower volume. The weaker yen continues to be a headwind. Although a portion of our manufacturing is in Japan, this natural hedge does not compensate for the relatively stronger dollar. As I mentioned earlier, we are taking aggressive actions to reduce our expenses by consolidating semiconductor crystal facilities and indefinitely closing our polysilicon and associated TCS facilities in Merano, Italy.

On to Page 9, our Solar Energy business. Fourth quarter Solar Energy segment non-GAAP grew 71% sequentially, driven by higher megawatt sales, partially offset by lower sales in solar materials. For the fourth quarter 2013, segment revenue was $754 million, up 71%. Of the $754 million, solar projects generated $631 million, up twofold from the $244 million in the third quarter. Sales of upstream solar materials declined to $80 million from $160 million the prior quarter, primarily because we had a large opportunistic module sale in the prior quarter that did not repeat in Q4. The remaining $43 million was split between energy, O&M services and other.

Solar Energy segment operating profit fell $61 million sequentially. Higher solar project margins were offset by lower materials margins combined with higher OpEx due to the investment in growth initiatives. Also in 2013 fourth quarter included a $52 million of charges from the indefinite closure of Merano and the amortization and the impairment of the intangible assets that we discussed and a onetime operating expense of $15 million related to the VIE. As you also will remember, third quarter 2013 included a $22 million benefit from the contract cancellation with Gintech. It is important to point out that our fourth quarter Solar Energy segment results do not reflect the true economic benefits of retaining projects on our balance sheet. Again if we include the $99 million of forgone margin in the fourth quarter and adjust for the noncash charges I just mentioned, our non-GAAP operating income would have been $61 million compared to the non-GAAP loss of $37.6 million.

Now let's move on to our pipeline. Our pipeline grew in the fourth quarter to 3.4 gigawatts, up 269 megawatts from 3.1 gigawatts in the third quarter. Including the 333 megawatts we completed in the fourth quarter, our gross pipeline was up over 600 megawatts sequentially. Our pipeline continues to be well diversified with 50% in North America, 30% in Europe and Latin America and 20% in emerging markets like South Africa, the Middle East and Asia. Our pipeline is also diversified by project size. 17% of our projects -- 17% of our pipeline consists of projects smaller than 10 megawatts in a category that we call distributed generation or DG. Mid-sized projects between 10 megawatts and 50 megawatts represented 30% of the pipeline and projects between 50 megawatts and 100 are about 1/4 of the pipeline with the remaining being projects over 100 megawatts. Similar to last quarter, our project construction activity remains very high. At end of the fourth quarter, we had 504 megawatts in various stages of construction. Most of these megawatts will be completed over the next few quarters.

On Slide 11, you will find some more details on our backlog and projects under construction. As a reminder, backlog represents projects with signed PPAs or backed by feed-in-tariffs and also includes projects under construction. Our backlog at end of the fourth quarter was 1.1 gigawatts, flat compared to the third quarter despite completing 333 megawatts. Our backlog is well diversified with about 60% in North America, 23% in Europe and the remaining 17% in emerging markets. Most of our backlog projects are planned for completion over the next 2 years.

On Slide 12, we included our major projects for 2013. We're very proud of our progress in 2013. And on this slide, we show several of our most significant projects for the year. As you can see, the list is diversified in terms of geography, size and partners. During 2013, our project list included 124 individual projects, 15 of them were utility scale and 109 of them were our DG business. Although we do not participate -- although we do participate to some degree in the larger-scale projects, our core focus is and has been on the commercial scale projects. As you can see, our average project size for the year was 4 megawatts.

Now on to Slide 13. Our completed megawatts have grown tremendously over the last few years and we expect to continue this trend into 2014. Over the last several years, we posted a 90% CAGR. Our leading brand is a very -- in a very fragmented and growing market is one of the major factors of our success. It is because of this growth that today we now have the scale required to optimize the value per watt of our projects. Retaining projects allows us to capture additional value and eliminate inefficiencies in the sale process. In addition, we receive low-risk cash flows from the projects that we retain into the future. Our balance sheet will be the enabler for our strategy and we have worked to strengthen our balance sheet through our recent follow-on offering and convertible notes offering, the upcoming IPO of our semi business and our continued working capital management.

On Slide 14, as I mentioned before, we've experienced tremendous growth. Having grown rapidly over the last several years, we have now reached the scale that gives us a better flexibility to optimize the value per watt of our solar projects. We can choose whether to sell a project directly as we have in the past or retain the projects. As a reminder, there are 2 distinct advantages for SunEdison for retaining projects. First, it contributes to the company's growing flow business by adding recurring contracted cash flows, which help smooth out the development business. Second, we can create higher value for the company by capturing several pieces of the project value that are otherwise captured by third-party project buyers. The advantages, however, come at the cost of reducing current period results because we do not recognize the revenue or margins associated with the sale of held projects immediately but instead recognize the economics of held projects over time through repeatable recurring revenue streams.

While retaining projects does require capital, we have a tremendous global project finance team that is known throughout the industry for pioneering unique and innovative financing structures. Innovative structures not only allows us to capture more of the value chain, but they also allow us to accelerate our growth into the coming years. In the near term, they're working to develop debt securitizations, the mentioned yield vehicle and other structures that will enable us to grow our portfolio of projects while utilizing third-party capital.

On Slide 15, as a reminder, last quarter, we walked you through the concept of retained value. As a reminder, retained value is the value created by holding a project in our balance sheet. Put simply, that the value of the cash flows from the projects discounted back to today at a discount rate representing an assumed cost of capital. When we retain a project, we don't generate sales or gross margin from the project in the current period. We recognize energy revenue and profit over the life of the system. But we do avoid significant costs that we typically incur when we sell a project. Retaining the projects allows us to capture value lost in the selling process due to higher cost of the one-off project financing versus leading-edge clearing prices available through yield vehicles and frictional losses that are part of negotiations with buyers.

And importantly, if we continue to own the project or at least own a major interest in it, we keep the value of the tail, which is the value of the cash generated from the end of the PPA period, which is typically 15 to 20 years, to the end of the project's useful life, which is often in excess of 30 years. The full benefit of holding projects can be monetized in a two ways. Number one, as ongoing cash flow in the business, adding to the period cash flows as energy is produced or sold, or by selling the projects. Projects in the vehicles at a cost of capital that more accurately reflects their risk profile. As these public vehicles are developed, we believe we will be able to capture much of the value that we are giving up today in a direct sale while enjoying benefits of repeatable recurring revenue streams and doing all this in a very capital-efficient manner.

In Q4, we retained 127 megawatts on our balance sheet, which represents $257 million of value. In the process, we chose to forgo an estimated $99 million of margin if we had sold these projects. The difference of $158 million is the value we created by not selling these projects. Similarly, for the full year, we held 165 megawatts of projects on the balance sheet, representing an estimated $300 million of retained value and capturing an additional $187 million of value versus selling all of those projects. In 2014, we will continue to hold projects on the balance sheet, creating significant value for the company.

Now let's move on to Slide 16 on cash. We began the fourth quarter with $654 million and ended with $832 million, growing the total cash balance by $178 million. Primary drivers were the convertible senior notes offering, management of working capital and other Solar Energy system financing, partially offset by outflows relating to the higher level of solar project construction. Cash committed for construction projects was $258 million at the end of the quarter. Cash and cash equivalents, cash committed for the construction of projects and restricted cash totaled $902 million, which is up $257 million from the previous quarter.

On Page 17, at the end of the quarter, we had $2 billion in Solar Energy assets, offset by $2.6 billion in nonrecourse debt. It's important to understand the nature of the nonrecourse debt and how it's tied to our sale-leaseback projects. Unlike the corresponding asset, this debt is nonamortizing and the full balance is extinguished upon the last lease payment, typically 20 years after the project is sold, at which time a GAAP gain will be recognized. Accordingly, the nonrecourse debt will always exceed the corresponding asset balance. For the purposes of our debt covenant calculations, nonrecourse debt is not included. Overall, we are comfortable with our balance sheet and our liquidity position.

On Slide 18, in summary, I'm very proud of our fourth quarter accomplishments and the execution in both over business segments. In Solar Energy, I'm very encouraged by the increasingly widespread penetration the solar market is enjoying today and excited about our future prospects. We are differentiated by our deep pipeline and significant backlog and our strategy to add multiple layers of recurring revenue to our business model. We believe there's a significant value created by building selected projects and retaining the value of those associated cash flows. The industry is in the early innings of a rerating of the cost of capital, and we plan to be a large participant in this, which we believe will drive significant value for our company. Our brand name continues to help us win valuable project contracts, achieve lower financing costs and will enable our global growth. In our Semiconductor Materials, the environment remains challenging with a prolonged cyclical downturn, which has now lasted over 2 years. However, we are well positioned for an upturn. We have a solid liquidity position and remain focused on improving our balance sheet, driving profitable growth and delivering strong returns for our stakeholders.

And also we will be hosting our annual Capital Markets Day next Tuesday, February 25 in New York, where we will be providing our 2014 guidance, sharing insights and discussing business trends. Any institutional investors or analysts wishing to attend the meeting in person should contact Chris Chaney, our Director of Investor Relations at the email address shown on the slide. We will also be webcasting the event, which will be available on our website in the Investor Relations section.

With that, we will now open the call up for your questions. Operator, you may begin the Q&A session now.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to the line of Brian Lee with Goldman Sachs.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

It's been a few months since you refinanced the balance sheet and also acquired some excess capital here. So I was just wondering how you might be thinking about a couple of things with that in mind, the ability to retain more balance sheet megawatts, deploy more megawatts overall versus the 800 to 1,050 guidance you provided before. And also just generally project M&A, the ability to maybe have more capacity there. And then I have a follow-up.

Brian Wuebbels

Absolutely, next week, we're going to give a lot more color on every one of the questions you asked. We're very bullish about the business. The liquidity clearly gives us the flexibility that we have been seeking and building over the last 24 months. It will allow us to retain more projects, and we'll share those exact details with you next week. It absolutely is opening up more opportunities for us to acquire projects and to partner with others. I think you would see that in the announcement of our yield S-1 filing that we did this past week. So overall, very bullish and we feel really good about 2014. And we'll share that with you in detail in next week's Capital Markets Day.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay, great. My follow-up was on YieldCo. I guess, how many megawatts of your current backlog are already sold and committed? I'm just trying to get a sense, I guess, for what the upper bound might be on capacity for YieldCo drop-downs.

Brian Wuebbels

Yes. Great questions. Obviously, I can't share a lot of the details that are in the confidential S-1 right now. But clearly, we believe that the very large backlog and pipeline that we have, specifically in the North America and other high-value regions, are great candidates for the YieldCo vehicle over the next several years. Those details will clearly be shared as we get closer to having the YieldCo IPO go live and go out on the roadshow. So that's pretty much all I can say right now, given the confidentiality of the filing.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay. I'm going to squeeze one last housekeeping one in, if I may. If we back out the one-timers, is the clean non-GAAP EPS number breakeven this quarter?

Brian Wuebbels

It is. And if you include the margins that we've forgone because of holding additional projects, I think you would see it would be significantly positive.

Operator

Go to the line of Krish Sankar with Bank of America.

Krish Sankar - BofA Merrill Lynch, Research Division

I have a couple of them. Brian, in Q4, can you help us understand of your megawatts, how many were EPC versus fully developed? And along the same path, on the megawatts retained on the balance sheet, are they now exclusively for the YieldCo?

Brian Wuebbels

Great questions, Krish. So the fully developed were primarily all of the projects in the fourth quarter. There was -- I don't think there were any -- maybe a few megawatts that were in Q4 of the 333. The second question is, yes, a majority of the 127 megawatts that we held are slated for the YieldCo vehicle.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. And then just as a quick follow-on, in your residual value calculation years 20 to 30 on the project, are you assuming a renewed contract? Or are you assuming selling electricity on a merchant basis?

Brian Wuebbels

It depends on the project and the region. On some instances where they are commercial projects, we're assuming an extension of the PPA at a discount, a pretty big discount to the rate that was in the contract. And in other cases where that's not the case, it is a merchant power price. So a lot of the utilities are more merchant, the commercial ones are more PPA extensions.

Operator

And our next question comes from Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

Just a couple of questions. Maybe if we could just start on the typical seasonal trends that you see in the first quarter. I know you're not giving specific guidance until the analyst meeting next week. But may you could just remind us of some the historical seasonal trends that you typically see in semis and also in solar in the first quarter, especially with, I guess, some of the harsh weather we've seen as well.

Brian Wuebbels

Yes. No, a great question, Stephen. I think certainly semis, you know that cycle well. Typically, Q1 is either sideways or a little bit softer than Q4. That's the historical norm. For the solar business, it does have some seasonality. And as we've shared in previous periods, there's no question that Q1 will not be at the level of Q4. We've kind of told you that in the last few quarters, when we've shared the quarterly looks for 2014. And we'll share that detail on Q1 next week. It's still going to be at a high level. As we've mentioned, Ahmad, we are targeting getting to the 200-ish or more megawatts per quarter. And so I think that's kind of where we're at right now, and we'll give you a lot more details next week.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And the follow-up question is on the solar business. It looks like the fourth quarter run rate was roughly in line with what we were expecting. So I guess, the question is what do you think -- or what are you estimating over the next 24 months for this run rate? Can we expect this 2:1 ratio of projects sold to projects being put on the balance sheet to be sustained? Is that kind of the right way to think of how you're going to try to manage the business?

Brian Wuebbels

It's going to be -- again, we'll share a lot more details next week. But I think you should very much assume that the ratio of held to sold is going to continue to grow. The value that we create is 2.5x the value of holding a project versus selling it. Now obviously for me, it's about managing the liquidity, managing the OpEx coverage for the company. But any excess dollar in my mind gets reinvested to hold a decisional project because of the return that we're going to get. So clearly, you should expect that number to continue to move up as a ratio. I think it will be more than what you saw in the fourth quarter.

Ahmad R. Chatila

I would also add that with the semi IPO, Stephen, and other activities, we will be able to bridge a significant shift because of the cash generated from those activities beyond just the cash flows from the business, so we're pretty bullish on our strategy. I wish I can print a beautiful number today, which I could have because I have significant demand on my projects. But the money in the retained value is so significant, I'm willing to print a negative number to keep all that for myself. And I will continue to be committed to that.

Operator

And our next question comes from Patrick Jobin with Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

So first question, just on kind of thinking about 2014 again, more projects being retained is clearly an emphasis, 2.5x more returns. I guess, the question is has anything changed in your view as to that 400 to 600 megawatt right size for a yield vehicle? Or can you talk through that at all? Has anything changed in that, Brian?

Brian Wuebbels

No, Patrick. At the end of the day, you're always balancing in an IPO, getting the right amount of cash flows in it and managing what we would hope to be the cash multiple expansion that we're going to have post-IPO. So we believe that, that number is the appropriate number to be able to launch the vehicle with scale and have it trade very effectively. And that's what we're still targeting.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay. And then a simple follow-up, and then one other question. Can you talk to your receptivity of opening up to third-party assets into the yield vehicle or these all be internally developed?

Brian Wuebbels

Very receptive. I think we've mentioned it on the previous call that 400 to 600 megawatts of projects, and some of those will come from SunEdison, developed projects or others will come from our third-party partners. And I think you'll see that trend continue. Clearly, having this out there puts us in a position to not only just attract finished projects but also allows us to get access to other projects that are in pipelines of people that we could extract value out of building out those projects as well plus the O&M, building on that capability that we have. So it's a very powerful multipointed strategy. And definitely, third parties are part of the equation.

Patrick Jobin - Crédit Suisse AG, Research Division

And then switching gears a little bit. Can you update us on the Samsung JV, just progress with the poly plants and how you see that progressing?

Brian Wuebbels

Yes. Progress is continuing. I mean, we expect to get polysilicon out later this year and ramp up to full capacity by the end of the year as we previously discussed, so still on track.

Operator

Our next question comes from Shar Pourreza with Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

Over the past several weeks, we've seen some pretty sizable RFPs coming out of utilities in nontraditional solar states. And I'm sort of wondering, does this present an opportunity? And can you shift a little bit of your megawatts to larger-scale projects in the U.S. as you consider the YieldCo?

Ahmad R. Chatila

So Shar, this is Ahmad. The answer is YieldCo is just yet another weapon we have. But we're not going to shift our strategy based on it. If you look at our pipeline backlog, it's pretty broad, multichannel, multigeography strategy. I have to tell you having YieldCo gives us a strong weapon. Having our integrated module, where we're able to have a cost lower than what we can buy it for in the U.S. also helps. So what I don't want to do is bomb the price. So that I won't do. All of sudden like YieldCo gives me, let's say, $0.5 or $1 advantage and I bomb the price that, that I won't do. We need to have the discipline. But even without bombing the price, I'm ramping my backlog and pipeline globally and aggressively better than anybody. So I hope that answers the question.

Shahriar Pourreza - Citigroup Inc, Research Division

No, it does. And then just shifting over real quick as the Samsung Fine Chemicals JV does start to ramp up and with the latest announcement coming out of Saudi Arabia, can we just talk about some potential royalty opportunities for the FBR technology within the Middle East, obviously within Europe?

Ahmad R. Chatila

Yes. I'll tell you that's part of the balance sheet discussion and our growth. I mean, let's step back a little bit. If we have to be a leading platform in the long run, we have to have 3 things well done. We have to continue to have the best development teams and multichannel strategy to ramp the volumes. We need to also have great financial structures. The volumes that we're talking about and we feel we can get to, you cannot do it through standard project finance. You have to have YieldCos and vehicles globally, potentially more than one. And finally, it's the technology and having the cost structure to feed the right cost into those projects. Yes, there are a lot of opportunities actually. We have more inbound demand for our technology than we can handle, I have to admit. And part of it is the FBR -- high-pressure silane FBR technology, the manufacturing cash cost in certain places in the world, like China or Saudi Arabia or elsewhere, is less than $10. So the advantage is $5 to $10 versus the best-known method in the world today adds an excellent quality that can feed into semi, so not like an FBR that has that quality. So because of that, we have it. But we have to be disciplined on how many deals we close execution-wise. But yes, there's a lot of demand and there's a lot of potential for licensing in that regard, selling equipment, making money on that, yet ramping the volume, creating value, later on, maybe do something with these companies and the JVs, taking them public potentially somewhere in the world. So there's a lot to be done. We'll share with you a little bit next week. But you'll see a lot more announcements from us in the next 1 to 2 years in that regard.

Shahriar Pourreza - Citigroup Inc, Research Division

Okay, perfect. And then just one last question. With the latest ITC news coming out regarding potentially extending the antidumping and countervailing tariffs for Taiwanese-sourced cells coming into the U.S., can you just remind us how much of your tech-agnostic project development business is actually using Chinese panels, maybe Trina or Yingli, what the impact could be there?

Ahmad R. Chatila

Yes. So first, I want to make a statement just in general. This is incredibly unhelpful for the industry. Probably, we will be able to navigate through it because of our supply chain network outside of China and potentially outside of Taiwan as well. But it's incredibly unhelpful to the industry. Even the people who have capacity outside of China and Taiwan will all be harmed because it will devastate the industry. It is completely counterproductive, I just want to say this. While I'm potentially more better suited and will make more money out of it, I'm against it. I think it's wrong. It's going to harm the industry. So that's a blanket statement. The thing is we use Taiwanese cells extensively today. But we are able to navigate through it. We have access to other sources. We don't know if we can cover every single megawatt, but clearly, it's going to -- we have ways to cover significant volume of our growth. You see it's not about like 2013 volumes, this is the future potential that we have in '14 and '15. But we think we can cover a lot of it, maybe not all of it but a lot of it. But I think that it's going to really harm the industry if it goes forward. It will -- tens of thousands of people lose their jobs. I think it will be devastating. Instead of making 4 gigawatts a year in the U.S., we'll go down to 0.5 gigawatt or 1 gigawatt if that's implemented.

Shahriar Pourreza - Citigroup Inc, Research Division

Got you, very helpful. And then just, Brian, just real quick, are you still comfortable still with 250 megawatts of direct sales and sale-leasebacks as you start to build more captive assets in your balance sheet?

Brian Wuebbels

No, I mean, obviously, that mix is going to change, Shar. And you're going to see that the sale megawatts, obviously as we mix up more and more held megawatts, I think our guidance, you're going to hear more about it next week. We feel comfortable about that level of completions. But the mix of what we're going to hold versus what we're going to sell is definitely going to change.

Ahmad R. Chatila

And you can see in Q4, we felt so confident and comfortable that we -- how many, like 30, extra 50?

Brian Wuebbels

Yes. So Shar, you're going to see more of that next week. But we like the run rate of 200 to 250. But the amount that I'm going to sell is going to move out of that mix.

Operator

Our next question comes from Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Ahmad, I wanted to just ask you a question on your strategy in the residential market. I know you're spending more on DG, and you talked about some DG projects in your backlog. Can you talk about how you think about the residential market and whether you can grow your portfolio in that segment as well?

Ahmad R. Chatila

Yes. So we're interested in it. We are dabbling with it, like we told in the Capital Markets Day. I'm not ready to make big wave announcements yet. But maybe in the second half of '14, Vishal, I will tell you a lot more about it. We have a strong team. We have some business in it, but we're trying to create a formula that really can match our execution and success on the rest of the business that we had from 2009 into the foreseeable future. So it is an interesting market for us. I think -- so I'll just leave it there. Sorry about that, I'll just leave it there. In the second half of '14, I'll give you a lot more information about it.

Vishal Shah - Deutsche Bank AG, Research Division

That's helpful. And just wanted to clarify your fourth quarter margins from the projects sold in the solar business. Can you talk about what kind of gross margins you realized on the megawatts you sold? I understand that you've given information on the gross margin that you've forgone. But can you talk about the realized margins on the megawatts sold?

Brian Wuebbels

Great question, Vishal. It's low to mid-teens. And what you're going to see is if you did the math on the megawatts that we held, clearly they are above the high end of the range that we've described previously as $1 per watt that we're going to make on projects. And so that's on purpose. And we've said this before, why do you want hold projects? Well, we're going to hold our best projects. So clearly, you're going to see that mix. But the average is still in that $0.60 range that we've talked about previously. But when you have held projects that were almost $0.80, clearly the margin on the projects that we're selling are on the lower end of the distribution. So I think that's a trend that you'll also you'll see in the future is that we're clearly going to keep the gems. But I would say the margins, we're still in the mid-teens for those projects in the fourth quarter.

Vishal Shah - Deutsche Bank AG, Research Division

And on that front, I mean, are you seeing more buyers for these projects, especially given that many more companies are contemplating a yield vehicle? I mean, what kind of customers are you seeing for the project sales?

Brian Wuebbels

Yes. No, a great question. I mean, as Ahmad mentioned earlier, I mean, tremendous demand for our projects. High-quality projects that, as Ahmad mentioned, previously we never had a stranded project. We have very -- our projects are performing above their performance rating to life. So I mean, it's the usual suspects. I mean, everybody is out there. And to be honest, I don't -- we're not really seeing a tremendous amount of interest from new YieldCo players. I think there's a lot of talk in the space. But you're definitely seeing people who are looking for yield coming after these projects. So whether it's sovereign wealth funds, whether it's insurances, whether it's utilities, whether it's -- there's just a tremendous appetite out there for the projects. So that is not the issue right now. So question is...

Ahmad R. Chatila

The asset class also, Brian, has improved a lot in terms of reputation and perception of it. And because of that, we're getting a lot of demand.

Brian Wuebbels

No, that's exactly right. So hopefully that helped, Vishal.

Operator

And we'll go to the line of Mahesh Sanganeria from RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Just a question on semi IPO. Usually, the semi revenues are weaker in Q1 but should expect a pretty strong growth in Q2 and Q3. As you plan for semi IPO, is how the market trending, is that a big factor on how you time the semi IPO? Or what are the other factors?

Brian Wuebbels

Mahesh, it's Brian. It is one of the factors, but I wouldn't say it's a major factor. I mean, obviously, it's a well-known industry. We're a well-known industry player. I think people have seen how we are able to perform through the cycle. And I believe that if the belief that the cycle is going to recover, the timing of exactly going out, I think, has an impact, but it's not the major driver. The biggest one for us today is we've just got to be ready. I mean, part of it is we're getting through the SEC review process. We're going to need the updates for year-end financials now to roll that. And a little bit of it is market timing. But a lot of it is just making sure that we have the right -- we've been assembling the leadership team. We've announced a new CFO. So we feel very comfortable about where we're at in the process, and you'll hear more about it soon quite frankly. But I wouldn't say that we're going to try to be overly sophisticated and try to time the market. Our view is it's a good asset. We believe there will be appetite out there for it. And I think we're well positioned in the industry, and that's how we see it.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

That's very helpful. And just following up on Vishal's question on margins, so I guess, previously when you were selling everything, the target for the gross margin was 20%. And what I hear you're saying is that if you take the project distribution and you'll be managing some set, you will keep the high-margin projects on the balance sheet and sell more of the lower margins. So should we plan on modeling gross margin in low to mid-teens for the sold projects?

Brian Wuebbels

We'll talk more about it next week. It clearly will be not up to the 20% range. But I still think mid-teens is not a bad expectation. And some projects are going to be higher. I mean, we believe that the cost reductions that we're driving into the future and the good high mix of ASPs that we have that we're still going to be able to maintain good margins on the projects, even the ones that we sell. So I don't think it's a big shift. I think it's more of detail on the edges, right? And that's kind of how I see it, Mahesh.

Ahmad R. Chatila

I think, Mahesh, is that the most important thing that I would like analysts to model is our retained value and that. Because, look, I mean, at the end of the day, why do we sell the higher gross margin projects? Because it's a force multiplier on retained value when you do the higher-value projects. So it's a force multiplier. So from a modeling, it's really keeping the projects. Think about it. If we're able to have an extra value of $160 million of retained value versus selling them, that's significant -- just only 1 quarter, that's a significant value creation for the shareholders. And that's, I think, what we should focus on in terms of modeling.

Operator

And we'll go to the line of Edwin Mok with Needham & Company;.

Y. Edwin Mok - Needham & Company, LLC, Research Division

If I look at your retained value that you calculated in the fourth quarter, it seems like it's a higher number, it was over $2 per watt versus what you reported in the first 3 quarters of this year. Is this a trend that we should look at? In terms of retained value, should we expect that you can extract greater retained value as you go into 2014 and beyond?

Brian Wuebbels

I think the retained value clearly, depending on which region, which project, which PPA, I mean, it's going to be a number that moves, right? We do not have a homogenous population of projects, so I think that's one of our very strong differentiators. But we still believe that, that number will be very similar to what we've experienced previously. And it may move around quarter-to-quarter, but it's not something that I get fixated over. For me, we're talking today selling projects at the low end of the range in the $0.45 to $0.50 per watt and at the high end of the range, selling them for $0.70 to $0.75 a watt. And now you're talking about holding a project that's going to create somewhere between $1.60 to $2 a watt. So in either sense, Edwin, it's a massive step up in value. And that's how we look at it. But no, we still think we can maintain that very high level going into 2014.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see. Great, that's very helpful. And then one question, I guess, on operating expense. Maybe kind of just conceptually, how do you kind of think about your OpEx longer term for the SunEdison business itself? Do you expect to kind of maintain a certain level and then just sell project to kind of cover for your OpEx, and then try to retain everything else into this YieldCo vehicle? Or do you think that you want to kind of generate some kind of margin from this SunEdison business? I'm talking about the solar power business.

Brian Wuebbels

Yes. No, it's an awesome question. I think that the balancing it is important to me. I think what you're going to see is that in the short term, and we'll talk about it next week in our Capital Markets, clearly we're going to be holding more projects than we had previously. And so for 2014, you're going to see the sales be less. And therefore, I think the pressure on the margin in year 1 will be the most extensive. As you grow back out of this and as you get into 2015 and '16, what you're going to see is that's going to start shifting because you're going to start getting these recurring energy revenues and profit streams flowing through the P&L. We're going to continue to grow the business, right? We believe, and we'll show you this next week, that this growth path that we're on, we believe we can continue it. So just by natural progression, even the sold megawatts are going to grow. But I think what you're going to see in '14 is that, that's not going to happen because we're going to retain so many more, and then you're going to see a recovery as you get into '15 and '16. That's how I look at it. The OpEx has to be put in place for the total completions because whether I hold a project or whether I sell a project, I still need to go develop it, I still need to go build it, I still need to go work with my partners, I need to acquire materials and those kinds of things. So I'm looking at it as, as my megawatts grow, we're going to get leverage over that OpEx. And that's exactly something we're going to show next week in our Capital Markets Day is how you should model that out and think about it. But I think in the short term you're on to it Edwin that you're going to see the dip because the sales are going to be less obviously than they were in the fourth quarter. But completions are going to continue to grow throughout the year. So hopefully that helps. I'm kind of being a little vague because we're going to show a lot more about this next week in our Capital Markets Day.

Operator

Our final question will come from Nimal Vallipuram with Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Just a couple of questions, I will be brief here. Number one is [indiscernible] all for Brian. If you look at the electricity tariffs around the world, we're looking in Japanese electricity tariffs almost 6 to 8x higher than the U.S. electricity tariffs. I mean, the differences could be different for PPAs you are signing. But given that, I would assume that for the company, we're just planning on issuing YieldCos. For SunEdison, it behooves them to develop more of these projects in high electricity tariff areas and not spend too much time on low electricity tariff areas. Is this the right way of thinking about it? Or am I missing something?

Brian Wuebbels

Here's how I think about it, Nimal, is it's about the quality of the tariff and the PPA. So it's not necessarily whether it's high or whether it's low. I actually think that in some of the cases, the really high tariffs are red flags because what we've seen historically is that when countries have had really high tariffs, there's going to be a discontinuity that's going to happen. They can't afford them. Eventually, they're going to have to cut the tariffs. And in some extreme cases, like in Eastern Europe, it goes crazy, right? They want to put taxes on it and all sorts of other things. So for us, it's actually almost counter to how you're thinking about it. What we're looking for is high credit offtake. What a yield vehicle wants and needs is to pay dividends on a very effective, growing manner. To do that, the credit and the assurance that you're going to get the electricity receipts are very important. So you want it, so state -- countries like the United States, where you're signing a PPA with an investment-grade company, we want those all day long. Countries where you expect the rule of law and them not to go back and have aggressive retroactive changes are also countries you want to target. So that's how we're looking at it. It's all about high credit, assurance of cash flows for our YieldCo investors.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Okay, makes perfect sense. My second question is that on Page 15, you talked about how much you would rather have on the balance sheet than do an immediate sale. I'm sure that you have discussed this in detail before, but if you can just touch back on that. What, from your point of view, decides or determines that? Is that because who do you deal in coming up with these projects? Or after you have dealt with a party, can you change the variables as to how much you want to keep on the balance sheet as opposed to how much you do immediate sales?

Brian Wuebbels

No, it's excellent. I mean, part of the strategy of why we believe we're going to be very successful on the YieldCo is that the way I sell our projects today is because we don't have these extremely large projects, we have a lot more commercial and a lot more small utility projects. The cycle time from starting that project to finishing it is pretty short, so my ability to line up an investor and not have to presell my backlog and pipeline, right. So the beauty of our business is we have not presold our backlog and pipeline, which means I now have choices to go launch this YieldCo and really put it in a situation where I can ramp it today and not have to worry about my commitments that I've made to other investors for the projects that I have. So to me, that's the big lever. That's why you look at it, and we can make a decision. And as we move forward, as investors become more aggressive to have to kind of compete with these type of cost of capitals that are in the yield vehicle, maybe you'll see some of that change. But the step-up in value is simply driven because, number one, you don't ever get paid when you sell a project for the tail. You only get paid for the contracted cash flows. So that is a value that we're going to keep by having this. Number two, today, the cost of capital that investors are willing to give you or the yield that they're willing to pay for solar projects is pretty high versus what we believe we're going to be able to get in a capital markets-type transaction. And then third, by not going through the negotiation, you don't lose the frictional losses. And there are frictional losses, any negotiation comes with frictional losses. Well, if you don't have to negotiate and you don't have to pay bankers and you don't have to pay lawyers, you don't have to pay anybody else, that's just money that our shareholders get to keep.

Ahmad R. Chatila

Actually, I want to add a couple of things, Brian. Great answer you gave. 2 other things about us is what you said about we don't presell our projects. With having a good size of projects for 10, 20 megawatts, we're not in danger if we don't presell a project. Like if I have a 500-megawatt project or a 250-megawatt project that is to the enterprise is so high, I have to presell it. I have to ensure that's it's presold for me to keep it around and ramp it. So that's one. The second thing is our business also is ramping nicely because we don't have a specific technology. We really have a flexible technology platform. So we can ramp significantly without having to add CapEx in the foreseeable future. So it's all like an engine that actually you have to think about as really all integrated together.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Just if I may, just one last question to Ahmad. After changing from mainly an electronic materials company very successful into a solar project development company, as a CEO, what do you see going forward ought to be the core competence that SunEdison needs to develop, which if you don't have already, I believe some of them you clearly have it, to be successful in this solar project development business around the world?

Ahmad R. Chatila

Well, look, 3 things. And number one, you have to be committed to development. You cannot like go and lay out your development people every time there's an issue. One of the powerful things we did is when we had problems in Europe, we deployed our team in Europe on Latin America. That's what I feel we're #1 there. So be committed to development, committed to development globally because markets shift. U.S. is great today. Tomorrow, it won't be great. We've seen it in wind. From 1995 to 2002, wind died off in the United States. So you have to be really strong in development. It's a multichannel approach, utility, commercial and residential. So that's number one. Number two, if you really want to scale the business, we're talking $10 billion, $15 billion potentially a year worth of project finance and debt and equity. You cannot do it through negotiating with large institutions. You have to do it through public markets really. And you have to do it globally. And third, you have to have great technology, not only in modules but in hybrid solution, diesel abatement, services because at some point, you want to securitize your debt, for example. If you don't have the technology and O&M to be able to handle 30 different module technologies and 30 different inverter technologies, how could you really ramp your YieldCos and work with others if you just know how to use it on one or you don't know how to do it at all? Because at some point when you do securitization, the credit agencies have to say that you're credible. And if you have not done it for a long time and really perform well, they won't give you that. So that technology element end-to-end is essential. So these are the 3 elements: development, capital and technology. And that's how we're focused on from day one and then for the foreseeable future.

Chris Chaney

Thank you, everyone. That concludes our call. Thank you, everyone, and have a great afternoon.

Brian Wuebbels

Thanks.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference service. You may now disconnect.

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