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SunEdison (NYSE:SUNE)

Q1 2014 Earnings Call

May 08, 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, Principal Accounting Officer and Executive Vice President

Analysts

Krish Sankar - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Thomas Daniels - Goldman Sachs Group Inc., Research Division

Aditya Satghare - FBR Capital Markets & Co., Research Division

Timothy Radcliff - Morgan Stanley, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SunEdison First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Chris Chaney, Director of Investor Relations. Please go ahead.

Chris Chaney

Thank you, Mary. Good morning. Thank you everyone who's on the line for joining SunEdison's first quarter 2014 results conference call. With me today are Ahmad Chatila, 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 first quarter performance, and Brian will then review the financial results. Brian's discussion will reference slides we have made available in the 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 with that, I will now turn the call over to Ahmad.

Ahmad R. Chatila

Thanks, Chris. Good morning, everyone. Once again, our project completions were in line with our guidance metrics. Brian will walk through the quarter in more detail in a few moments. But first, I would like to briefly update you on the 3 components of long-term value creation that we have been discussing with you the past couple of quarters.

As we've said, to be the most valuable solar company, our megawatt growth rate must be healthy, the value per watt extracted from our installations 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. We have grown our megawatts at greater than 90% per year since 2009. In the first quarter, we completed 150 megawatts of solar projects, in line with our target. This keeps us on track towards the record annual target we laid out at our recent Capital Markets Day.

Similar to our prior quarter, we held more on our balance sheet than we previously estimated in order to support our yield take off [ph]. I'll talk more about this in a moment. And while we completed 150 megawatts in Q1, we still exited the quarter with more than 450 megawatts under construction. There continues to be significant demand in the market for our projects. And our diversified pipeline grew once again and now stands at 3.6 gigawatts, up by about 170 megawatts from last quarter.

Second, retained value per watt. We said we would optimize value per watt and increase shareholder value by retaining certain value projects on the balance sheet and by using public vehicles. During the first quarter, we retained 74 megawatts on our balance sheet. This follows the 127 megawatts we retained in Q4. We retain more value when we hold projects, whether outright or in a yield vehicle, so we were opportunistic and again retained megawatts above our guidance during the quarter.

Retaining these projects during the quarter captured roughly $100 million of additional value, what we would have received had we sold them. So while we forgo higher short-term gross margin, giving up about $25 million in Q1 gross margin, we create higher long-term value of more than $120 million in those same projects for SunEdison shareholders.

As a reminder, the significant benefits to SunEdison from utilizing public vehicles, including lowering our cost of capital, capturing the sale of the project and eliminating much of the friction loss through negotiating output and degradation rates with a buyer. Cumulatively through the end of Q1, we have retained a total of 240 megawatts on our balance sheet, amounting to retained value of approximately $420 million.

The third component we -- will enable us to build greater value and a strong balance sheet. We continue to take actions to strengthen our balance sheet and ensure we have appropriate levels of cash and liquidity to support our growth. During the quarter, we closed on a $150 million project finance revolver with Deutsche Bank. The facility is expandable to $300 million. Also during the quarter, we closed $250 million non-recourse acquisition facility to acquire projects from third parties or projects developed by SunEdison for our yield vehicles. And finally, the Semiconductor IPO, which will further reinforce the strength of our balance sheet, remains on track pending market conditions.

So in summary, our progress continues as we drive the 3 business elements that will enable us to become the most valuable platform in the industry: rapid growth, high value per watt and a strong balance sheet. We are excited about our positioning and the opportunity ahead.

I'll now turn the call over to Brian to discuss the quarter and provide additional insights. Brian?

Brian Wuebbels

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 we'll reference the first quarter 2014 results conference call presentation posted in the Investor Relations section of our website. Let's begin with Slide 3 in the presentation titled, Quarter Overview.

During the quarter -- first quarter of 2014, we continued to focus on retaining projects in order to maximize retained value and NPV per watt. Solar energy project demand remained strong. We completed 150 megawatts in the first quarter, which is up nearly threefold compared to our first quarter of last year. And construction activity for new projects remained strong with over 460 megawatts under construction at the end of the quarter.

As I mentioned earlier, we remain focused on creating value through building and retaining projects. In the quarter, as Ahmad mentioned, we retained 74 megawatts on the balance sheet, which was nearly 20 megawatts above our guidance midpoint. These projects represent over $120 million in retained value, which is nearly $100 million in excess of the forgone margin that we would have made had we sold these projects.

Our gross pipeline additions for the quarter were again strong at 323 megawatts. Our pipeline grew to 3.6 gigawatts from 3.4 gigawatts in the prior quarter, and our backlog is at 1 gigawatt. We added about 80 new projects in diverse markets, such as the U.S., Japan, U.K., India, Latin America and Canada, to our pipeline.

We secured 2 important debt facilities in the first quarter, which will help us grow through the year and allow us to continue to maximize value through retaining projects. As Ahmad mentioned, we closed on a $150 million non-recourse construction revolver, which will be expanded to $300 million at our option and we look on track to do that in the second quarter. And we closed a $250 million non-recourse facility with -- for our yield vehicle to buy additional solar projects.

As we previously discussed, we filed a confidential S-1 for the initial public offering of our yield vehicle. We are pleased with the progress we've made so far, and subject to market conditions, we are on track for a midyear launch, as we previously communicated.

Now let's move on to more detailed discussion of our first quarter results. On Slide 4, you will see a summary of the guidance we gave at our Capital Markets Day on February 24 compared to our first quarter results. We sold 76 megawatts of projects in the quarter, and we held 74 megawatts, exceeding the high end of our guidance range. We chose to retain more megawatts on the balance sheet than we originally planned to drive greater value given the progress that we've seen on our yield vehicle. We estimate that the retained projects will generate over $120 million of retained value.

Our total megawatt completions, which is the sum of the projects sold and retained, was 150 megawatts and was in the middle of our range. Our fully developed ASP was $3.02 a watt. As you'll recall, ASPs can vary widely from quarter-to-quarter depending on the geography and the mix of our projects.

Now let's move on to Page 5. On this slide, we show our GAAP to non-GAAP summary P&L. First quarter 2014 non-GAAP revenue was $576 million, of which 2/3 was generated from our Solar Energy segment and 1/3 from our Semiconductor Materials business. The non-GAAP net income and earnings per share we show on this page exclude $1.09, net of tax, of fair value adjustments related to the convertible note-related derivatives. This accounting treatment will be required until the share increase is authorized at the annual shareholder meeting. This noncash charge was almost entirely due to the large increase in our share price during the quarter that ended at $18.84 and above the conversion price. To the extent that the share price is different on the date of -- on the date the shares are authorized, we will make another fair value adjustment at that time, and this will be reflected in our Q2 2014 results.

On Page 6, the total non-GAAP sales declined sequentially, reflecting seasonally lower solar energy sales and the fact that we decided to retain more megawatts on the balance sheet. These projects generate attractive returns and retain value.

Gross margin declined sequentially due to lower project margins, lower margins on our solar materials business partially offset by higher Semiconductor gross margin. Recall that our business model is transitioning to one that we retain projects which generate the greatest NPV per watt and sell those that do not.

Operating expenses were lower sequentially as we kept tight control on our expense structure. Assuming we sold all projects in the quarter, we would have generated an additional $0.10 a share of earnings.

Now let's move on to Slide 7. First quarter Solar Energy segment non-GAAP revenue dropped to $372 million driven by lower megawatt sales, partially offset by higher solar material sales. We also continue to focus on creating more value by increasing the percentage of projects that we hold versus what we sell. In Q1 2014, we held half of the projects versus only 20% in Q1 of 2013. And this is a trend that you should expect to continue into the future.

Of the $372 million in revenue, solar projects generated $230 million, down from $631 million in 2013 Q4 due to lower megawatt volumes. Sales of upstream solar materials rose to $107 million from $80 million in the prior quarter primarily due to the increase in solar module sales. The remaining $35 million was split between energy and O&M.

It is important to point out that our reported Solar Energy segment results do not reflect the true economic benefits of retaining these projects. Towards the bottom of this page, we illustrate the benefits of our retained value strategy. In 2014 first quarter, even with relatively low solar project sales volume, we created $35 million of value due to the retention of the projects. We have a strong growth trajectory, and we will retain more projects in the back half of this year, which will drive even higher value.

Now let's move on to Slide 8, which is our pipeline. Our pipeline grew in the first quarter to 3.6 gigawatts, up 173 megawatts from 3.4 in 2013 Q4. Including the 150 megawatts we completed in the quarter, our gross pipeline was up 323 megawatts sequentially.

Our pipeline continues to be well diversified with 47% in North America, 27% in Europe and Latin America and 26% in the emerging markets like South Africa, the Middle East and Asia. Our pipeline is also diversified by project size. About 16% of our pipeline consists of DG projects, which are generally smaller than 10 megawatts; mid-sized projects between 10 megawatts and 50 megawatts represent 34% of our pipeline; and projects between 500 and 100 megawatts were the 28%; and products over 100 megawatts were 22% of the pipeline.

Our project construction activity remained high. At end of the first quarter, we had over 463 megawatts in various stages of construction. Most of these megawatts will be completed over the next couple of quarters.

On Slide 9, we discuss our backlog. As a reminder, backlog represents projects with signed PPAs or backed by feed-in-tariffs and include projects under construction. Our backlog at end of the first quarter was 1 gigawatt, down 73 megawatts compared to 2013 fourth quarter despite completing 150 megawatts in the quarter. Our backlog is well diversified with about 62% in North America, 17% in Europe and LatAm and 21% in emerging markets. Most of our backlog projects are planned for completion over the next 2 years.

On Slide 10, driving higher NPV per watt. Our completed megawatts have grown tremendously over the last few years, and we expect this trend to continue this year. From 2009 through this year, we expect to post a CAGR of 90%. Our leading brand 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 underwriting process. In addition, we receive low-risk cash flows from projects we retain. Our balance sheet will be the enabler for our strategy, and we have worked to strengthen it over the last several quarters.

On to Slide 11. As I mentioned before, we continue to experience tremendous growth. Our leading brand in multiple channels and multiple regions has contributed heavily to this growth. Having grown rapidly over the last several years, we have now reached the scale that gives us the flexibility to best optimize value per watt of our solar projects. We can choose whether to sell the projects directly, as we have in the past, or retain them. The advantages of retaining them is, first, it contributes to the company's growing flow business by adding recurring contracted cash flows, which helps smooth out the development business. Second, we can continue -- we can create higher value by -- for the company by capturing several pieces of the project values that otherwise were captured by third-party project buyers. The advantages, however, come in the cost of reducing current period results because we do not recognize the revenue and profits associated with the sale of the held projects but instead recognize the economics over time through repeatable, recurring revenue streams. Innovative structures not only allow us to capture more of the retained value, but they also allow us to accelerate our growth in the coming years. In the near term, we are working to develop debt securitizations, yield vehicles and other structures that will enable us to grow our portfolio projects while utilizing third-party capital.

On the next page, on retained value, as a reminder, retained value is the value created by holding a project on our balance sheet. Put simply, the value of the cash flows and the projects discounted back to today at a discount representing the assumed cost of the capital of that project.

When we retain a project, we don't generate sales or gross margin 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 it. Retaining the projects allows us to capture value in the selling process due to the higher cost of 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 through the end of PPA, which is typically 15 to 20 years, to the end of the project's useful life, which is often 30 years.

As I mentioned earlier, the benefit of holding projects can be monetized in 2 ways: as ongoing cash flow in the business, adding to period cash flows as energy is produced and sold; or selling the projects into vehicles at a cost of capital that more accurately reflects their risk profile. As these public vehicles are developed, we believe we'll be able to capture more value than we are giving up today in a direct sale, while enjoying the benefits of repeatable, recurring revenue streams.

In the first quarter, we retained 74 megawatts on the balance sheet, which represents an estimated $122 million of retained value. In the process, we chose to forego about $25 million of margin if we had sold these projects. The difference, so this $97 million, is the value that we create above the margin had we sold them. Since late last year when we began our efforts to retain more projects, we've retained a total of 239 megawatts on our balance sheet and generated over $420 million of value, which is $284 million above the margin we would have made had we sold the projects. During the remainder of this year, we will continue to hold additional projects on the balance sheet, creating significant value for the company.

On Slide 13, we began the quarter with cash of $832 million and ended at $642 million. Primary drivers were the timing of solar project construction and partially offset by the financing that we received on those projects. And our construction activity remained strong heading into the second quarter.

On Slide 14, at the end of the quarter, we had $2.4 billion in Solar Energy assets, offset by $3 billion in non-recourse debt. Included in non-recourse debt was the drawn portion of the $150 million construction revolver and the $250 million acquisition facility of our yield vehicle. It is important to understand the nature of the non-recourse debt and how it is tied to our sale-leasebacks. Unlike the corresponding debt -- or, excuse me, the corresponding asset, this debt is non-amortizing. And the full balance is extinguished upon the last lease payment, typically 20 years after the project is sold, at which time a large GAAP gain will be realized. Accordingly, the non-recourse debt will always be -- will always exceed the asset balance. For the purposes of our debt covenant calculations, non-recourse debt is not included. Overall, we are very comfortable with our balance sheet and our liquidity position.

Now let's move on to our guidance. Slide 15 shows our guidance. Our efforts to maximize retained value will continue in the second quarter as we commit more resources to building and holding our projects. For the second quarter, we expect to sell 60 to 80 megawatts at an ASP of $2.85 to $3.15. And we plan to retain 100 to 120 megawatts during the quarter.

We expect our total megawatt completion to be 160 to 200 megawatts for the quarter. And for the full year, we are revising our expectations on held projects to be now in the range of 440 to 570 megawatts, and we expect to sell 460 to 580 at an ASP that we believe will be better at $2.40 to $2.75 now. And we expect the full year 2014 project completions to remain unchanged at 900 to 1,150 megawatts, unchanged from our previous guidance.

In summary, I'm very encouraged by the trends we see developing this year. The solar market continues to expand rapidly, and we are positioned well to capture a disproportionate share of it this year. We are differentiated by our deep pipeline and significant backlog and our strategy to add multiple layers of recurring revenue to the business model.

Our brand name continues to help us win valuable projects, achieve lower financing cost and will enable our global growth. We have a solid liquidity position and remain focused on improving our balance sheet, maximizing retained value and delivering strong returns for our stakeholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

I had a couple of them, either Ahmad or Brian. First and foremost, if we look at the valuation for third-party asset acquisitions to populate the YieldCo, where do you think they are? And do you think it's getting more difficult to make these accretive third-party acquisitions?

Brian Wuebbels

Yes, Krish, hi, thank you. This is Brian Wuebbels. So as we mentioned on our previous call, the strategy that we have for acquiring these third-party assets really have to do with combining those completed assets and under-development assets. As we mentioned on our last call, we have over 100 development partners today that we have been working with and continue to work with, and this is really where we see the source of these projects coming from. So we believe that, that value, by approaching it through that model versus just competing in the open market for external completed projects only, is where we can continue to drive additional value for both SunEdison as well as the yield vehicle in the future. So I don't -- we see it -- again, very fragmented market, Krish, and see it still as a very big opportunity for us to create that arbitrage.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it, Brian. That's very helpful. And then as a quick follow-up, when you look at the U.S.-based projects, which have commercial operating dates that begin after 2017, are you able to set up financing now given the step down in ITC that was expected to occur?

Brian Wuebbels

As we have mentioned previously, we do not presell our projects out that far in the future. We believe by having these public yield vehicles, this allows us an option to not have to worry about that financing from a third party in a post-2017 era. It's all going to all be about driving the cost of the system down and creating value in a post-ITC reduction era.

Operator

Our next question comes from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

First of all, I think we saw the -- your pipeline growth increase this year, but your backlog decreased year-on-year -- or quarter-on-quarter. Could you give some background on your expectations for the pipeline conversion into backlog and why that kind of depth [ph], spread is opening up going forward or at least this quarter?

Brian Wuebbels

Yes. No, great question. Just timing. I mean, we've completed 150 megawatts this quarter. We feel -- and the backlog moved a little bit but not a lot. We still feel very comfortable at that backlog continuing to build to support our current period growth. We have line of sight to the over 1 gigawatt that we've been projecting right now by project, by COD date for the rest of the year and feel very comfortable about that conversion heading into the future. It really is just quarter-to-quarter timing of it and nothing that I worry about. And the second thing is, just remember, as we continue to move to the flow business, which is DG and residential, those megawatts don't even go through our backlog and go right into projects that are completed. So those are the 2 variables that I look at. In my view, the backlog is well sufficient, and the conversion that we see going into it is very good. No worries on my -- in my part on that one.

Stephen Chin - UBS Investment Bank, Research Division

Got you. Just another quick question. You actually mentioned retained value on the megawatts you guys are holding on to, which is great for your yield vehicle. But could you guys give maybe another -- I know you guys at the Analyst Day gave a good breakdown of what that retained value consisted of. Can you guys give a sense of what your -- once again, talking about -- when you talk about this upside retained value, what is driving that x percentage that -- those hundreds of millions of retained value? How much is residual value? Or how much is other aspects of the project? How much is actually bookable as -- I know you guys can't share details on the YieldCo vehicle yet, but can you talk a little bit about what's driving that value add there in terms of cost of capital, in terms of edge [ph]? What -- I mean, it's a very large number, so a little bit more background of -- there. And also, really what's bankable upon -- given the -- once there's information [ph] about the YieldCo and once there's an actual spinoff, what of that is actually bankable on day 1 or even day 100 of that -- the extra $300 million of retained value for assets that you held on to this quarter?

Brian Wuebbels

Yes, so the ratio is not changed from what we showed in the Capital Markets Day. At the Capital Markets Day, we showed that there is about $0.60 of value created by the cost of capital, which is the difference between 7% to 7.5% that we see today, and we estimated at the time conservatively at 6%, which, depending on what view you have on that, it could be even higher than that. We had just over $0.20 from what we call frictional losses and $0.40 of residual value. So in my mind, all of that is bankable today. And the reason it's bankable today is because you own the asset. And you have a marker out there of what the cost to capital is for these yield vehicles. I know what the underwrite -- I know what these frictional costs are because I don't have to pay them anymore. So that's real savings, real value created. And for the residual value, I do have that PPA and that option into the future. So in our perspective, all of that is bankable today. The challenge that you have is, you're not going to recognize at all today. So you're going to get that significant value bump over the next 30 years versus -- discounted back, of course, versus recognizing a small chunk of it today by selling the asset. I mean, that's how we look at it. It's nothing different than what we showed at our Capital Markets Day.

Operator

Our next question comes from the line of Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

I wanted to just understand the pipeline additions in the quarter. It looks like most of your growth in pipeline is coming from emerging markets. Can you talk about if that's the case and where you see the opportunity in emerging markets? And also just on the residential business, it doesn't look like your pipeline composition has changed since the last quarter. So what kind of traction are you seeing in the residential market? And when do you expect to be a meaningful player in that market?

Brian Wuebbels

Yes, so no, we're very excited about the pipeline growth and the backlog as well that we're seeing. And it's very diverse. As we said, we added over 80 projects this period, 80 new products to that pipeline. So it continues to be smaller projects that have higher value versus the extremely large projects. As I mentioned, the areas that we added those 80 projects were pretty much all over the world. The growth areas that we really see right now are Japan, which is an area that we added projects in. We think that's a very exciting market and continue to see growth. Latin America. Obviously, the head start that we have in Chile and the continued success that we continue to see in Latin America is excellent. I think you saw a recent announcement about the moves that we've made in the U.K. The U.K. is a very positive market for us right now, and we see that momentum continuing in that market. And then, obviously, we also made several very large announcements this past quarter in what we're doing in India and some of the emerging markets of Southeast Asia. So it's very diverse, and I think that's the thing, Vishal, that's -- that we're excited about, is that we're not just seeing the growth in one area, we're seeing it across the board. In reference to the residential, we are very excited about the momentum that's building in that area. And it's not just building in North America. Our approach on residential has been to make sure that it's a global model that is scalable. And the momentum is building. And as Ahmad mentioned during the last call, later this year, likely in third quarter, we'll be ready to talk a lot more about what that business looks like and the scale of it. But we're very excited about the traction that we're making so far not just in the United States.

Vishal Shah - Deutsche Bank AG, Research Division

Okay, that's helpful. And just one follow-up. On the YieldCo announcement you've kind of alluded to in midyear launch, is that -- I mean, when you talk about projects that you're going to put into YieldCo, are they going to be mostly U.S. projects? Are you also going to include some international projects? Can you talk there?

Brian Wuebbels

Yes, as we mentioned during the last call, we already mentioned the countries. We said that they would be U.S., Canada, Chile and the U.K. is the countries that we mentioned that we believe will make up the assets that will be on our yield vehicle.

Operator

And our next question comes from the line of Patrick Junigan [ph] from Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

It's actually Patrick Jobin. Just a few quick questions. First, if I can look at the retained value per watt in the quarter of $1.65. Just comparing that to, I think, a little over $2 in Q4 and kind of your outlook for $1.90 which you gave at the Analyst Day, how should we think about that? I assume there's some regional mix with your projects in Chile. Or are you still comfortable with that $1.90 number for the year? And then I have a follow-up.

Brian Wuebbels

Yes, no, great question, Patrick. The answer is absolutely, we're comfortable for the full year. You nailed it. There's a few less -- as we mentioned in previous calls, there are certain regions that have $2.50-plus retained value on the projects and others that are more in the $1.50 to $1.60 range. So the mix was about $1.65 to $1.70 this quarter. So we absolutely have line of sight and believe that we'll meet or beat the $1.92 for the year.

Patrick Jobin - Crédit Suisse AG, Research Division

That's very helpful. And then just some simple questions here. The gross margin for projects being sold, I think about 11%, kind of what's driving some of that decline is the first part of the question. The second part is kind of more big picture, but looking at distributable cash flow from projects you're retaining or at least cash flow available for distribution of projects you're putting on your balance sheet, how should we look at kind of the cash flow profile for projects in U.S. and -- I mean, with tax equity versus projects elsewhere? I think in the past, you've given some numbers. I just want to understand that better.

Brian Wuebbels

No, great question. So on the margin side, I mean, as we've mentioned earlier, I still believe and see line of sight to 15% average for the year, which is what we talked about at the Capital Markets Day. Mix of projects this quarter was a little bit lower. The mix of projects in the coming quarters is going to be a lot better and a lot higher. So nothing in particular there. There was no sort of one-off oddities or oddballs that we didn't predict or didn't expect. So the execution is happening very well on the team versus in previous years. So nothing of alarm there, just the mix of projects. The -- on the other side, the cash available for distributions, obviously we've mentioned in previous calls that we're targeting $40 million to $60 million as a sort of an amount that we need to launch projects. What I will tell you right now is that we see that number being even higher. Can't really talk a lot more in detail about it, obviously, given everything that's going on with the filings, but we think that number could be in excess of the top end of that range by the time we launch. Momentum is excellent in that area.

Operator

Our next question comes from the line of Mahesh Sanganeria from RBC Capital.

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

This is Shailender in for Mahesh. One question. So we have seen some reports on the Solar PPA rate declines in the U.S. Some projects are signed at $0.09, $0.10 per kilowatt-hour, so even lower. Can you provide some color on what are -- PPA rates you're getting for your projects in both U.S. and the other markets? And then a follow-up to that, you talked about targeting a 6% IRR before. I mean, given the decline of PPA rate, is the 6% IRR still the target?

Brian Wuebbels

Yes, so thank you for your question. I mean, PPA rates are all over the map. For us, we feel that in a post-ITC, if you're talking about U.S. utility projects, you're $0.06 or less. If you're in residential, you're significantly higher than that. If you're in DG, you're probably in that $0.09 to $0.10 range. Internationally, it really just depends on the avoided cost of energy in those markets and the current incentives that are available out there. So, I mean, I think long run, yes, you have to get below the average cost of retail energy to be -- to have solar continue to grow at the rates that it's growing, and I don't see any reason that's not going to happen. So we feel very bullish about the cost reductions that are happening not only within our company but across the industry to help enable that. As far as the 6%, the 6% I think we are referring to is the cost -- the average cost of capital on our projects that we're seeing, which is the average of the yield expectation from the equity as well as the debt. And the answer is, I think in the United States clearly with yield vehicles and such, I think you can do better than that. I think internationally, in some countries, you can -- they clearly can be that good. And in others, you're probably talking something more that's in the 7% to 8% range that are the riskier countries. But overall, I think we feel -- and when we look at our retained value, that is predominantly driven by projects that are what I would call developed countries which have much lower cost of capital. So I don't see any reason why we can't continue to achieve that given the success that we've seen in the capital markets of other yielding vehicles. So hopefully, that helps.

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Yes, that's very helpful. And then one quick follow-up. Just wondering the status of the Semi IPO because you mentioned briefly that it's going well. And then is it possible that the Semi IPO may be launched after the YieldCo IPO? Is there -- can you talk about the timing between Semi and the YieldCo IPO? Because I understand YieldCo launch is going to be mid of the year; and Semi IPO, originally it was targeted in Q1.

Brian Wuebbels

Yes, I think -- as Ahmad mentioned earlier, I think we are progressing along with the Semi IPO. We obviously feel very comfortable about where that's at. It's all going to be about the market conditions. And so timing, I can't really talk about the timing of it other than we believe it's going to happen in the near term. Other than that, I don't -- I can't say much more about it. But we feel very good about the status of where we're at. It's going to be about the market window.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Thomas Daniels - Goldman Sachs Group Inc., Research Division

This is Tom Daniels on for Brian. I just had 2. One is kind of a follow-up to the prior question on PPA rates. On a go-forward basis in the current ITC environment, how should we be thinking about the PPA rates that are going to be in the YieldCo? Do you think these will be in the 8% to 10% range? And the reason I ask is because obviously, we've all seen some recent PPAs in kind of the $0.05, $0.06 range, and I think we're all trying to get to distributed cash flow maybe in '15 and '16 and then walking that down a post-ITC world in 2017. So any color you can provide on that would be very helpful.

Brian Wuebbels

Yes. No, I think one of the things that I think -- I believe our average of PPA rates that will be in our YieldCo will be higher, much higher than some of those numbers you've seen published. And the reason for that is, we fully intend to put distributed generation and residential projects into our YieldCo. So we believe the average PPA rate for our yield vehicle will probably be in that range that you had mentioned, the $0.08 to $0.10 range, in some cases higher. Clearly, there are announcements that have been happening. I would tell you that the majority of the PPAs that I -- that we see in our distributed generation and our residential business are significantly higher than those. So I don't -- clearly, if you're a utility-scale only player, you are going to feel a much more significant decline in the post-ITC era than you are if you're a distributed player and competing in much higher cost of electricity. So, I mean, I think we are well positioned given the average project size that we have, which is less than 3 megawatts today.

Thomas Daniels - Goldman Sachs Group Inc., Research Division

Great. That's really helpful, Brian. Then I -- my follow-up question was just we kind of think about your retained -- the megawatt proportion of your development business, maybe 50/50 mix, we have a pretty clear line of sight into what drop-downs could grow the YieldCo. I think one area of debate is this third-party purchases. Could that be as high, just in terms of megawatt numbers, as what you drop down? Or should we be thinking that the majority of your YieldCo megawatt growth will come from drop-downs, just a little bit from third-party buys? If you could help us kind of understand that a little bit better, it'd be great.

Brian Wuebbels

Nope. So any of the numbers that -- so I guess here's the best way to think about it. We -- you're going to hear a lot more about this post, obviously, the YieldCo launch because there is incremental value here. There is incremental value that the yield vehicle is going to provide to SunEdison in its ability to acquire third-party projects above and beyond the value that you may be multiplying in today based on my own backlog and pipeline. So there will be some additional. Can't talk a lot about it right now, but I'm telling you that, that arbitrage exists and we're seeing it and it will continue. What I would tell you is that the mix will vary. It's going to be opportunistic. Clearly, we have line of sight to significant growth within our own backlog and pipeline to grow the yield vehicle in coming years, and the external stuff will only be there to accentuate it to be able to strengthen the parent, strengthen the yield vehicle above and beyond what we could do just by ourselves. So more to come on that. And ideally, after we launch the YieldCo, this is something that we're going to talk a lot more about, is the extra value that we're not even talking about today associated with these third-party projects.

Operator

Our next question comes from the line of Aditya Satghare from FDC Capital Markets.

Aditya Satghare - FBR Capital Markets & Co., Research Division

It's Aditya Satghare from FBR Capital Markets. Two questions, if I may. Firstly, can you give us an update? And this more refers to Slide 8 and 9 on your presentation. How should we think about the proportion of projects in your pipeline maybe by region or by size which could be eligible for a drop-down into a yield vehicle, maybe on a more ongoing basis versus the launch of the YieldCo?

Brian Wuebbels

Yes, great question. Clearly, it's a mix of all of those. I mean, U.S. definitely. Canada, yes. EMEA and LatAm, a mix of those. So obviously, as we've said previously, projects like in Chile and the U.K. are definitely excellent candidates. I think it's some of the -- we define Japan and Australia as -- in our categorization of this would be in the sort of in this emerging bucket. I think those are excellent candidates potentially for the future. We haven't talk about those. But I think the way you'd look at it is it's all about the quality of those cash flows. So if it's a high-quality country, high-quality risk, low risk sort of backing up that PPA, then those all could be candidates for a yield-type vehicle. And as we've said previously, that yield vehicle could be listed in the U.S., it could be listed somewhere else. So there's multiple angles to get at that. But certainly, for the U.S. yield vehicle that we're discussing now, a big chunk of this backlog and pipeline we feel like could be excellent candidates for this vehicle into the future. And obviously, as the filings become public, you're going to see a lot more in there about what we disclose as to what we're going to be feeding into that thing in the future.

Aditya Satghare - FBR Capital Markets & Co., Research Division

Yes, got it. And my second question is on distributable cash flow. When we think about U.S. projects versus the international projects given the lack of tax structures outside the U.S., do you still get to the same or higher distributable cash flow given that in certain countries, your feed-in-tariff rate is higher? And does that offset some of the tax benefits we have in the U.S.?

Brian Wuebbels

The answer very simply is yes. Clearly, projects that don't have the ITC investor in the U.S. -- outside the U.S. have higher distributable cash flows. And some of those, as you mentioned, tend to have higher PPA rates. So the answer is yes. And that's why we believe the global -- the diversification that we have at SunEdison really makes this a compelling story versus potentially a single-region-only-type conversation. And as we had mentioned previously, it's all about that portfolio, putting it together, that we believe is going to be differentiated for SunEdison. And a lot more to come on that.

Operator

The next question comes from the line of Timothy Radcliff with Morgan Stanley.

Timothy Radcliff - Morgan Stanley, Research Division

I had a follow-up question on the response that you gave a bit earlier about the initial yield of the YieldCo cash flow. So you had mentioned in quarters past that you expected about 400 to 600 megawatts of initial project size. But given that the cash flow could be in excess of the $40 million to $60 million of cash flow, should we be thinking in terms of an initial YieldCo size greater than 600 megawatts?

Brian Wuebbels

Very possible. Very possible.

Timothy Radcliff - Morgan Stanley, Research Division

Okay. And given that prospect, does that change your thinking at all about acquiring projects in order to kind of get to scale here initially given that those projects probably have a higher cost basis and, therefore, lower return to SunEdison and/or its YieldCo?

Brian Wuebbels

No, Tim, I think it doesn't change our strategy. I think as we are retaining more projects inside as well to position, we are seeing outside opportunities. So I think that mix and that thinking from the original $40 million to $60 million is unchanged. We're just seeing a lot more progress than we originally had projected or at least expected 3 to 6 months ago. So it's really just about the momentum that's building.

Timothy Radcliff - Morgan Stanley, Research Division

Got you. That's really helpful. And then I just have one specific one on the higher proportion of retained projects in the quarter. Is it safe to assume that you've pulled forward some projects in the backlog that were slated for construction later in the year that would have been retained? Or were these kind of fully newly developed projects?

Brian Wuebbels

These were fully newly developed projects. So these were projects [indiscernible].

Timothy Radcliff - Morgan Stanley, Research Division

Okay, the outlook is [indiscernible]?

Brian Wuebbels

Correct. The -- and again, it goes back to the conversation we keep having on the positive momentum on the yield vehicle. I mean, those decisions are all about timing of that and when we see it and the incremental value that we believe we can create by continuing to move in this direction and the comfort that we have around being able to manage the balance sheet and the future growth of the company. So all those are positives.

Operator

And our next question comes from the line of Patrick Junigan [ph] from Credit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

It's Patrick Jobin again. So one simple thing and then one other question. Of the 239 megawatts that you've put on your balance sheet today, can you break that down by size, DG versus utility? And apologies if you've already disclosed that. And I have a simple follow-up.

Brian Wuebbels

No, we've never disclosed that. But I would tell you that, Patrick, it's not much different than the mix of projects that I have in my backlog or pipeline. So the average project size in that is probably 5 to 10 megawatts, maybe even smaller.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay, that make sense. And then looking at kind of distributable cash flow. When I think about U.S. projects that maybe have tax equity involved just given typical structure of 5, 6 years, it seems like you get a natural bump up in distributable cash flow once that tax equity structure kind of flips back. Is that the right cash flow dynamic?

Brian Wuebbels

I think yes, the answer is yes. It all depends on the structuring that you're using, obviously. But no question, once that recapture period is over, typically the economics come back to the asset owner or the other party, which would be us in that case. And therefore, you should definitely see a change in the distributable cash flows.

Operator

And our last question is from the line of Edwin Mok with Needham.

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

So first question, regarding -- if I look at your full year guidance, right, you raise your ASP guidance for the full year but still lower than what we saw in the first quarter, right? I think on -- I think answering Patrick's question, you talked about that you expect your margins to be better as we go towards the later half of year. How does that dynamic work with lower pricing but better margins?

Brian Wuebbels

Yes. No, good question, Edwin. It's all about the regional mix. I mean, if you go back to the backup slide that I gave at the Capital Markets Day, you'll see it in there. As we continue to see the growth in the emerging markets, what you typically see is much lower ASPs on average. But what you also see is much higher margins because the costs tend to be significantly lower in those areas. So what we expect to continue to see throughout the year is that our average ASP will decline, but our average cost of our project will decline even more, therefore margin's improving. It really is just about the regional mix and, obviously, cost reduction programs that we currently have going on such as the modules that we're using and the higher efficiency modules that we talked about in our Capital Markets Day, the cost of the goods sold reductions that we're seeing across the projects. So that's how we see that dynamic going. And as we saw in the first quarter, it really is about the mix of that project that creates that ASP change. But it -- all the data is unchanged from what I showed you in the Capital Markets Day backup slide. That's exactly what it is.

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

Great, that's helpful. And then on the YieldCo, I'm curious if you can you give us any color around how you think about leverage or debt that will be used for the projects that you plan to put at YieldCo, maybe how do we kind of think about how much leverage do you expect the YieldCo will have. Or any color on that?

Brian Wuebbels

Yes, I mean, I think expectation as a base should be -- you shouldn't assume overall leverage at the yield vehicle shouldn't be much different than what you would see on a normal project. Now what I would tell you is that having a portfolio of projects allows an optimization that's not available to you today on a single project level. So -- but I wouldn't expect the leverage to be -- at the beginning to be significant, as we've talked about previously. The benefit of putting some unlevered projects early on in the project is that you get a lot more distributable cash flows, which then allow you the opportunity to back lever in the future. So what I would tell you is that the base assumption should be not much different than the leverage you would see at a project level today but from the start maybe a little bit less to optimize the model. That's how you should think about it.

Operator

We have no more questions in queue at this time.

Brian Wuebbels

All right. Well, thank you, everyone, for joining the call today, and thank you for the questions. Have a great day. Bye.

Operator

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

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