TODAY’S STUDY: SOLAR WHEELING AND DEALING DOWN IN Q3

Solar Funding and M&A Q3 2012 Report

October 2012 (Mercom Capital Group)

Introduction

Venture capital (VC) funding in the solar sector in Q3 2012 was down to its lowest levels since 2008. VC funding amounted to only $72 million in Q3 2012 in 14 deals compared to $376 million in 32 deals in Q2 2012. VC deal size was also much smaller, the largest being just $15 million.

The leading VC deal this quarter was concentrating photovoltaic company SolFocus with $15 million. At the end of Q3, most of the year-to-date VC funding went to solar downstream ($258 million) and thin film companies ($246 million).

Only 26 investors participated in the 14 deals in Q3, and only New Enterprise Associates was involved in multiple deals.

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Underlying Trends: Global solar installations have been growing remarkably, from just 7 GW in 2009 to a forecasted 29 GW by the end of 2012, fueled by significant drops in polysilicon prices from around $200/kg in 2009 to approximately $19/kg currently, as well as drops in prices of Chinese c-Si PV modules from about $3.00/W in 2009 to current prices of approximately $0.65-0.70/W. Not to mention loans, credit facilities and frame work agreements of about $50 billion received by Chinese manufacturers from state owned Chinese banks, which has led to unbridled capacity expansion resulting in chronic oversupply, further fueling the drop in prices.

Meanwhile, billions of dollars in venture funding has gone into some very large thin film, CSP, and CPV companies over the last few years:

• 2010 – BrightSource Energy $176M, Amonix $129M, Stion $70M, Abound Solar $110M;

• 2011 – BrightSource Energy $201M, MiaSolé $106M, Alta Devices $72M, SoloPower $52M, Stion $130M;

• 2012 – MiaSolé $55M, Nanosolar $70M and $20M.

Over $1 billion in VC funding has gone into thin film (primarily CIGS) companies alone since 2010. While these deals may have made sense when c-Si panels were $3-4/W and polysilicon was in the $200-300/kg range, the quick and steep fall of c-Si prices have put crushing pressure on thin film companies as well as CSP and CPV companies. However, VCs saw CIGS as one of the last few areas with promise to compete for market share.

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Having already invested heavily in CIGS, and no near-term exits in sight, many VCs were doubling down and seeing their investments through commercialization in the hopes that they will be competitive once they start shipping.

The recent MiaSolé acquisition for $30 million by Chinese renewable company Hanergy frames the current challenge faced by VCs and companies as well. After approximately $500M in funding, MiaSolé was acquired for $30M – a very bad result.

Our Bankruptcy and Restructuring sections reflect the current market environment. This year alone, we have tracked approximately 22 solar bankruptcies and 42 restructuring and downsizing announcements so far.

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Solar Lease – A Bright Spot: Solar third party finance firms (solar lease/PPA firms) have been the bright spot this year. About $1 billion in solar residential and commercial lease funds have been raised just in Q3 2012, and almost $2 billion in 2012 YTD. Some of the notable third party finance firms include: SolarCity, SunRun, SunPower, Sungevity, OneRoof Energy, Clean Power Finance, and Enfinity among others. Active investors in these funds in 2012 include: Credit Suisse, Rabobank, Wells Fargo, Citi, and U.S. Bancorp. In a move that highlights this trend, SolarCity filed to raise more than $200 million in an IPO on October 5.

There were 12 corporate M&A transactions in Q3 2012, totalling $393 million with only four of them disclosing amounts. Two of these transactions, Q.Cells and MiaSolé, were distressed sales. German solar cell and module manufacturer Q.Cells was acquired by Korean conglomerate Hanwha Group for $322 million ($50 million and $272 million debt assumption). Chinese vertically-integrated manufacturer JA Solar acquired a 65 percent stake in Hebei Ningjin Songgong Semiconductor Co, a wholly-owned subsidiary of the Japanese polysilicon and wafer manufacturer M.Setek, for $39 million, and CIGS thin film company MiaSolé was acquired by the Chinese renewables company Hanergy for $30 million.

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Hanergy also acquired CIGS company Solibro a few months ago. Other CIGS strategic transactions included the partnership between Heliovolt and Korea's SK Group, and Stion and Korea's Avaco.

A notable M&A transaction this quarter was the acquisition of Vivint by Blackstone Group for $2 billion. Included in the transaction was the Vivint Solar division, a third party solar finance lease firm. The valuation of Vivint Solar on its own is unknown.

With the current success of solar lease firms, it remains to be seen if more security/home automation companies who already have access to millions of homes will also jump into the solar lease business.

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VC Funding

There were 14 VC funding deals in the third quarter of 2012, of which 13 disclosed funding amounts.

VC Funding by quarter

VC investment in Q3 2012 came to a paltry $72 million in 14 deals, compared to $376 million in 32 deals in Q2 2012.

VC Funding by technology by quarter

PV companies led VC funding this quarter with $25 million in four deals.

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VC Funding by technology 2011-12 (YTD)

Solar downstream companies have received $258 million in 20 deals, closely followed by thin film companies with $246 million in 14 deals. BOS companies continue to lag in VC funding, although these could be strong drivers for cost reductions and improved efficiencies.

VC Funding by stage

In Q3 2012, the average VC deal size in solar was $5.1 million in 14 deals. In comparison, the average deal size was $6.7 million higher in Q2 2012 with an average of $11.8 million in 34 deals.

Looking beyond the spikes created from some very large deals (Q2 2010 - BrightSource Energy, $176M; Solyndra, $175M; Amonix, $129M, Stion, $70M, Fonroche $66M, Enphase $63M, SunRun $50M; Q1 2011 - BrightSource Energy, $201M; MiaSolé $106M; Alta Devices $72M; SoloPower $52M; Q4 2011 - Stion $130M; Kiran Energy $50M; Sunpreme $50M; Q2 2012 - NanoSolar $70M, SunRun $60M), the average deal size has trended downward to $5.1 million from $15.2 million since 2010.

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VC Activity by country

The United States continued to be the leader in venture capital funding, accounting for $62 million out of $72 million in Q3 2012. The United States also led in the number of deals with 12 out of 14.

Large-Scale Project Activity

Large-scale project funding announced in Q3 2012 amounted to $1.1 billion in 15 deals compared to $1.4 billion in Q2 2012.

Large-Scale Project Funding by technology

There were 15 large-scale project funding announcements in Q3 2012, 13 of them were PV for a combined $1.1 billion. Thin film accounted for $57 million.

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Top 5 Large-Scale Project Funding Deals

The top announced large-scale project funding deals included $500 million raised by LS Power for its 170 MW Centinela Solar PV Project in California, $227 million raised by Northland Power for the six Ontario projects totaling 60 MW in Canada, and $116 million raised by Sonnedix for the 24 MW Toul 3 Solar Plant. Other significant projects funded were Borrego Solar Systems’ eight solar projects totaling 18 MW with $64.4 million, and Welspun Energy’s Rajasthan 50 MW PV Project with $60.6 million raised.

Residential/Commercial Solar Project Funds

The solar lease model has continued to be popular especially in the United States, and has attracted over $1 billion in this quarter alone, helped by a falling solar risk profile. It has been one of the primary drivers of residential installations in California and is now spreading to other states.

Debt Funding

Announced debt funding for solar in Q3 2012 amounted to $225 million in six deals compared to $2.3 billion in 15 deals in Q2 2012.

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Debt Funding Transactions

China Development Bank (CDB) continues to be active in providing debt to solar companies. This quarter CDB deals included $93.8 million to Canadian Solar which will be used to partially finance a previously announced $187 million acquisition of a majority interest in 16 solar projects in Ontario. CDB also announced a loan of $32 million for Chinese solar manufacturer Suntech.

Mergers and Acquisitions

There were 12 M&A transactions in Q3 2012 amounting to $393 million with only four disclosing transaction amounts.

The largest disclosed M&A transaction was the acquisition of Q-Cells, a manufacturer of solar cells and modules, for $322 million by Hanwha. Hanwha will only pay $50 million in cash to Q.Cells, but it will also assume about $272 million of debt. Other disclosed transactions involved the acquisition of a 65 percent stake in Hebei Ningjin Songgong Semiconductor Co, a wholly-owned subsidiary of the Japanese polysilicon and wafer manufacturer M.SETEK (controlled by AU Optronics) for $39 million by Chinese vertically-integrated manufacturer JA Solar; the acquisition of CIGS thin film company MiaSolé by Chinese renewable energy company Hanergy for $30 million; and acquisition of a 56 percent stake in solar installer Premier Power Renewable Energy for $1.8 million by Gascom Renew.

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Project M&A

Solar project M&A activity came to $777 million in 17 transactions in Q3 2012, compared to $437 million in 19 transactions in Q2 2012. Only eight transactions disclosed amounts.

Top 5 Project M&A Transactions

Top solar project M&A transactions included the two PV plants (92 MW total) acquired from GCL-Poly Energy by Consolidated Edison for $266 million, followed by Aviva’s acquisition of the HomeSun’s solar rooftop systems portfolio (23 MW total) for $156 million. Other top transactions were EDP-Energias de Portugal’s acquisition of 60 MW of Romanian solar projects for $154 million, Avelos’ acquisition of 30 PV (30MW) plants from Aion Renewables for $61 million, and Stonepeak Infrastructure Partners’ acquisition of the Canadian Solar 1 Project from Canadian Solar for $48.4 million.

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