Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. SUNPOWER CORP (867773) 10-K published on Feb 13, 2019 at 10:00 pm
Reporting Period: Dec 29, 2018
In 2018, TEP UK acted as agent for BHP and Marubeni, which faced difficulty securing banking arrangements allowing them to accept payments from IOC, and, thus, received payments from IOC in relation to BHP and Marubeni’s share of income from the Bruce Rhum Agreement under the terms of an agency agreement entered into in June 2018 between BHP, Marubeni and TEP UK (the “Agency Agreement”). Payments made from IOC to BHP and Marubeni in 2018 related to the periods prior to the completion of their divestment to Serica in November 2018. Total payment received on behalf of BHP and Marubeni by TEP UK under this arrangement in 2018 was approximately £7 million. This amount relates to income due to BHP and Marubeni under the Bruce Rhum Agreement for 2017 and 2018. TEP UK transferred all income received under the Agency Agreement to BHP and Marubeni and provided the service on a no profit, no loss basis. The Agency Agreement is expected to be terminated upon receipt of all payments relating to the period up to November 30, 2018.
Prior to the re-imposition of U.S. secondary sanctions on the oil industry as of November 5, 2018, TEP UK liaised directly with IOC concerning its interest in the Bruce Rhum Agreement and it received payments directly for services provided to IOC under the Bruce Rhum Agreement. In October 2018, the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) granted a new conditional license to BP and Serica authorizing the provision of services to the Rhum field, following the reinstatement of U.S. secondary sanctions. The principal condition of the OFAC license is that the Iranian government’s
During fiscal 2018 we faced market challenges, including competitive solar product pricing pressure including the impact of tariffs imposed pursuant to Section 201 and Section 301 of the Trade Act of 1974. On January 23, 2018, the President of the United States issued Proclamation 9693, which approved recommendations to provide relief to U.S. manufacturers and imposed safeguard tariffs on imported solar cells and modules, based on the investigations, findings, and recommendations of the International Trade Commission. The tariffs went into effect on February 7, 2018. While solar cells and modules based on interdigitated back contact ("IBC") technology, like our Maxeon 3, Maxeon 2 and related products, were granted exclusion from these safeguard tariffs on September 19, 2018, our solar products based on other technologies continue to be subject to the safeguard tariffs. Additionally, the Office of the United States Trade Representative (“USTR”) initiated an investigation under Section 301 of the Trade Act of 1974 into the government of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation. The USTR imposed additional import duties of up to 25% on certain Chinese products covered by the Section 301 remedy. These tariffs include certain solar power system components and finished products, including those purchased from our suppliers for use in our products and used in our business. In the near term, imposition of these tariffs - on top of anti-dumping and countervailing duties on Chinese solar cells and modules, imposed under the prior administration - is likely to result in a wide range of impacts to the U.S. solar industry, global manufacturing market and our business. Such tariffs could cause market volatility, price fluctuations, and demand reduction. Uncertainties associated with the Section 201 and Section 301 trade cases prompted us to adopt a restructuring plan and implement initiatives to reduce operating expenses and cost of revenue overhead and improve cash flow. During fiscal 2018, we incurred total tariffs charges of approximately $42.5 million.
In evaluating the accounting treatment for the transaction described above, we concluded that the Residential Lease Portfolio meets the definition of a business and then proceeded to assess whether SunPower has a controlling financial interest in SunStrong in accordance with the relevant consolidation accounting guidance. We have offered SunStrong certain substantive, non-standard indemnifications related to cash flow losses arising from a recapture of California property taxes on account of a change in ownership, recapture of federal tax attributes and cash flow losses from leases that do not generate the promised savings to homeowners. The maximum exposure to loss arising from the indemnifications is limited to the consideration received for the solar power systems. While our retention of certain indemnification obligations on behalf of SunStrong may require us to absorb losses that are not proportionate with our equity interests, we do not have the power to unilaterally make decisions that affect the performance of SunStrong. Under the Operating Agreement, we and HA SunStrong Parent are given equal governing rights and all major decisions, including among others, approving or modifying the budget, terminating service providers, incurring indebtedness, refinancing any existing loans, declaring distributions, commencing or settling any claims, require unanimous consent. Therefore, we concluded that we do not control SunStrong nor are we the primary beneficiary of SunStrong. Accordingly, we deconsolidated SunStrong and thereby deconsolidated the Residential Lease Portfolio including the associated non-recourse financing debt of $561.6 million as of the date of sale. We have accounted for our retained investment in SunStrong as an equity method investment and have estimated the fair value of the retained interest at $9.6 million. We computed the fair value for our retained investment consistent with the methodology and assumptions that market participants would use in their estimates of fair value. Determining the fair value involves significant estimates and assumptions. We used the income approach to estimate the fair value of our retained investment in Residential Lease Portfolio. The income approach is based on the discounted cash flow method that uses the estimates for forecasted future financial performance, including assumptions for, among others, forecasted contractual lease income, lease expenses, residual value of these lease assets and long-term discount rates, and forecasted default rates over the lease term and discount rates, some of which require significant judgment by management. These estimates are developed based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. In addition to the cash proceeds noted above, we are entitled to additional cash and non-cash consideration that is described below.
On August 10, 2018, SunStrong Capital Acquisition, LLC, a wholly-owned subsidiary of SunStrong (“Mezzanine Loan 1 Borrower”), and SunStrong Capital Lender LLC, a subsidiary of Hannon Armstrong, entered into a mezzanine loan agreement under which Mezzanine Loan 1 Borrower borrowed a subordinated, mezzanine loan of $110.5 million (the “Mezzanine Loan 1”) and incurred issuance costs of $1.4 million related to the loan. On August 31, 2018, we repaid a principal amount of $2.1 million that resulted in an adjusted Mezzanine Loan 1 balance, net of issuance costs, of $107.0 million. In connection with the closing of the PSA, SunStrong assumed all current and future debt service obligations associated with Mezzanine Loan 1. The assumption of such debt, although a non-cash transaction for us, was reflected in the determination of the loss recognized upon deconsolidation of the Residential Lease Portfolio.
On November 5, 2018, SunStrong Capital Acquisition OF, LLC, a wholly-owned subsidiary of SunStrong (“Mezzanine Loan 2 Borrower”), and SunStrong Capital Lender 2 LLC, a subsidiary of Hannon Armstrong, entered into a loan agreement under which, Mezzanine Loan 2 Borrower may borrow a subordinated, mezzanine loan of up to $32.0 million (the “Mezzanine Loan 2”). The borrowing facilities provided by the Mezzanine Loan 2 have been determined in consideration of the residential lease assets for which we have either completed construction or have the obligation to complete construction after November 5, 2018. On November 20, 2018, Mezzanine Loan 2 Borrower borrowed approximately $24.6 million and distributed $19.6 million of the proceeds to us. The remaining proceeds of $5.0 million represents additional consideration that is held in a reserve by SunStrong and the proceeds will be distributed to us upon completion of our contractual obligations by the second quarter of 2019. Mezzanine Loan 2 Borrower is expected to draw an additional approximately $5.6 million against the Mezzanine Loan 2 of which approximately $4.0 million is associated with residential lease assets for which construction was completed. On December 21, 2018, we received $4.6 million as a special distribution from SunStrong. The remaining amount of $1.0 million represents additional consideration related to residential lease assets for which we will provide construction services after the close of the Transaction.
In the fourth quarter of fiscal 2018, we entered into a joint venture with HA SunStrong Capital LLC (“HA SunStrong Parent”), an affiliate of Hannon Armstrong Sustainable Infrastructure Capital, Inc., to acquire, own, manage, operate, finance, and maintain a portfolio of residential rooftop or ground-mounted solar photovoltaic electric generating systems ("Solar Assets"). Pursuant to the terms of the Purchase and Sale Agreement (the “PSA"), we sold to HA SunStrong Parent, in exchange for consideration of $10.0 million, membership units representing a 49.0% membership interest in SunStrong Capital Holdings, LLC (“SunStrong”), formerly our wholly-owned subsidiary. Following the closing of the PSA, we deconsolidated certain entities that have historically held the assets and liabilities comprising our residential lease business (the "Residential Lease Portfolio"), as part of our previously announced decision to sell a portion of our interest in the Residential Lease Portfolio, and retained membership units representing a 51% membership interest in SunStrong. The loss on divestment and the remaining unsold residential lease asset impairment with its corresponding depreciation savings are excluded from our segment results as they are non-cash in nature and not reflective of ongoing operating results.