Even Solar Haters Are Loving SunEdison’s Power-Plant Strategy

Gordon Johnson
Gordon Johnson, analyst with Wolfe Research in New York. Source: Wolfe Research via Bloomberg

SunEdison Inc.’s focus on developing renewable energy plants worldwide, rather than the panels that make them work, has won over one of the industry’s top critics.

Gordon Johnson, an analyst with Wolfe Research in New York, has been warning investors for years that solar companies face a survival challenge as margins continue to fall for photovoltaic panels that convert energy from the sun.

SunEdison’s focus on power plants offers higher margins and strong growth prospects, with a business model that’s starting to deliver steady dividend payouts. The result: When Johnson initiated coverage of the company last month, he awarded the Maryland Heights, Missouri-based company an outperform rating.

“The bulls got one right,” said Johnson, who expects the shares to climb to $44, from about $30 now.

So far this year SunEdison has gained 60 percent, the most among U.S. companies on the Bloomberg Intelligence Global Large Solar index. It’s got 15 buy ratings from analysts, two holds and one sell, for an average rating of 4.5 out of 5, the highest for U.S.-based members of the 21-company index.

The company has had a complex history. Founded in 2003, it was purchased in 2009 for $200 million, by a semiconductor-materials supplier once owned by Monsanto Co. The buyer, named MEMC Electronic Materials, adopted the SunEdison name in 2013 as it began shifting away from manufacturing silicon wafers for computer chips and solar cells.

Since then SunEdison has expanded rapidly, with power plants in operation or under development on every continent except Antarctica. It had 4.9 gigawatts of capacity in operation at the end of the first quarter and 7.5 gigawatts under development as of June 1.

On Tuesday, the company gained another 2 gigawatts with deals to acquire developers in Central America and Asia.

‘Massive’ Opportunity

“We are preparing ourselves for rapid growth to capitalize on a massive market opportunity,” Chief Executive Officer Ahmad Chatila said on a May 7 conference call.

Chatila declined to be interviewed as the company prepares for an initial public offering of TerraForm Global Inc., a separate unit of the company focusing on emerging markets that may raise as much as $800 million.

And that’s the second part of SunEdison’s success story.

TerraForm Global was formed to own and operate power plants, using the revenue from selling electricity to purchase more power plants, from SunEdison and other developers. This model is becoming increasingly popular with clean energy developers. The structure, known as a yieldco, helps lower borrowing costs for their parent companies and offers consistent dividends to investors.

Second Yieldco

TerraForm Global will be SunEdison’s second yieldco. It’s first, TerraForm Power Inc., focuses mainly on power plants in the U.S. and other developed nations. It’s gained 55 percent since its IPO in July, and raised its dividend from 17 cents a share in November to 32.5 cents in May.

Along with the developer acquisitions Tuesday, SunEdison also raised $402.5 million for TerraForm Global through two private placement deals.

Johnson’s rosy outlook for SunEdison isn’t because he sees improving fundamentals in the solar industry, he said in a telephone interview. It’s largely because of the yieldcos.

“Our enthusiasm centers on investors’ current thirst for yield and SunEdison’s solid execution so far, not a solar market recovery,” Johnson wrote in a May 22 research note.

SunEdison is his only recommendation in the clean energy industry, and he’s betting against all the other U.S.-traded solar stocks. “I’m extremely bearish on the manufacturing side.”

That includes First Solar Inc. and SunPower Corp., the biggest U.S. panel makers, which Johnson no longer covers.

‘Defined by Oversupply’

“First Solar and SunPower, their core business is module manufacturing, Johnson said. ‘‘That market is clearly defined by oversupply.’’

Johnson has been pessimistic on panel producers for years. In November 2010, he predicted the industry would face ‘‘Armageddon’’ because of a growing oversupply. Less than a year later, Solyndra LLC filed for bankruptcy, marking the start of a two-year global solar slump.

SunEdison has also broadened out its business in other ways. In January, it acquired the wind-farm developer First Wind Holdings Inc. for $2.4 billion.

In May, when it announced plans for the TerraForm Global IPO, SunEdison also agreed to buy 757 megawatts of wind and solar farms in Brazil, China, India and other developing nations, and rights of first offer for projects with another 1,918 megawatts of capacity.

“SunEdison is now seen as the preeminent global solar play,” Johnson said. Combining cheap solar modules from China with the company’s financing and developing prowess will make it tough for competitors like First Solar and SunPower to catch up. “I don’t think they can match SunEdison in a global solar market.”

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