SunEdison's Yieldco Overreach Stirs Angst at Solar Companies

  • Canadian Solar, Trina consider other options after market rout
  • SunEdison's TerraForm Global down 40 Percent Since IPO in July

When SunEdison Inc. Chief Executive Officer Ahmad Chatila sold shares in his second power-plant holding company to the public in July, he already suspected the offering might not draw enough investors.

He was right. TerraForm Global Inc. declined $1 in its trading debut and has never risen above its $15 IPO price. The Bethesda, Maryland-based company rose 1 percent to $9.03 at the close in New York.

TerraForm Global’s weak showing is a sign of waning interest in this model: companies known as yieldcos that are formed to own and operate power plants. Since then, renewable-energy companies have shifted their strategies for tapping into the same kind of low-cost financing provided by these publicly traded ventures.

“We tried to do transactions the market couldn’t absorb,” Chatila said in an interview. “It started over a year ago but we got the brunt of it over the last two months.” Maryland Heights, Missouri-based SunEdison is the biggest renewable energy developer.

Many yieldcos that soared in their initial offerings have since tanked, including TerraForm Global’s sister company TerraForm Power Inc., which closed Friday at $21.58, down from its $42.15 peak in April and its $25 IPO price in July 2014. NRG Yield Inc., formed in 2013 by the biggest U.S. independent power producer NRG Energy Inc., has slipped 35 percent this year, and Abengoa Yield Plc has fallen 33 percent since its IPO at $29 in June 2014.

The turmoil has prompted Canadian Solar Inc. and Trina Solar Ltd. to consider different ways to attract investors to their power-plant portfolios and use the proceeds to finance projects at lower costs.

‘Different Attitude’

“Ninety days ago, investors had a very different attitude toward yield companies,” Nat Kreamer, chairman of the Solar Energy Industries Association, said Sept. 16 in an interview at an industry conference in Anaheim, California.

Selling shares of renewable energy generators to the public as a way to reduce financing costs isn’t as compelling, and “private equity is now cheaper than yield companies,” he said.

Yieldcos are designed to buy power plants from their parent companies, providing fresh capital to the developers to build more projects. The yieldcos collect revenue from selling electricity, and use it to fund more acquisitions and make dividend payments to shareholders.

Driving Up Prices

At least 15 yieldcos have held IPOs since early 2013, raising more than $12 billion, according to Bloomberg New Energy Finance. Because the model relies on consistent growth, there’s concern the boom in yieldcos has created too much demand for new clean-power plants, driving up prices, NRG Energy Chief Executive Officer David Crane said in August.

New Energy Finance has said that rising interest rates may also present a threat by making government debt more competitive. That concern was assuaged Thursday when the Federal Reserve opted to leave U.S. interest rates unchanged, for now.

Canadian Solar Chief Financial Officer Michael Potter said the company is still planning to form a yieldco, despite the recent market volatility.

“We believe a yieldco, at the right price, will deliver the best value for our shareholders,” Potter said in an e-mail Sept. 16.

However, he’s also keeping his options open. Potter told analysts during an Aug. 18 conference call that the company is developing backup strategies. “We have alternative plans in place to a yieldco, if needed, to monetize our utility-scale solar power plant assets. Yields are not in a range that you would hope to have a robust yieldco launched in it.” He expects pricing for yieldcos to improve in the next six months.

‘Growthco’ Model

Trina Solar, the largest panel producer, isn’t waiting.

Trina announced Sept. 11 plans to form an alternative to a yield company, where it would sell shares to the public in its portfolio of power plants, a structure it called a “growthco.” It would focus on increasing value by using cash flows to add power plants to its portfolio rather than paying dividends from the income they produce.

Kreamer, who’s also CEO of Clean Power Finance Inc., said the recent drop in yieldco share prices is attracting the institutional investors that avoided them when valuations were soaring earlier this year. He agreed in July to merge his company with the energy-efficiency provider Kilowatt Financial LLC.

“They’re looking a lot more attractive now,” Kreamer said.

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