SunEdison Pivots Away From Yield Companies That Can't Buy Plants

  • CEO Ahmad Chatila to hold new projects in bank warehouses
  • SunEdison cuts 2016 project development plans by 20 percent

SunEdison Inc. Chief Executive Officer Ahmad Chatila created two companies over the past 15 months to buy his solar and wind farms. Now he’s cutting them off, and investors like it.

The world’s biggest developer of renewable-energy power plants doesn’t expect to sell any projects through next year to the two units, TerraForm Power Inc. and TerraForm Global Inc., after they lost more than half their value.

With their share prices down, the two TerraForm companies are no longer in a position to purchase power plants, Chatila said Wednesday during a conference call with analysts. That means he’s looking for outside buyers or will hold the projects on SunEdison’s balance sheet. It’s the latest sign that this model, known as yieldcos, is falling from favor in the renewable energy industry.

“We’re going to pivot to third-party sales,” Chatila said on the call. “There’s a disconnect between the value of these underlying assets and what people are willing to pay for them in a yieldco.”

Strategic Shift

The move is part of a strategic shift at SunEdison that also includes firing 15 percent of its workforce and scaling back growth plans by about 20 percent. The Maryland Heights, Missouri-based company had previously said it expected installations to double next year, to as much as 4,500 megawatts. Chatila said Wednesday he expect to build 3,300 megawatts to 3,700 megawatts in 2016.

SunEdison shares jumped on the news, gaining 12 percent to $9.72 at the close in New York. The company has slumped 50 percent this year.

“We knew they were holding off on dropping projects to the yieldcos but zero is a big shift,” said Angelo Zino, an analyst at S&P Capital IQ in New York. “This puts the bad news behind them. Reality hit them and they adjusted.” He reduced his 12-month price target on SunEdison to $18 from $32 and rates them a buy. 

Yieldco Model

TerraForm Power and TerraForm Global were formed to own and operate power plants, purchased from SunEdison and other developers. The steady, long-term revenue from selling electricity helps fund dividend payments, which is why they’re known as yieldcos. They also can use capital from their initial public offerings and secondary offerings to buy more power plants.

The model has fallen from favor in recent months, amid questions about whether they’ll retain their popularity with investors if interest rates go up, and some concern that the increasing number of yieldcos may create competition to buy wind and solar farms and drive up prices.

TerraForm Power has plunged 53 percent to $19.77 since reaching its record high in April, and is trading below its $25 IPO price in July 2014. TerraForm Global is down 52 percent since debuting at $15 in July of this year.

At those prices, the companies can’t sell shares to fund more acquisitions, Chatila said. SunEdison will either sell them to other buyers, like pension funds, insurance companies and other investors seeking steady, long-term revenue. Warren Buffett’s Berkshire Hathaway Inc. has purchased stakes in SunEdison projects in the past. 

Warehouse Lines

Another option is holding onto projects through financing facilities SunEdison has formed with companies like Goldman Sachs Group Inc. and JP Morgan Chase & Co. Chatila expects at least 2,500 megawatts of completed projects will be held next year on these so-called warehouse lines.

“Warehouses would love to keep these assets,” SunEdison’s Chief Financial Officer Brian Wuebbels said on the call. SunEdison retains the revenue they generate while held in a warehouse line but can’t recognize revenue from selling the plants as long as the banks hold the assets. Some of those projects could remain in the warehouses for as long as seven years.

While the yieldco model is struggling, Chatila expects it to rebound.

“The long-term best thing for SunEdison shareholders is to hold onto these assets” through the yieldcos. “The asset class has to mature.”

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