(NYSE: SUNE) Yieldco slump buffeting SunEdison seen providing third party investment opportunity by Matt Whittaker
The current yieldco slump could offer an opportunity to investors who want to buy solar and wind assets from renewable energy development companies.
In the latest sign of headwinds in the market for so-called yieldcos, or spun-off subsidiaries that buy wind and solar generation assets from parent companies, SunEdison (NYSE:SUNE) last week said it would back off its yield company model for the time being.
The company, which says it is the world’s largest renewable energy development company, said it does not plan to “drop down” any assets into its two yieldcos in 2016. Instead, it will fund itself with sales to “warehouse” facilities backed by equity investors including First Reserve and Goldman Sachs, as well as third party sales.
Travis Miller, director of utilities research at Morningstar Inc., thinks the yieldco market had gotten frothy. The current slump is simply a correction for the relatively new yieldco vehicles rather than an indication of more fundamental problems. He added that whether other development companies follow SunEdison’s lead will be on a case-by-case basis depending on how much their cost of capital rises.
RBC Capital Markets solar energy analyst Mahesh Sanganeria said other developers SunPower (NASDAQ: SPWR) and First Solar (NASAQ:FSLR) will probably also not drop down assets into their joint yieldco 8Point3 Energy Partners (CAFD).
With yieldcos offering less competition, renewable assets from developers can be had for a bit cheaper by third party buyers, Sanganeria said.
Derek HasBrouck, energy expert with PA Consulting Group, agrees that this represents a good opportunity for third-party long-term investors who are patient, such as pension funds or unregulated affiliates of regulated utilities.
Some of the froth coming out of the yieldco and solar markets also means that for those in the solar industry, capital will be more expensive and securitization arrangements and mergers and acquisitions will come under greater scrutiny, he said.
However, he added that more M&A makes sense given that the solar development business is still a very young industry with many smaller players in addition to large scale companies like SolarCity (NASDAQ:SCTY) and SunEdison, he said.
SunEdison’s newest yieldco, TerraForm Global (NASDAQ:GLBL), closed Monday off more than 42 percent from its initial public offering in July. Meanwhile, SunEdison’s first yieldco, TerraForm Power (NASDAQ: TERP), closed down more than 39 percent year to date. The Global X YieldCo Index ETF (NASDAQ:YLCO) closed more than 25 percent lower than its start in May.
Against this backdrop, SunEdison management in a business update Wednesday said the yieldco market is dislocated and that it was revising its 2016 volume guidance to 3,300-3,700 megawatts from 4,200-4,500.
“Yieldcos have been impacted by the turbulence in the energy markets,” SunEdison CEO Ahmad Chatila said Wednesday on the conference call. “While we believe that the underperformance is driven by technical factors rather than a change in the underlying fundamental structure, we need to adjust our tactics, at least in the short to intermediate term.”
Brian Wuebbels, chief financial officer, said the company is shifting to the warehouse strategy to retain the option to drop down assets to yieldcos later on “when conditions improve,” rather than shifting to all third-party sales right now.
“While management is clearly pausing on drop-downs, they have not completely given up on the yieldco vehicles for the long-term as evidenced by the warehouse strategy,” UBS analysts said in a note on Wednesday.
In light of this turmoil and shifting strategy, analysts at UBS lowered their 12-month price target for SunEdison to $9 per share from $11. They said cost cutting efforts are offset by reduced discounted cash flow value. Lower megawatts volumes more than offset a modest gross margin increase, they said.
“We do not see a path back to the $30 (per share) level without healthy yieldcos,” the UBS analysts said. SunEdison’s share price was last above the $30 in July. It closed Monday at $8.97.
See Figure 1 below comparing SUNE against S&P 500 performance over the last three months revealing substantial market resistance.
Key questions about SunEdison’s new strategy include how pricing will be dictated to the warehouse structures, whether the company will continue to have full control when it does decide to drop down assets and whether it would still be entitled to any excess cash flows above the minimum interest levels, the UBS analysts said.
“Effectively, we see these warehouses as becoming the intermediate-term home for some of these assets, rather than (a) strictly transient structure,”the analysts said.
The analysts said the company “appears to be de-emphasizing international project development as part of the restructuring.”
Emphasizing the company’s collapsed $700 million acquisition of Latin America Power, the analysts said “the markets being pursued by SUNE for the global vehicle are risky in nature.”
They said they are “skeptical” on SunEdison’s emerging markets expansion initiative and the TerraForm Global yieldco.
All this negative pressure may present an opportunity to those looking for a lower entry point for SUNE.
Matt Whittaker is a journalist specializing in natural resources coverage. His work has appeared in The Wall Street Journal, Barron’s and other international publications. He has reported from the Americas, Europe and Asia.