In the past six months, no company has moved more aggressively to expand in the renewable-energy industry than SunEdison (SUNEQ). The latest move was a $2.4 billion purchase of First Wind, one of the largest wind project developers in the world.
Some of First Wind's assets will be pushed down to TerraForm Power (TERP), the yieldco that also owns the solar systems SunEdison owns.
A SunEdison project in Chile. Image source: SunEdison.
How SunEdison got here
SunEdison hasn't always been the aggressive renewable-energy company it is today. It began as MEMC Electronics, which made semiconductor materials, including solar panels that were sold to project developers. When it acquired SunEdison, the company moved into the development, financing, and operation of solar projects.
Today, many of the old MEMC Electronics assets are being sold off, and SunEdison is first and foremost a solar project developer. It completed 297 MW of projects in the third quarter of this year and expects to install 1.6 to 1.8 GW of solar projects next year.
But that's only part of the story today. SunEdison also launched TerraForm Power, a subsidiary known as a yieldco that owns renewable-energy assets that generate cash flow for shareholders over 20 years or more. Last quarter, 251 MW of the 297 MW SunEdison completed were retained with the intention of pushing them down to TerraForm Power.
The subsidiary allows SunEdison to benefit from the long-term value of a project while still generating some cash from the sale to the subsidiary. The company also receives incentive distribution rights that are basically a bonus for growth of TerraForm Power.
A growing trend in renewable energy
Yieldcos are a growing trend in renewable energy and allow investors to participate in the industry without betting on which manufacturer's technology will win. In a yieldco, they're buying real energy-generating assets that that have predictable cash flows over a long period of time.
More projects like SunPower's California Valley Solar Ranch are ending up in yieldcos. Image source: SunPower.
NRG Yield (CWEN 2.30%) was one of the first yieldcos to hit the market, owning some of the largest solar plants in the world. But it also owns some fossil-fuel assets so it can use tax advantages that come with renewable-energy development.
SunPower (SPWR -8.41%) is also considering a yieldco and is holding 640 MW of projects on its balance sheet in case it does launch one. The difference from SunEdison's TerraForm Power is that SunPower only builds projects with its own solar panels and SunEdison is more technology agnostic. Interestingly, First Solar, which is one of the largest project builders in the world, has said it won't launch its own yieldco.
Different companies are taking different strategies when it comes to renewable-energy project development, and one thing we know is that SunEdison is going big or going home.
Betting big on renewable energy
What separates SunEdison from competitors is its aggressive growth in both wind and solar. Last month, it signed a 5 GW memorandum of understanding in India for multiple 500 MW projects. A few days later, it won a bid to build 150 MW in solar projects in Karnataka, India.
The $2.4 billion First Wind acquisition adds 521 MW of operating projects to SunEdison and TerraForm and adds 8.0 GW of new project opportunities. Management expects that the transaction will be immediately accretive and will allow TerraForm Power to increase its dividend 44% to $1.30 per share next year.
The big risk for SunEdison and its investors comes down to executing on projects and getting capital for growth. As long as interest rates remain low and SunEdison and TerraForm Power can access capital, there's no limit to how big this company can grow. But right now it doesn't have enough cash to acquire First Wind or build multiple GW of projects each year without raising funds through debt or share sales.
I'll be watching to see how the First Wind acquisition is funded beyond the current bridge loan (short-term) and if the company's aggressive expansion will lead to shareholder value long-term, but that may take decades to fully play out. What we know right now is that the market loves this new aggressive developer in renewable energy and if you're interested in renewable energy it's a company worth watching.
