Renewable energy developer SunEdison Inc (OTC:SUNEQ) continued its push to become the biggest owner of renewable energy projects in the world in the first quarter. Recently published quarterly results showed just $323 million in revenue and a loss of $424 million, or $1.36 per share, but the company continued to store projects on its balance sheet and push projects down to its yieldco.
It's a global yieldco that's grabbing attention today, though.
Here comes TerraForm Global
The big news of the day was that SunEdison plans to launch an emerging markets yieldco, which would own projects outside the U.S. This is the first global yieldco, and it could create an avenue for long-term value creation internationally.
As usual with initial filings, details were sparse, but the company looks to raise $700 million in an IPO and would target China, Brazil, India, South Africa, Peru, Uruguay, Malaysia, and Thailand initially. The projects currently in the pipeline have a capacity of 987.8 million and an estimated cash available for distribution of $164.8 million by the end of 2016.
Keep an eye on how this launch proceeds. There are a lot of questions to answer around tax structure and what projects will be included long term.
SunEdison's first quarter
On the earnings side, revenue and net loss for the first quarter don't exactly tell the whole story for SunEdison. It only sold 71 MW out of the 273 MW of projects it built, with the rest retained or pushed down to its yieldco TerraForm Power (NASDAQ:TERP).
A backlog of 5.2 GW of projects and total leads, pipeline, and backlog totaling 53 GW should keep that flow of projects to TerraForm Power growing. The question is just how much cash the yieldco will be able to generate long term? SunEdison is clearly bidding aggressively to win new projects, and with interest rates at all-time lows, I'm worried the company is building leverage at precisely the wrong time.
To show why I'm skeptical, let's take a look at TerraForm Power's actual cash flows in the first quarter.
TerraForm Power and the mythical CAFD
Yieldcos are really just power plant owners that pay dividends to their owners. They're valuable to a company like SunEdison because it can push assets down to the yieldco at a higher price than it could sell a project for on the open market -- and it gets incentive distribution rights, or IDRs, or a disproportionate amount of the dividends paid.
So, when TerraForm Power announces an increase in cash available for distribution, or CAFD, guidance for the full year to $225 million, or $1.35 per share, everyone gets excited. But we should dig into what that number really means.
Net loss attributable to TerraForm Power was $28.1 million in the first quarter, after accounting for the $55.4 million loss shared with non-controlling interests (tax equity investors). If we look on the cash flow statement, even after you pull out project depreciation and foreign currency losses, TerraForm Power's loss from operations was still $10.6 million. That's a far cry from the $39 million management said was available for distribution.
To get cash available for distribution, management added back $10.5 million in "changes in assets and liabilities," $14.2 million in acquisition costs, $8.7 million in "change in accrued interest," and $6.7 million in general and administrative costs associated with paying for SunEdison's overhead.
These costs may not be directly associated with cash from projects, but they are very real costs associated with running the business. My concern here is that TerraForm Power is trying to trump up cash available and paid in distributions at the expense of a solid balance sheet. After all, SunEdison has an economic incentive to increase payouts as quickly as possible to increase its own IDRs.
SunEdison is... complicated
There's no question that SunEdison is growing quickly as a renewable energy project developer. What is in question is how profitably it's doing so. This quarter, the company reported a $372 million loss attributed to its shareholders, and its subsidiary TerraForm Power reported a $28.1 million loss. These numbers may not tell the whole story given the long-term structure of the projects the company owns, but GAAP accounting metrics were designed to account for all costs associated with running a business, so they're worth noting.
It's also concerning that TerraForm Power has $2.2 billion in debt, while SunEdison has a whopping $9.2 billion in debt (some consolidated from TerraForm Power). That makes the business much more risky than it seems, and without a profit even project debt has to become a concern at some point.
SunEdison has a lot of promise for value creation someday, but I'm not seeing it coming to fruition today, and with a $7.4 billion valuation, the stock is just too rich for me.