SunEdison's Thorny Situation Is Getting Worse

David Tepper is becoming a problem SunEdison would love to get rid of.

Travis Hoium
Travis Hoium
Dec 29, 2015 at 8:45AM
Energy, Materials, and Utilities

Image source: SunEdison.

A growing thorn in the side of SunEdison (OTC:SUNEQ) isn't going away and may only get worse over time. The thorn I'm talking about is David Tepper, who now holds nearly a 10% stake in SunEdison's yieldco TerraForm Power (NASDAQ:TERP), and he wants answers about what in the world is going on with SunEdison and its yieldcos. Given his holiday week's threat of legal action, it doesn't seem like he's going away anytime soon.

Tepper's latest demand
In early December, David Tepper announced his position in TerraForm Power and sent a letter to the board of directors calling into question "obvious conflicts". He also wasn't happy about TerraForm Power potentially acquiring a large portfolio of residential solar projects as part of the Vivint Solar acquisition.

Since then, SunEdison renegotiated the Vivint Solar deal to lower the cash portion of the acquisition from $1.05 billion to $840.6 million, but TerraForm Power is still expected to spend $799 million to buy 523 MW of residential solar assets (down from $922 million for the same assets in July).  

Combine the modified acquisition with the management shakeup a few weeks ago (which I covered here) and Tepper is threatening legal action if he doesn't find out what's going on in the boardroom. He wants meeting minutes from the Nov. 20 board meeting, documents about the Vivint Solar transaction, and copies of director liability and indemnification agreements.  

Why this threatens SunEdison
Tepper's continued pursuit of information from SunEdison is problematic because TerraForm Power is a key to the company's long-term plans. Not only is it needed to fund the Vivint Solar acquisition, but it's where SunEdison is hoping to house projects long term.

If the yieldco recovers to the point where it can sell new debt and equity for expansion, it could then buy projects from SunEdison. The company would collect dividends from TerraForm Power, and if the dividend grew enough, it would get incentive distribution rights that could be worth billions.

That's the view from SunEdison's perspective, and TerraForm Power's falling stock price makes that scenario implausible. TerraForm Power's current dividend yield of 11% makes any equity sale to fund expansion virtually impossible.

TERP Chart

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How Tepper sees TerraForm Power
What I've outlined above is how to look at TerraForm Power from SunEdison's position. But if you look at TerraForm Power as a completely separate entity, as Tepper does, the picture changes. The current dividend yield of 11% could be seen as great for investors and with the predictable long-term nature of wind and solar projects, the company could pay a large dividend for decades. But owning TerraForm Power for the high yield also means you don't care about growth and may not want the company to buy more projects at yields lower than the dividend. This fundamentally changes your view of the company.

Reading between the lines, Tepper is saying that it's not in TerraForm Power's best interest to be involved in acquiring Vivint Solar assets and the company should just be a plain old boring dividend-paying energy company. Forget that SunEdison needs the company to fund growth -- that's not TerraForm Power's problem as a separate entity.

The drama continues
This banter between Tepper and SunEdison's management is far from over, and I think there will be a lot more drama in 2016. Tepper has the money and the patience to play the long game with TerraForm Power. And he's proving to be a thorn in the side of SunEdison that just won't go away.