TerraForm Power (NASDAQ: TERP) IPO

SunEdison's Transformative Solar Yieldco

Posted July 15, 2014 at 12:13PM

suneSunEdison (NYSE: SUNE), the company formerly known as MEMC Electronic Materials, is undergoing a reinvention, and its latest phase could make a lot of money.

Just two years ago, MEMC looked like it was going to crumble like its competitors Abound Solar Inc. and Solyndra LLC. The government's solar tax credits expired, it endured quarter after quarter of negative profit, laid off 20% of its workforce, and was downgraded by two major credit rating agencies.

Things looked grave.

Fortunately, a broader trend in the energy industry had the capacity to put MEMC back on the right track, and one of the company's directors believed it could work.

The trend was the renewable yieldco, and the director was Altai Capital executive Steve Tesoriere. By spinning off SunEdison's semiconductor business into a new company (NASDAQ: SEMI) and its solar properties into a yieldco called TerraForm Power (NASDAQ: TERP), the company simultaneously shifted its focus to solar energy and mitigated some of the risk associated with the space.

Like SEMI back in May, TERP is going public.

The Yieldco

Since 2013, half a dozen energy companies have created yieldcos for their renewable energy projects, and all of them have performed strongly. TerraForm Power is following their lead.

Take a look at these yieldcos which all went public within the last year.

NRG Yield (NASDAQ: NYLD)

NRG Yield NYLD


Brookfield Renewable Energy Partners (BYSE: BEP)

Brookfield Renewable Energy Partners BEP


Pattern Energy Group (NASDAQ: PEGI)

Pattern Energy Co PEGI


Abengoa Yield PLC (NASDAQ: ABY)

Abengoa Yield ABY


Hannon Armstrong Sustainable Infrastructure (NYSE: HASI)

Hannon Armstrong Yield HASI


While some of them are still very young and the historical data is scarce, they are all broadly following the same path.

Yieldcos behave like Real Estate Investment Trusts (REITs) or Master Limited Partnerships (MLPs). The company owns assets that already produce cash, and a minimum percentage of earnings are paid out in the form of dividends. Because these energy companies get their cash from long-term power purchasing agreements, their cash flow is extremely predictable and can sustain a high yield. This makes them highly attractive to capital investors, especially when interest rates are low.

In a panel discussion at the Chadbourne Global Energy and Finance Conference last year, the CFO of K Road Power, Carl Weatherley-White, explained the value of yieldcos in the following way:

“For a company like K Road that has developing assets, a yieldco is a possible future way of financing our assets. Investors are willing to pay more for assets that have a proven history than for those that are merely under development. Separating the more volatile activities of development and construction from the more stable and less volatile cash flows of operating assets is a good choice. NRG recently filed an initial public offering for a portfolio of contracted assets in the hope of attracting capital at lower cost.”

Renewable energy projects face a lot of uncertainty when they're developing, but have low-risk cash flows after they're built. These yieldcos consolidate their low-risk cash flows into a single, tax advantaged entity.

SunEdison first filed for the TerraForm Power IPO in February 2014, and planned to raise $401 million in funds by offering 20.1 million shares at a price between $19 and $21. The median of the proposed share price range would put the company at a market value of $2 billion.

TerraForm Power formed in 2014 and posted $26 million in bookings for the year ending on March 31, 2014. According to the company's S-1 filing with the SEC, it had a 3.6 GW pipeline of “development-stage solar projects, and approximately 1.9 GW of self-developed and third party developed solar power generation assets under management.”

SunEdison has been beefing up its solar assets in anticipation of this IPO.

In June, SunEdison made the largest acquisition of solar assets in Massachusetts history when it bought 50 MW of PV projects from BlueWave Capital LLC. Then in July, it acquired a 50% stake in the Silver Ridge Power JV for its retained photovoltaic power plants. Through its stake in the joint venture, SunEdison (or TerraForm Power) will own 50% of 336 MW solar power plant operating projects and a 40% stake in the Tenaska Imperial Solar Energy Center West 183 MW facility which will be completed in 2016.

In short, SunEdison is putting its solar projects in TerraForm Power, and then commanding a big stake in the company so it can tap the markets for cash at a cost significantly lower than a bank loan. The result is a high-yield, low risk security that capitalizes on our currently low interest rates that will fund the expansion of higher risk energy projects under SUNE.