SunEdison Spinning Yieldcos

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by Debra Fiakas CFA

Two weeks ago TerraForm Global, Inc. filed yet another amendment to its S-1 registration statement as the SunEdison, Inc. (SUNE:  NYSE) spinout grinds forward with its initial public offering.  TerraForm is a collection of SunEdison’s renewable energy properties, primarily its solar, wind and hydro-electric power generation facilities around the world.  The current portfolio sums up to over 1,400 megawatts in total generating capacity, of which over 900 are spoken for through power purchase commitments that cover the next 19 years.    On a pro forma basis, the assets produced $298.9 million in total revenue, providing $44.1 million in net income.   

This will be SunEdison’s second spinout of renewable assets.  TerraForm Power, Inc. (TERP:  NYSE) was spun out of SunEdison a year ago, gaining 48% from its IPO price of 25%.  Even at its present elevated price, the stock offers a dividend yield of 3.3%.  The success of SunEdison’s first ‘yieldco’ is likely to influence the pricing and trading of the international properties now up for grabs if the SEC can be appeased.

SunEdison has been the premier acquirer of renewable energy projects.  Its reputation precedes it, opening doors and priming negotiations.  A central point of the case for Terraform Global is the existence of over 600 gigawatts of power generating capacity that the company apparently considers fair game for adding to the portfolio.  Seven acquisitions are already in the pipeline, representing 921.7 megawatts of generating capacity. 

SunEdison is projecting 32% compound annual growth over the next five years for Terraform Global and expects to have $231 million in cash available to distribute as a dividend in 2016.  Projecting cash generation in the next year is relatively easy given all those power purchase agreements that lock in sales levels and pricing.  However, in predicting high double digit growth for the next five years, SunEdison could be out on the proverbial limb.

Indeed, with big numbers like 32% growth etched into the prospectus, do not be surprised if Terraform Global debuts at a health multiple of earnings  –  a multiple that might be sustainable if growth fails to materialize.  Thus it might be wise to wait for the stock to mature a few weeks before jumping into long positions.  I note that the ‘big sister’ Terraform Power closed near $32.00 on its first day of trading, but within three months had skidded below its offering price.  This presented an interesting window of opportunity to access shares at compelling prices.  It will be worthwhile watching this new IPO for similar developments.  

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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