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 SunEdison had established TerraForm Power Inc. as a “yieldco,” a
complex financing vehicle to purchase energy projects from SunEdison
and other developers. TerraForm lured investors with the promise of
reliable dividends based on long-term power contracts.
As Wuebbels’ presentation made clear, the yieldcos also created
incentives for SunEdison to rapidly acquire more power projects.
"It's all about growth, creating a pipeline, feeding that pipeline
into TerraForm," he told investors.
The resulting acquisition spree would drive SunEdison deeply into
debt - and ultimately into bankruptcy. SunEdison's Chapter 11 filing
last week has brought new scrutiny to the company’s relationship
with TerraForm Power and a second yieldco it formed in 2015,
TerraForm Global<GLBL.O>.
A spokesperson representing both yieldcos declined to comment.
SunEdison officials did not respond to a request for comment.
Wuebbels - who became CEO of both yieldcos late last year - resigned
last month and could not be reached for comment.
Yieldcos have become relatively common in the alternative energy
sector since their launch in 2013. But unlike the earliest such
entities, TerraForm Power and TerraForm Global were structured to
include “incentive distribution rights,” or IDRs, designed to direct
additional cash to SunEdison as the yieldcos reached certain levels
of dividends to investors.
Under the arrangement, SunEdison would collect a rising share of
TerraForm’s dividends as they grew - reaching a high of 50 cents for
every additional dividend dollar beyond 45.14 cents a share.
Getting to that level quickly, Wuebbels told investors in February
of 2015, would require rapid expansion of the yieldco’s holdings.
"In doing that, we get more cash and IDRs back to the company," he
said.
DOUBLING DOWN ON DEBT
By September of last year, SunEdison reported more than 800 projects
in the pipeline or in backlog, and it had branched out from its core
business of utility-scale solar into wind power and residential
solar. The company - which owned a controlling interest in both
yieldcos - launched deals across the United States as well as in
Europe, Latin America and Asia.
The rapid growth required prolific borrowing, and SunEdison’s debt
level nearly doubled between September of 2014 and September of
2015, from $9 billion to $16.1 billion.
As investor skepticism mounted, the company’s stock plunged by 84%,
from a lifetime high of $33.45 in July to $5.09 at the end of 2015.
By the time the company filed for bankruptcy last week, the stock
was trading at 34 cents a share.
In March, the company announced it had received a subpoena from the
U.S. Department of Justice seeking information about SunEdison’s
relations with its yieldcos and about its failed attempt to acquire
residential solar company Vivint Solar Inc.
Earlier this month, SunEdison said in a regulatory filing that an
audit committee investigation had found no evidence of fraud. The
company conceded, however, that the counsel hired by its independent
directors had “identified issues with the Company’s overly
optimistic culture and its tone at the top.”
Neither TerraForm Power nor TerraForm Global was included in the
Chapter 11 filing, and both have said in statements that they expect
to continue operations. On Friday, shares of TerraForm Power and
TerraForm Global closed down 57 percent and 79 percent from their
respective IPO prices.
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FROM “YIELDCOS” TO “GROWTHCOS”
The industry’s first yieldcos were broadly viewed as a success
through 2014. They worked as intended, lowering capital costs for
their parent companies and delivering stable returns to investors.
But strong appetite for their stocks among hedge funds and
institutional investors drove share prices up for many yieldcos,
including those formed by SunEdison.
That created more pressure for acquisitions to bolster dividend
yields and drove up prices for power projects as yieldcos competed
with one another to purchase them. Their voracious appetites soon
led investors to nickname them “growthcos."
"It becomes a treadmill whose speed is constantly ramping up," said
Keith Martin, a project finance attorney at Chadbourne & Park LLP,
which has represented yieldcos in asset acquisitions.
Ed Feo, president of renewable energy developer Coronal Group LLC,
described the dynamic as "trying to fill up a bucket that has a hole
in the bottom.” INVESTOR ANGST
As SunEdison and its yieldcos continued to pile on debt to expand,
analysts and investors became increasingly skeptical.
In 2014 and 2015, SunEdison’s yieldcos raised more than $7.5 billion
through debt and equity, according to data compiled by research firm
Clean Energy Pipeline.
In November of 2015, billionaire hedge fund manager David Tepper's
Appaloosa Management, which acquired a 9.3 percent stake in
TerraForm Power, sent a letter to TerraForm’s board of directors
criticizing the Vivint deal, saying it was motivated by the
SunEdison’s thirst for cash payouts from IDRs.
An outspoken critic of how SunEdison uses the IDRs - and what he
called its outsized influence on TerraForm Power's project purchases
- Tepper filed suit in January in an attempt to block the yieldco's
Vivint acquisition. Initially priced at $922 million, the deal
eventually fell apart, and Vivint sued SunEdison for breach of
contract.
One industry observer attributed SunEdison's woes to the risks
inherent in an emerging industry toying with experimental financial
instruments.
“You are combining a relatively new energy sector with a brand new
investment vehicle," Dan Reicher, executive director of Center for
Energy Policy and Finance at Stanford University. "We shouldn't be
terribly surprised that we've had some problems.”
(Editing by Sue Horton and Brian Thevenot)
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