The sudden drop in oil and energy prices have sapped the speculative energy out of many firms operating in the space. With it, the enthusiasm for alternative and renewable energy sources has been waning as of late. But a recent development has sparked some renewed interest for a solar company being pursued by renewable energy firm SunEdison Inc (SUNE) and its newly formed (and controversial) yieldco.
More on those later.
Yesterday morning while sitting in on Squawk Box on CNBC, Warren Buffett commented on the prospects for solar energy to power consumer homes and said he would prefer that subsidies to get solar panels on residential home roofs should not be spread widely across his Berkshire Hathaway Energy customer base. It’s an important argument that SunEdison will need to address as it pursues Vivint Solar Inc (VSLR).
In what seems like forever ago in today’s fast-paced financial markets, last July, SunEdison announced that it and TerraForm Power Inc (TERP) were acquiring Vivint Solar, a solar energy provider to residential customers across the United States. The deal size at the time was $2.2 billion. The jury is still out, but regardless of whether the deal closes, the transaction from here looks better for solar consumers than SUNE stock holders.
Also last July, SunEdison announced that it was offering shares of its wholly owned subsidiary TerraForm to the public through an initial public offering. TerraForm is known in the industry as a yieldco unit and was created to help SUNE run assets it acquires, such as power plants and firms like Vivint Solar.
SunEdison initially pitched the deal as helping it become “the leading global residential and commercial solar provider” and compete with the likes of SolarCity Corp (SCTY). Elon Musk, the billionaire entrepreneur who runs SpaceX and Tesla Motors Inc (TSLA) serves as the Chairman of SolarCity, and helps illustrate the interest — both from its benefit to society and opportunity to make investors wealthy — in developing alternative energy technologies.
The Vivint deal was already amended in December. The purchase price was lowered slightly to $1.9 billion and an investment vehicle backed by private equity firm Blackstone Group LP (BX) agreed to provide a $250 million credit facility to help get the deal closed. TerraForm is estimated to pitch in nearly $800 million to fund the Vivint purchase, with SunEdison contributing the rest.
The primary hold-up on SunEdison’s interest in Vivint Solar stems from hedge fund manager David Tepper, who runs Appaloosa Management that owns shares in TerraForm. Back in January, despite the lower deal price, he sued to block the deal on the grounds that it wasn’t in the best interests of TerraForm shareholders.
Favorably for SunEdison, last week the company officially announced that a judge denied Appaloosa’s injunction, which would have paved the way for the deal to go through, with speculation it could be closed by March. This was in the works late last week and helped push SunEdison’s stock from close to $1 per share to around $2.50 per share.
However, Appaloosa is now planning to “seek expedited trial” against SUNE, which smacked shares down by double digits on Monday.
SunEdison stock was set to open Tuesday down another 30% after the company announced it was delaying its 2015 results amid internal investigations.
SUNE Stock’s Investment Appeal: Murky!
Looking at the investment merits of these companies, it’s currently difficult to discern what this means to their future profitability. For the current year, analysts currently project sizable earnings losses for SunEdison and Vivint (a loss of $3.84 per share and $2.54, respectively), with a more modest loss of 49 centsprojected for TerraForm.
SolarCity is projected to lose $9.18 per share, which is rather significant given the share price is currently below $19.20. Over the past couple of years, it and SUNE stock are each down nearly 80%, well below the market’s 6% gain over the same period. TerraForm is in the same boat and down more than 70%.
The share price difficulties are due to a combination of the murky financial outlook for these firms, but also an uneven stock market environment, especially for newer technologies in the energy sector. yieldco uncertainty is also to blame.
Are YieldCos the Way to Go?
A research piece by tax advisory firm EY points out that yieldcos were created to help firms like SunEdison raise capital for assets it acquires yet keep the asset partially off its books (and onto the yieldco), which could free up capital for yet more deals. It was also meant to allow the yieldco, like TerraForm, to pay a higher yield and benefit both the parent energy firm and its yieldco subsidiary.
Yet the market is skeptical of the appeal of these arrangements. Part of their inspiration was master limited partnerships (MLPs) by pipeline and other energy firms, but they are being unwound and, on balance, haven’t been sustainably economical for shareholders.
The Bottom Line
There is no denying that the court decision to help the deal go through was beneficial for current shareholders in SunEdison and Vivint. But with Appaloosa still fighting, with SunEdison’s results now delayed, and given the stock market’s risk-averse mood, the newness of the yieldco structure and Wall Street’s expectations for significant losses … prospective investors would be well served to tread lightly in SUNE stock.
The real winners in the solar space could be consumers served by Vivint and SolarCity. Their losses suggest they are subsidizing adding solar panels to consumer homes, which is good for the environment (through the use of less pollutive fossil fuels) and potentially individual pocketbooks via lower energy costs.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
