SunEdison’s Brave New World: YieldCos, First Wind

SunEdison has gone through a lot of changes in the past year, diversifying beyond solar power and into wind power through its $2.4 billion acquisition of First Wind, and beyond being solely a developer of projects for others into owning its own projects through its YieldCo, TerraForm Power.

On Wednesday, SunEdison reported fourth-quarter and fiscal year 2014 results that helped illustrate how these shifts are affecting the company’s bottom line -- and laying the groundwork for matching global demand for renewable energy.

SunEdison reported fourth quarter non-GAAP revenues of $625.5 million and a net loss of $42.7 million, or 16 cents per share, compared to revenues of $540 million and a net loss of $181.8 million, or 68 cents per share, in the fourth quarter of 2013.

On a GAAP basis, the company reported fourth-quarter 2014 revenues of $610.5 million and a net loss of $242.1 million, or 89 cents per share, compared to fourth-quarter 2013 revenues of $681.2 million and a net loss of $283.4 million, or $1.06 per share.

These results didn’t match analysts’ fourth-quarter targets of revenues of $683.8 million and a loss of 32 cents per share, pushing SunEdison’s share price down slightly in after-hours trading Wednesday. But shares had regained those losses in early Thursday trading -- perhaps because of the rosier picture painted by the company’s record-setting 2014 project growth, as well as its backlog and pipeline of projects.

SunEdison reported a record 1,048 megawatts of new projects in 2014, up 506 megawatts, or 94 percent, from the previous year. That included 783 megawatts of projects retained on its balance sheet through the spinout of TerraForm this summer, and projects “dropped down” into that YieldCo since then, SunEdison CFO Brian Wuebbels said in a Thursday morning conference call. TerraForm Power reported fourth-quarter 2014 net sales of $42.6 million, up from  $4.5 million in the same quarter in 2013.

The YieldCo structure allows SunEdison to retain the ongoing income from projects and attract investors looking for steady income and dividends, rather than the revenues from projects developed and sold to third parties. Other companies have set up YieldCos such as NRG Yield, NextEra Energy Partners, Abengoa Yield, and TransAlta Renewables.

But SunEdison, unlike these other companies that have created their own YieldCos, has not reported a profitable quarter on a GAAP basis since 2011. The company’s vertically integrated silicon and semiconductor manufacturing and solar project development business model, created when U.S. semiconductor manufacturer MEMC bought SunEdison in 2009, was hit hard by ongoing price pressures, and the future worry of losing the U.S. federal Investment Tax Credit (ITC) for solar projects in 2017.

SunEdison reported 467 megawatts of projects under construction at the end of the fourth quarter, and a pipeline of 5.1 gigawatts, with 973 megawatts of gross additions in 2014. Here’s a breakdown of those projects by geographic region and size, along with a chart that shows the growth of projects retained on the company's balance sheet.



“As we continue to see the acceleration of our yield vehicles, you’re going to see the plan to move further and further to retaining more projects and selling fewer projects,” Wuebbels said.

SunEdison is still growing its utility-scale and distributed solar business in North America, CEO Ahmad Chatila said in Thursday’s call. Indeed, SunEdison has quietly launched a residential solar loan program called SolarOwn. At the same time, “We continue our strong momentum in emerging markets,” and “we expect these markets to outpace the overall markets in the coming years,” he said.

In particular, “when Europe went through its challenges, we refocused our efforts on LatAm,” he said, using shorthand for Latin America, where SunEdison has taken the lead in terms of operational capacity, according to GTM Research’s Latin America PV Playbook. SunEdison has also submitted a confidential S-1 filing to create a second YieldCo, focusing on emerging markets in Africa and Asia, he said.

As for First Wind, it brought 1.6 gigawatts of pipeline and backlog to the company’s fourth-quarter results, as well as an additional 1.6 gigawatts of projects eligible for U.S. Production Tax Credits (PTC), Wuebbels said. First Wind is also the 11th-largest solar PV developer in the U.S., with a total of 468 megawatts in operation and in development, according to GTM Research's U.S. Utility PV Market Tracker.

SunEdison has also set up a warehouse facility, which combines $500 million in equity financing with $1 billion in long-term and revolving debt, to finance construction of both wind and solar projects, Wuebbels said. “This is only the first of several innovations we’re working on to create additional sources of growth capital beyond capital markets while continuing to drive down the cost of capital for our capital business,” he said.



Fourth-quarter non-GAAP gross margins were 10.8 percent, down from the third quarter’s 15.8 percent but up from the 4.9 percent gross margins of the fourth quarter of 2013. As this chart indicates, the company’s margins have been dragged down by the poor performance of its silicon materials segment.


Other highlights of the quarter included:

• An average cost of solar installations of $2.97 per watt, on the high side of the company’s projections for the year
• Fourth-quarter capital expenditures of $47.8 million, of which $23.1 million was incurred in the semiconductor materials segment
• $158.9 million in capital expenses incurred to secure the wind turbines expected to result in 1.6 gigawatts of PTC-eligible wind projects
• $304.3 million spent on acquisitions

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DOWN WIND - Wind Turbine documentary (part one)

Hawaii Wind Farm, Failing, for Sale

An SEC filing required as a condition of the potential sale of windfarms from Hawaii’s largest wind farm developer, First Wind, to TerraForm Power, Inc., have revealed a number of difficulties the subsidized windfarm has faced in meeting its terms of operation with regard to generating and delivering reliable power to the grid.

As reported in the Hawaii Free Presss (Feb. 8), the SEC filing paints a company in trouble, even before the sale is approved. In the filings TerraForm acknowledged:

We have limited experience in energy generation operations. As a result of this lack of experience, we may be prone to errors .... We lack the technical training and experience with developing, starting or operating non-solar generation facilities. With no direct training or experience in these areas, our management may not be fully aware of the many specific requirements related to working in industries beyond solar energy generation. Additionally, we may be exposed to increased operating costs, unforeseen liabilities or risks, and regulatory and environmental concerns associated with entering new sectors of the power generation industry, which could have an adverse impact on our business as well as place us at a competitive disadvantage relative to more established non-solar energy market participants. In addition, such ventures could require a disproportionate amount of our management’s attention and resources. Our operations, earnings and ultimate financial success could suffer irreparable harm due to our management’s lack of experience in these industries.

Equipment Problems

TerraForm’s filing also indicates First Wind’s wind farms suffer from an array of problems. For instance, under its power purchasing agreement, First Wind was required to install and maintain a battery energy storage system to maintain electric grid stability and reliability. However, the battery system manufacturer and manager, Xtreme Power, is in bankruptcy and no longer provides replacement batteries or other necessary components. Though First wind is attempting to secure replacement batteries, it admits the new battery system may not be able to meet the company’s terms of operation.

An additional equipment problem uncovered in TerraForm’s SEC filing is the turbines and other equipment originally produced and supplied to First Wind by Clipper Windpower are no longer manufactured, backed or serviced by Clipper. A number of defects were found in the turbines and other equipment Clipper provided, affecting various turbines operations up to the present. The defects resulted in prolonged, “downtime for turbines at various projects,” according to TerraForm’s SEC filing.

Prolonged arbitration and litigation ensued, resulting in a settlement agreement signed by First Wind releasing Clipper from all warranty and maintenance obligations. As a result, TerraForm reports, “if Clipper equipment experiences defects in the future, we will not have the benefit of a manufacturer’s warranty on such original equipment, may not be able to obtain replacement components and will need to self-fund the correction or replacement of such equipment, which could negatively impact our business financial condition, results of operations and cash flows.”

Location and Financing Problems

TerraForm lists a number of other problems potentially resulting in losses or even the closure of some turbines or windfarm sites entirely. For instance, First Wind did not properly notify the FAA of wind turbine construction in certain locations, thus if aviation conflicts arise, the turbines may have curtail their operation or even be shut down. In addition, operations at some wind farm locations have been curtailed due to an excessive number of endangered bats and birds being killed by the turbines.

TerraForm is also concerned the wind farms it wishes to purchase may be unable to secure financing for ongoing operations unless Congress keeps in place the entire panoply of subsidies and tax advantages wind farms currently benefit from. According to TerraForm, “PTCs and accelerated tax depreciation benefits generated by operating projects can be monetized by entering into tax equity financing agreements with investors that can utilize the tax benefits, which have been a key financing tool for wind energy projects. The growth of our wind energy business may be dependent on the U.S. Congress extending the expiration date of, renewing or replacing PTCs, without which the market for tax equity financing for wind projects would likely cease to exist.” It is an open question whether Congress will continue to renew the wind production tax credit or if it will continue to provide favorable tax breaks to the energy industry.

With the all of these forces buffeting First Wind’s wind farms, one may wonder why TerraForm wants to purchase the assets.

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Peer-reviewed literature supports anti-wind sentiment

In a recent WBOC newscast, Paul Harris, development manager for Pioneer Green’s Somerset County wind farm project, said there are “more than 20 peer-reviewed scientific studies that dispel health concerns related to turbines.”

I asked Harris to provide a list of these publications, which he did. Upon inspection, however, the list included only seven peer-reviewed literature reviews, none of which were experimental studies. Most of the list consisted of non peer-reviewed reports, some written by paid consultants for the wind industry.

Peer-reviewed experimental studies are important because they are the gold standard for scientific knowledge. As scientists conduct studies, they gather evidence, interpret the results and write a paper that is submitted for publication in a scientific journal.

Prior to publication, the journal sends the paper to anonymous reviewers who are experts on the topic. The expert reviewers are asked to provide a critique of the paper to ensure it meets rigorous scientific standards.

If the paper does not stand up to such scrutiny, it is not published. This process ensures the data provide the best information available and are as unbiased possible.

Contrary to Harris’s claims that industrial wind turbines pose no health risks, a quick literature search turned up more than 30 peer-reviewed studies showing negative health impacts from wind-turbine noise. Specifically, these studies include multiple human experiments demonstrating that industrial wind turbine-type noise affects human ear function and interferes with sleep.

The fact that communities continue to sue wind developers and utilities on the grounds that their quality of life and health has been compromised further reflects this reality.

Sadly, wind developers and local governments continue to ignore known health hazards and put profits before citizens.

Ryan Taylor of Westover is an associate professor of biology and bioacoustics at Salisbury University.

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SunEdison gets $410 million loan for First Wind acquisition

SunEdison, the Maryland Heights-based solar developer, has received a $410 million loan from Deutsche Bank to help pay for its $2.4 billion acquisition of First Wind, a U.S. developer, owner and operator of wind projects.

The loan carries a 3.75 percent interest rate and matures in January 2020.

The loan will be paired with financing SunEdison secured earlier this month.

The First Wind acquisition, which closed last week, added more than 1.6 gigawatts of pipeline and backlog projects for SunEdison. Those projects will eventually be sold to TerraForm Power, a subsidiary of SunEdison that serves as a yieldco for SunEdison, which owns a majority of the company.

The deal was paid for with an upfront payment of $1 billion, including the assumption of $361 million of debt at closing, and an expected $510 million of earn-out payments over two and a half years.

First Wind CEO Paul Gaynor has been appointed executive vice president of SunEdison's North American Utility and Global Wind business unit.

SunEdison shares were trading at $20.51 per share at market close Tuesday.

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SunEdison Appoints EVP of North America Utility

SunEdison has appointed Paul Gaynor as Executive Vice President of SunEdison, responsible for the North America Utility and Global Wind business unit.

Paul Gaynor was previously the Chief Executive Officer of First Wind Holdings, LLC, which SunEdison acquired earlier this year. As the leader of the North America Utility and Global Wind business, Mr. Gaynor is charged with reinforcing SunEdison's leadership position in the North America utility scale solar market, growing the global wind platform and accelerating the development and construction of the projects acquired from First Wind.

"Paul possesses both the breadth and depth of industry experience and the leadership abilities that are essential to growing SunEdison's North America Utility and Global Wind business. At First Wind, Paul helped to build one of the leading U.S. wind energy companies, putting in place first-class development and operations," said Ahmad Chatila, President and Chief Executive Officer of SunEdison. "At SunEdison, Paul will apply his development and management expertise to accelerate the growth of our business as we go to market with a clean energy platform."

"I'm excited to join SunEdison and lead a very dynamic and experienced North American team," said Gaynor. "I look forward to working with my team to develop, build and operate well-sited and well-run renewable energy projects that deliver clean, cost effective solar and wind energy to our customers across North America and around the world."

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