SunEdison Inc. (SUNE) and its yield co company TerraForm Power Inc. (TERP) have entered into a long-term agreement. Per the deal, TerraForm will invest $47 million to buy 21 U.S. distributed generation (DG) units including up to 26 megawatts (MW) of SunEdison’s solar projects. Post the announcement, shares of SunEdison closed 3.2% higher in yesterday’s trading session.
TerraForm secured $75 million of funds from Barclays, Citi and JPM Capital Corporation to finance its solar projects in the United States. More than 10% investment was obtained from the unlevered return on equity. The 21 power plants have an average remaining life of 20 years. The acquisition is expected to help SunEdison expand its foothold in the U.S.
Distributed generation, also known as on-site generation is a method of generating electricity near the end users. It enables small and medium sized manufactures to procure electricity at lower cost and also reduces loss of electricity during transmission. The market for DG and services is expected to grow from 12GW in 2013 to 27GW by 2017. The company is looking to more than double its DG MW in 2017 from 2013, which in turn will increase its overall market share, going forward.
TerraForm is a subsidiary of SunEdison and acts as a yield co of the parent firm. Yield co is formed to buy operating assets from the parent company to generate higher cash flows. SunEdison separated TerraForm last year in a public offering. Currently, SunEdison owns a 65% stake in TerraForm.
The sale of these assets will generate immediate cash for SunEdison so that it can further invest in its project portfolio. Also, this financing would increase the confidence of prospective project partners.
The deal enabled SunEdison to raise its project installation guidance range for fiscal 2015 to 2.1 GW-2.3 GW from 1.6 GW-1.8 GW. The company also expects to complete more than 2000 MW in 2016.
On the other hand, TerraForm will get 26 MW of contracted DG generation assets which will increase its power generation capacity. Moreover, this will help it expand its foothold across the U.S in the DG market segment.
Last month, SunEdison secured a $75 million investment from JPM Capital Corporation for its $175 million solar energy development fund.
SunEdison’s focus on expanding clean energy capabilities through acquisitions should drive its long-term growth. We believe that the demand for clean energy will increase manifold over the next few years due to environmental concerns and depleting natural resources. SunEdison, being the world’s leading developer of solar energy, is well positioned to capitalize on this opportunity.
Despite the positive factors, we recognize that solar projects require considerable time and investment and any delay or inability to sell these projects at desired prices could affect liquidity.
The pricing environment and a highly leveraged balance sheet remain the other concerns for SunEdison. Competition from SunPower Corp. (SPWR) and First Solar Inc. (FSLR) further add to its woes.
Currently, SunEdison has a Zacks Rank #5 (Strong Sell).
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