Shares of solar technology company SunEdison Inc. SUNE gained nearly 7.8% in after-hours trading yesterday, following the company’s announcement to sell two wind-power plants with a total capacity of 333 megawatt (“MW”) to Terra Nova Renewable Partners for a consideration of $209 million.
Under the joint venture agreement, SunEdison has an option to buy back the plants within a period of five years. The transactions include the sale of the 185-MW Bingham wind farm and the 148-MW Oakfile wind farm.
The 185 MW project, being developed by SunEdison, is currently under construction and is expected to be in service in 2016. On the other hand, the 148 MW wind power plant is currently in operation.
SunEdison and Terra Nova Renewable Partners formed a strategic equity partnership in September with institutional investors recommended by J.P. Morgan Asset Management. Per the agreement, “J.P. Morgan's clients are expected to provide equity to purchase renewable energy projects developed or purchased by SunEdison. Remaining project costs are expected to be funded with traditional, non-recourse commercial bank debt and tax equity.”
The company believes that the strategic partnership will be able to generate cash flow and profitability in the future. As stated by Brian Wuebbels, SunEdison's chief financial officer "This transaction represents good value for SunEdison's shareholders and enhances our financial strength and flexibility." This will also increase investors’ confidence about its liquidity position.
We believe that SunEdison will gain the most from yesterday’s JV agreements. The company intends to add more long-term cash flows to its business, but lacks sufficient capital to fund the projects.
SunEdison exited third-quarter 2015 with cash and cash equivalents of $2.39 billion as against $1.29 billion in the previous quarter. Total debt (excluding current portion) increased to $9.77 billion from $9.17 billion at the end of second-quarter 2015. During the first three quarters of 2015, the company used $1.14 billion of cash for operational activities. In our opinion, a highly leveraged balance sheet may limit its financial flexibility and weaken earnings growth prospects.
We believe that the world’s largest renewable energy developer should look for such ownership and financing structures that provide it with the much-needed funds to finance its energy projects while reducing risks for investors. The two YieldCos that the company listed in the past two years are positives in this regard, helping it to boost its liquidity position while at the same time, maximizing dividends for investors.
However, the pricing environment and competition from SunPower Corp. SPWR and First Solar Inc. FSLR remain headwinds.
Currently, SunEdison carries a Zacks Rank #3 (Hold). Investors may consider VASCO Data Security International Inc. VDSI, which carries a Zacks Rank #1 (Strong Buy).
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