At an early 2015 investor conference, SunEdison’s then-chief financial officer, Brian Wuebbels, trumpeted the profit potential in the solar developer’s relationship with a venture it had recently spun off.
SunEdison (SUNE) had established TerraForm Power as a “yieldco,” a complex financing vehicle to purchase energy projects from SunEdison and other developers. TerraForm (TERP) 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).
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 (VSLR).
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% and 79% from their respective IPO prices.
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.”
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% 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.”