Though Not For The Fainthearted, Sunedison Inc (NYSE:SUNE) Is An Exciting Story
An important research finding about LED technology and energy efficiency was recently published in the journal Advanced Materials. When a topic like renewable power and a company called Sunedison Inc (NYSE:SUNE) are the subjects of discussion, the news about a new LED technology is important.
Researchers at the Florida State University, led by one Zhibin Yu, reported that they had discovered a cheap and highly efficient LED technology. LED lighting, energy cost and renewable energy are connected in a special way. If you can acquire energy efficient bulbs at a lower cost, you can do more with the renewable energy from solar or wind sources. Solar and wind power are the domains of Sunedison, and the story begins here.
Sunedison Inc (NYSE:SUNE) has a presence in both the global wind and solar power markets. The company can develop new solar/wind assets or manage them on the behalf of others.
When it comes to project development, Sunedison drops down the duties to be handled by yieldcos, a strategy that has been immensely rewarding in terms of free cash flow.
Sunedison has two public yieldcos, namely TerraForm Power Inc (NASDAQ:TERP) and TerraForm Global Inc (NASDAQ:GLBL).
Yieldcos are critical for SUNE
By dropping down project development to yieldcos, Sunedison is able to continue generating more free cash flow. Given that the demand for renewable power is expected to continue growing globally, investors are increasingly showing interest in investment vehicles such as public yieldcos. Because of that, raising funds in the equity or debt market won’t be difficult for Sunedison’s yieldcos. As such, Sunedison can confidently go for more and bigger development projects and sell them to its yieldcos, leading to a strong free cash flow position.
Renewable energy and the demand for it
Global energy trend:
Concerns over global warming, caused by a rising concentration of greenhouse gas in the atmosphere, have turned the tides against fossil fuels. Governments and environmental activists around the world are pushing for reduction in fossil fuel usage. At the same time, attention and funding is being shifted to renewable energy projects.
It is estimated that spending on renewable energy will account for two-thirds of global total spending on new energy plants within the next 25 years (or by 2040). Solar and wind are expected to lead in spending on renewable energy, thanks to falling costs of the two sources of clean energy.
Clean energy will attract about $8 trillion in investments through 2040, compared to $4.1 trillion in spending on fossil fuels. Solar is expected to draw $3.7 trillion in investment by 2020 while wind is expected to attract $2.4 trillion in the same period. Coal, gas and nuclear are expected to draw $1.6 trillion, $1.2 trillion and $1.3 trillion in new investment over the next 25 years.
Given the global energy trend, Sunedison Inc (NYSE:SUNE) is part of the future, which is made better by its yieldcos structure.
Demand for clean energy:
The story about the discovery of a better LED technology applies here. For the most part, demand for renewable energy has been artificial, powered by government subsidies. Part of the reason governments are stepping in to create demand for renewable energy is that the cost of renewable energy is currently higher than the alternatives. The situation has kept many renewable energy buyers off, but things have started changing for the better, and demand for clean energy should increase going forward.
If the newly discovered LED lighting technology is adopted in the production of the next-generation LED bulbs, such bulbs would be more affordable and there will be room for more energy savings. The result should be high demand for renewable energy because people can do more with the electricity, thus opportunity to cut their power bills.
When you combine government incentives with low-cost and more efficient LED bulbs, you can see real demand for renewable energy.
Is Sunedison ready for the opportunity?
Sunedison Inc (NYSE:SUNE) has figured out that the renewable energy industry is poised for a major explosion in the not-so-distant future, and the company is moving to roundup the opportunities. The company is exploring project development opportunities abroad, especially in EMEA, Latin America and Asia regions. Brazil, China and India have been some of Sunedison’s core emerging market where it mostly serves utilities.
Given its experience developing solar projects and managing generation properties in many regions of the world, Sunedison believes that it has a head start against competitors in its aggressive expansion abroad.
Sunedison has very ambitious capacity targets, because it is looking for incremental benefits that come with scale. As Sunedison pursues economies of scale, the management is clear on where more capacity is required.
Sunedison is more interested in expanding its Distributed Generation (DG) capacity, especially in the residential and small commercial (RSC) sub-segment. The company’s greatest DG interest is in the U.S., the U.K. and Australia markets.
Toward bolstering its DG capacity, Sunedison is acquiring Vivint Solar Inc (NYSE:VSLR), and the transaction is also a hedging move. The anticipated cut in tax incentives for solar (from 30% to 10%) will certainly make utility-scale solar projects less attractive in the U.S. because of margin pressure. As such, Sunedison is looking for scale in DG to offset the potential impact and accelerate growth in the space, which is why the company is acquiring Vivint.
As one of leading DG solar firms in the U.S., Vivint will enable Sunedison to quickly expand its footprint in the U.S. DG market and to benefit from economies of scale, which competitors may not easily match or achieve.
To further bolster its DG play, Sunedison recently acquired Mark Group, a move that should particularly help its RSC agenda abroad.
The dark clouds in Sunedison’s world
The cost of renewable power is currently high compared to conventional power sources. As such, demand for renewable energy is mostly artificial, supported by government subsidies. With cuts in incentives for solar projects in the U.S. on the way and potential incentive step-down in other markets, renewable energy projects could cool significantly, impacting Sunedison in the process.
Cyclicality in yieldco financing:
The ability of Sunedison Inc (NYSE:SUNE) to continue squeezing more free cash flow from its yieldcos will largely depend on how those yieldcos can attract more financing to acquire projects from the parent. It is not only the availability of financing opportunities that is important for the yieldcos, but also low-cost financing.
It is possible that investors will, over the long-term, embrace yieldco structures and put more money in them. However, in the near-term, and perhaps in the future also, there will be some issues that will from time to time make it difficult for yieldcos to raise the financing they need. The risk of cyclicality in yieldco financing could see Sunedison selling some projects to third-parties, but that will likely erode the company’s returns from projects.
Cost of funding:
When it comes to debt financing, Sunedison could be faced with higher costs of borrowing compared to competitors because of its already leveraged balance sheet.
The company finished the second quarter of 2015 with total debt of $10.7 billion and cash and equivalents of $1.29 billion.
Sunedison Inc (NYSE:SUNE) operates in some markets that are prone to political interference, which on a bad day can lead to projects terms being renegotiated in an unfavorable manner. Such renegotiations can have enormous adverse impact on Sunedison’s returns.
Sunedison Inc (NYSE:SUNE) is not for the fainthearted, but it has a bright future.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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