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SunEdison Launches Yieldco to Unearth, Leverage Solar Asset Values

Six weeks into the new year and we're already seeing another example of anticipated innovations in renewable energy finance: SunEdison's planned "yieldco" IPO aimed at unlocking the true value of its solar energy assets, and using them to tap into the power of big capital markets.

The proposed initial public offering (IPO) of common stock for a new yieldco vehicle, with terms yet to be determined, was announced hours before the company's quarterly and year-ending financials. Reports over the past couple of months have suggested a SunEdison yieldco could generate a $300 million payday. Later this month (Feb. 24) the company will hold its Capital Markets Day with a more extensive analysis of its business strategies, and surely this will be a big topic of conversation.

Here's why SunEdison and the rest of the industry is so keen to pursue new finance options. Back in its 3Q13 financial results SunEdison calculated its current business model of building and selling solar projects yields about $0.74/Watt -- but those assets' true value could jump as high as $1.97/W if the company can find ways to enumerate and apply various methods: lower the cost of capital, apply various underwriting assumptions, and factor in residual value in power purchase agreements. That's a startling 2.6× increase in potential value creation that SunEdison thinks it can unlock, and creating a yieldco structure to attract interest from the broader investor community is a big part of the answer.

In its 4Q results SunEdison puts more numbers to that value-creation equation: in the fourth quarter it captured an additional $158 million by retaining projects vs. simply selling them off. And by applying most of the 127-MW on its balance sheet with an estimated $257 million in "retained value" to this yieldco, the company says it has sufficient scale to unlock the true value of those solar assets.

In the past year several yieldcos have come to the forefront. Last summer NRG Energy launched NRG Yield with a 1.3-GW portfolio of energy generation assets, though fewer than half of them were renewables (solar and wind); earlier this month NRG Yield proposed to raise another $300 million. Pattern Energy issued its IPO in the fall backed by a number of wind farms. Other recent yieldco examples include Brookfield Renewable Energy Partners and Hannon Armstrong.

More directly from the solar sector, SunPower recently talked about doing a yieldco maybe in late 2015, likely to feature its 135-MW Quinto project and possibly its 120-MW Henrietta project. Others eyeing the yieldco model reportedly include Canadian Solar, Jinko Solar, and First Solar.

"This trend is transformative for the solar industry" because of how it can unlock so much more value and thus returns, explained Patrick Jobin, Clean Technology Equity Research analyst with Credit Suisse. (Disclosure: SunEdison is one of his top picks specifically for that reason.) "We're probably in the first or second inning of the public capital markets appreciating what this does for the industry."

Lead image: Happy successful business man raised arms with sky, via Shutterstock

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