SunEdison’s activity in the financial markets has been off the charts in the past few months. The solar developer launched a yield company, sealed a financing backing that vehicle and kept up a steady pace of acquisitions and development. The 156 MW Comanche solar project is the latest addition to its utility scale pipeline. PFR Editor Sara Rosner spoke with Frank DeRosa, chief commercial officer,and Ryan Bennett, head of North America project finance, about the company’s growth and development strategy, the impact of its yieldco and its take on the markets.
PFR: With regards to the Comanche project, why has SunEdison decided to make this purchase now, as opposed to six months ago or six months from now? What were there external or internal factors at play?
DeRosa: We entered into a partnership with Community Energy.They’re a Colorado-based developer. The timing was right. They took the project through a certain stage of development, to the point where, to continue the development and then ultimately finance and construct it, would take more resources, a step-up in expenditures for the project such as posting a security under the PPA.
PFR: What about the Comanche project was attractive to SunEdison? Is there a certain set of qualities that SunEdison looks for when considering assets for acquisition?
DeRosa: It’s a great project.Community Energy has done a very good job of developing it. The basic fundamentals are there. It’s an excellent site, there’s a good interconnection to the Public Service Co. of Colorado grid, it’s a good location for solar. The insolation is good.
SunEdison is a developer, owner and operator of solar power plants. It was a great fit and a symbiotic relationship with Community Energy.
PFR: SunEdison’s yield company, TerraForm Power, has the option to purchase the Comanche project. How does the creation of the yieldco change or influence SunEdison’s acquisition and development strategy going forward?
Bennett: The TerraForm facility is hugely impactful for the health of our company. The ability for the equity ownership to be held in a publicly traded vehicle has really pushed down the cost of capital on the sponsor equity side, which in turn pulls down the overall cost of capital of our projects.
The launching of TerraForm was pivotal to be able to make economic sense out of a deal like this vis-à-vis other options we may have had in the past with private equity firms or other IPPs. TerraForm is foundational for our ability to be able to move into opportunities like Comanche or other projects that may have cash-flow characteristics or other characteristics that may have been challenging under our prior lens of decision making.
DeRosa: The fact that SunEdison will be a long-term owner of this plant, gives a lot of assurance to our utility customers. Public Service Co. of Colorado knows who they’ll be dealing with long-term. From a customer relationship standpoint, the establishment of TerraForm has been mutually beneficial to us and Public Service Co. of Colorado and its parent company Xcel Energy.
PFR: How much will it cost to develop the Comanche project? What kind of financing structure will the company look to use for project financing?What will the debt-to-equity ratio be?
Bennett: What we’ll do is combine a sequence of construction financing for the working capital needs during construction, which may involve perhaps a combination of delayed payment terms with EPC providers or other technology providers, plus senior secured construction financing. Then at COD, SunEdison will sell the project to TerraForm for the cash equity piece of the project. We’ll have already arranged, prior to construction, the commitments needed for both the tax equity and the term debt, if we choose to put debt on the project.
There are many different ways that we’re considering structuring the deal. We’re considering structures such as levered partnerships, unlevered partnerships, back-levered partnerships, lease pass-through structures or others that we have familiarity with and will enable the strong relationships that we have with key tax equity and debt partners. We’ll look at each deal through a variety of lenses and make decisions based on the financial profile to SunEdison parent,the distribution profile to TerraForm investors, the ease of transaction characteristics with our highly valued capital partners and other sensitivities that can influence decision making. For Comanche, we still have to go through the process of designing the ultimate financing structure. But it really all does come together when we take a look at what the sponsor equity cost of capital is and then compare that to what we might be getting from the other providers in the capital stack, which are the tax equity and the term debt.
PFR: What is the timeline for financing Comanche?
Bennett: The project will break ground around mid-2015. We’ll have conducted all of our capital formation for construction and permanent prior to the start of construction.
PFR: Is every project finance transaction bespoke to the asset at SunEdison or is there a general format that the company prefers to follow?
Bennett: We work with all structures and continue to push the boundaries with all structures. We have a very deep team of project finance professionals, with people that come from a mix of banking, law and industry backgrounds. The capital formation process is where SunEdison really prides itself. We have one the strongest project and structured finance teams in the entire market right now, domestically and internationally.
When it comes to projects like Comanche and the huge quiver of additional projects in our utility scale portfolio, we will go through a process of putting the portfolio through various funding vehicles,understanding that tax equity is not a bottomless market and every player in the space has their particularities. We want to be able to accommodate some of those particularities, but also make sure that we’re tapping into a sufficient supply of tax equity.
The structuring work is critical and we will do that on a deal-by-deal basis, for larger projects like this. But when we start migrating into our distributed generation portfolio, which is the bread and butter of the company, those are vehicles where we’ll set up a fund structure with debt, tax equity and cash equity so that we can replicate deals through a standard set of papers.
PFR: SunEdison has been pretty active in the financing markets this year, on a variety of different fronts. Can you describe how the company’s found these markets and lender response, from a borrower’s perspective?
Bennett: On the lender side, we find that the market is extremely active, the project finance market as well as the institutional debt market. We just completed a bank/bond hybrid structure for one of our largest projects and we see unique, combined products like that as something that the market will continue to adopt. The project finance market,in general, is pretty liquid right now. Current yields are really allowing a pretty aggressive cost of capital for sponsors like us.
On the tax equity side, we’re seeing more players become hungrier for solar assets. It is a market that is deepening,especially with the choppiness of the PTC cycle. We’re also seeing a number of different low-income housing tax credit investors start to enter the solar market in a meaningful way. The corporate tax equity investors, such as Google and others in the industry, are really learning a lot right now and providing additional pockets of tax equity that we might not have found otherwise within traditional banking channels.
PFR: Can you speak a little bit about what’s on the agenda for development and acquisition activity for SunEdison in the next 12-18 months?
DeRosa: We just completed an acquisition of a partnership, Silver Ridge Power, where we bought AES’ 50% share of Silver Ridge Power. It’s now a joint venture between SunEdison and Riverstone with operating and development assets around the world. The major operating asset is the 200 MW Mt. Signal solar plant in Imperial Valley, Calif. That sells power to San Diego Gas & Electric.
Mt. Signal is a good example of an acquisition where that operating plant was placed into TerraForm. It’s a very stable asset, with a power purchase agreement with a large, credit-worthy entity and stable cash flows for the TerraForm yieldco. Silver Ridge also has other development assets in the U.S. and we’ll be working within that joint venture to develop those.
We’ve partnered with Community Energy to acquire Comanche. We have our Beacon solar project, which is a PPA with Los Angeles Department of Water and Power for an 88 MW solar project in Southern California. It’s on about the same schedule as the Comanche project.
We are in construction with our Regulus project in California,70 MW that should come online by year-end. We’re also in construction with another 20 MW project called Vega in Southern California. We should complete construction by the first quarter of 2015. There’s a lot of activity.
Bennett: The market for acquiring projects is competitive. There are a lot more buyers than we’ve seen previously. There are some great opportunities, but the key is to make sure that you have the right partner who is motivated by the correct incentives to get a project done, which includes ultimate completion of the project. On the M&A side, there continues to be decent opportunities, but there is a bit of a sense of irrational exuberance on original developer’s side. We work most effectively with partners who see us as more than a financial outlet, but really a channel for larger success given our access to capital, technology expertise and underwriting abilities.
PFR: Finally, I know that SunEdison has been active in Latin America and Canada. Can you describe the company’s strategy approach to those regions?
Bennett: Canada is a core market for us.We’re the largest solar developer in Canada. We’ve got a large office out of Toronto and we’ve been very successful with the Feed-In 1.0 and 2.0 tariff programs. With the re-election of the current government in Ontario, we feel that we’re in a great position to win a significant amount of Feed-In 3.0 tariff programs as the solicitations come out. We’re going to continue to have a meaningful presence in Canada.
In Latin America, there have been a few markets that have been extremely successful for us. The primary one of focus is Chile, where we have some fantastic projects that we’ve constructed and are operational and which are owned by TerraForm now.
We continue to be very active in Chile. We have market presences in Mexico, which we think is a very interesting market,Honduras, Brazil and other parts of South America. The LatAm development focus is run by our Madrid office and it is a core market for us.
PFR: Is there anything else that you’d like to add?
DeRosa: I would just say that the Comanche project is a good model for one of the avenues to grow our portfolio.To partner with a local developer like Community Energy and then take these projects to the next step, get them constructed and operational. We do our own greenfield development as well, but as Ryan said earlier, these relationships with developers are a good synergistic arrangement for parties like ourselves and Community Energy.
