SunEdison shows strong growth in Q2 2014, supported by yieldco launch

SunEdison has reported strong results for the second quarter of 2014, reporting a 62% year-over-year increase in revenues to US$646 million. The company completed 218 MW of projects, its second-highest volume to date, and grew its backlog and pipeline while ending the quarter with a large volume of projects under construction.

Of these metrics, backlog may be the most telling, as this includes projects that hold power purchase agreements or feed-in tariff contracts. During the quarter SunEdison’s backlog grew 99 MW to 1.1 GW.

SunEdison has been growing very rapidly over the last few years. The company expects to complete more than 1 GW of projects in 2014, which will give it a 95% annual rate of growth in volume over the last five years.

Not only is SunEdison growing, but its business model is changing. In late July the company held an IPO for yieldco TerraForm Power, and SunEdison is holding an increasing volume of projects destined for this vehicle. Of the 218 MW of projects completed during the quarter, SunEdison retained 164 MW, around 50 MW more than the mid-point of its guidance.

SunEdison owns 64% of TerraForm, and has remained clear that this strategy allows it to realize much more value over the long term. “TerraForm is an engine for value creation,” says CEO Ahmad Chatila. “Projects are simply worth more in TerraForm Power than outside it.”

TerraForm is not the only yieldco that SunEdison is planning, and says that it has been contemplating yield vehicles for years. “We are thinking about others,” says CEO Ahmad Chatila. “We are not ready to announce exact dates.”

As a result of selling fewer projects, SunEdison reported a -16.8% operating margin and net loss of $41.2 million. However, similar to SolarCity, these metrics mean less for a company that is based on revenues from the long-term sale of electricity.

SunEdison also has ample cash to navigate project development while selling fewer projects. Thanks largely to $535 million in net proceeds from a convertible bond issuance, the company ended the quarter holding just over $1 billion in cash.

The other parts of SunEdison’s business support its position as a developer and owner of solar projects. SunEdison estimates that 1/3 of the modules that it uses comes from its internal supply chain, which based on OEM manufacturing by Flextronics. These modules are not subject to recent tariffs on Chinese products.

Over the full year 2014, SunEdison expects to retain over 70% of the more than 1 GW of projects which it plans to complete. SunEdison also anticipates a long-term move to smaller projects, predicting a doubling in the volume of distributed solar projects that it will build in 2014, and again in 2015.

“We think the U.S. utility business might be soft in 2017 and 2018,” warns CEO Ahmad Chatila, referencing the expiration of the 30% U.S. investment tax credit at the end of 2016. This is especially significant for SunEdison, given that roughly half the projects in its pipeline and backlog are in the United States.