Shale drilling’s made such dramatic progress that at least one enthusiast is now making the case that it might soon produce crude for as little as $5 a barrel.

And if that sounds like science fiction consider that until recently few believed that solar power might become competitive with fossil fuels as a power source. That’s one reason most solar projects have enjoyed hefty government subsidies to this point, though hydrocarbon drillers get breaks of their own they would rather not talk about.

Yet over the last decade or so solar power production unit costs have dropped even faster than the cost of generating power from fossil fuels, to the point where certain utility-scale arrays are now competitive with gas-burning power plants before any subsidies.

Source: Berkeley National Laboratory

And, like fossil fuels, the solar industry has figured out a way to use some of its tax breaks to attract cheap outside capital. Its answer to the MLP has been the yieldco, a sponsored vehicle paying out a yield from cash flows backed by long-term power purchase agreements with utilities.

Earlier this year yieldcos were much in demand. The trade got so crowded, however, that this summer, with energy prices weak and credit markets twitchy, many investors tried to exit it all at once.

The resulting trampling has been downright ugly, particularly for leading alternative energy project developer and our #4 Best Buy SunEdison (NYSE: SUNE), whose yieldco wasn’t the first but was well on its way to becoming the largest.

That’s probably still the case even though SunEdison’s share price has dropped 55% over the last four weeks. But, as that drop implies, right now the market’s taking nothing for granted.

The tipping point for SunEdison proved to be its announcement last month that it would pay $2.2 billion in stock, cash and convertible debt for Vivint Solar (NYSE: FSLR), the second-largest marketer of residential solar panels in the U.S.

As with a string of other sizeable SunEdison acquisitions over the last year, its domestic yieldco affiliate TerraForm Power (NASDAQ: TERP) was expected to come up with a big chunk of the purchase price in exchange for some of the acquired assets.

As TerraForm Power’s sponsor SunEdison would still be entitled to collect progressively richer incentive distribution rights, just like an MLP general partner. (In fact, SunEdison is considering reorganizing to become one.)

But it’s one thing to sell proven assets to an affiliated MLP over a period of a few years at least before being able to cream off as IDRs 50% of any further growth in the distribution. And another to compress the process to under two years by flipping assets with a limited track record, if any, as SunEdison has done.

When TerraForm Power’s price slumped in response to the Vivint announcement SunEdison’s followed suit, in a vicious feedback loop made worse by SUNE’s prior popularity with hedge funds, which tend to cut their losses quickly.


Relationships between the sponsors and buyers of yield vehicles are built on trust. The bear case on SunEdison is that it has permanently damaged this trust, though we know general partners have committed worse sins than growing the distribution at their affiliates too rapidly.

TerraForm Power now yields 5.3% based on its dividend guidance for 2015, which would go up to 6.9% based on the current share price if the dividend rises 30% next year as the company has forecast. Its recently launched overseas twin TerraForm Global (NASDAQ: GLBL) now yields 10.4% based on its initial promised yield and a share price down 25% since the IPO two weeks ago, which went off way below the proposed price range.

In effect, yieldco investors are saying they’ve had quite enough of this amazing income opportunity for the time being, thank you very much. But with investments powering TerraForm’s distributions for next year already financed, the question becomes whether they will be able to resist the attractions of a 7% tax-shielded yield a year from now.

In the meantime, it’s not as if SunEdison lacks for other financing options. Last week it announced a joint venture with utility giant Dominion (NYSE: D) for a solar plant it has been building in Utah, on attractive terms that will have Dominion supplying $500 million of the project’s $650 million cost in exchange for half the cash flow and all the tax equity. Also Wednesday, SunEdison announced the successful syndication of a $280 million, seven-year intermediate “warehouse” loan for assets previously acquired from Atlantic Power and expected to be sold to TerraForm Power over time. The interest rate, at LIBOR+4%, was in line with initial guidance, it noted.

So institutional partners and lenders remain on board. And in the meantime SunEdison’s stock has been discounted to the point where one analyst has just estimated it trades at 4 times next year’s expected project development cash flows, factoring out SunEdison’s majority stakes in the two TerraForms.

This is a pittance by MLP standards for a general partner set to hit the highest bracket of the IDR incentives within 18 months. It reflects fear based on limited familiarity with the model, the yieldcos’ lack of an established track record and serious investor indigestion after so many were marketed so fast.

What it does not reflect at all is the strong likelihood that the conditions that made yieldcos popular in the first place are likely to pertain, to borrow a phrase, for an extended period of time after the Federal Reserve announces its first token rate hike.

The global economic drags from structural deficiencies in Europe and China have not gone away. Nor has the rapid decline of solar power generating costs slowed. Certainly the need to replace more greenhouse-gas producing hydrocarbons with clean energy sources has not gone away.