Future Bright’s SR-Investor – July 2014

Future Bright’s SR-Investor – July 2014

One to Watch:

The long awaited ‘YieldCo’ will arrive on the Solar landscape this Thursday with the IPO of Terraform (TERP:NASDAQ). Terraform is a spinoff of completed and operational utility-scale solar installations from Sunedison (SUNE:NASDAQ). If you’ll remember, Sunedison and its founder, Jigar Shah, are largely credited with opening the investment landscape for rooftop solar with their boilerplate solar services agreement.

The Key Points:

• Terraform will operate largely like a REIT distributing income from electricity sales instead of rent.
• Terraform will have access to a pipeline of new projects from its proven developer and parent, SUNE. Through initial allocation and call-right exercise, Terraform expect around 740MW of power assets in 2015 and the company forecasts $162M in revenue or around $218K per MW. This is an important benchmark and comparable for similar structures.
• Assuming SUNE gets a 50% dividend and the other 50% is distributed a valuation based on a div yield of 3%-4.5% would give TERP a market cap between $930M – $1.4B.
• Future Bright believes an analysis of utility, commercial and residential defaults would show a lower comparable risk profile to many REIT’s. A point for follow up research.

In short, TERP’s reception in the secondary marketplace in an important event for energy investors and the development and maturation of the solar segment as a staples investment for any SRI portfolio.

Notable Investments:

KKR’s renewable investment – On June 24^th, KKR announced a one-third stake in the renewable energy arm of Spain’s Acciona for $567. The transaction gives the renewable component of the business a E2.6B enterprise value making the deal one of the largest to date in the sector. Plans for a YieldCo are in the works, so the transaction can largely be seen as an entry point for mature private equity.

Deutsche Bank Invests in Japan Solar – The German bank, whose home country derives more than 30% of end-use electricity from solar power, is betting on the trend continuing and focusing on Japan. Deutsche Bank plans to lend up to $1B to finance Japanese solar projects taking advantage of 20-yr Feed-In Tariff (FIT) of 32Y or 310MW/0.31Kwh US equivalent. For comparison, the highest, longest duration repeatable US FIT’s are in VT at $0.24/kwh for 25 years.

UBS invests in Texas wind – 50% stake in 161MW wind farm (terms undisclosed).

Bottom Line: Large players are circling in the water and the deal flow will be characterized by 1.) Large portfolios of performing assets and 2.) A race to lock in high value, long duration subsidies.

The Blindside:

Like it did in the semiconductor industry, I fully expect Moore’s law to throw some exciting pitches in the SRI ballgame. I most expect these in solar efficiency and conversion, investment vehicle innovation and grid/battery technology. Three different areas. Three different opportunities.

o   Solar Conversion Efficiency: At a recent PV conference, three separate companies claimed to beat the long-standing efficiency record for PV panels of 25%. Typically, PV panels in production are between 15-20% efficient at converting the sun energy that hits them into Kwh’s. Efficiency is one of the core, direct to bottom line, drivers of Solar Park profitability.

o   Investment Vehicles: let’s not stop at YieldCo’s. Real-Option analysis shows us there are many applications for valuing embedded options, floating outcomes and in new markets that should wet the appetite of the equity and volatility communities as well.

o   Battery Technology: What happened for Solar costs between 2008-2012, is happening for batteries right now. As a result of competition and innovation, costs are falling and new technologies are achieve breakthroughs that would seem incredible framed in last’s years expectation. That’s the system at work and private equity has already taken notice.

 

This note was published by Ken Coulson and Future Bright for educational and informational purposes only. It is not a solicitation to invest nor an endorsement of any investments discussed. Future Bright is a think tank and advisory in Sustainability and has worked with solar developers, renewable energy technologies, vertical farmers and investors. www.futurebrightllc.com