SunEdison Is Having 'Family' Problems

 | Dec 02, 2015 | 11:33 AM EST
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This story has been updated to reflect a recent SEC filing regarding TerraForm Power.

There is never a dull moment with SunEdison (SUNE) and its yieldcos, TerraForm Power (TERP) and TerraForm Global (GLBL). This week has so far seen a series of mixed analyst ratings for the family of companies, wild stock movement and a letter and filing from David Tepper, an activist TerraForm Power shareholder.

While posting significant losses for the year, the stocks of the three companies have had wild swings in the last few days. Analysts and shareholders questioned the management structure of the three companies as well as the financial standing and transparency of SunEdison. As of Wednesday's midday trading, SunEdison was up 3%, TerraForm Power was down 2% and TerraForm Global was down over 3%.

The integration of the three companies and their stock movement are enough to make investors dizzy at best, and seriously worried about oversight among the three.

SunEdison's recent strategy of acquiring companies was not in line with the goals of its shareholder base, which is made up of income-seeking investors holding TerraForm Power and TerraFrom Global as utility plays, Michael Morosi of Avondale Capital told Real Money on Wednesday.

On Wednesday morning, David Tepper of Appaloosa Management filed a form 13D with SEC in which he disclosed a 9.25% stake in TerraForm Global. The filing states that Appaloosa is "independently exploring potential claims of impropriety" against TerraForm Power, SunEdison, and its advisors for how it handled and disclosed recent changes to TerraForm Power's board. Tepper declined to comment further on the filing.

Earlier Wednesday, Goldman Sachs downgraded TerraForm Global due to risks posed by SunEdison as well as TerraForm Global's own lack of growth. However, most of the attention this week has been on SunEdison and TerraForm Power.

On Tuesday, SunEdison said it is no longer planning to purchase a 15.87% stake in Brazilian-based clean energy provider Renova Energia, which analysts at Credit Suisse viewed as a positive. Meanwhile, Oppenheimer upgraded TerraForm Power to Outperform while Avondale Partners downgraded the company to Market Perform from Outperform.

Also on Tuesday, Tepper released a letter he sent to TerraForm Power's board in which he criticized the family of companies for "obvious conflicts between the interests of TERP and its 'sponsor,' SunEdison."

Tepper's note called out SunEdison for hurting TerraForm Power's credit and stock price through its "ambitious growth objectives and overextended financial commitments" as well as "TERP's incomplete and selective disclosures."

Tepper initially kept the note private but after TerraForm Power filed several 8-Ks late on Black Friday -- in the middle of a holiday weekend -- he was compelled to share his grievances, he told Real Money on Tuesday. His filing on Wednesday suggests further proof of his frustration.

TerraForm Power's 8-Ks, which were released on Friday, detailed several changes SunEdison made to the board of TerraForm Power's on Nov. 20, which included the resignations of five board members: Ahmad R. Chatila, Steven Tesoriere, Francisco Pancho, Mark Florian and Mark Lerdal.

Chatila resigned at the start of the meeting, Tesoriere resigned in the middle of the meeting and did not stay for the remainder, and Pancho, Florian and Lerdal resigned because they disagreed with the board's decision to name a new board chairman of the board, president and CEO and CFO.

Only the letters of Florian and Lerdal were included in TerraForm Power's 8-K. Both wrote that they had been "working hard and in good faith to protect the interests of the stockholders. As a result of the board's actions today, I do not believe I will be able to do so going forward and therefore resign."

Tepper's concern for TerraForm Power is the nature of its relationship with its parent, SunEdison.

"David (Tepper) did a very good job of summarizing the issues regarding the independence of the board," Morosi said. He added that SunEdison faces serious capital constraints, which could create incentives for its management not to act in the best interest of its yieldcos.

"What's best for SunEdison is not best for TerraForm Power," Morosi added.

In 2014, SunEdison spun off TerraForm Power and TerraForm Global, collectively known as "yieldcos," which would operate SunEdison projects. Yieldcos are dividend-growth-oriented companies created by a parent to generate predictable cash flows. In July, SunEdison announced that it planned to acquire Vivint Solar (VSLR), a manufacturer of solar rooftop panels for the home. Many questions remain about the acquisition as SunEdison has significant financial challenges, but Tepper takes issue with how the acquisition could hurt TerraForm Power.

Tepper said the move marks "an unfortunate departure from this business model and appears to serve the sole purpose of promoting SUNE's desire to acquire VSLR's development and operating assets, rather than enhancing the quality and value of TERP's holdings." He also worries that Vivint Solar's "inferior assets" will be passed down to TERP.

"At its core, operating a yieldco should be remarkably easy, each should just look to close a transaction or two every quarter," Morisi said. In the case of SunEdison and its yieldcos, the arrangement has been "problematic" as management has had to wear many hats.

If there is a solution for the family of companies, Morosi said the yieldco relationship needs to be simplified and derisked from SunEdison.

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