Many people believe that they’re on a trajectory similar to the traditional energy service providers, like Duke Energy, PSEG, PGE, Next Era, and others.
But there’s a fundamental problem that spooked investors and hedge funds alike.
They had a very difficult time digesting the enormous debt that they took on, which is reportedly in the 11 billion dollar range. Each year, they carry the burden of interest payments of close to half a billion dollars.
Just this past week, their CFO appeared on a financial news channel to lay out the plans for shoring up their debt. Included in this strategy was a 1-billion-dollar revolver with Goldman Sachs. He also stated they have more liquidity now, in the 4 billion range to help allay concerns Main Street or Wall Street has.
So how does this situation help you plan out your solar farm development and not let your debt and yieldco structures employed by SunEdison and large energy firms get in your way to your path to success?
Before we touch on that, let’s also not forget the buying spree SunEdison has been on in the last 12 months. It seems like they scooped up a new portfolio or company almost every month. Folding assets in their yieldcos from wind to solar to hydro.
This tells of part of the story of the weight of the debt. Even their recent acquisition of Vivint Solar, was, for many, the tipping point to the equity collapse.
Knowing this, how can you leverage your experience and know-how and avoid the pitfalls of this leveraged scenario?
How Small Developers Can Fare Better Than SunEdison
What many smaller developers often miss is a strong and well-thought-through development plan. Knowing costs and categorizing activities and applying money and time to these activities increases the likelihood that you’re planning for success.
It also tells your lender or tax equity partner that you’re deliberate in filtering all the potential situations that could impact your project development.
Second, would be strengths in modeling out a project. When I refer to modeling, I mean Excel modeling and being able to plug in all the variables for O&M costs, taxes, revenue, depreciation, insurance, land leases, and more.
Being able to get concrete numbers from your partners often goes overlooked. They guess and then when you don’t have a bonafide proposal, you get caught flatfooted.
This chews away at forecasted returns, your ability to determine your effective IRR, and investor expectations.
Lastly, when lenders or tax equity partners look at you, they want to know that the cash flows from the projects are going to cover the debt service.
After all, you’re not Goldman Sachs. Even if you were, you’d require even more certainty that the cash flows and the debt service coverage ratios were sound.
Developers often overlook a few significant elements in their development plans (many don’t have a development plan) and Excel modeling that can cripple their projects from the onset.
The target returns never tell the whole story within the Excel file. It’s not just about the numbers in the spreadsheet. I have a developer friend who lost millions last year on a project pipeline that they purchased that could not be built. This was painful.
Being a “solar development archaeologist” and discovering and identifying the painstaking details in your project will make the difference between passing the project on to the next generation or having the potential of becoming extinct before your project is completed.