TerraForm Power (TERP)
By: David Schmitt, Paul Harrison, Ike Nwafor, Ian Naccarella,
Xianming Li, and Luke Chen
TerraForm Power (Ticker: TERP)
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Current Share Price: $39.61
Current Dividend: 1.08/share (up to 1.30/share for the rest of 2015)
Yieldco affiliated with SunEdison (SunEdison owns about 48%)
IPOed June 2014
Investment Thesis
TerraForm is a lower-risk way to
capture the upside potential of
the renewable energy sector
Important Solar Terms
-What is a yieldco?
-Revenue?
- Power Purchase Agreements (PPAs)
- Investor Tax Credits (ITCs)
Yieldcos
- Similar to MLP or REIT
- Way for parent company to finance large-scale
projects (i.e. solar installations)
- Lower cost of capital
Power Purchase Agreements
- contract in which buyer agrees to purchase
power from project owner (i.e. solar
company)
- annual escalation (2.9%)
Investor Tax Credits (ITCs)
- Governments offered incentives to solar
buyers
- 30% of face value and accelerated
depreciation (6 year schedule)
Industry Overview
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Concerns that lower prices for energy from
traditional sources (oil, natural gas) will
destroy demand and profitability of
renewable energy are unfounded.
Historically, fossil fuel prices have had little
correlation to electricity prices, where the
majority of renewable energy actually
towards producing.
Therefore, even though oil prices have fallen
to around $50/barrel, pricing for electricity
derived from sources such as solar is unlikely
to significantly lower.
Parent Company Overview
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SunEdison (ticker: SUNE)
Market cap: roughly $8B
largest market cap of primarily solar players (but as we’ll see later, venturing into other forms of alternative
energy)
Recently announced 2nd yieldco focusing on emerging markets
Trends
Growth
Correlation with parent company
Comps Model
SunEdison
First Solar
SunPower
NextEra
Market Cap
$8B
$5.5B
$4.2B
$45B
Cash on Hand
$789M
$1.4B
$601.5M
$490M
Solar Projects
in Pipeline
7.6 GW
3 GW
7.5 GW
Not listed
Market Cap of
Yieldco
$4.87B
$50M
$50M
$828M
First Solar & SunPower
Yieldco
8point3 Energy Partners
Management Team
Key Management positions contain substantial carry over from SunEdison
-Carlos Domenech | President & Chief Executive Officer
-continuation from SunEdison, previously spent time at Universal Pictures International Entertainment and
General Electric
-Pancho Perez Gundin | Chief Operating Officer
-continuation from SunEdison Europe, previously spent time at Universal Pictures International
Entertainment
-Alejandro Hernandez | Chief Financial Officer
-appointed in 2014, previously Managing Director at Goldman Sachs responsible for coverage of North
American Energy companies
-General Counsel, Corporate Development, and Mergers & Acquisitions are continuations from SunEdison as well
Recent Company History
- Acquired First Wind Holdings, LLC (Jan 2015) for $2.4B
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500 MW of operating wind power plants, 21 MW of solar power plants
Expected to add $73M of cash available for distribution (CAFD)
Portfolio with average counterparty credit rating of A- (A(low))
Madison Dearborn Partners= major investor in First Wind
- Impact
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Potential for growth in global renewable energy markets
Diversifies portfolio to include contracted wind assets, more dividends
Recent Company History (cont)
June 2014- Purchased half of Silver Ridge Partners’
336 Megawatt Photovoltaic portfolio for roughly
$200M
Impact: Silver Ridge Partners half-owned by a PE
firm Riverstone Holdings
Balance Sheet Takeaways
- $2 billion in PP&E (all they do is acquire stuff)~
70% of assets
- Take production costs up front (very low deferred
costs)
- 1:1 debt:equity ratio
Cash Flow Takeaways
- Around $60 million available for distribution in
dividends last year (roughly 85% of cash available
for distribution is distributed per TERP’s policy)
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Retain 15%
Catalysts
- Undervalued renewables, because people associate oil
prices with renewable energy stocks
- SunEdison is well positioned to purchase many other
companies (lots of cash on hand and cheap renewable
energy companies) so ready made stream of projects for
TerraForm
- Buyer’s market in renewables (end of ITC)
Risks
- Parties in PPA may default on payments (doubtful because all
of major creditors are investment-grade-- most are utilities or
gov’ts)
- Dividend policy inhibits ability to grow on its own (85% of
CAFD goes to dividends)
- Market timing
- Government policy changes
Dividend Discount Valuation
Investment Thesis
TerraForm is a lower-risk way to
capture the upside potential of
the renewable energy sector
Recap
- TerraForm is the best positioned yieldco at a solid
time for renewable energy investment
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parental support
sellers in the market
depreciated renewables prices
Exit Strategy
● Uncertain energy regulation new government
● Market correction?
Sale price: ~$45
Time-scale: 12 months