TerraForm Power Investment Overview
TerraForm Power (TERP) is an affiliated Yieldco of SunEdison, offering a lower-risk approach to investing in renewable energy. Learn about yieldcos, power purchase agreements, investor tax credits, and the industry overview. Discover how TerraForm Power provides a way to capture the upside potential of the renewable energy sector amidst concerns about traditional energy prices. Get insights into the parent company SunEdison and emerging market trends in the renewable energy industry.
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Presentation Transcript
TerraForm Power (TERP) By: David Schmitt, Paul Harrison, Ike Nwafor, Ian Naccarella, Xianming Li, and Luke Chen
TerraForm Power (Ticker: TERP) 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 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 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 - 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 - 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) - 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 - - -
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 - 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
