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

TrendsCorrelation with parent company Growth

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

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- parental support- sellers in the market- depreciated renewables prices

Exit Strategy

● Uncertain energy regulation new government ● Market correction?

Sale price: ~$45Time-scale: 12 months