David Tepper's Appaloosa Letter to TerraForm Power
We write in respect of Appaloosa Management LP's ("AMLP") holdings of TerraForm Power, Inc. ("TERP") common equity and senior notes. We note with interest this week's announced changes to the TERP management team and Board of Directors. Notwithstanding your explanation in the release, we find that "aligning the company's strategic focus around acquiring projects from its Sponsor" offers little apparent benefit for TERP stakeholders and raises concern for obvious conflicts between the interests of TERP and its "Sponsor", SunEdison ("SUNE").
Until recently, TERP's business purpose was to act as a vehicle to hold and finance a high quality portfolio of fully-developed wind and solar power assets that were supported by long-term power purchase agreements with large, investment-grade corporate counterparties. Isolating these projects within a ring-fenced vehicle made sense for both TERP and SUNE, as the most efficient cost of capital could be obtained by segregating them from the operational, developmental and construction risks of SUNE's main operating businesses.
The July announcement of the acquisition of the Vivint Solar ("VSLR") portfolio of residential rooftop assets 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. Indeed, the shift to weaker counterparties (homeowners) and the higher risk profile inherent in these assets (small rooftop panels) also appears to disproportionately benefit the "Sponsor's" incentive distribution right ("lOR") at the expense of significant downside financial risk to TERP. Worse yet, is SUNE's stated intention (revealed through the release of an Interim Agreement between SUNE and TERP) to place 500MW per year of these inferior assets in TERP for the next 5 years.
Disclosure of the precise details of this acquisition plan is long overdue, as well. So too, are the details surrounding the distinct possibility that TERP will be forced to accept a note from SUNE (which is of dubious credit quality and market value) due to a shortfall in the market value of the assets to be delivered in the first leg of the VSLR portfolio transaction relative to the $922 million purchase price (i.e., the "Advanced Amount" mandated under the Summary of the Note Terms in Exhibit E to the Purchase Agreement between SUNE and TERP). Given the erosion in the market value of comparable rooftop operators to VSLR (SunRun and Solar City, for example) the face value of that note will likely need to be considerable (but of suspect worth given the obligor).
The reconfiguration of the lnvenergy transaction announced November 9th is no
better for TERP stakeholders and is obviously intended for the sole benefit of
SUNE. These modifications will hand off SUNE's responsibility for a $388
million equity warehouse commitment to TERP -- yet another departure from
TERP's traditional role of owning permanently-financed, income-producing assets.
The investment also strains TERP'S resources and significantly raises its
leverage and financial risk profile. In downgrading TERP's debt to a
highly-speculative rating of B2, Moody's cited the change in operating
arrangement brought about from both the Vivint and lnvenergy transactions, and
the inherent financial strain thereof. Greater linkage to the "Sponsor" also
figured significantly in Moody's analysis.
Thus, it is obvious that the deterioration in TERP's security prices and credit profile this month results from (among other things): (1) the transmission of
financial stress related to its "Sponsor's" ambitious growth objectives and
over-extended financial commitments; and (2) TERP's incomplete and
selective disclosures. TERP's "reliance on third party acquisitions" has little
bearing on either of those factors. We note the advertised increase in the
number of independent directors on TERP's board and trust that the Corporate
Governance and Conflicts Committee (the "Conflicts Committee") will
appropriately investigate these and any other related-party transactions to
ensure that they are conducted for the benefit of TERP stakeholders. Recent
rumors of discussions between SUNE and VSLR regarding "strategic options" for
the proposed merger transaction, if true, may represent an opportunity for the
Committee to exercise its independence and relieve the financial pressures on
both TERP and its "Sponsor" from this harmful transaction. Such efforts would be
strongly supported by Appaloosa.
As previously suggested, substantial further disclosures are incumbent on TERP so that investors can assess the full impact of the pending transactions, the relationship between TERP and its "Sponsor", and the circumstances surrounding the changes in TERP's management and Board. We look forward to such disclosures and stand ready to meet and discuss any of the issues raised by this letter. In the meantime, we expect the Board and the Conflicts Committee to respect and defend the integrity of TERP's corporate identity and the interests of its stakeholders. We reserve all rights accordingly.