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TerraForm Sisters: No Free Lunch

Recently we have gotten two press releases from TerraForm Power, $TERP, (and TerraForm Global, $GLBL) regarding their stability after the Chapter 11 bankruptcy of SunEdison. There are a few vital pieces of information that, to my knowledge, weren’t explicitly disclosed in the past.

Sources:

  1. TerraForm Power Comments on SunEdison’s Chapter 11 Restructuring Filing
  2. TerraForm Power and TerraForm Global Overview

Source #1:

  • TerraForm Power and its sister company, TerraForm Global, Inc. (Nasdaq:GLBL), are not part of the SunEdison bankruptcy filing and have no plans to file for bankruptcy themselves.
  • TerraForm Power and TerraForm Global are publicly listed companies that are separate legal entities and are traded separately on Nasdaq.
  • The equity interests of TerraForm Power and TerraForm Global in their respective wind and solar power plants that are legally owned by their respective subsidiaries are not available to satisfy the claims of creditors of SunEdison.

As we see here, as I have pointed out constantly in the past, the TerraForm sisters will not be losing their assets to creditors and are not at risk of filing for bankruptcy. They also explicitly state, as if common sense was not enough, that they are separate legal entities from SunEdison. Therefore, what happens to one may not apply to the other.

Source #2

  • YieldCo operations are provided by SUNE employees

This piece of information briefly displayed on slide 13 of the presentation provides clarity on what could now be a major issue within the TerraForm companies. I was not aware that all of the operations and maintenance of the TerraForm assets are provided by SunEdison. This means that the more people SunEdison lays off as they pen their will, the more people the TerraForm companies will have to hire. This is most likely a very unexpected expenditure for the companies, even though they noted in Source #1 they were developing (not pre-developed) contingency plans. Be it major or minor, it is material. We are provided more clarity on the subject of their working relationship with SunEdison back in Source #1:

  • SunEdison affiliates provide asset management and operations and maintenance (“O&M”) services to many of TerraForm Power’s power plants.
  • TerraForm Power anticipates that SunEdison will continue to provide these asset management and O&M services for TerraForm Power’s power plants following the filing.
  • TerraForm Power expects that SunEdison generally will continue to fulfill its obligations to provide corporate level support to TerraForm Power
  • TerraForm Power expects to be able to continue operating its business pursuant to contingency plans it has been developing

Basically, TerraForm Power has been focusing the people they actually do employ on finding new projects, financing, and management roles. What’s sad about the situation is that TerraForm Power, according to this release, is still developing contingency plans versus the obvious need for their completion in late 2015. On the subject of forecasting, this trio of companies have proven to not be experts by any means. This is why their method of anticipating and expecting certain accommodations and results from SunEdison should not be trusted at face value alone. Remember, faith is not a strategy, nor is hope. Below is a visual of exactly what order of the ducks in a row TerraForm Power needs to rodeo, a process that they state is “complex”:

Slide 13 of Source #2

Looking towards the future, we can first return to Source #1:

  • the Company’s corporate level revolving credit facility and indentures for its senior unsecured bonds do not include event of default provisions triggered by a SunEdison bankruptcy
  • the Company has not identified any significant power purchase agreement (“PPA”) that includes a provision that would permit the offtake counterparty to terminate the agreement in the event of a SunEdison bankruptcy
  • As a result of SunEdison’s bankruptcy filing and delays in the preparation of audited financial statements, there may now exist defaults under many of TerraForm Power’s non-recourse project-debt financing agreements (or such defaults may arise in the future); however, these defaults are generally curable

There’s that “generally” word again. I hate to be the one who manipulates the words, but certainly investors want to be spoken to in terms of absolute and confidence. Wouldn’t it also have been better for the company to say that they have not identified any PPA’s affected by the bankruptcy of SunEdison, rather than any significant PPA’s? With wording like that I have to conclude that there are PPA’s affected by SunEdison’s bankruptcy. It should also be noted that my, and Wall Street’s, definition of significant are likely worlds apart compared to what TerraForm Power is implying. To top it all off, the company admits that there may now exist defaults due to their co-financer’s bankruptcy, something many investors believed wouldn’t be the case.

We, and the TerraForm sisters have learned, is that there is no free lunch.

Finally, I’ll leave you with the nearest-term plan the companies share:

Slide 15 from Source #2