S-1/A 1 d672387ds1a.htm S-1/A #5 S-1/A #5
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As filed with the Securities and Exchange Commission on July 16, 2014

No. 333-196345

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TerraForm Power, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   4911   46-4780940

(State or other jurisdiction of incorporation

or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer Identification No.)

12500 Baltimore Avenue

Beltsville, Maryland 20705

(443) 909-7200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Sebastian Deschler, Esq.

Senior Vice President, General Counsel and Secretary

TerraForm Power, Inc.

12500 Baltimore Avenue

Beltsville, Maryland 20705

(443) 909-7200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Dennis M. Myers, P.C.   Kirk A. Davenport II
Kirkland & Ellis LLP   Latham & Watkins LLP
300 North LaSalle   885 Third Avenue
Chicago, Illinois 60654   New York, New York 10022
(312) 862-2000   (212) 906-1200

Approximate date of commencement of proposed sale to the public: As soon as practicable after this

Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  ¨   Non-accelerated filer  x   Smaller reporting company  ¨
    

(Do not check if a

smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered
 

Amount

to be

Registered(1)

 

Estimated
Maximum

Offering Price

per share(2)

 

Estimated

Maximum

Aggregate

Offering

Price(2)(3)

 

Amount of
Registration 

Fee(3)(4)

Class A Common Stock, $0.01 par value per share

  23,074,750   $25.00   $576,868,750   $74,301

 

 

(1) Includes 3,009,750 shares of Class A Common Stock that may be sold if the option to purchase additional shares granted by us to the underwriters is exercised in full.
(2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) Includes the offering price of any additional shares of Class A Common Stock that the underwriters have the option to purchase.
(4) $70,840 was previously paid in connection with the initial filing of this Registration Statement.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated July 16, 2014

20,065,000 Shares

 

LOGO

TerraForm Power, Inc.

Class A Common Stock

 

 

This is an initial public offering of the Class A common stock of TerraForm Power, Inc. All of the shares of Class A common stock are being sold by TerraForm Power, Inc.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $23.00 and $25.00. Our Class A common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “TERP.”

We will have three classes of common stock outstanding after this offering: Class A common stock, Class B common stock and Class B1 common stock. Each share of Class A common stock and Class B1 common stock entitles its holder to one vote on all matters presented to our stockholders generally. All of our Class B common stock will be held by SunEdison, Inc., or our “Sponsor,” or its controlled affiliates. Each share of Class B common stock entitles our Sponsor to 10 votes on all matters presented to our stockholders generally. Immediately following this offering, the holders of our Class A common stock will collectively hold 100% of the economic interests in us, and the holders of our Class A common stock will hold 3.9% of the voting power in us, the holders of our Class B1 common stock will hold 0.9% of the voting power in us and our Sponsor will hold the remaining 95.2% of the voting power in us. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Global Select Market. We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

 

 

See “Risk Factors” beginning on page 39 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $         $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to us

   $                    $                    

 

(1) Excludes a structuring fee payable to Goldman, Sachs & Co. equal to 0.559% of the gross offering proceeds. See “Underwriting.”

The underwriters have the option to purchase up to an additional 3,009,750 shares from TerraForm Power, Inc. at the initial public offering price less the underwriting discount for a period of 30 days after the date of this prospectus.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2014.

 

 

 

 

Goldman, Sachs & Co.

 

Barclays                        

 

Citigroup

J.P. Morgan  

Macquarie Capital

 

 

 

Santander

 

 

FBR

 

 

Prospectus Dated                     , 2014.


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TABLE OF CONTENTS

 

     Page  

Summary

     1   

The Offering

     23   

Summary Historical and Pro Forma Financial Data

     35   

Risk Factors

     39   

Cautionary Statement Concerning Forward-Looking Statements

     79   

Use of Proceeds

     81   

Capitalization

     84   

Dilution

     86   

Cash Dividend Policy

     88   

Unaudited Pro Forma Condensed Consolidated Financial Data

     103   

Selected Historical Combined Consolidated Financial Data

     118   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     121   

Industry

     144   

Business

     152   

Management

     179   

Executive Officer Compensation

     185   

Security Ownership of Certain Beneficial Owners and Management

     191   

Certain Relationships and Related Party Transactions

     194   

Description of Certain Indebtedness

     218   

Description of Capital Stock

     225   

Shares Eligible for Future Sale

     233   

Material United States Federal Income Tax Consequences to Non-U.S. Holders

     236   

Underwriting (Conflicts of Interest)

     241   

Legal Matters

     247   

Experts

     247   

Where You Can Find More Information

     248   

Index to Financial Statements

     F-1   

We have not and the underwriters have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until                    , 2014 (25 days after the date of this prospectus), all dealers that buy, sell or trade our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of SunEdison, Inc. and third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or

 

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sponsorship of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our market position and market estimates are based on independent industry publications, government publications, third party forecasts, management’s estimates and assumptions about our markets and our internal research. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in this prospectus.

As used in this prospectus, all references to watts (e.g., Megawatts, Gigawatts, MW, GW, etc.) refer to measurements of direct current, or “DC,” except where otherwise noted.

Certain Defined Terms

Unless the context provides otherwise, references herein to:

 

    “we,” “our,” “us,” “our company” and “TerraForm Power” refer to TerraForm Power, Inc., together with, where applicable, its consolidated subsidiaries after giving effect to the Organizational Transactions (as defined herein);

 

    “Terra LLC” refers to TerraForm Power, LLC;

 

    “Terra Operating LLC” refers to TerraForm Power Operating, LLC, a wholly owned subsidiary of Terra LLC; and

 

    “SunEdison” and “Sponsor” refer to SunEdison, Inc. together with, where applicable, its consolidated subsidiaries.

See “Summary—Organizational Transactions” for more information regarding our ownership structure.

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus. It does not contain all the information you need to consider in making your investment decision. Before making an investment decision, you should read this entire prospectus carefully and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our and our predecessor’s financial statements and related notes thereto appearing elsewhere in this prospectus.

About TerraForm Power, Inc.

We are a dividend growth-oriented company formed to own and operate contracted clean power generation assets acquired from SunEdison and unaffiliated third parties. Our business objective is to acquire high-quality contracted cash flows, primarily from owning solar generation assets serving utility, commercial and residential customers. Over time, we intend to acquire other clean power generation assets, including wind, natural gas, geothermal and hydro-electricity, as well as hybrid energy solutions that enable us to provide contracted power on a 24/7 basis. We believe the renewable power generation segment is growing more rapidly than other power generation segments due in part to the emergence in various energy markets of “grid parity,” which is the point at which renewable energy sources can generate electricity at a cost equal to or lower than prevailing electricity prices. We expect retail electricity prices to continue to rise due to increasing fossil fuel commodity prices, required investments in generation plants and transmission and distribution infrastructure and increasing regulatory costs. We believe we are well-positioned to capitalize on the growth in clean power electricity generation, both through project originations and transfers from our Sponsor, as well as through acquisitions from unaffiliated third parties. We will benefit from the development pipeline, asset management experience and relationships of our Sponsor, which as of March 31, 2014, had a 3.6 GW pipeline of development stage solar projects and approximately 1.9 GW of self-developed and third party developed solar power generation assets under management. Our Sponsor will provide us with a dedicated management team that has significant experience in clean power generation. We believe we are well-positioned for substantial growth due to the high-quality, diversification and scale of our project portfolio, the long-term power purchase agreements, or “PPAs,” we have with creditworthy counterparties, our dedicated management team and our Sponsor’s project origination and asset management capabilities.

Our initial portfolio will consist of solar projects located in the United States and its unincorporated territories, Canada, the United Kingdom and Chile with total nameplate capacity of 807.7 MW. All of these projects have long-term PPAs with creditworthy counterparties. The PPAs have a weighted average (based on MW) remaining life of 20 years as of March 31, 2014. We intend to rapidly expand and diversify our initial project portfolio by acquiring utility-scale and distributed clean power generation assets located in the United States, Canada, the United Kingdom and Chile, each of which we expect will also have a long-term PPA with a creditworthy counterparty. Growth in our project portfolio will be driven by our relationship with our Sponsor, including access to its project pipeline, and by our access to unaffiliated third party developers and owners of clean generation assets in our core markets.

Immediately prior to the completion of this offering, we will enter into a project support agreement, or the “Support Agreement,” with our Sponsor, which will require our Sponsor to offer us additional qualifying projects from its development pipeline by the end of 2016 that are projected to generate an aggregate of at least $175.0 million of cash available for distribution during the first 12 months following

 

 

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the qualifying projects’ respective commercial operations date, or “Projected FTM CAFD.” We refer to these projects as the “Call Right Projects.” Specifically, the Support Agreement requires our Sponsor to offer us:

 

    from the completion of this offering through the end of 2015, solar projects that are projected to generate an aggregate of at least $75.0 million of cash available for distribution during the first 12 months following their respective commercial operations date; and

 

    during calendar year 2016, solar projects that are projected to generate an aggregate of at least $100.0 million of cash available for distribution during the first 12 months following their respective commercial operations date.

If the amount of Projected FTM CAFD of the projects we acquire under the Support Agreement from the completion of this offering through the end of 2015 is less than $75.0 million, or the amount of Projected FTM CAFD of the projects we acquire under the Support Agreement during 2016 is less than $100.0 million, our Sponsor has agreed that it will continue to offer us sufficient Call Right Projects until the total aggregate Projected FTM CAFD commitment has been satisfied. The Call Right Projects that are specifically identified in the Support Agreement currently have a total nameplate capacity of 1.1 GW. We believe the currently identified Call Right Projects will be sufficient to satisfy a majority of the Projected FTM CAFD commitment for 2015 and between 15% and 40% of the Projected FTM CAFD commitment for 2016 (depending on the amount of project-level financing we use for such projects). The Support Agreement provides that our Sponsor is required to update the list of Call Right Projects with additional qualifying Call Right Projects from its pipeline until we have acquired projects under the Support Agreement that have the specified minimum amount of Projected FTM CAFD for each of the periods covered by the Support Agreement.

In addition, the Support Agreement grants us a right of first offer with respect to any solar projects (other than Call Right Projects) located in the United States and its unincorporated territories, Canada, the United Kingdom, Chile and certain other jurisdictions that our Sponsor decides to sell or otherwise transfer during the six-year period following the completion of this offering. We refer to these projects as the “ROFO Projects.” The Support Agreement does not identify the ROFO Projects since our Sponsor will not be obligated to sell any project that would constitute a ROFO Project. As a result, we do not know when, if ever, any ROFO Projects or other assets will be offered to us. In addition, in the event that our Sponsor elects to sell such assets, it will not be required to accept any offer we make to acquire any ROFO Project and, following the completion of good faith negotiations with us, our Sponsor may choose to sell such assets to a third party or not to sell the assets at all.

We believe that we are well-positioned to capitalize on additional growth opportunities in the clean energy industry as the demand for renewable energy among our customer segments is accelerating due to the emergence of grid parity in certain segments of our target markets, the lack of commodity price risk in renewable energy generation and strong political and social support. In addition, growth is driven by the ability to locate renewable energy generating assets at a customer site, which reduces our customers’ transmission and distribution costs. We believe that we are already capitalizing on the favorable growth dynamics in the clean energy industry, as illustrated by the following examples:

 

   

Grid Parity.    We evaluate grid parity on an individual site or customer basis, taking into account numerous factors including the customer’s geographical location and solar availability, the terrain or roof orientation where the system will be located, cost to install, prevailing electricity rates and any demand or time-of-day use charges. One of our projects located in Chile provides approximately 100 MW of utility-scale power under a 20-year PPA with a mining company at a price below the current wholesale price of electricity in that region. We believe

 

 

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that additional grid parity opportunities will arise in other markets with growing energy demand, increasing power prices and favorable solar attributes.

 

    Distributed Generation.    We own and operate a 134.8 MW distributed generation platform with a footprint in the United States, Puerto Rico and Canada with commercial and residential customers, who currently purchase electricity from us under long-term PPAs at prices at or below local retail electricity rates. These distributed generation projects reduce our customers’ transmission and distribution costs because they are located on the customers’ sites. By bypassing the traditional electrical suppliers and transmission systems, distributed energy systems delink the customers’ electricity price from external factors such as volatile commodity prices and costs of the incumbent energy supplier. This makes it possible for distributed energy purchasers to buy electricity at predictable and stable prices over the duration of a long-term contract.

As our addressable market expands, we expect there will be significant additional opportunities for us to own clean energy generation assets and provide contracted, reliable power at competitive prices to the customer segments we serve, which we believe will sustain and enhance our future growth.

We intend to use a portion of the cash available for distribution, or “CAFD,” generated by our project portfolio to pay regular quarterly cash dividends to holders of our Class A common stock. Our initial quarterly dividend will be set at $0.2257 per share of Class A common stock, or $0.9028 per share on an annualized basis. We established our initial quarterly dividend level based upon a targeted payout ratio by Terra LLC of approximately 85% of projected annual CAFD. Our objective is to pay our Class A common stockholders a consistent and growing cash dividend that is sustainable on a long-term basis. Based on our forecast and the related assumptions and our intention to acquire assets with characteristics similar to those in our initial portfolio, we expect to grow our CAFD and increase our quarterly cash dividends over time.

We intend to target a 15% compound annual growth rate in CAFD per unit over the three-year period following the completion of this offering. This target is based on, and supported by, our Sponsor’s $175.0 million aggregate Projected FTM CAFD commitment to us under the Support Agreement and our track record of successful project acquisitions from unaffiliated third parties, which will provide us the opportunity to grow our CAFD following this offering. While we believe our targeted growth rate is reasonable, it is based on estimates and assumptions regarding a number of factors, many of which are beyond our control, including the market value of projects we acquire from third parties, the purchase price we pay for acquired projects, our cost of capital, the ratio of debt to equity with respect to the financing of acquisitions, whether we have the financial resources to acquire the Call Right Projects and the timing of such acquisitions. Prospective investors should read “Cash Dividend Policy,” including our financial forecast and related assumptions, and “Risk Factors,” including the risks and uncertainties related to our forecasted results, completion of construction of projects and acquisition opportunities, in their entirety.

We intend to cause Terra LLC to distribute its CAFD to holders of its units (including us as the sole holder of the Class A units and our Sponsor as the sole holder of the Class B units) pro rata, based on the number of units held, subject to the incentive distribution rights, or “IDRs,” held by our Sponsor that are described below. However, the Class B units held by our Sponsor are deemed “subordinated” because for a period of time, referred to as the “Subordination Period,” the Class B units will not be entitled to receive any distributions from Terra LLC until the Class A units and Class B1 units (which may be issued upon reset of IDR target distribution levels or in connection with acquisitions from our Sponsor or third-parties) have received quarterly distributions in an amount equal to $0.2257 per unit, or the “Minimum Quarterly Distribution,” plus any arrearages in the payment of

 

 

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the Minimum Quarterly Distribution from prior quarters. The practical effect of the subordination of the Class B units is to increase the likelihood that during the Subordination Period there will be sufficient CAFD to pay the Minimum Quarterly Distribution on the Class A units and Class B1 units (if any). See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

Our Sponsor has further agreed to forego any distributions on its Class B units with respect to the third and fourth quarters of 2014 (i.e., distributions declared on or prior to March 31, 2015), and thereafter has agreed to a reduction of distributions on its Class B units until the expiration of the Distribution Forbearance Period. The amount of our Sponsor’s distribution reduction between March 31, 2015 and the end of the Distribution Forbearance Period is based on the percentage of the As Delivered CAFD compared to the expected CAFD attributable to the Contributed Construction Projects (and substitute projects contributed by our Sponsor). The practical effect of this forbearance is to ensure that the Class A units will not be affected by delays (if any) in completion of the Contributed Construction Projects. All of the projects in our initial portfolio have already reached their commercial operations date, or “COD,” or are expected to reach COD prior to the end of 2014. The projects expected to reach COD in 2014 are the U.S. Projects 2014, Regulus Solar, the North Carolina Portfolio, Marsh Hill, SunE Perpetual Lindsay, Crucis Farm and two of the California Public Institution projects, which in aggregate represent 200.3 MW. We collectively refer to these projects as the “Contributed Construction Projects.” For a description of the IDRs, the Subordination Period and the Distribution Forbearance Period, including the definitions of Subordination Period, As Delivered CAFD, CAFD Forbearance Threshold and Distribution Forbearance Period see “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

About our Sponsor

We believe our relationship with our Sponsor provides us with the opportunity to benefit from our Sponsor’s expertise in solar technology, project development, finance, management and operations. Our Sponsor is a solar industry leader based on its history of innovation in developing, financing and operating solar energy projects and its strong market share relative to other U.S. and global installers and integrators. As of March 31, 2014, our Sponsor had a development pipeline of approximately 3.6 GW and solar power generation assets under management of approximately 1.9 GW, comprised of over 900 solar generation facilities across 12 countries. These projects were managed by a dedicated team using three renewable energy operation centers globally. As of March 31, 2014, our Sponsor had approximately 2,200 employees. After completion of this offering, our Sponsor will own 100.0% of Terra LLC’s outstanding Class B units and will hold all of the IDRs.

Purpose of TerraForm Power, Inc.

We intend to create value for the holders of our Class A common stock by achieving the following objectives:

 

    acquiring long-term contracted cash flows from clean power generation assets with creditworthy counterparties;

 

    growing our business by acquiring contracted clean power generation assets from our Sponsor and third parties;

 

    capitalizing on the expected high growth in the clean power generation market, which is projected to require over $2.9 trillion of investment over the period from 2013 through 2020, of which $802 billion is expected to be invested in solar photovoltaic, or “PV,” generation assets;

 

    creating an attractive investment opportunity for dividend growth-oriented investors;

 

 

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    creating a leading global clean power generation asset platform, with the capability to increase the cash flow and value of the assets over time; and

 

    gaining access to a broad investor base with a more competitive source of equity capital that accelerates our long-term growth and acquisition strategy.

Our Initial Portfolio and the Call Right Projects

The following table provides an overview of the assets that will comprise our initial portfolio:

 

Project Names

  Location  

Commercial
Operations Date(1)

  Nameplate
Capacity
(MW)(2)
    # of
Sites
    Project
Origin(3)
   

Offtake Agreements

 
           

Counterparty

  Counterparty
Credit
Rating(4)
  Remaining
Duration
of PPA
(Years)(5)
 

Distributed Generation:

               

U.S. Projects 2014

  U.S.   Q2 2014-Q4 2014     46.0        41        C     

Various utilities,

municipalities and commercial entities(6)

  A+, A1     19   

Summit Solar Projects

  U.S.   2007-2014     19.6        50        A      Various commercial and governmental entities   A, A2     14   
  Canada  

2011-2013

    3.8        7        A      Ontario Power Authority   A-, Aa1     18   

Enfinity

  U.S.   2011-2013    
15.7
  
    16        A      Various commercial, residential and governmental entities   A, A2     18   

U.S. Projects 2009-2013

 

U.S.

 

2009-2013

 

 

15.2

  

 

 

73

  

 

 

C

  

  Various commercial and governmental entities  

BBB+, Baa1

 

 

16

  

California Public Institutions

 

U.S.

 

Q4 2013-Q3 2014

 

 

13.5

  

 

 

5

  

 

 

C

  

  State of California Department of Corrections and Rehabilitation  

A, A1

 

 

20

  

MA Operating

  U.S.   Q3 2013-Q4 2013     12.2        4        A      Various municipalities   A+, A1     20   

SunE Solar Fund X

  U.S.   2010-2011     8.8        12        C      Various utilities, municipalities and commercial entities   AA, Aa2     17   
     

 

 

   

 

 

         

Subtotal

    134.8        208           

Utility:

               

Regulus Solar

  U.S.   Q4 2014     81.9        1        C      Southern California Edison   BBB+, A3     20   

North Carolina Portfolio

  U.S.   Q4 2014     26.0        4        C      Duke Energy Progress   BBB+, Baa2     15   

Atwell Island

  U.S.   Q1 2013     23.5        1        A      Pacific Gas & Electric Company   BBB, A3
    24   

Nellis

  U.S.   Q4 2007     14.1        1        A      U.S. Government (PPA); Nevada Power Company (RECs)(6)   AA+, Aaa,

BBB+, Baa2

    14   

Alamosa

  U.S.   Q4 2007     8.2        1        C      Xcel Energy   A-, A3     14   

CalRENEW-1

  U.S.   Q2 2010     6.3        1        A     

Pacific Gas &

Electric Company

  BBB, A3     16   

Marsh Hill

  Canada   Q4 2014     18.7        1        A      Ontario Power Authority   A-, Aa1     20   

SunE Perpetual Lindsay

 

Canada

 

Q4 2014

 

 

15.5

  

 

 

1

  

 

 

C

  

 

Ontario Power Authority

 

A-, Aa1

 

 

20

  

Stonehenge Q1

  U.K.   Q2 2014     41.1        3        A     

Statkraft AS

  A-, Baa1     15   

Stonehenge Operating

 

U.K.

 

Q1 2013-Q2 2013

 

 

23.6

  

 

 

3

  

 

 

A

  

 

Total Gas & Power Limited

 

NR, NR

 

 

14

  

Says Court

  U.K.   Q2 2014     19.8        1        C     

Statkraft AS

  A-, Baa1     15   

Crucis Farm

  U.K.   Q3 2014     16.1        1        C     

Statkraft AS

  A-, Baa1     15   

Norrington

  U.K.   Q2 2014     11.2        1        A     

Statkraft AS

  A-, Baa1     15   

CAP(7)

  Chile   Q1 2014     101.2        1        C      Compañía Minera del Pacífico (CMP)   BBB-, NR     20   

Mt. Signal(8)

  U.S.   Q1 2014     265.7        1        A      San Diego Gas & Electric   A, A1     25   
     

 

 

   

 

 

         

Subtotal

    672.9        22           
     

 

 

   

 

 

         

Total Initial Portfolio

    807.7        230           
     

 

 

   

 

 

         

 

(1) Represents actual or anticipated COD, as applicable, unless otherwise indicated.
(2) Nameplate capacity represents the maximum generating capacity at standard test conditions of a facility multiplied by our percentage ownership of that facility (disregarding any equity interests held by any tax equity investor or lessor under any sale-leaseback financing or of any non-controlling interests in a partnership). Generating capacity may vary based on a variety of factors discussed elsewhere in this prospectus.

 

 

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(3) Projects which have been contributed by our Sponsor, or “Contributed Projects,” are reflected in the Predecessor’s combined consolidated historical financial statements, and are identified with a “C” above. Projects which have been acquired or are probable of being acquired contemporaneously with the completion of this offering, each an “Acquisition” or “Acquired Project,” are identified with an “A” above.
(4) For our distributed generation projects with one counterparty and for our utility-scale projects the counterparty credit rating reflects the counterparty’s or guarantor’s issuer credit ratings issued by Standard & Poor’s Ratings Services, or “S&P,” and Moody’s Investors Service Inc., or “Moody’s.” For distributed generation projects with more than one counterparty the counterparty credit rating represents a weighted average (based on nameplate capacity) credit rating of the project’s counterparties that are rated by S&P, Moody’s or both. The percentage of counterparties that are rated by S&P, Moody’s or both (based on nameplate capacity) of each of our distributed generation projects is as follows:

 

    U.S. Projects 2014: 82%
    Summit Solar Projects (U.S.): 21%
    Summit Solar Projects (Canada): 100%
    Enfinity: 85%
    U.S. Projects 2009-2013: 35%
    California Public Institutions: 100%
    MA Operating: 100%
    SunE Solar Fund X: 89%

 

(5) Calculated as of March 31, 2014. For distributed generation projects, the number represents a weighted average (based on nameplate capacity) remaining duration. For Nellis, the number represents the remaining duration of the renewable energy credit, or “REC,” contract.
(6) The REC contract for the Nellis project, which represents over 90% of the expected revenues, has remaining duration of approximately 14 years. The PPA of the Nellis project has an indefinite term subject to one-year reauthorizations.
(7) The PPA counterparty has the right, under certain circumstances, to purchase up to 40% of the project equity from us pursuant to a predetermined purchase price formula. See “Business—Our Portfolio—Initial Portfolio—Utility Projects—CAP.”
(8) The Mt. Signal project is currently owned by Imperial Valley Solar 1 Holdings II, LLC, the entity we will acquire from Silver Ridge Power LLC, or “Silver Ridge,” concurrently with the completion of this offering. See “—Organizational Transactions.”

The projects in our initial portfolio, as well as the Call Right Projects discussed below, were selected because they are located in the geographic locations we intend to initially target. All of the projects in our initial portfolio have, and all of the Call Right Projects have or will have, long-term PPAs with creditworthy counterparties that we believe will provide sustainable and predictable cash flows to fund the regular quarterly cash dividends that we intend to pay to holders of our Class A common stock. All the projects in our initial portfolio have already reached COD or are expected to reach COD prior to the end of 2014, while the Call Right Projects generally are not expected to reach COD until the fourth quarter of 2014 or later.

The Support Agreement has established an aggregate cash purchase price that, when taken together with applicable project-level debt, equals $732.0 million subject to such adjustments as the parties may mutually agree) for the Call Right Projects set forth in the table below under the heading “Priced Call Right Projects.” This aggregate price was determined by good faith negotiations between us and our Sponsor. If we elect to purchase less than all of the Priced Call Right Projects, we and our Sponsor will negotiate prices for individual projects.

We will have the right to acquire additional Call Right Projects set forth in the table below under the heading “Unpriced Call Right Projects” at prices that will be determined in the future. The price for each Unpriced Call Right Project will be the fair market value of such project. The Support Agreement provides that we will work with our Sponsor to mutually agree on the fair market value, but if we are unable to, we and our Sponsor will engage a third-party advisor to determine the fair market value, after which we have the right (but not the obligation) to acquire such Call Right Project. Until the price for a Call Right Asset is mutually agreed to by us and our Sponsor, in the event our Sponsor receives a bona fide offer for a Call Right Project from a third party, we will have the right to match any price offered by such third party and acquire such Call Right Project on the terms our Sponsor could obtain from the third party. After the price for a Call Right Asset has been agreed upon and until the total aggregate Projected FTM CAFD commitment has been satisfied, our Sponsor may not market, offer or sell that Call Right Asset to any third party without our consent. The Support Agreement will further provide that our Sponsor is required to offer us additional qualifying Call Right Projects from its pipeline on a quarterly basis until we have

 

 

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acquired projects under the Support Agreement that have the specified minimum amount of Projected FTM CAFD for each of the periods covered by the Support Agreement. We cannot assure you that we will be offered these Call Right Projects on terms that are favorable to us. See “Certain Relationships and Related Party Transactions—Project Support Agreement” for additional information.

The following table provides an overview of the Call Right Projects that are currently identified in the Support Agreement:

 

Project Names(1)

   Location    Expected
Acquisition Date(2)
   Nameplate
Capacity
(MW)(3)
     # of Sites  

Priced Call Right Projects:

           

Ontario 2015 projects

   Canada    Q1 2015 - Q4 2015      13.2         22   

UK projects #1-6

   U.K.    Q1 2015 - Q2 2015      139.0         6   

Chile project #1

   Chile    Q1 2015      69.0         1   
           

Ontario 2016 projects

   Canada    Q1 2016 - Q4 2016      10.8         18   

Chile project #2

   Chile    Q1 2016      94.0         1   
        

 

 

    

 

 

 

Total Priced Call Right Projects

     326.0         48   

Unpriced Call Right Projects:

           

US DG 2H2014 & 2015 projects

   U.S.    Q3 2014 - Q4 2015      137.3         115   

US AP North Lake I

   U.S.    Q3 2015      21.6         1   

US Victorville

   U.S.    Q3 2015      13.0         1   

US Bluebird

   U.S.    Q2 2015      7.8         1   
           

US Western project #1

   U.S.    Q2 2016      156.0         1   

US Southwest project #1

   U.S.    Q2 2016      100.0         1   

Tenaska Imperial Solar Energy Center West(4)

   U.S.    Q3 2016      72.5         1   

US Island project #1

   U.S.    Q2 2016      65.0         1   

US Southeast project #1

   U.S.    Q2 2016      65.0         1   

US California project #1

   U.S.    Q2 2016      54.2         1   

US DG 2016 projects

   U.S.    Q1 2016 - Q4 2016      45.9         8   

US California project #2

   U.S.    Q3 2016      44.8         1   
        

 

 

    

 

 

 

Total Unpriced Call Right Projects

     783.1         133   
        

 

 

    

 

 

 

Total 2015 projects

     400.9         147   

Total 2016 projects

     708.2         34   
        

 

 

    

 

 

 

Total Call Right Projects

     1,109.1         181   
        

 

 

    

 

 

 

 

(1) Our Sponsor may remove a project from the Call Right Project list effective upon notice to us if, in its reasonable discretion, a project is unlikely to be successfully completed. In that case, the Sponsor will be required to replace such project with one or more additional reasonably equivalent projects that have a similar economic profile.
(2) Represents date of anticipated acquisition.
(3) Nameplate capacity represents the maximum generating capacity at standard test conditions of a facility multiplied by our expected percentage ownership of such facility (disregarding equity interests of any tax equity investor or lessor under any sale-leaseback financing or any non-controlling interests in a partnership). Generating capacity may vary based on a variety of factors discussed elsewhere in this prospectus.
(4) Our Sponsor acquired an indirect 19.8% interest in the Tenaska Imperial Solar Energy Center West project in July 2014 and has entered into an agreement to acquire an additional 19.8% interest in such project from Silver Ridge upon the project achieving COD. This acquisition is in addition to the acquisition of the Mt. Signal project from Silver Ridge, which will occur concurrently with the completion of this offering. See “—Organizational Transactions.” The 72.5 MW nameplate capacity included in the table above reflects a 39.6% interest in the 183 MW Tenaska Imperial Solar Energy Center West project. We expect the project to achieve COD in the second half of 2016. Our Sponsor’s acquisitions of the interest in the Tenaska Imperial Solar Energy Center West project are subject to certain regulatory approvals, including Federal Energy Regulatory Commission, or “FERC,” approval and third-party consents, as well as customary closing conditions.

 

 

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Cash Available for Distribution

The table below summarizes our estimated cash available for distribution per share of Class A common stock for the 12 months ending June 30, 2015 and December 31, 2015 based on our forecasts included elsewhere in this prospectus:

 

     Forecast for the 12 Months Ending  
     June 30, 2015      December 31,
2015
 
(in thousands, except share, per share and project data)    (unaudited)  

Assumed average MW for period

     733         808   

Cash available for distribution(1)

   $ 89,500       $ 107,300   

Cash available for distribution to holders of Class A shares(2)

   $ 24,563       $ 29,449   

Class A shares at period end

     27,724,712         27,724,712   

Cash available for distribution per Class A share

   $ 0.8860         1.0622   

 

(1) Cash available for distribution is not a measure of performance under U.S. generally accepted accounting principles, or “GAAP.” For a reconciliation of these forecasted metrics to their closest GAAP measure, see “Cash Dividend Policy—Estimate of Future Cash Available for Distribution” elsewhere in this prospectus.
(2) Does not give effect to any reductions of distributions on the Class B units during the Distribution Forbearance Period.

We define “cash available for distribution” or “CAFD” as net cash provided by operating activities of Terra LLC as adjusted for certain other cash flow items that we associate with our operations. It is a non-GAAP measure of our ability to generate cash to service our dividends. As calculated in this prospectus, cash available for distribution represents net cash provided by (used in) operating activities of Terra LLC (i) plus or minus changes in assets and liabilities as reflected on our statements of cash flows, (ii) minus deposits into (or plus withdrawals from) restricted cash accounts required by project financing arrangements to the extent they decrease (or increase) cash provided by operating activities, (iii) minus cash distributions paid to non-controlling interests in our projects, if any, (iv) minus scheduled project-level and other debt service payments and repayments in accordance with the related borrowing arrangements, to the extent they are paid from operating cash flows during a period, (v) minus non-expansionary capital expenditures, if any, to the extent they are paid from operating cash flows during a period, (vi) plus cash contributions from our Sponsor pursuant to the Interest Payment Agreement, (vii) plus operating costs and expenses paid by our Sponsor pursuant to the Management Services Agreement to the extent such costs or expenses exceed the fee payable by us pursuant to such agreement but otherwise reduce our net cash provided by operating activities and (viii) plus or minus operating items as necessary to present the cash flows we deem representative of our core business operations, with the approval of the audit committee. Our intention is to cause Terra LLC to distribute a portion of the cash available for distribution generated by our project portfolio to its members each quarter, after appropriate reserves for our working capital needs and the prudent conduct of our business. For further discussion of cash available for distribution, including a reconciliation of net cash provided by (used in) operating activities to cash available for distribution and a discussion of its limitations, see footnote (2) under the heading “Summary Historical and Pro Forma Financial Data” elsewhere in this prospectus.

 

 

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Industry Overview

We expect to benefit from continued high growth in clean energy across the utility, commercial and residential customer segments. According to Bloomberg New Energy Finance, over 1,418 GW of clean power generation projects are expected to be installed globally over the period from 2013 through 2020, requiring an aggregate investment of over $2.9 trillion across the utility, commercial and residential markets.

We believe the solar segment of the clean power generation industry is particularly attractive as declining solar electricity costs and increasing grid electricity costs are accelerating the attainment of grid parity in various markets. Solar energy offers a compelling value proposition in markets that have reached grid parity because customers can typically purchase renewable energy for less than the cost of electricity generated by local utilities, pay little to no up-front cost and lock in long-term energy prices, insulating themselves from rising electricity rates. We expect a number of additional markets in our target geographies will reach grid parity in the coming years.

Solar energy benefits from highly predictable energy generation, the absence of fuel costs, proven technology and strong political and social support. In addition, solar generating assets are able to be located at a customer’s site which reduces the customer’s transmission and distribution costs. Finally, solar energy generation benefits from governmental, public and private support for the development of solar energy projects due to the environmentally friendly attributes of solar energy.

Our Business Strategy

Our primary business strategy is to increase the cash dividends we pay to the holders of our Class A common stock over time. Our plan for executing this strategy includes the following:

Focus on long-term contracted clean power generation assets.    Our initial portfolio and any Call Right Projects that we acquire pursuant to the Support Agreement will have long-term PPAs with creditworthy counterparties. We intend to focus on owning and operating long-term contracted clean power generation assets with proven technologies, low operating risks and stable cash flows consistent with our initial portfolio. We believe industry trends will support significant growth opportunities for long-term contracted power in the clean power generation segment as various markets around the world reach grid parity.

Grow our business through acquisitions of contracted operating assets.    We intend to acquire additional contracted clean power generation assets from our Sponsor and unaffiliated third parties to increase our cash available for distribution. The Support Agreement provides us with (i) the option to acquire the identified Call Right Projects, which currently represent an aggregate nameplate capacity of approximately 1.1 GW, and additional projects from our Sponsor’s development pipeline that will be designated as Call Right Projects under the Support Agreement to satisfy the aggregate Projected FTM CAFD commitment of $175.0 million and (ii) a right of first offer on the ROFO Projects. In addition, we expect to have significant opportunities to acquire other clean power generation assets from third-party developers, independent power producers and financial investors. We believe our knowledge of the market, third-party relationships, operating expertise and access to capital will provide us with a competitive advantage in acquiring new assets.

Attractive asset class.    We intend to initially focus on the solar energy segment because we believe solar is currently the fastest growing segment of the clean power generation industry and offers attractive opportunities to own assets and deploy long-term capital due to the predictability of solar

 

 

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power cash flows. In particular, we believe the solar segment is attractive because there is no associated fuel cost risk and solar technology has become highly reliable and, based on the experience of our Sponsor, requires low operational and maintenance expenditures and a low level of interaction from managers. Solar projects also have an expected life which can exceed 30 to 40 years. In addition, the solar energy generation projects in our initial portfolio generally operate under long-term PPAs with terms of up to 20 years.

Focus on core markets with favorable investment attributes.    We intend to focus on growing our portfolio through investments in markets with (i) creditworthy PPA counterparties, (ii) high clean energy demand growth rates, (iii) low political risk, stable market structures and well-established legal systems, (iv) grid parity or the potential to reach grid parity in the near term and (v) favorable government policies to encourage renewable energy projects. We believe there will be ample opportunities to acquire high-quality contracted power generation assets in markets with these attributes. While our current focus is on solar generation assets in the United States and its unincorporated territories, Canada, the United Kingdom and Chile, we will selectively consider acquisitions of contracted clean generation sources in other countries.

Maintain sound financial practices.    We intend to maintain our commitment to disciplined financial analysis and a balanced capital structure. Our financial practices will include (i) a risk and credit policy focused on transacting with creditworthy counterparties, (ii) a financing policy focused on achieving an optimal capital structure through various capital formation alternatives to minimize interest rate and refinancing risks, and (iii) a dividend policy that is based on distributing the cash available for distribution generated by our project portfolio (after deducting appropriate reserves for our working capital needs and the prudent conduct of our business). Our initial dividend was established based on our targeted payout ratio of approximately 85% of projected cash available for distribution. See “Cash Dividend Policy.”

Our Competitive Strengths

We believe our key competitive strengths include:

Scale and diversity.    Our initial portfolio and the Call Right Projects will provide us with significant diversification in terms of market segment, counterparty and geography. These projects, in the aggregate, represent 807.7 MW of nameplate capacity, which are expected to consist of 672.9 MW of nameplate capacity from utility projects and 134.8 MW of nameplate capacity of commercial, industrial, government and residential customers. Of the projects in our initial portfolio, only three account for more than $10.0 million of our forecasted CAFD for the 12 months ending December 31, 2015 and no single project accounts for more than 20% of our forecasted CAFD for the same period. Our diversification reduces our operating risk profile and our reliance on any single market or segment. We believe our scale and geographic diversity improve our business development opportunities through enhanced industry relationships, reputation and understanding of regional power market dynamics.

Stable, high-quality cash flows.    Our initial portfolio of projects, together with the Call Right Projects and third-party projects that we acquire, will provide us with a stable, predictable cash flow profile. We sell the electricity generated by our projects under long-term PPAs with creditworthy counterparties. As of March 31, 2014, the weighted average (based on MW) remaining life of our PPAs was 20 years. The weighted average credit rating (based on nameplate capacity) of the counterparties to the PPAs for the projects in our initial portfolio is A-/A3, which includes only those counterparties that are rated by S&P, Moody’s or both (representing approximately 92% of the total MW of our initial

 

 

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portfolio). All of our projects have highly predictable operating costs, in large part due to solar facilities having no fuel cost and reliable technology. Finally, based on our initial portfolio of projects, we do not expect to pay significant federal income taxes in the near term.

Newly constructed portfolio.    We benefit from a portfolio of relatively newly constructed assets, with most of the projects in our initial portfolio having achieved COD within the past three years. All of the Call Right Projects are expected to achieve COD by the end of 2016. The projects in our initial portfolio and the Call Right Projects utilize proven and reliable technologies provided by leading equipment manufacturers and, as a result, we expect to achieve high generation availability and predictable maintenance capital expenditures.

Relationship with SunEdison.    We believe our relationship with our Sponsor provides us with significant benefits, including the following:

 

    Strong asset development and acquisition track record.    Over the last five calendar years, our Sponsor has constructed or acquired solar power generation assets with an aggregate nameplate capacity of 1.4 GW and, as of March 31, 2014, was constructing additional solar power generation assets expected to have an aggregate nameplate capacity of approximately 504 MW. Our Sponsor has been one of the top five developers and installers of solar energy facilities in the world in each of the past four years based on megawatts installed. In addition, our Sponsor had a 3.6 GW pipeline of development stage solar projects as of March 31, 2014. Our Sponsor’s operating history demonstrates its organic project development capabilities and its ability to work with third-party developers and asset owners in our target markets. We believe our Sponsor’s relationships, knowledge and employees will facilitate our ability to acquire operating projects from our Sponsor and unaffiliated third parties in our target markets.

 

    Project financing experience.    We believe our Sponsor has demonstrated a successful track record of sourcing long duration capital to fund project acquisitions, development and construction. Since 2005, our Sponsor has raised approximately $5.0 billion in long-term, non-recourse project and tax equity financing for hundreds of projects. We expect that we will realize significant benefits from our Sponsor’s financing and structuring expertise as well as its relationships with financial institutions and other providers of capital.

 

    Management and operations expertise.    We will have access to the significant resources of our Sponsor to support the growth strategy of our business. As of March 31, 2014, our Sponsor had over 1.9 GW of projects under management across 12 countries. Approximately 16.0% of these projects are third-party power generation facilities, which demonstrates our Sponsor’s collaboration with multiple solar developers and owners. These projects utilize 30 different module types and inverters from 12 different manufacturers. In addition, our Sponsor maintains three renewable energy operation centers to service assets under management. Our Sponsor’s operational and management experience helps ensure that our facilities will be monitored and maintained to maximize their cash generation.

Dedicated management team.    Under the Management Services Agreement, our Sponsor has committed to provide us with a dedicated team of professionals to serve as our executive officers and other key officers. Our officers have considerable experience in developing, acquiring and operating clean power generation assets, with an average of over nine years of experience in the sector. For example, our President and Chief Executive Officer has served as the President of SunEdison’s solar energy business since November 2009. Our management team will also have access to the other significant management resources of our Sponsor to support the operational, financial, legal and regulatory aspects of our business.

 

 

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Our management team includes certain individuals that were previously employed by Everstream Energy Capital Management LLC, or “Everstream,” a private equity investment firm that specializes in energy infrastructure projects, and that assisted in the early stage diligence and acquisition of certain projects in our initial portfolio.

Agreements with our Sponsor

We will enter into the agreements described below with our Sponsor immediately prior to the completion of this offering. For a more comprehensive discussion of these agreements, see “Certain Relationships and Related Party Transactions.” For a discussion of the risks related to our relationship with our Sponsor, see “Risk Factors—Risks Related to our Relationship with our Sponsor.” In addition, we will amend Terra LLC’s operating agreement to provide for Class A units, Class B units and Class B1 units and to convert our Sponsor’s interest in TerraForm Power’s common equity into Class B units and issue the IDRs to our Sponsor. As a result of holding Class B units and IDRs, subject to certain limitations during the Subordination Period and the Distribution Forbearance Period, our Sponsor will be entitled to share in distributions from Terra LLC to its unit holders. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC.”

Project Support Agreement.    Pursuant to the Support Agreement, our Sponsor will provide us with the right, but not the obligation, to purchase for cash certain solar projects from its project pipeline with aggregate Projected FTM CAFD of at least $175.0 million by the end of 2016. Specifically, the Support Agreement requires our Sponsor to offer us:

 

    from the completion of this offering through the end of 2015, solar projects that have Projected FTM CAFD of at least $75.0 million; and

 

    during calendar year 2016, solar projects that have Projected FTM CAFD of at least $100.0 million.

If the amount of Projected FTM CAFD of the projects we acquire under the Support Agreement from the completion of this offering through the end of 2015 is less than $75.0 million, or the amount of Projected FTM CAFD of the projects we acquire under the Support Agreement during 2016 is less than $100.0 million, our Sponsor has agreed that it will continue to offer us sufficient Call Right Projects until the total aggregate Projected FTM CAFD commitment has been satisfied. We have agreed to pay cash for each Call Right Project that we acquire, unless we and our Sponsor otherwise mutually agree. The Support Agreement provides that we will work with our Sponsor to mutually agree on the fair market value of each Unpriced Call Right Project within a reasonable time after it is added to the list of identified Call Right Projects. If we are unable to agree on the fair market value, we and our Sponsor will engage a third-party advisor to determine the fair market value, after which we will have the right (but not the obligation) to acquire such Call Right Project. Until we provide our Sponsor with written notice of our exercise of our right to purchase a Call Right Project, in the event our Sponsor receives a bona fide offer for a Call Right Project from a third party, our Sponsor must give us notice of such offer in reasonable detail and we will have the right to acquire such project on terms substantially similar to those our Sponsor could have obtained from such third party, but at a price no less than the price specified in the third-party offer. After the price for a Call Right Asset has been agreed and until the total aggregate Projected FTM CAFD commitment has been satisfied, our Sponsor may not market, offer or sell that Call Right Asset to any third party without our consent.

The Support Agreement provides that our Sponsor is required to offer us additional qualifying Call Right Projects from its pipeline on a quarterly basis until we have acquired projects under the Support

 

 

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Agreement that have the specified minimum amount of Projected FTM CAFD for each of the periods covered by the Support Agreement. These additional Call Right Projects must satisfy certain criteria. In addition, our Sponsor may remove a project from the Call Right Project list if, in its reasonable discretion, the project is unlikely to be successfully completed. In that case, the Sponsor will be required to replace such project with one or more additional reasonably equivalent projects that have a similar economic profile. Generally, we may exercise our call right with respect to any Call Right Project identified in the Support Agreement at any time until 30 days prior to COD for that Call Right Project. If we exercise our option to purchase a project under the Support Agreement, our Sponsor is required to sell us that project on or about the date of its COD unless we agree to a different date.

In addition, our Sponsor has agreed to grant us a right of first offer on any of the ROFO Projects that it determines to sell or otherwise transfer during the six-year period following the completion of this offering. Under the terms of the Support Agreement, our Sponsor will agree to negotiate with us in good faith, for a period of 30 days, to reach an agreement with respect to any proposed sale of a ROFO Project for which we have exercised our right of first offer before it may sell or otherwise transfer such ROFO Project to a third party. However, our Sponsor will not be obligated to sell any of the ROFO Projects and, as a result, we do not know when, if ever, any ROFO Projects will be offered to us. In addition, in the event that our Sponsor elects to sell ROFO Projects, it will not be required to accept any offer we make and may choose to sell the assets to a third party or not sell the assets at all.

Under our related party transaction policy, the prior approval of our Corporate Governance and Conflicts Committee will be required for each material transaction with our Sponsor under the Support Agreement. See “—Conflicts of Interest” below.

Management Services Agreement.    Pursuant to the Management Services Agreement, our Sponsor will provide, or arrange for the provision of, operational, management and administrative services to us and our subsidiaries, and we will pay our Sponsor a base management fee as follows: (i) no fee for the remainder of 2014, (ii) 2.5% of Terra LLC’s CAFD in 2015, 2016 and 2017 (not to exceed $4.0 million in 2015 or $7.0 million in 2016 or $9.0 million in 2017), and (iii) an amount equal to our Sponsor’s actual cost for providing services pursuant to the terms of the Management Services Agreement in 2018 and thereafter. We and our Sponsor may agree to adjust the management fee as a result of a change in the scope of services provided under the Management Services Agreement, but no adjustment will be required solely as a result of our acquisition of Call Right Projects or other assets. In addition, in the event that TerraForm Power, Terra LLC, Terra Operating LLC or any of our subsidiaries refers a solar power development project to our Sponsor prior to our Sponsor’s independent identification of such opportunity, and our Sponsor thereafter develops such solar power project, our Sponsor will pay us an amount equal to $40,000 per MW multiplied by the nameplate capacity of such solar power project, determined as of the COD of such solar power project (not to exceed $30.0 million in the aggregate in any calendar year). The prior approval of our Corporate Governance and Conflicts Committee will be required for each material transaction with our Sponsor under the Management Services Agreement unless such transaction is expressly contemplated by the agreement.

Repowering Services ROFR Agreement.    Immediately prior to the completion of this offering, TerraForm Power, Terra LLC and Terra Operating LLC, collectively, the “Service Recipients,” will enter into a Repowering Services ROFR Agreement with our Sponsor, pursuant to which our Sponsor will be granted a right of first refusal to provide certain services, including (i) repowering operating solar generation projects and providing related services to analyze, design and replace or improve any of the solar power generation projects through the modification of the relevant solar energy system or the installation of new solar components, but excluding any maintenance, and (ii) such other services as

 

 

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may from time to time reasonably requested by the Service Recipients related to any such repowerings, collectively, the “Repowering Services.”

Interest Payment Agreement. Terra LLC and Terra Operating LLC will enter into the Interest Payment Agreement with our Sponsor and its wholly owned subsidiary, SunEdison Holdings Corporation, pursuant to which our Sponsor will agree to pay all of the scheduled interest on our new term loan facility, or the “Term Loan,” through the third anniversary of our entering into the Term Loan, up to an aggregate of $48 million over such period (plus any interest due on any payment not remitted when due). Our Sponsor will not be obligated to pay any amounts payable under the Term Loan in connection with an acceleration of the indebtedness thereunder. Any amounts payable by our Sponsor under the Interest Payment Agreement that are not remitted when due will remain due (whether on demand or otherwise) and interest will accrue on such overdue amounts at a rate per annum equal to the interest rate then applicable under the Term Loan. In addition, Terra LLC will be entitled to set off any amounts owing by our Sponsor pursuant to the Interest Payment Agreement against any and all sums owed by Terra LLC to our Sponsor under the distribution provisions of the amended and restated operating agreement of Terra LLC, and Terra LLC may pay such amounts to Terra Operating LLC.

Operating Agreements.    Our contributed projects were or are being built pursuant to engineering, procurement and construction, or “EPC,” contracts, and will be operated and maintained pursuant to operations and maintenance, or “O&M,” contracts with affiliates of our Sponsor. Under the EPC contracts, the relevant Sponsor affiliates provide liquidated damages to cover delays in project completions, as well as market standard warranties, including performance ratio guarantees, designed to ensure the expected level of electricity generation is achieved, for periods that range between two and five years after project completion depending on the relevant market. The O&M contracts cover comprehensive preventive and corrective maintenance services for a fee as defined in such agreement. The applicable Sponsor affiliates also provide generation availability guarantees of 99% for a majority of the projects covered by such O&M Agreements (on a MW basis), designed to ensure the expected level of power plant operation is achieved, and related liquidated damage obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Operating Metrics—Generation Availability” for a description of “generation availability.”

Conflicts of Interest.    While our relationship with our Sponsor and its subsidiaries is a significant strength, it is also a source of potential conflicts. As discussed above, our Sponsor and its affiliates will provide important services to us, including assisting with our day-to-day management and providing individuals who are dedicated to serve as our executive officers and other key officers. Our management team, including our officers, will remain employed by and, in certain cases, will continue to serve as an executive officer or other senior officer of, SunEdison or its affiliates. Our officers will also generally continue to have economic interests in our Sponsor following this offering. However, pursuant to the Management Services Agreement, our officers will be dedicated to running our business. These same officers may help our board of directors and, in particular, our Corporate Governance and Conflicts Committee evaluate potential acquisition opportunities presented by our Sponsor under the Support Agreement. As a result of their employment by, and economic interest in, our Sponsor, our officers may be conflicted when advising our board of directors or Corporate Governance and Conflicts Committee or otherwise participating in the negotiation or approval of such transactions.

Notwithstanding the significance of the services to be rendered by our Sponsor or its designated affiliates on our behalf in accordance with the terms of the Management Services Agreement or of the assets which we may elect to acquire from our Sponsor in accordance with the terms of the Support Agreement or otherwise, our Sponsor will not owe fiduciary duties to us or our stockholders and will have significant discretion in allocating acquisition opportunities (except with respect to the Call Right

 

 

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Projects and ROFO Projects) to us or to itself or third parties. Under the Management Services Agreement, our Sponsor will not be prohibited from acquiring operating assets of the kind that we seek to acquire. See “Risk Factors—Risks Related to our Relationship with our Sponsor.”

Any material transaction between us and our Sponsor (including the proposed acquisition of any assets pursuant to the Support Agreement) will be subject to our related party transaction policy, which will require prior approval of such transaction by our Corporate Governance and Conflicts Committee. That committee will be comprised of at least three directors, each of whom will satisfy the requirements for independence under applicable laws and regulations of the Securities and Exchange Commission, or the “SEC,” and the rules of the NASDAQ Global Select Market. See “Risk Factors—Risks Related to our Relationship with our Sponsor,” “Certain Relationships and Related Party Transactions—Procedures for Review, Approval and Ratification of Related-Person Transactions; Conflicts of Interest” and “Management—Committees of the Board of Directors—Corporate Governance and Conflicts Committee” for a discussion of the risks associated with our organizational and ownership structure and corporate strategy for mitigating such risks.

Organizational Transactions

Formation Transactions

TerraForm Power, Inc. is a Delaware corporation formed on January 15, 2014 by SunEdison to serve as the issuer of the Class A common stock offered hereby. In connection with the formation of TerraForm Power, certain employees of SunEdison who will perform services for us were granted equity incentive awards under the TerraForm Power, Inc. 2014 Second Amended and Restated Long-Term Incentive Plan, or the “2014 Incentive Plan,” in the form of restricted shares of TerraForm Power. See “Executive Officer Compensation—Equity Incentive Awards.”

TerraForm Power, LLC is a Delaware limited liability company formed on February 14, 2014 as a wholly owned indirect subsidiary of SunEdison to own and operate through its subsidiaries a portfolio of contracted clean power generation assets acquired and to be acquired from SunEdison and unaffiliated third parties. Following its formation and prior to the completion of this offering: (i) SunEdison and its subsidiaries will contribute to Terra LLC the solar energy projects developed or acquired by SunEdison that are included in our initial portfolio, which we refer to as the “Initial Asset Transfers,” or “Contributed Projects” and (ii) Terra LLC will complete the acquisitions of the solar energy projects developed by third parties that are included in our initial portfolio (including the Mt. Signal project discussed below), which we refer to as the “Acquisitions” or “Acquired Projects.” On March 28, 2014, Terra LLC entered into a new $250.0 million term loan Bridge Facility, or the “Bridge Facility,” to provide funding for the Acquisitions. Through an amendment dated May 15, 2014, the size of the Bridge Facility was increased to $400.0 million.

We collectively refer to these transactions as the “Formation Transactions.”

Private Placements

On July 3, 2014, Altai Capital Master Fund, Ltd. and Everstream Opportunities Fund I, LLC entered into stock purchase agreements with us in which they agreed to purchase $45.0 million and $20.0 million, respectively, of our Class A common stock at a price per share equal to the initial public offering price in separate private placement transactions. These share purchases are subject to certain customary closing conditions and will be completed concurrently with the closing of this offering. The shares sold in these private placement transactions will not be registered under the Securities Act of

 

 

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1933, as amended, or the “Securities Act.” For a further discussion of the private placement transactions, see “Certain Relationships and Related Party Transactions–Private Placements and Related Transactions.”

Throughout this prospectus, we collectively refer to the foregoing transactions as the “Private Placements.”

Offering Transactions

In connection with and, in certain cases, concurrently with the completion of, this offering, based on an assumed initial public offering price of $24.00 per share, which is the midpoint of the range listed on the cover of this prospectus:

 

    we will amend and restate TerraForm Power’s certificate of incorporation to provide for Class A common stock, Class B common stock and Class B1 common stock (which Class B1 Common Stock will be distributed to Riverstone as described below and which may also be issued in the future upon a reset of IDR target distribution levels or in connection with acquisitions from our Sponsor or third parties), at which time SunEdison’s interest in TerraForm Power’s common equity will be solely shares of Class B common stock and interests in Terra LLC (as described below) and the restricted shares issued under the 2014 Incentive Plan will automatically convert into a number of shares of Class A common stock that represent an aggregate 3.55% economic interest in Terra LLC, subject to certain adjustments to prevent dilution;

 

    we will amend Terra LLC’s operating agreement to provide for Class A units, Class B units and Class B1 units (which Class B1 units will be distributed to Riverstone as described below and which may be issued in the future upon a reset of IDR target distribution levels or in connection with acquisitions from our Sponsor or third parties) and to convert our Sponsor’s interest in TerraForm Power’s common equity into Class B units, issue to TerraForm Power a number of Class A units equal to the number of shares of Class A common stock (including any restricted shares) outstanding immediately after TerraForm Power amends and restates its certificate of incorporation as described above, issue the IDRs to our Sponsor and appoint TerraForm Power as the sole managing member of Terra LLC;

 

    TerraForm Power will issue 20,065,000 shares of its Class A common stock to the purchasers in this offering (or 23,074,750 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $445.2 million (or approximately $512.0 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), after deducting underwriting discounts and commissions and the structuring fee but before offering expenses;

 

    TerraForm Power will issue 2,708,333 shares of its Class A common stock to the purchasers in the Private Placements for gross proceeds of $65.0 million;

 

    TerraForm Power will use $436.0 million of the net proceeds from this offering and the Private Placements to acquire newly-issued Class A units of Terra LLC directly from Terra LLC, and will use all remaining net proceeds (including any proceeds received by us upon exercise of the underwriters’ option to purchase additional shares of our Class A common stock) to purchase Class B units (and Class B common stock) from our Sponsor at a price equal to the price per share in this offering, less underwriting discounts and commissions and a pro rata portion of the structuring fee, following which those Class B units (and the related shares of Class B common stock) will be cancelled and Terra LLC will issue to us an equal number of Class A units, collectively representing 22.5% of Terra LLC’s outstanding membership units (or 25.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

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    Terra LLC will use such proceeds of $436.0 million, together with borrowings under the Term Loan, to repay certain project-level indebtedness, to repay the Bridge Facility (including accrued interest), to pay fees and expenses associated with the Term Loan and Revolver (as defined below), to fund approximately $86.0 million of the cost of the acquisition and related milestone payments of certain projects included in our initial portfolio from our Sponsor and for general corporate purposes, which may include future acquisitions of solar assets from our Sponsor pursuant to the Support Agreement or from third parties;

 

    we will acquire Imperial Valley Solar 1 Holdings II, LLC, which owns the Mt. Signal project, from Silver Ridge in exchange for consideration consisting of (i) 6,083,333 Class B1 units of Terra LLC (and a corresponding number of shares of Class B1 common stock) equal in value to $146.0 million, which Silver Ridge will distribute to R/C US Solar Investment Partnership, L.P., or “Riverstone,” and (ii) 6,083,333 Class B units of Terra LLC (and a corresponding number of shares of Class B common stock) equal in value to $146.0 million, which Silver Ridge will distribute to our Sponsor;

 

    Terra Operating LLC will enter into a new $140.0 million revolving credit facility, or the “Revolver,” which will remain undrawn at the completion of this offering, and the $300 million Term Loan to refinance any remaining borrowings under the Bridge Facility; and

 

    TerraForm Power will enter into various agreements with our Sponsor, including the Support Agreement, the Management Services Agreement, the Repowering Services ROFR Agreement and the Interest Payment Agreement.

We collectively refer to the foregoing transactions as the “Offering Transactions” and, together with the Formation Transactions, as the “Organizational Transactions.” We intend to use any net proceeds we receive as a result of the underwriters’ option to purchase additional shares of Class A common stock to purchase Class B units (and shares of Class B common stock) held by our Sponsor at a price equal to the initial public offering price less the underwriting discounts and commissions and structuring fee, and immediately cancel such Class B units (and shares of Class B common stock) contemporaneously with Terra LLC issuing Class A units to us. We will not retain any proceeds used by us to acquire Class B units (and shares of Class B common stock) from our Sponsor.

Immediately following the completion of this offering, based on an assumed initial public offering price of $24.00 per share, which is the midpoint of the range listed on the cover of this prospectus:

 

    TerraForm Power will be a holding company and the sole material asset of TerraForm Power will be the Class A units of Terra LLC;

 

    TerraForm Power will be the sole managing member of Terra LLC and will control the business and affairs of Terra LLC and its subsidiaries;

 

    TerraForm Power will hold 27,724,712 Class A units of Terra LLC representing approximately 27.4% of Terra LLC’s total outstanding membership units (or 30.4%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    SunEdison, through a wholly owned subsidiary, will own 67,210,944 Class B units of Terra LLC representing approximately 66.5% of Terra LLC’s total outstanding membership units (or 63.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    SunEdison or one of its wholly owned subsidiaries will be the holder of the IDRs;

 

 

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    SunEdison, through the ownership by a wholly owned subsidiary of our Class B common stock, will have 95.2% of the combined voting power of all of our common stock and, through such subsidiary’s ownership of Class B units of Terra LLC, will hold, subject to the right of holders of IDRs to receive a portion of distributions after certain thresholds are met and certain limitations during the Subordination Period and the Distribution Forbearance Period, approximately 66.5% of the economic interest in our business (or 94.6% of the combined voting power of our common stock and a 63.6% economic interest in our business if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    Riverstone, through its ownership of our Class B1 common stock, will have 0.9% of the combined voting power of all our common stock, and, through its ownership of Class B1 units of Terra LLC, will hold, subject to the right of holders of IDRs to receive a portion of distributions after certain thresholds are met, approximately 6.0% of the economic interest in our business (or 0.9% of the combined voting power and a 6.0% economic interest in our business if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

    the purchasers in this offering will own 20,065,000 shares of our Class A common stock, representing 2.8% of the combined voting power of all of our common stock and, through our ownership of Class A units of Terra LLC, subject to the right of holders of IDRs to receive a portion of distributions after certain thresholds are met, approximately 19.9% of the economic interest in our business (or 3.4% of the combined voting power of our common stock and a 22.8% economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

SunEdison and Riverstone (or any other permitted holder) may exchange its Class B units or Class B1 units in Terra LLC, together with a corresponding number of shares of Class B common stock or shares of Class B1 common stock, as applicable, for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications in accordance with the terms of the exchange agreements we will enter into with SunEdison and Riverstone concurrently with the completion of this offering. When a holder exchanges a Class B unit or Class B1 unit of Terra LLC for a share of our Class A common stock, (i) Terra LLC will cancel the Class B units or Class B1 units, as applicable, (ii) Terra LLC will issue additional Class A units to us, (iii) we will cancel a corresponding number of shares of our Class B common stock or Class B1 common stock, as applicable, and (iv) we will issue a corresponding number of shares of Class A common stock to such holder. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Exchange Agreements.”

We have established the Class B1 common stock and Class B1 units primarily to be issued in connection with resetting the IDR target distribution levels. We will also issue Class B1 common stock and Class B1 units as a portion of the consideration for our acquisition of Mt. Signal from Silver Ridge concurrently with the completion of this offering and may issue such shares and units in the future in connection with acquisitions from our Sponsor or third parties.

 

 

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The following chart summarizes certain relevant aspects of our ownership structure and principal indebtedness, as of March 31, 2014, after giving effect to the Organizational Transactions and this offering, based on the assumptions set forth in “The Offering—Certain Assumptions”:

 

LOGO

 

(1) Our Sponsor’s economic interest is subject to certain limitations on distributions to holders of Class B units during the Subordination Period and the Distribution Forbearance Period. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.” In the future, our Sponsor may receive Class B1 units and Class B1 common stock in connection with a reset of the IDR target distribution levels or sales of projects to Terra LLC.

 

(2) The economic interest of holders of Class A units, Class B units and Class B1 units, and, in turn, holders of shares of Class A common stock, is subject to the right of holders of the IDRs to receive a portion of distributions after certain distribution thresholds are met. See “—The Offering—IDRs” and “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

 

(3)

Incentive distribution rights, or “IDRs,” represent a variable interest in distributions by Terra LLC and therefore cannot be expressed as a fixed percentage interest. All of our IDRs will be issued to SunEdison Holdings Corporation, which is a wholly owned subsidiary of our Sponsor. In connection with a reset of the target distribution levels, holders of IDRs will be entitled to receive newly-issued Class B1 units of Terra LLC and shares of our Class B1 common stock. Please read “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—

 

 

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  Distributions” for further description of the IDRs and “Description of Capital Stock—Class B1 Common Stock” for further description of the Class B1 common stock.

 

(4) Terra Operating LLC will enter into the Term Loan concurrently with the completion of this offering and use borrowings therefrom to refinance a portion of borrowings under the Bridge Facility.

 

(5) Concurrently with the completion of this offering, Terra Operating LLC plans to enter into the Revolver, which will provide for a revolving line of credit of $140.0 million. The closing of the Revolver will be conditioned upon completion of this offering, the implementation of our Organizational Transactions and other customary closing conditions.

 

(6) For additional information regarding our project-level indebtedness, see “Description of Certain Indebtedness—Project-Level Financing Arrangements.”

 

(7) Silver Ridge has agreed to distribute the shares of Class B1 common stock and the Class B1 units that it receives as consideration for the sale of the Mt. Signal project to Riverstone, and the shares of Class B common stock and Class B units that it receives as consideration for such sale to our Sponsor.

Material Tax Considerations

If we make a distribution from current or accumulated earnings and profits, as computed for United States federal income tax purposes, such distribution will generally be taxable to holders of our Class A common stock in the current period as ordinary income for United States federal income tax purposes, eligible under current law for the lower tax rates applicable to qualified dividend income of non-corporate taxpayers. If a distribution exceeds our current and accumulated earnings and profits as computed for United States federal income tax purposes, such excess distribution will constitute a non-taxable return of capital to the extent of a holder’s United States federal income tax basis in our Class A common stock and will result in a reduction of such basis. The portion of any such excess distribution that exceeds a holder’s basis in our Class A common stock will be taxed as capital gain. While we expect that a portion of our distributions to holders of our Class A common stock may exceed our current and accumulated earnings and profits as computed for United States federal income tax purposes and therefore constitute a non-taxable return of capital to the extent of a holder’s basis in our Class A common stock, no assurance can be given that this will occur. See “Risk Factors—Risks Related to Taxation—Distributions to holders of our Class A common stock may be taxable as dividends.” Upon the sale of our Class A common stock, the holder generally will recognize capital gain or loss measured by the difference between the sale proceeds received by the holder and the holder’s basis in the Class A common stock sold, adjusted to reflect prior distributions that were treated as return of capital. Based on our current portfolio of assets that we expect will benefit from an accelerated depreciation schedule, we expect to generate net operating losses, or “NOLs,” and NOL carryforwards that we can utilize to offset future taxable income. As such, we do not anticipate paying significant United States federal income taxes for a period of approximately ten years. If you are a non-U.S. investor, please read “Material United States Federal Income Tax Consequences to Non-U.S. Holders” for a more complete discussion of the expected material United States federal income tax consequences of owning and disposing of shares of our Class A common stock.

Certain Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors,” before investing in our Class A common stock.

Risks related to our business include, among others:

 

    counterparties to our PPAs may not fulfill their obligations, which could result in a material adverse impact on our business, financial condition, results of operations and cash flows;

 

 

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    a portion of the revenues under certain of the PPAs for our solar energy projects are subject to price adjustments after a period of time; if the market price of electricity decreases and we are otherwise unable to negotiate more favorable pricing terms, our business, financial condition, results of operations and cash flows may be materially and adversely affected;

 

    certain of the PPAs for power generation projects in our initial portfolio and that we may acquire in the future will contain provisions that allow the offtake purchaser to terminate or buyout a portion of the project upon the occurrence of certain events; if these provisions are exercised and we are unable to enter into a PPA on similar terms, in the case of PPA termination, or find suitable replacement projects to invest in, in the case of a buyout, our cash available for distribution could materially decline; and

 

    the growth of our business depends on locating and acquiring interests in additional attractive clean energy projects at favorable prices from our Sponsor and unaffiliated third parties.

Risks related to our relationship with our Sponsor include, among others:

 

    our Sponsor will be our controlling stockholder and will exercise substantial influence over TerraForm Power, and we are highly dependent on our Sponsor;

 

    we may not be able to consummate future acquisitions from our Sponsor; and

 

    our organizational and ownership structure may create significant conflicts of interest that may be resolved in a manner that is not in our best interests or the best interests of holders of our Class A common stock and that may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks related to an investment in the Class A common stock offered in this offering include, among others:

 

    we may not be able to continue paying comparable or growing cash dividends to holders of our Class A common stock in the future;

 

    the assumptions underlying the forecasts presented elsewhere in this prospectus are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution to differ materially from our forecasts;

 

    we are a holding company and our only material asset after completion of this offering will be our interest in Terra LLC, and we are accordingly dependent upon distributions from Terra LLC and its subsidiaries to pay dividends and taxes and other expenses;

 

    as a result of our Sponsor holding all of our Class B common stock (each share of which entitles our Sponsor to 10 votes on matters presented to our stockholders generally), our Sponsor will control a majority of the vote on all matters submitted to a vote of our stockholders for the foreseeable future following this offering;

 

    the holder or holders of our IDRs may elect to cause Terra LLC to issue Class B1 units in connection with a resetting of target distribution levels which could result in lower distributions to holders of our Class A common stock; and

 

    we are an “emerging growth company” and have elected in this prospectus, and may elect in future SEC filings, to comply with reduced public company reporting requirements, which could make our Class A common stock less attractive to investors.

 

 

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Corporate Information

Our principal executive offices are located at 12500 Baltimore Avenue, Beltsville, Maryland 20705. Our telephone number is (443) 909-7200. Our internet site is www.terraform.com. Information contained on our internet site is not incorporated by reference into the prospectus and does not constitute part of this prospectus.

JOBS Act

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the “JOBS Act.” Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the “Sarbanes-Oxley Act;”

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2019. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, Section 107(b) of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to “opt in” to such extended transition period election under Section 107(b). Therefore we are electing to delay adoption of new or revised accounting standards, and as a result, we may choose to not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.

 

 

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THE OFFERING

 

Shares of Class A common stock
offered by us

  


20,065,000 shares of our Class A common stock.

Shares of Class A common stock to be sold in the Private Placements

  



2,708,333 shares of our Class A common stock.

Option to purchase additional
shares of our Class A common
stock

  



We have granted the underwriters an option to purchase up to an additional 3,009,750 shares of our Class A common stock, at the initial public offering price, less the underwriting discounts and commissions, within 30 days of the date of this prospectus. We intend to use the net proceeds from the exercise of such option, if any, to purchase Class B units (and shares of Class B common stock) from our Sponsor, which would be immediately cancelled in connection with our receiving a corresponding number of Class A units from Terra LLC.

Shares of Class A common stock
outstanding after this offering and the Private Placements

  



27,724,712 shares of our Class A common stock (or 30,734,462 shares, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

Shares of Class B common stock
outstanding after this offering

  


67,210,944 shares of our Class B common stock, all of which will be beneficially owned by our Sponsor.

Class A units and Class B units of
Terra LLC outstanding after this offering

  



27,724,712 Class A units and 67,210,944 Class B units of Terra LLC (or 30,734,462 Class A units and 64,201,194 Class B units of Terra LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

Shares of Class B1 common stock and Class B1 units outstanding after this offering

  



6,083,333 Class B1 units of Terra LLC and 6,083,333 shares of our Class B1 common stock. We have established the Class B1 common stock and Class B1 units primarily to be issued in connection with resetting the IDR target distribution levels. We will also issue Class B1 common stock and Class B1 units as a portion of the consideration for our acquisition of Mt. Signal from Silver Ridge concurrently with the completion of this offering and may issue such shares and units in the future in connection with acquisitions from our Sponsor or third parties.

 

 

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Use of proceeds

   Assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, we estimate that the net proceeds to us from this offering will be approximately $445.2 million after deducting underwriting discounts and commissions and the structuring fee. We will also receive gross proceeds of $65.0 million from the sale of the Class A common stock in the Private Placements. If the underwriters exercise in full their option to purchase additional shares of Class A common stock, we estimate that the additional net proceeds will be approximately $66.8 million after deducting underwriting discounts and commissions and the structuring fee.
   We will use $436.0 million of the net proceeds from this offering and the Private Placements to acquire newly-issued Class A units of Terra LLC directly from Terra LLC, and we will use all remaining net proceeds (including any proceeds received by us upon exercise of the underwriters’ option to purchase additional shares of our Class A common stock) to purchase Class B units (and Class B common stock) from our Sponsor at a price equal to the price per share in this offering, less underwriting discounts and commissions and a pro rata portion of the structuring fee, following which those Class B units (and the related shares of Class B common stock) will be cancelled and Terra LLC will issue to us an equal number of Class A units. These Class A units will collectively represent approximately 22.5% of Terra LLC’s outstanding membership units after this offering (calculated without regard to the IDRs) assuming the underwriters do not exercise their option to purchase additional shares, or approximately 25.5% if the underwriters exercise their option to purchase additional shares. TerraForm Power will not retain any of the net proceeds from this offering or the Private Placements and all such net proceeds in excess of $436.0 million will be paid to our Sponsor, as described above.
   Terra LLC will use net proceeds of $436.0 million, together with borrowings under the Term Loan, to repay all outstanding indebtedness (including accrued interest) under the Bridge Facility, to pay fees and expenses related to the Term Loan and the Revolver and to repay $47.0 million of project-level indebtedness. In addition, Terra LLC will use $86.0 million of the net proceeds to pay for the acquisition and related milestone payments of certain projects included in our initial portfolio from our Sponsor. The $194.4 million of net proceeds remaining with Terra LLC after the foregoing will be used for general corporate purposes, which may include future acquisitions of solar assets from SunEdison pursuant to the Support Agreement or from unaffiliated third parties. As of the date of this prospectus, we have not identified any other specific potential future acquisitions other than under the Support Agreement, as discussed elsewhere in this prospectus.

 

 

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   Our Sponsor will not receive any of the net proceeds or other consideration in connection with this offering, other than: (i) the net proceeds used by us to purchase Class B units (and shares of Class B common stock) from our Sponsor, including in the event the underwriters exercise their option to purchase additional shares; (ii) the Class B common stock, Class B units of Terra LLC and the IDRs issued to it in the Offering Transactions; and (iii) any proceeds it receives from our acquisition of certain projects at the completion of this offering (as described in ‘‘—Organizational Transactions—Offering Transactions’’), or, as discussed above, if Terra LLC elects in the future to use a portion of the net proceeds to fund acquisitions from our Sponsor.

Voting rights and stock lock up

  

Each share of our Class A common stock and Class B1 common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.

 

   All of our Class B common stock will be held by our Sponsor or its controlled affiliates. Each share of our Class B common stock will entitle our Sponsor to 10 votes on matters presented to our stockholders generally. Our Sponsor, as the holder of our Class B common stock, will control a majority of the vote on all matters submitted to a vote of stockholders for the foreseeable future following the completion of this offering. Additionally, Terra LLC’s amended and restated operating agreement will provide that our Sponsor (and its controlled affiliates) must continue to own a number of Class B units equal to 25% of the number of Class B units held by the Sponsor upon completion of this offering until the earlier of: (i) three years from the completion of this offering or (ii) the date Terra LLC has made cash distributions in excess of the Third Target Distribution (as defined herein) for four quarters (which need not be consecutive). The number of shares of Class B common stock corresponding to such number of Class B units would represent a majority of the combined voting power of all shares of Class A common stock, Class B common stock and Class B1 common stock outstanding upon completion of this offering. Any Class B units of Terra LLC transferred by our Sponsor (other than to its controlled affiliates) will be automatically exchanged (along with a corresponding number of shares of Class B common stock) into shares of our Class A common stock in connection with such transfer. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Issuances and Transfer of Units” and “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Exchange Agreements.”
   Holders of our Class A common stock, Class B common stock and Class B1 common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law. See “Description of Capital Stock.”

 

 

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Economic interest

  

Immediately following this offering, subject to the right of holders of IDRs to receive a portion of distributions after certain thresholds are met, the purchasers in this offering will own in the aggregate a 19.9% economic interest in our business through our ownership of Class A units of Terra LLC, our Sponsor will own a 66.5% economic interest in our business through its ownership of Class B units of Terra LLC and Riverstone will own a 6.0% economic interest in our business through its ownership of Class B1 units of Terra LLC (or a 22.8% economic interest, a 63.6% economic interest and a 6.0% economic interest, respectively, if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). See “—IDRs” and “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

 

   Our Sponsor’s economic interest in our business, through its ownership of Class B units of Terra LLC, is subject to the limitations on distributions to holders of Class B units of Terra LLC during the Subordination Period and the Distribution Forbearance Period.

Exchange and registration rights

   Each Class B unit and each Class B1 unit of Terra LLC, together with a corresponding number of shares of Class B common stock or Class B1 common stock, as applicable, will be exchangeable for a share of our Class A common stock at any time, subject to equitable adjustments for stock splits, stock dividends and reclassifications, in accordance with the terms of the exchange agreements we will enter into with our Sponsor and Riverstone concurrently with the completion of this offering. Our Sponsor or Riverstone (or any other permitted holder) may exchange its Class B units or Class B1 units in Terra LLC, together with a corresponding number of shares of Class B common stock or shares of Class B1 common stock, as applicable, for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications, in accordance with the terms of the exchange agreements we will enter into with our Sponsor and Riverstone concurrently with the completion of this offering. When a holder exchanges a Class B unit or Class B1 unit of Terra LLC for a share of our Class A common stock, (i) such holder will surrender such Class B unit or Class B1 unit, as applicable, and a corresponding share of our Class B common stock or Class B1 common stock, as applicable, to Terra LLC, (ii) we will issue and contribute a share of Class A common stock to Terra LLC for delivery of such share by Terra LLC to the exchanging holder, (iii) Terra LLC will issue a Class A unit to us, (iv) Terra LLC will cancel the Class B unit or Class B1 unit, as applicable, and we will cancel the corresponding share of our Class B common stock or Class B1 common stock, as applicable, and (v) Terra LLC will deliver the share of Class A common stock it receives to the exchanging holder. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Exchange Agreements.”

 

 

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   Pursuant to registration rights agreements that we will enter into with our Sponsor and Riverstone concurrently with the completion of this offering, we will agree to file registration statements for the sale of the shares of our Class A common stock that are issuable upon exchange of Class B units or Class B1 units of Terra LLC upon request and cause that registration statement to be declared effective by the SEC as soon as practicable thereafter. See “Certain Relationships and Related Party Transactions— Registration Rights Agreements” for a description of the timing and manner limitations on resales of these shares of our Class A common stock.

Cash dividends:

  

Class A common stock

   Upon completion of this offering, we intend to pay a regular quarterly dividend to holders of our Class A common stock. Our initial quarterly dividend will be set at $0.2257 per share of Class A common stock ($0.9028 per share on an annualized basis), which amount may be changed in the future without advance notice. Our ability to pay the regular quarterly dividend is subject to various restrictions and other factors described in more detail under the caption “Cash Dividend Policy.”
   We expect to pay a quarterly dividend on or about the 75th day following the expiration of each fiscal quarter to holders of our Class A common stock of record on or about the 60th day following the last day of such fiscal quarter. With respect to our first dividend payable on December 15, 2014, we intend to pay a pro-rated dividend (calculated from the completion date of this offering through and including September 30, 2014) of $0.1717 per share of Class A common stock.
   We believe, based on our financial forecast and related assumptions included in “Cash Dividend Policy—Estimated Cash Available for Distribution for the 12 Months Ending June 30, 2015 and December 31, 2015” and our acquisition strategy, that we will generate sufficient cash available for distribution to support our Minimum Quarterly Distribution of $0.2257 per share of Class A common stock ($0.9028 per share on an annualized basis). However, we do not have a legal obligation to declare or pay dividends at such initial quarterly dividend level or at all. See “Cash Dividend Policy.”

Class B common stock

   Holders of our Class B common stock will not have any right to receive cash dividends. See “Description of Capital Stock—Class B Common Stock—Dividend and Liquidation Rights.” However, holders of our Class B common stock will also hold Class B units issued by Terra LLC. As a result of holding the Class B units, subject to certain limitations during the Subordination Period and the Distribution Forbearance Period, our Sponsor will be entitled to share in distributions from Terra LLC to its unit holders (including distributions to us as the holder of the Class A units of Terra LLC). See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

 

 

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Class B1 common stock

   Holders of our Class B1 common will not have any right to receive cash dividends. See “Description of Capital Stock— Class B1 Common Stock—Dividend and Liquidation Rights.” However, holders of our Class B1 common stock will also hold Class B1 units issued by Terra LLC. As a result of holding Class B1 units, such holders will be entitled to share in distributions from Terra LLC to its unit holders (including distributions to us as the holder of the Class A units of Terra LLC) pro rata based on the number of units held. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

IDRs

   The IDRs represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of Terra LLC’s quarterly distributions after the Class A units, Class B units and Class B1 units of Terra LLC have received quarterly distributions in an amount equal to $0.2257 per unit, or the “Minimum Quarterly Distribution,” and the target distribution levels have been achieved. Our Sponsor may not sell, transfer, exchange, pledge (other than as collateral under its credit facilities) or otherwise dispose of the IDRs to any third party (other than its controlled affiliates) until after it has satisfied its $175.0 million aggregate Projected FTM CAFD commitment to us in accordance with the Support Agreement. Our Sponsor will pledge the IDRs as collateral under its existing credit agreement, but the IDRs may not be transferred upon foreclosure until after our Sponsor has satisfied its Projected FTM CAFD commitment to us. Our Sponsor has granted us a right of first refusal with respect to any proposed sale of IDRs to a third party (other than its controlled affiliates), which we may exercise to purchase the IDRs proposed to be sold on the same terms offered to such third party at any time within 30 days after we receive written notice of the proposed sale and its terms.
  

If for any quarter:

 

• Terra LLC has made cash distributions to the holders of its Class A units, Class B1 units and, subject to the Subordination Period and Distribution Forbearance Provisions, Class B units in an amount equal to the Minimum Quarterly Distribution; and

 

• Terra LLC has distributed cash to the holders of its Class A units and Class B1 units in an amount necessary to eliminate any arrearages in payment of the Minimum Quarterly Distribution;

  

 

then Terra LLC will make additional cash distributions for that quarter to holders of its Class A units, Class B units and Class B1 units and the IDRs in the following manner:

 

• first, to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, until each holder receives a total of $0.3386 per unit for that quarter, or the “First Target Distribution” (150.0% of the Minimum Quarterly Distribution);

 

 

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•  second, 85.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 15.0% to the holders of the IDRs, until each holder of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units receives a total of $0.3950 per unit for that quarter, or the “Second Target Distribution” (175.0% of the Minimum Quarterly Distribution);

 

•  third, 75.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 25.0% to the holders of the IDRs, until each holder of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units receives a total of $0.4514 per unit for that quarter, or the “Third Target Distribution” (200.0% of the Minimum Quarterly Distribution); and

  

 

•  thereafter, 50.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 50.0% to the holders of the IDRs.

  

 

The following table illustrates the percentage allocations of distributions between the holders of Class A units, Class B units and Class B1 units of Terra LLC and the IDRs based on the specified target distribution levels. The amounts set forth under the column heading “Marginal Interest in Distributions” are the percentage interests of the holders of Class A units, Class B units and Class B1 units of Terra LLC and the IDRs in any distributions Terra LLC makes up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests set forth below assume there are no arrearages on Class A units or Class B1 units of Terra LLC and the Distribution Forbearance Provisions have terminated or otherwise do not apply.

 

    Total Quarterly Distribution
Per Unit
    Marginal Percentage
Interest in Distributions to
 
      Unitholders     IDR Holders  

Minimum Quarterly Distribution

    up to $ 0.2257 (1)      100.0     0.0

First Target Distribution

    above $0.2257      up to $ 0.3386 (2)      100.0     0.0

Second Target Distribution

    above $0.3386      up to $ 0.3950 (3)      85.0     15.0

Third Target Distribution

    above $0.3950      up to $ 0.4514 (4)      75.0     25.0

Thereafter

    above $0.4514          50.0     50.0

 

  (1) This amount is equal to the Minimum Quarterly Distribution.
  (2) This amount is equal to 150.0% of the Minimum Quarterly Distribution.
  (3) This amount is equal to 175.0% of the Minimum Quarterly Distribution.
  (4) This amount is equal to 200.0% of the Minimum Quarterly Distribution.

 

 

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Right to reset incentive distribution levels

  


Our Sponsor, as the holder of the IDRs, has the right, after Terra LLC has made cash distributions in excess of the Third Target Distribution (i.e., 50% to holders of units and 50% to the holder of the IDRs) for four consecutive quarters, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments would be set.

   In connection with the resetting of the target distribution levels and the corresponding relinquishment by our Sponsor of incentive distribution payments based on the target distribution levels prior to the reset, our Sponsor will be entitled to receive a number of newly-issued Class B1 units of Terra LLC and shares of our Class B1 common stock based on the formula described below that takes into account the “cash parity” value of the cash distributions related to the IDRs for the two consecutive quarters immediately prior to the reset event as compared to the cash distribution per unit in such quarters.
  

The number of Class B1 units of Terra LLC and shares of Class B1 common stock to be issued in connection with a resetting of the Minimum Quarterly Distribution amount and the target distribution levels then in effect would equal the quotient determined by dividing (i) the average aggregate amount of cash distributions received in respect of the IDRs during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (ii) the average of the aggregate amount of cash distributed per Class A unit, Class B1 unit and Class B unit of Terra LLC during each of those two quarters.

 

Post-Reset IDRs

  

Following a reset election, a baseline Minimum Quarterly Distribution amount will be calculated as an amount equal to the average cash distribution amount per Class A unit, Class B1 unit and Class B unit of Terra LLC for the two consecutive fiscal quarters immediately preceding the reset election, which amount we refer to as the “Reset Minimum Quarterly Distribution,” and the target distribution levels will be reset to be correspondingly higher than the Reset Minimum Quarterly Distribution. Following a resetting of the Minimum Quarterly Distribution amount, Terra LLC would make distributions for each quarter ending after the reset date as follows:

 

• first, to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, until each holder receives an amount per unit for that quarter equal to 115.0% of the Reset Minimum Quarterly Distribution;

 

• second, 85.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 15.0% to the holders of the IDRs, until each holder of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units receives an amount per unit for that quarter equal to 125.0% of the Reset Minimum Quarterly Distribution;

 

 

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• third, 75.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 25.0% to the holders of the IDRs, until each holder of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units receives an amount per unit for that quarter equal to 150.0% of the Reset Minimum Quarterly Distribution; and

 

• thereafter, 50.0% to all holders of Class A units, Class B1 units and, subject to the Distribution Forbearance Provisions, Class B units, pro rata, and 50.0% to the holders of the IDRs.

Subordination of Class B units

   During the Subordination Period, holders of the Class B units of Terra LLC will not be entitled to receive any distributions until the Class A units and Class B1 units of Terra LLC (if any) have received the Minimum Quarterly Distribution for such quarter plus any arrearages in the payment of the Minimum Quarterly Distribution from prior quarters. Class B units of Terra LLC will not accrue arrearages.

Subordination Period

  

The “Subordination Period” means the period beginning on the closing date of this offering and extending until each of the following tests has been met, which will be a minimum three-year period ending no earlier than the beginning of the period for which a distribution is paid for the third quarter of 2017:

 

• distributions of CAFD on each of the outstanding Class A units, Class B units and Class B1 units of Terra LLC equaled or exceeded $0.9028 per unit (the annualized Minimum Quarterly Distribution) for each of the three consecutive, non-overlapping, four-quarter periods immediately preceding that date;

 

• the CAFD generated during each of the three consecutive, non-overlapping, four-quarter periods immediately preceding that date equaled or exceeded the sum of $0.9028 per unit (the annualized Minimum Quarterly Distribution) on all of the outstanding Class A units, Class B units and Class B1 units of Terra LLC during those periods on a fully diluted basis; and

 

• there are no arrearages in payment of the Minimum Quarterly Distribution on the Class A units or Class B1 units of Terra LLC.

 

Notwithstanding the foregoing, the Subordination Period will automatically terminate when each of the following tests are met:

 

• distributions of CAFD on each of the outstanding Class A units, Class B units and Class B1 units of Terra LLC equaled or exceeded $1.8056 per unit (200.0% of the annualized Minimum Quarterly Distribution) for the four-quarter period immediately preceding that date;

  

• the CAFD generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $1.8056 per unit (200.0% of the annualized Minimum Quarterly Distribution) on all of the outstanding Class A units, Class B units and Class B1 units of Terra LLC during such four quarters on a fully-diluted basis, and (ii) the

corresponding distributions on the IDRs during such four quarters; and

 

 

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• there are no arrearages in payment of the Minimum Quarterly Distributions on the Class A units or Class B1 units of Terra LLC.

Distribution Forbearance Provisions

  


Our Sponsor has further agreed to forego any distributions on its Class B units of Terra LLC with respect to the third or fourth quarter of 2014 (i.e., distributions declared on or prior to March 31, 2015), and thereafter has agreed to a reduction of distributions on its Class B units of Terra LLC until the expiration of the Distribution Forbearance Period. The amount of the distribution reduction during the Distribution Forbearance Period is based on the percentage of the As Delivered CAFD compared to the expected CAFD from the Contributed Construction Projects attributable to such Contributed Construction Projects (and substitute projects contributed by our Sponsor). See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

Material federal income tax
consequences to non-U.S.
holders

  



For a discussion of the material federal income tax consequences that may be relevant to prospective investors who are non-U.S. holders, please read “Material United States Federal Income Tax Consequences to Non-U.S. Holders.”

FERC-related purchase
restrictions

  


Except to the extent authorized by FERC pursuant to Section 203 of the Federal Power Act, or the “FPA,” a purchaser of Class A common stock in this offering will not be permitted to acquire (i) an amount of our Class A common stock that, after giving effect to such acquisition, would allow such purchaser together with its affiliates (as understood for purposes of FPA Section 203) to exercise 10% or more of the total voting power of the outstanding shares of our Class A common stock, Class B common stock and Class B1 common stock in the aggregate, or (ii) an amount of our Class A common stock as otherwise determined by our board of directors sufficient to allow such purchaser together with its affiliates to exercise control over our company. See “Business—Regulatory Matters.”

Reserved share program

   At our request, the underwriters have reserved up to 5% of the shares for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed share program. The number of shares available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Except for certain of our officers, directors and employees who have entered into lock-up agreements, each person buying shares through the directed share program has agreed that, for a period of 180 days from the date of this prospectus, he or she will not, without the prior written consent of Citigroup Global Markets Inc., Goldman,

 

 

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   Sachs & Co. and Barclays Capital Inc., dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock with respect to shares purchased in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares. See “Underwriting (Conflicts of Interests).”

Conflicts of interest

   Goldman, Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Santander Investment Securities Inc. and/or their respective affiliates are lenders under our Bridge Facility. As described in “Use of Proceeds,” a portion of the net proceeds of this offering will be used to repay amounts outstanding under our Bridge Facility. Because affiliates of Goldman, Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Santander Investment Securities Inc. will receive more than 5% of the net proceeds of this offering due to the repayment of amounts outstanding under our Bridge Facility, Goldman, Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Santander Investment Securities Inc. are deemed to have a conflict of interest under FINRA Rule 5121, or “FINRA Rule 5121,” of the Financial Regulatory Authority, Inc., or “FINRA.” Accordingly, this offering will be conducted in compliance with FINRA Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. Macquarie Capital (USA) Inc. has agreed to act as the qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act specifically including those inherent in Section 11 of the Securities Act.

Stock exchange listing

   Our Class A common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “TERP.”

Controlled company exemption

   After completion of this offering, we will be considered a “controlled company” for the purposes of the NASDAQ Global Select Market listing requirements. As a “controlled company,” we are not required to establish a compensation or nominating committee under the listing rules of the NASDAQ Global Select Market and we do not intend to establish such committees in connection with the completion of this offering.

 

 

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Certain Assumptions

The number of shares of our common stock and the number of units of Terra LLC to be outstanding after this offering, the combined voting power that identified stockholders will hold after this offering and the economic interest in our business that identified stockholders will hold after this offering are based on 27,724,712 shares of our Class A common stock (including 20,065,000 shares offered by us in this offering and 2,708,333 shares sold in the Private Placements), 67,210,944 shares of our Class B common stock, 6,083,333 shares of our Class B1 common stock, 27,724,712 Class A units of Terra LLC, 67,210,944 Class B units of Terra LLC and 6,083,333 Class B1 units of Terra LLC outstanding immediately after this offering are based on an assumed initial public offering price of $24.00 per share, the midpoint of the range set forth on the cover of this prospectus, and excludes (i) 3,009,750 shares of our Class A common stock which may be issued upon the exercise of the underwriters’ option to purchase additional shares of our Class A common stock and the corresponding number of Class A units of Terra LLC that we would purchase from Terra LLC with the net proceeds therefrom; (ii) 73,294,277 shares of our Class A common stock reserved for issuance upon the subsequent exchange of Class B units and Class B1 units of Terra LLC that will be outstanding immediately after this offering; and (iii) 5,000,440 shares of our Class A common stock reserved for future issuance under our 2014 Incentive Plan, including an aggregate of approximately 500,000 shares underlying restricted stock units that are expected to be granted to several persons who have provided or are expected to provide services to us in connection with the completion of this offering as discussed in “Executive Officer Compensation—Equity Incentive Awards—IPO Grants.”

Except as otherwise indicated, all information in this prospectus also assumes:

 

    we will file our amended and restated certificate of incorporation and adopt our amended and restated bylaws immediately prior to the completion of this offering;

 

    we will cause Terra LLC to amend and restate its operating agreement immediately prior to the completion of this offering; and

 

    an initial public offering price of $24.00 per share of Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table shows summary historical and pro forma financial data at the dates and for the periods indicated. The summary historical financial data as of and for the years ended December 31, 2012 and 2013 have been derived from the audited combined consolidated financial statements of our accounting predecessor included elsewhere in this prospectus. The summary historical financial data as of and for the three months ended March 31, 2014 and 2013 have been derived from the unaudited condensed combined consolidated financial statements of our accounting predecessors included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of the financial position and the results of operations for such periods. Results for the interim periods are not necessarily indicative of the results for the full year. The historical combined consolidated financial statements of our accounting predecessors as of December 31, 2013 and 2012, for the years ended December 31, 2013 and 2012, as of March 31, 2014, and for the three months ended March 31, 2014 and 2013 are intended to represent the financial results of SunEdison’s contracted renewable energy assets that have been or will be contributed to Terra LLC as part of the Initial Asset Transfers.

The summary unaudited pro forma financial data have been derived by the application of pro forma adjustments to the historical combined consolidated financial statements of our accounting predecessor included elsewhere in this prospectus. The summary unaudited pro forma statements of operations data for the year ended December 31, 2013 and for the three months ended March 31, 2014 give effect to the Organizational Transactions (as described under “Summary—Organizational Transactions”), including the use of the estimated net proceeds from this offering, and the Acquisitions, as if they had occurred on January 1, 2013. The summary unaudited pro forma balance sheet data as of March 31, 2014 give effect to the Organizational Transactions, this offering and the use of the estimated net proceeds therefrom, and Acquisitions, as if each had occurred on January 1, 2014. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for additional information. As described in “Summary—Organizational Transactions,” TerraForm Power will own approximately 27.5% of Terra LLC’s outstanding membership interests after completion of the Organizational Transactions based on the assumptions set forth in “The Offering—Certain Assumptions,” including no exercise by the underwriters of their option to purchase additional shares.

The following table should be read together with, and is qualified in its entirety by reference to, the historical combined consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical combined consolidated financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Relationships and Related Party Transactions—Management Services Agreement.”

Our summary unaudited pro forma financial data are presented for informational purposes only. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. Our summary unaudited pro forma financial information does not purport to represent what our results of operations or financial position would have been if we operated as a public company during the periods presented and may not be indicative of our future performance. We have not made any pro forma adjustments relating to the historical operations of our acquisitions of the Stonehenge Q1 or Norrington projects that are part of our initial portfolio, as such projects had not, as of March 31, 2014, commenced commercial operations and are not otherwise material as compared to our historical financial statements.

Financial data of TerraForm Power, Inc. has not been presented in this prospectus for periods prior to its date of incorporation of January 15, 2014.

 

 

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           Pro Forma     For the Three
Months Ended

March 31,
    Pro Forma  
     For the Year Ended
December 31,
    For the Year
Ended
December 31,
2013
      For the Three
Months Ended

March 31,
2014
 
(in thousands except operational
data)
   2012     2013       2013     2014    
                 (unaudited)     (unaudited)     (unaudited)  

Statement of Operations Data:

            

Operating revenue

            

Energy

   $ 8,193      $ 8,928      $ 20,575      $ 1,693      $ 10,174      $ 19,360   

Incentives

     5,930        7,608        23,944        1,162        1,567        5,252   

Incentives-affiliate

     1,571        933        933        120        139        139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     15,694        17,469        45,452        2,975        11,880        24,751   

Operating costs and expenses:

            

Cost of operations

     837        1,024        4,700        91        460        2,056   

Cost of operations-affiliate

     680        911        1,116        243        352        418   

General and administrative

     177        289        12,932        44        98        3,598   

General and administrative-affiliate

     4,425        5,158        5,158        1,075        1,590        1,590   

Depreciation, amortization and accretion

     4,267        4,961        15,495        1,090        3,241        10,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     10,386        12,343        39,401        2,543        5,741        18,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,308        5,126        6,051        432        6,139        6,318   

Other (income) expense:

            

Interest expense, net

     5,702        6,267        42,504        1,374        7,082        22,263   

Loss (gain) on foreign currency exchange and other expense

     —          (771     (873     —          595        370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     5,702        5,496        41,631        1,374        7,677        22,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (394     (370     (35,580     (942     (1,538     (16,315

Income tax benefit

     (1,270     (88     (15,202     (451     (457     (4,189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     876        (282     (20,378     (491     (1,081     (12,126

Less net income attributable to non-controlling interest

     —          —          (6,554     —          (361     (8,319
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TerraForm Power.

   $ 876      $ (282   $ (13,824   $ (491   $ (720   $ (3,807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data: (unaudited)

            

Adjusted EBITDA(1)

   $ 9,575      $ 10,858      $ 37,007      $ 1,522      $ 8,785      $ 21,705   

Cash available for distribution(2)

     2,817        122        22,962        (808     1,999        9,088   

Cash Flow Data:

            

Net cash provided by (used in):

            

Operating activities

   $ 2,890      $ (7,202     $ (42,299   $ (20,611  

Investing activities

     (410     (264,239       (725     (92,889  

Financing activities

     (2,477     272,482          43,024        334,946     

Balance Sheet Data (at period end):

            

Cash and cash equivalents

   $ 3      $ 1,044        $ 3      $ 222,490      $ 394,587   

Restricted cash(3)

     8,828        69,722          9,247        54,146        56,394   

Property and equipment, net

     111,697        407,356          113,553        586,032        1,454,001   

Total assets

     158,955        566,877          198,662        1,018,118        2,264,002   

Total liabilities

     128,926        551,425          167,189        967,673        1,383,240   

Total equity

     30,029        15,452          31,473        50,445        880,807   

Operating Data (for the period):

            

MWh sold(4) (unaudited)

     52,325        60,176          10,620        58,116        NA   

 

(1) Adjusted EBITDA is a non-GAAP financial measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

 

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We define Adjusted EBITDA as net income plus interest expense, net, income taxes, depreciation, amortization and accretion, and stock compensation expense after eliminating the impact of non-recurring items and other factors that we do not consider indicative of future operating performance. We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because:

 

    securities analysts and other interested parties use such calculations as a measure of financial performance and debt service capabilities; and

 

    it is used by our management for internal planning purposes, including aspects of our consolidated operating budget and capital expenditures.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

    it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    it does not reflect changes in, or cash requirements for, working capital;

 

    it does not reflect significant interest expense or the cash requirements necessary to service interest or principal payments on our outstanding debt;

 

    it does not reflect payments made or future requirements for income taxes;

 

    it reflects adjustments for factors that we do not consider indicative of future performance, even though we may, in the future, incur expenses similar to the adjustments reflected in our calculation of Adjusted EBITDA in this prospectus; and

 

    although depreciation and accretion are non-cash charges, the assets being depreciated and the liabilities being accreted will often have to be replaced or paid in the future and Adjusted EBITDA does not reflect cash requirements for such replacements or payments.

Investors are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis.

The following table presents a reconciliation of net income to Adjusted EBITDA:

 

           Pro Forma                 Pro Forma  
     For the Year
Ended
December 31,
    For the Year
Ended
December 31,

2013
    For the Three
Months Ended

March 31,
    For the Three
Months Ended

March 31,
2014
 
(in thousands)    2012     2013       2013     2014    
                 (unaudited)    

(unaudited)

    (unaudited)  

Net income (loss)

   $ 876      $ (282   $ (20,378   $ (491   $ (1,081   $ (12,126

Add:

            

Depreciation, amortization and accretion

     4,267        4,961        22,102        1,090        3,241        13,534   

Interest expense, net

     5,702        6,267        42,504        1,374        7,082        22,263   

Income tax benefit

     (1,270     (88     (15,202     (451     (457     (4,189

Stock compensation expense

     —          —          7,981        —          —          2,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 9,575      $ 10,858      $ 37,007      $ 1,522      $ 8,785      $ 21,705   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Cash available for distribution represents net cash provided by (used in) operating activities of Terra LLC (i) plus or minus changes in assets and liabilities as reflected on our statements of cash flows, (ii) minus deposits into (or plus withdrawals from) restricted cash accounts required by project financing arrangements to the extent they decrease (or increase) cash provided by operating activities, (iii) minus cash distributions paid to non-controlling interests in our projects, if any, (iv) minus scheduled project-level and other debt service payments in accordance with the related borrowing arrangements, to the extent they are paid from operating cash flows during a period, (v) minus non-expansionary capital expenditures, if any, to the extent they are paid from operating cash flows during a period, (vi) plus cash contributions from our Sponsor pursuant to the Interest Payment Agreement, (vii) plus operating costs and expenses paid by our Sponsor pursuant to the Management Services Agreement to the extent such costs or expenses exceed the fee payable by us pursuant to such agreement but otherwise reduce our net cash provided by operating activities and (viii) plus or minus operating items as necessary to present the cash flows we deem representative of our core business operations, with the approval of our audit committee. Our intention is to cause Terra LLC to distribute a portion of the cash available for distribution generated by our project portfolio as distributions each quarter, after appropriate reserves for our working capital needs and the prudent conduct of our business.

 

 

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We disclose cash available for distribution because management recognizes that it will be used as a supplemental measure by investors and analysts to evaluate our liquidity. However, cash available for distribution is a non-GAAP measure and should not be considered an alternative to net income, net cash provided by (used in) operating activities or any other liquidity measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs. In addition, our calculation of cash available for distribution is not necessarily comparable to cash available for distribution as calculated by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net income (loss) and net cash provided by (used in) operating activities. For a discussion of the risks and uncertainties with respect to our forecasted cash available for distribution see “Risk Factors—Risks Inherent in an Investment in Us—We may not be able to continue paying comparable or growing cash dividends to holders of our Class A common stock in the future,” “—The assumptions underlying the forecast and targeted growth rate presented elsewhere in this prospectus are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution in the aggregate and/or on a per-share basis, to differ materially from our forecasts,” and “—We are a holding company and our only material asset after completion of this offering will be our interest in Terra LLC, and we are accordingly dependent upon distributions from Terra LLC and its subsidiaries to pay dividends and taxes and other expenses.”

The most directly comparable GAAP measure to cash available for distribution is net cash provided by (used in) operating activities. The following table is a reconciliation of our net cash provided by (used in) operating activities to cash available for distribution for the periods presented:

 

     For the Year Ended
December 31,
    Pro Forma     For the Three
Months Ended
March 31,
    Pro Forma  
      

For the Year

     

For the Three

 
      

Ended

     

Months Ended

 
      

December 31,

     

March 31,

 
(in thousands)    2012     2013     2013     2013     2014     2014  
                

(unaudited)

    (unaudited)    

(unaudited)

 

Net cash provided by (used in) operating activities

   $ 2,890      $ (7,202   $ (20,379   $ (42,299   $ (20,611   $ 15,149   

Changes in assets and liabilities

     456        10,162        37,360        41,796        22,945        (7,969

Scheduled project-level and other debt service payments

     (529     (2,838     (12,302  

 

(305

 

 

(335

 

 

(2,663

Contributions received pursuant to the Interest Payment Agreement with our Sponsor

     —          —          18,283        —          —          4,571   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated cash available for distribution

   $ 2,817      $ 122      $ 22,962      $ (808   $ 1,999      $ 9,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(3) Restricted cash includes current restricted cash and non-current restricted cash included in “Other assets” in the condensed combined consolidated financial statements.

 

(4) For any period presented, MWh sold represents the amount of electricity measured in MWh that our projects generated and sold.

 

 

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RISK FACTORS

This offering and an investment in our Class A common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our Class A common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose all or part of your investment in our Class A common stock.

Risks Related to our Business

Counterparties to our PPAs may not fulfill their obligations, which could result in a material adverse impact on our business, financial condition, results of operations and cash flows.

All of the electric power generated by our initial portfolio of projects will be sold under long-term PPAs with public utilities or commercial, industrial or government end-users. We expect the Call Right Projects will also have long-term PPAs. If, for any reason, any of the purchasers of power under these contracts are unable or unwilling to fulfill their related contractual obligations or if they refuse to accept delivery of power delivered thereunder or if they otherwise terminate such agreements prior to the expiration thereof, our assets, liabilities, business, financial condition, results of operations and cash flows could be materially and adversely affected. Furthermore, to the extent any of our power purchasers are, or are controlled by, governmental entities, our facilities may be subject to legislative or other political action that may impair their contractual performance.

A portion of the revenues under the PPAs for the U.K. projects included in our initial portfolio are subject to price adjustments after a period of time. If the market price of electricity decreases and we are otherwise unable to negotiate more favorable pricing terms, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

The PPAs for the U.K. projects included in our initial portfolio will have fixed electricity prices for a specified period of time (typically four years), after which such electricity prices are subject to an adjustment based on the current market price. While the PPAs with price adjustments specify a minimum price, the minimum price is significantly below the initial fixed price. The pricing for ROCs under the PPAs is fixed by U.K. laws or regulations for the entire term of the PPA. A decrease in the market price of electricity, including lower prices for traditional fossil fuels, could result in a decrease in the pricing under such contracts if the fixed-price period has expired, unless we are able to negotiate more favorable pricing terms. We can offer no assurances that we will be able to negotiate more favorable pricing terms if the price of electricity decreases. Any decrease in the price payable to us under our PPAs could materially and adversely affect our business, financial condition, results of operations and cash flows.

Certain of the PPAs for power generation projects in our initial portfolio and that we may acquire in the future contain or will contain provisions that allow the offtake purchaser to terminate or buy out a portion of the project upon the occurrence of certain events. If these provisions are exercised and we are unable to enter into a PPA on similar terms, in the case of PPA termination, or find suitable replacement projects to invest in, in the case of a buyout, our cash available for distribution could materially decline.

Certain of the PPAs for power generation projects in our initial portfolio and that we may acquire in the future allow the offtake purchaser to purchase a portion of the applicable project from us. For example, in connection with the PPA for the CAP project, the off-taker has, under certain circumstances, the right to purchase up to 40% of the project equity from us pursuant to a

 

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predetermined purchase price formula. If the off-taker of the CAP project exercises its right to purchase a portion of the project, we would need to reinvest the proceeds from the sale in one or more projects with similar economic attributes in order to maintain our cash available for distribution. Additionally, under the PPAs for the U.S. distributed generation projects, off-takers have the option to either (i) purchase the applicable solar photovoltaic system, typically five to six years after the COD under such PPA and for a purchase price equal to the greater of a value specified in the contract or the fair market value of the project determined at the time of exercise of the purchase option or (ii) pay an early termination fee as specified in the contract, terminate the contract and require the project company to remove the applicable solar photovoltaic system from the site. If we were unable to locate and acquire suitable replacement projects in a timely fashion it could have a material adverse effect on our results of operations and cash available for distribution.

Additionally, certain of the PPAs associated with projects in our initial portfolio allow the offtake purchaser to terminate the PPA in the event certain operating thresholds or performance measures are not achieved within specified time periods, and we are therefore subject to the risk of counterparty termination based on such criteria for such projects. In addition, certain of the PPAs associated with distributed generation projects allow the offtaker to terminate the PPA by paying an early termination fee. Further, the PPA for the Regulus Solar project permits the offtake purchaser to terminate the contract if construction is not completed by December 31, 2014, although lender consent allows the collateral agent an additional 60-day cure. In the event a PPA for one or more of our projects is terminated under such provisions, it could materially and adversely affect our results of operations and cash available for distribution until we are able to replace the PPA on similar terms. We cannot provide any assurance that PPAs containing such provisions will not be terminated or, in the event of termination, we will be able to enter into a replacement PPA. Moreover, any replacement PPA may be on terms less favorable to us than the PPA that was terminated.

Most of our PPAs do not include inflation-based price increases.

In general, the PPAs that have been entered into for the projects in our initial portfolio and the Call Right Projects do not contain inflation-based price increase provisions. Certain of the countries in which we have operations, or that we may expand into in the future, have in the past experienced high inflation. To the extent that the countries in which we conduct our business experience high rates of inflation, thereby increasing our operating costs in those countries, we may not be able to generate sufficient revenues to offset the effects of inflation, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

A material drop in the retail price of utility-generated electricity or electricity from other sources could increase competition for new PPAs.

We believe that an end-user’s decision to buy clean energy from us is primarily driven by their desire to pay less for electricity. The end-user’s decision may also be affected by the cost of other clean energy sources. Decreases in the retail prices of electricity supplied by utilities or other clean energy sources would harm our ability to offer competitive pricing and could harm our ability to sign new customers. The price of electricity from utilities could decrease for a number of reasons, including:

 

    the construction of a significant number of new power generation plants, including nuclear, coal, natural gas or renewable energy facilities;

 

    the construction of additional electric transmission and distribution lines;

 

    a reduction in the price of natural gas, including as a result of new drilling techniques or a relaxation of associated regulatory standards;

 

    energy conservation technologies and public initiatives to reduce electricity consumption; and

 

    the development of new clean energy technologies that provide less expensive energy.

 

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A reduction in utility retail electricity prices would make the purchase of solar energy less economically attractive. In addition, a shift in the timing of peak rates for utility-supplied electricity to a time of day when solar energy generation is less efficient could make solar energy less competitive and reduce demand. If the retail price of energy available from utilities were to decrease, we would be at a competitive disadvantage, we may be unable to attract new customers and our growth would be limited.

We are exposed to risks associated with the projects in our initial portfolio and the Call Right Projects that are newly constructed or are under construction.

Certain of the projects in our initial portfolio are still under construction. We may experience delays or unexpected costs during the completion of construction of these projects, and if any project is not completed according to specification, we may incur liabilities and suffer reduced project efficiency, higher operating costs and reduced cash flows. Additionally, the remedies available to us under the applicable EPC contract may not sufficiently compensate us for unexpected costs and delays related to project construction. If we are unable to complete the construction of a project for any reason, we may not be able to recover our related investment. In addition, certain of the Call Right Projects are under construction and may not be completed on schedule or at all, in which case any such project would not be available for acquisition by us during the time frame we currently expect or at all. Since our primary growth strategy is the acquisition of new clean energy projects, including under the Support Agreement, a delay in our ability to acquire a Call Right Project could materially and adversely affect our expected growth.

Furthermore, the PPA for the Regulus Solar project in the United States will terminate if construction is not completed by the end of 2014. If the construction of the Regulus Solar project is not completed in 2014 and the related PPA is terminated, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

In addition, our expectations for the operating performance of newly constructed projects and projects under construction are based on assumptions and estimates made without the benefit of operating history. Projections contained in this prospectus regarding our ability to pay dividends to holders of our Class A common stock assume such projects perform to our expectations. However, the ability of these projects to meet our performance expectations is subject to the risks inherent in newly constructed power generation facilities and the construction of such facilities, including, but not limited to, degradation of equipment in excess of our expectations, system failures and outages. The failure of these facilities to perform as we expect could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to pay dividends to holders of our Class A common stock.

Certain of our PPAs and project-level financing arrangements include provisions that would permit the counterparty to terminate the contract or accelerate maturity in the event our Sponsor ceases to control or own, directly or indirectly, a majority of our company.

Certain of our PPAs and project-level financing arrangements contain change in control provisions that provide the counterparty with a termination right or the ability to accelerate maturity if a change of control consent is not received. These provisions are triggered in the event our Sponsor ceases to own, directly or indirectly, capital stock representing more than 50% of the voting power (which is equal to 9% ownership) of all of our capital stock outstanding on such date, or, in some cases (less than 5% of our projects based on MW), if our Sponsor ceases to be the majority owner, directly or indirectly, of the applicable project subsidiary. As a result, if our Sponsor ceases to control, or in some cases, own a majority of TerraForm Power, the counterparties could terminate such contracts or accelerate the maturity of such financing arrangements. The termination of any of our PPAs or the

 

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acceleration of the maturity of any of our project-level financing as a result of a change in control of TerraForm Power could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The growth of our business depends on locating and acquiring interests in additional, attractive clean energy projects from our Sponsor and unaffiliated third parties at favorable prices.

Our primary business strategy is to acquire clean energy projects that are operational. We may also, in limited circumstances, acquire clean energy projects that are pre-operational. We intend to pursue opportunities to acquire projects from both our Sponsor and third parties. The following factors, among others, could affect the availability of attractive projects to grow our business:

 

    competing bids for a project, including from companies that may have substantially greater capital and other resources than we do;

 

    fewer third-party acquisition opportunities than we expect, which could result from, among other things, available projects having less desirable economic returns or higher risk profiles than we believe suitable for our business plan and investment strategy;

 

    our Sponsor’s failure to complete the development of (i) the Call Right Projects, which could result from, among other things, permitting challenges, failure to procure the requisite financing, equipment or interconnection, or an inability to satisfy the conditions to effectiveness of project agreements such as PPAs, and (ii) any of the other projects in its development pipeline in a timely manner, or at all, in either case, which could limit our acquisition opportunities under the Support Agreement; and

 

    our failure to exercise our rights under the Support Agreement to acquire assets from our Sponsor.

We will not be able to achieve our target compound annual growth rate of CAFD per unit unless we are able to acquire additional clean energy projects at favorable prices.

Our acquisition strategy exposes us to substantial risks.

The acquisition of power generation assets is subject to substantial risks, including the failure to identify material problems during due diligence (for which we may not be indemnified post-closing), the risk of over-paying for assets (or not making acquisitions on an accretive basis), the ability to obtain or retain customers and, if the projects are in new markets, the risks of entering markets where we have limited experience. While we will perform our due diligence on prospective acquisitions, we may not be able to discover all potential operational deficiencies in such projects. The integration and consolidation of acquisitions requires substantial human, financial and other resources and may divert management’s attention from our existing business concerns, disrupt our ongoing business or not be successfully integrated. There can be no assurance that any future acquisitions will perform as expected or that the returns from such acquisitions will support the financing utilized to acquire them or maintain them. As a result, the consummation of acquisitions may have a material adverse effect on our business, financial condition, results of operations and cash flows and ability to pay dividends to holders of our Class A common stock.

Any of these factors could prevent us from executing our growth strategy or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition, the development of clean energy projects is a capital intensive, high-risk business that relies heavily on the availability of debt and equity financing sources to fund projected construction and other projected capital expenditures. As a result, in order to successfully develop a clean energy

 

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project, development companies, including our Sponsor, from which we may seek to acquire projects, must obtain at-risk funds sufficient to complete the development phase of their projects. We, on the other hand, must anticipate obtaining funds from equity or debt financing sources, including under our Term Loan or Revolver, or from government grants in order to successfully fund and complete acquisitions of projects. Any significant disruption in the credit or capital markets, or a significant increase in interest rates, could make it difficult for our Sponsor or other development companies to successfully develop attractive projects as well as limit their ability to obtain project-level financing to complete the construction of a project we may seek to acquire. If our Sponsor or other development companies from which we seek to acquire projects are unable to raise funds when needed or if we or they are unable to secure adequate financing, the ability to grow our project portfolio may be limited, which could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition, results of operations and cash flows.

We may not be able to effectively identify or consummate any future acquisitions on favorable terms, or at all. Additionally, even if we consummate acquisitions on terms that we believe are favorable, such acquisitions may in fact result in a decrease in cash available for distribution per Class A common share.

The number of acquisition opportunities for solar energy projects is limited. While our Sponsor will grant us the option to purchase the Call Right Projects and a right of first offer with respect to the ROFO Projects, we will compete with other companies for acquisition opportunities. This may increase our cost of making acquisitions or cause us to refrain from making acquisitions at all. Some of our competitors for acquisitions are much larger than us with substantially greater resources. These companies may be able to pay more for acquisitions and may be able to identify, evaluate, bid for and purchase a greater number of assets than our resources permit.

In addition, if we are unable to reach agreement with our Sponsor regarding the pricing of the Unpriced Call Right Projects, our acquisition opportunities may be more limited than we currently expect. In addition, if our Sponsor’s development of new projects slows, we also may have fewer opportunities to purchase projects from our Sponsor. If we are unable to identify and consummate future acquisitions, it will impede our ability to execute our growth strategy and limit our ability to increase the amount of dividends paid to holders of our Class A common stock.

Even if we consummate acquisitions that we believe will be accretive to CAFD per unit, those acquisitions may in fact result in a decrease in CAFD per unit as a result of incorrect assumptions in our evaluation of such acquisitions, unforeseen consequences or other external events beyond our control. Furthermore, if we consummate any future acquisitions, our capitalization and results of operations may change significantly, and stockholders will generally not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

New projects being developed that we may acquire may need governmental approvals and permits, including environmental approvals and permits, for construction and operation. Any failure to obtain necessary permits could adversely affect our growth.

The design, construction and operation of solar energy projects is highly regulated, requires various governmental approvals and permits, including environmental approvals and permits, and may be subject to the imposition of related conditions that vary by jurisdiction. We cannot predict whether all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial or loss of a permit essential to a project or the imposition of impractical conditions upon renewal could impair our ability to construct and operate a project. In addition, we cannot predict whether the permits will attract significant opposition or whether the

 

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permitting process will be lengthened due to complexities, legal claims or appeals. Delays in the review and permitting process for a project can impair or delay our ability to acquire a project or increase the cost such that the project is no longer attractive to us.

Our ability to grow and make acquisitions with cash on hand may be limited by our cash dividend policy.

As discussed in “Cash Dividend Policy,” our dividend policy is to cause Terra LLC to distribute approximately 85% of CAFD each quarter and to rely primarily upon external financing sources, including the issuance of debt and equity securities and, if applicable, borrowings under our Term Loan or our Revolver, to fund our acquisitions and growth capital expenditures (which we define as costs and expenses associated with the acquisition of project assets from our Sponsor and third parties and capitalized expenditures on existing projects to expand capacity). We may be precluded from pursuing otherwise attractive acquisitions if the projected short-term cash flow from the acquisition or investment is not adequate to service the capital raised to fund the acquisition or investment, after giving effect to our available cash reserves. See “Cash Dividend Policy—Our Ability to Grow our Business and Dividend.”

We intend to use a portion of the CAFD generated by our project portfolio to pay regular quarterly cash dividends to holders of our Class A common stock. Our initial quarterly dividend will be set at $0.2257 per share of Class A common stock, or $0.9028 per share on an annualized basis. We established our initial quarterly dividend based upon a target payout ratio by Terra LLC of approximately 85% of projected annual CAFD. As such, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional equity securities in connection with any acquisitions or growth capital expenditures, the payment of dividends on these additional equity securities may increase the risk that we will be unable to maintain or increase our per share dividend. There will be no limitations in our amended and restated certificate of incorporation (other than a specified number of authorized shares) on our ability to issue equity securities, including securities ranking senior to our common stock. The incurrence of bank borrowings or other debt by Terra Operating LLC or by our project-level subsidiaries to finance our growth strategy will result in increased interest expense and the imposition of additional or more restrictive covenants which, in turn, may impact the cash distributions we distribute to holders of our Class A common stock.

Our indebtedness could adversely affect our financial condition and ability to operate our business, including restricting our ability to pay cash dividends or react to changes in the economy or our industry.

As of March 31, 2014, after giving pro forma effect to the Organizational Transactions, we would have had approximately $1,189 million of indebtedness and an additional $140.0 million available for future borrowings under our Revolver. Our substantial debt following the completion of this offering could have important negative consequences on our financial condition, including:

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to pay dividends to holders of our Class A common stock or to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

    limiting our ability to enter into or receive payments under long-term power sales or fuel purchases which require credit support;

 

    limiting our ability to fund operations or future acquisitions;

 

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    restricting our ability to make certain distributions with respect to our capital stock and the ability of our subsidiaries to make certain distributions to us, in light of restricted payment and other financial covenants in our credit facilities and other financing agreements;

 

    exposing us to the risk of increased interest rates because certain of our borrowings, which may include borrowings under our Revolver, are at variable rates of interest;

 

    limiting our ability to obtain additional financing for working capital, including collateral postings, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

    limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.

Our Revolver and Term Loan will contain financial and other restrictive covenants that limit our ability to return capital to stockholders or otherwise engage in activities that may be in our long-term best interests. Our inability to satisfy certain financial covenants could prevent us from paying cash dividends, and our failure to comply with those and other covenants could result in an event of default which, if not cured or waived, may entitle the related lenders to demand repayment or enforce their security interests, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, failure to comply with such covenants may entitle the related lenders to demand repayment and accelerate all such indebtedness.

The agreements governing our project-level financing contain financial and other restrictive covenants that limit our project subsidiaries’ ability to make distributions to us or otherwise engage in activities that may be in our long-term best interests. The project-level financing agreements generally prohibit distributions from the project entities to us unless certain specific conditions are met, including the satisfaction of certain financial ratios. Our inability to satisfy certain financial covenants may prevent cash distributions by the particular project(s) to us and our failure to comply with those and other covenants could result in an event of default which, if not cured or waived may entitle the related lenders to demand repayment or enforce their security interests, which could have a material adverse effect on our business, results of operations and financial condition. In addition, failure to comply with such covenants may entitle the related lenders to demand repayment and accelerate all such indebtedness. If we are unable to make distributions from our project-level subsidiaries, it would likely have a material adverse effect on our ability to pay dividends to holders of our Class A common stock.

If our subsidiaries default on their obligations under their project-level indebtedness, this may constitute an event of default under our Term Loan and Revolver, and we may be required to make payments to lenders to avoid such default or to prevent foreclosure on the collateral securing the project-level debt. If we are unable to or decide not to make such payments, we would lose certain of our solar energy projects upon foreclosure.

Our subsidiaries incur, and we expect will in the future incur, various types of project-level indebtedness. Non-recourse debt is repayable solely from the applicable project’s revenues and is secured by the project’s physical assets, major contracts, cash accounts and, in many cases, our ownership interest in the project subsidiary. Limited recourse debt is debt where we have provided a limited guarantee, and recourse debt is debt where we have provided a full guarantee, which means if our subsidiaries default on these obligations, we will be liable directly to those lenders, although in the case of limited recourse debt only to the extent of our limited recourse obligations. To satisfy these obligations, we may be required to use amounts distributed by our other subsidiaries as well as other sources of available cash, reducing our cash available to execute our business plan and pay dividends to holders of our Class A common stock. In addition, if our subsidiaries default on their obligations under non-recourse financing agreements this may, under certain circumstances, result in an event of default under our Term Loan and Revolver, allowing our lenders to foreclose on their security interests.

 

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Even if that is not the case, we may decide to make payments to prevent the lenders of these subsidiaries from foreclosing on the relevant collateral. Such a foreclosure could result in our losing our ownership interest in the subsidiary or in some or all of its assets. The loss of our ownership interest in one or more of our subsidiaries or some or all of their assets could have a material adverse effect on our business, financial condition, results of operations and cash flow.

If we are unable to renew letter of credit facilities our business, financial condition, results of operations and cash flows may be materially adversely affected.

We expect our Revolver to include a letter of credit facility to support project-level contractual obligations. This letter of credit facility will need to be renewed after three years, at which time we will need to satisfy applicable financial ratios and covenants. If we are unable to renew our letters of credit as expected or if we are only able to replace them with letters of credit under different facilities on less favorable terms, we may experience a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, the inability to provide letters of credit may constitute a default under certain project-level financing arrangements, restrict the ability of the project-level subsidiary to make distributions to us and/or reduce the amount of cash available at such subsidiary to make distributions to us.

Our ability to raise additional capital to fund our operations may be limited.

Our ability to arrange additional financing, either at the corporate level or at a non-recourse project-level subsidiary, may be limited. Additional financing, including the costs of such financing, will be dependent on numerous factors, including:

 

    general economic and capital market conditions;

 

    credit availability from banks and other financial institutions;

 

    investor confidence in us, our partners, our Sponsor, as our principal stockholder (on a combined voting basis), and manager under the Management Services Agreement, and the regional wholesale power markets;

 

    our financial performance and the financial performance of our subsidiaries;

 

    our level of indebtedness and compliance with covenants in debt agreements;

 

    maintenance of acceptable project credit ratings or credit quality, including maintenance of the legal and tax structure of the project-level subsidiary upon which the credit ratings may depend;

 

    cash flow; and

 

    provisions of tax and securities laws that may impact raising capital.

We may not be successful in obtaining additional financing for these or other reasons. Furthermore, we may be unable to refinance or replace project-level financing arrangements or other credit facilities on favorable terms or at all upon the expiration or termination thereof. Our failure, or the failure of any of our projects, to obtain additional capital or enter into new or replacement financing arrangements when due may constitute a default under such existing indebtedness and may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our ability to generate revenue from certain utility solar energy projects depends on having interconnection arrangements and services.

Our future success will depend, in part, on our ability to maintain satisfactory interconnection agreements. If the interconnection or transmission agreement of a solar energy project is terminated

 

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for any reason, we may not be able to replace it with an interconnection and transmission arrangement on terms as favorable as the existing arrangement, or at all, or we may experience significant delays or costs related to securing a replacement. If a network to which one or more of the solar energy projects is connected experiences “down time,” the affected project may lose revenue and be exposed to non-performance penalties and claims from its customers. These may include claims for damages incurred by customers, such as the additional cost of acquiring alternative electricity supply at then-current spot market rates. The owners of the network will not usually compensate electricity generators for lost income due to down time. These factors could materially affect our ability to forecast operations and negatively affect our business, results of operations, financial condition and cash flow.

For some of our projects, we rely on electric interconnection and transmission facilities that we do not own or control and that are subject to transmission constraints within a number of our regions. If these facilities fail to provide us with adequate transmission capacity, we may be restricted in our ability to deliver electric power to our customers and we may incur additional costs or forego revenues.

For our utility-scale projects we depend on electric transmission facilities owned and operated by others to deliver the power we generate and sell at wholesale to our utility customers. A failure or delay in the operation or development of these transmission facilities or a significant increase in the cost of the development of such facilities could result in our losing revenues. Such failures or delays could limit the amount of power our operating facilities deliver or delay the completion of our construction projects. Additionally, such failures, delays or increased costs could have a material adverse effect on our business, financial condition and results of operations. If a region’s power transmission infrastructure is inadequate, our recovery of wholesale costs and profits may be limited. If restrictive transmission price regulation is imposed, the transmission companies may not have a sufficient incentive to invest in expansion of transmission infrastructure. We also cannot predict whether transmission facilities will be expanded in specific markets to accommodate competitive access to those markets. In addition, certain of our operating facilities’ generation of electricity may be physically or economically curtailed without compensation due to transmission limitations or limitations on the transmission grid’s ability to accommodate all of the generating resources seeking to move power over or sell power through the grid, reducing our revenues and impairing our ability to capitalize fully on a particular facility’s generating potential. Such curtailments could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, economic congestion on the transmission grid (for instance, a positive price difference between the location where power is put on the grid by a project and the location where power is taken off the grid by the project’s customer) in certain of the bulk power markets in which we operate may occur and we may be deemed responsible for those congestion costs. If we were liable for such congestion costs, our financial results could be adversely affected.

We face competition from traditional and renewable energy companies.

The solar energy industry is highly competitive and continually evolving as market participants strive to distinguish themselves within their markets and compete with large incumbent utilities and new market entrants. We believe that our primary competitors are the traditional incumbent utilities that supply energy to our potential customers under highly regulated rate and tariff structures. We compete with these traditional utilities primarily based on price, predictability of price and the ease with which customers can switch to electricity generated by our solar energy systems. If we cannot offer compelling value to our customers based on these factors, then our business will not grow. Traditional utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result of their greater size, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Traditional utilities could also offer other value-added products or services that could help them to compete with us even if the cost of

 

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electricity they offer is higher than ours. In addition, a majority of traditional utilities’ sources of electricity is non-solar, which may allow them to sell electricity more cheaply than electricity generated by our solar energy systems.

We also face risks that traditional utilities could change their volumetric-based (i.e., cents per kWh) rate and tariff structures to make distributed solar generation less economically attractive to their retail customers. Currently, net metering programs are utilized in 43 states to support the growth of distributed generation solar by requiring traditional utilities to reimburse their retail customers who are home and business owners for the excess power they generate at the level of the utilities’ retail rates rather than the rates at which those utilities buy power at wholesale. These net metering policies have generated controversy recently because the difference between traditional utilities’ retail rates and the rates at which they can buy power at wholesale can be significant and solar owners can escape most of the infrastructure surcharges that are part of other electricity users’ bills recovered through volumetric-based rates. To address those concerns and to allow traditional utilities to cover their transmission and distribution fixed charges, at least one state public utility commission, in Arizona, has allowed its largest traditional utility, Arizona Public Service, to assess a surcharge on customers with solar energy systems for their use of the utility’s grid, based on the size of the customer’s solar energy system. This surcharge will reduce the economic returns for the excess electricity that the solar energy systems produce. These types of changes or other types of changes that could reduce or eliminate the economic benefits of net-metering could be implemented by state public utility commissions or state legislatures in the other 43 states throughout the United States that utilize net-metering programs, and could significantly change the economic benefits of solar energy as perceived by traditional utilities’ retail customers.

We also face competition in the energy efficiency evaluation and upgrades market and we expect to face competition in additional markets as we introduce new energy-related products and services. As the solar industry grows and evolves, we will also face new competitors who are not currently in the market. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business and prospects.

There are a limited number of purchasers of utility-scale quantities of electricity, which exposes us and our utility-scale projects to additional risk.

Since the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions, there are a limited number of possible purchasers for utility-scale quantities of electricity in a given geographic location, including transmission grid operators, state and investor-owned power companies, public utility districts and cooperatives. As a result, there is a concentrated pool of potential buyers for electricity generated by our plants and projects, which may restrict our ability to negotiate favorable terms under new PPAs and could impact our ability to find new customers for the electricity generated by our generation facilities should this become necessary. Furthermore, if the financial condition of these utilities and/or power purchasers deteriorated or the Renewable Portfolio Standard, or “RPS,” climate change programs or other regulations to which they are currently subject and that compel them to source renewable energy supplies change, demand for electricity produced by our plants could be negatively impacted. In addition, provisions in our power sale arrangements may provide for the curtailment of delivery of electricity for various reasons, including to prevent damage to transmission systems, for system emergencies, force majeure or for economic reasons. Such curtailment would reduce revenues to us from power sale arrangements. If we cannot enter into power sale arrangements on terms favorable to us, or at all, or if the purchaser under our power sale arrangements were to exercise its curtailment or other rights to reduce purchases or payments under such arrangements, our revenues and our decisions regarding development of additional projects may be adversely affected.

 

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A significant deterioration in the financial performance of the retail industry could materially adversely affect our distributed generation business.

The financial performance of our distributed generation business depends in part upon the continued viability and financial stability of our customers in the retail industry, such as medium and large independent retailers and distribution centers. If the retail industry is materially and adversely affected by an economic downturn, increase in inflation or other factors, one or more of our largest customers could encounter financial difficulty, and possibly, bankruptcy. If one or more of our largest customers were to encounter financial difficulty or declare bankruptcy, they may reduce their power purchase agreement payments to us or stop them altogether. Any interruption or termination in payments by our customers would result in less cash being paid to the special purpose legal entities we establish to finance our projects, which could adversely affect the entities’ ability to make lease payments to the financing parties which are the legal owners of many of our solar energy systems or to pay our lenders in the case of the solar energy systems that we own. In such a case, the amount of distributable cash held by the entities would decrease, adversely affecting the cash flows we receive from such entities. In addition, our ability to finance additional new projects with PPAs from such customers would be adversely affected, undermining our ability to grow our business. Any reduction or termination of payments by one or more of our principal distributed generation customers could have a material adverse effect on our business, financial condition and results of operations.

The generation of electric energy from solar energy sources depends heavily on suitable meteorological conditions. If solar conditions are unfavorable, our electricity generation, and therefore revenue from our renewable generation facilities using our systems, may be substantially below our expectations.

The electricity produced and revenues generated by a solar electric generation facility are highly dependent on suitable solar conditions and associated weather conditions, which are beyond our control. Furthermore, components of our system, such as solar panels and inverters, could be damaged by severe weather, such as hailstorms or tornadoes. We generally will be obligated to bear the expense of repairing the damaged solar energy systems that we own, and replacement and spare parts for key components may be difficult or costly to acquire or may be unavailable. Unfavorable weather and atmospheric conditions could impair the effectiveness of our assets or reduce their output beneath their rated capacity or require shutdown of key equipment, impeding operation of our solar assets and our ability to achieve forecasted revenues and cash flows. Sustained unfavorable weather could also unexpectedly delay the installation of solar energy systems, which could result in a delay in us acquiring new projects or increase the cost of such projects.

We base our investment decisions with respect to each solar energy facility on the findings of related solar studies conducted on-site prior to construction or based on historical conditions at existing facilities. However, actual climatic conditions at a facility site may not conform to the findings of these studies and therefore, our solar energy facilities may not meet anticipated production levels or the rated capacity of our generation assets, which could adversely affect our business, financial condition and results of operations and cash flows.

While we currently own only solar energy projects, in the future we may decide to expand our acquisition strategy to include other types of energy or transmission projects. To the extent that we expand our operations to include new business segments, our business operations may suffer from a lack of experience, which may materially and adversely affect our business, financial condition, results of operations and cash flows.

We have limited experience in non-solar energy generation operations. As a result of this lack of experience, we may be prone to errors if we expand our projects beyond solar energy. We lack the technical training and experience with developing, starting or operating non-solar generation facilities.

 

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With no direct training or experience in these areas, our management may not be fully aware of the many specific requirements related to working in industries beyond solar energy generation. Additionally, we may be exposed to increased operating costs, unforeseen liabilities or risks, and regulatory and environmental concerns associated with entering new sectors of the power generation industry, which could have an adverse impact on our business as well as place us at a competitive disadvantage relative to more established non-solar energy market participants. In addition, such ventures could require a disproportionate amount of our management’s attention and resources. Our operations, earnings and ultimate financial success could suffer irreparable harm due to our management’s lack of experience in these industries. We may rely, to a certain extent, on the expertise and experience of industry consultants and we may have to hire additional experienced personnel to assist us with our operations. We can offer no assurance that if we expand our business beyond solar energy generation, we will be able to effectively develop new non-solar projects and achieve our targeted financial goals.

Operation of power generation facilities involves significant risks and hazards that could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may not have adequate insurance to cover these risks and hazards.

The ongoing operation of our facilities involves risks that include the breakdown or failure of equipment or processes or performance below expected levels of output or efficiency due to wear and tear, latent defect, design error or operator error or force majeure events, among other things. Operation of our facilities also involves risks that we will be unable to transport our product to our customers in an efficient manner due to a lack of transmission capacity. Unplanned outages of generating units, including extensions of scheduled outages, occur from time to time and are an inherent risk of our business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues as a result of generating and selling less power or require us to incur significant costs as a result of obtaining replacement power from third parties in the open market to satisfy our forward power sales obligations.

Our inability to operate our solar energy assets efficiently, manage capital expenditures and costs and generate earnings and cash flow from our asset-based businesses could have a material adverse effect on our business, financial condition, results of operations and cash flows. While we maintain insurance, obtain warranties from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance, warranties or performance guarantees may not cover our lost revenues, increased expenses or liquidated damages payments should we experience equipment breakdown or non-performance by contractors or vendors.

Power generation involves hazardous activities, including delivering electricity to transmission and distribution systems. In addition to natural risks such as earthquake, flood, lightning, hurricane and wind, other hazards, such as fire, structural collapse and machinery failure are inherent risks in our operations. These and other hazards can cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment and contamination of, or damage to, the environment and suspension of operations. The occurrence of any one of these events may result in our being named as a defendant in lawsuits asserting claims for substantial damages, including for environmental cleanup costs, personal injury and property damage and fines and/or penalties. We maintain an amount of insurance protection that we consider adequate but we cannot provide any assurance that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Furthermore, our insurance coverage is subject to deductibles, caps, exclusions and other limitations. A loss for which we are not fully insured could have a material adverse effect on our business, financial condition, results of operations or cash flows. Further, due to rising insurance costs and changes in the insurance markets, we cannot provide any assurance that our insurance coverage will continue to be available at all or at rates or on terms similar

 

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to those presently available. Any losses not covered by insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business is subject to substantial governmental regulation and may be adversely affected by changes in laws or regulations, as well as liability under, or any future inability to comply with, existing or future regulations or other legal requirements.

Our business is subject to extensive federal, state and local laws and regulations in the countries in which we operate. Compliance with the requirements under these various regulatory regimes may cause us to incur significant costs, and failure to comply with such requirements could result in the shutdown of the non-complying facility or, the imposition of liens, fines and/or civil or criminal liability.

With the exception of the Mt. Signal project located in California, all of the U.S. projects in our initial portfolio are “qualifying small power production facilities,” or “Qualifying Facilities,” as defined under the Public Utility Regulatory Policies Act of 1978, as amended, or “PURPA.” Our Qualifying Facilities and their immediate project company owners have various exemptions from ratemaking and certain other regulatory provisions of the FPA, from the books and records access provisions of the Public Utility Holding Company Act of 2005, or “PUHCA,” and from state organizational and financial regulation of electric utilities, depending upon the power production capacity of the project in question. The project company owner of the Mt. Signal project, or the “Mt. Signal ProjectCo,” is regulated as a “public utility” under the FPA and is not eligible for any of the exemptions from ratemaking and certain other regulatory provisions of the FPA afforded to the owners of certain Qualifying Facilities under PURPA. However, the Mt. Signal ProjectCo has obtained “market-based rate authorization” and associated blanket authorizations and waivers from FERC under the FPA, which allow it to sell electric energy, capacity and ancillary services at wholesale from the Mt. Signal project as a public utility at negotiated, market-based rates, instead of cost-of-service rates as well as waivers of, and authorizations under, certain FERC regulations that are commonly granted to market-based rate sellers, and a waiver from FERC’s transmission open access regulations with respect to its interconnection facilities (which interconnect the project to the grid). Moreover, the Mt. Signal ProjectCo is an “Exempt Wholesale Generator” as defined under PUHCA, which exempts it and us (for purposes of our ownership of the Mt. Signal ProjectCo) from the federal books and records access provisions of PUHCA and from regulation as a utility under California law. The failure of the project company owners of our Qualifying Facilities to maintain available exemptions under PURPA may result in them becoming subject to significant additional regulatory requirements. In addition, the failure of a project company owner of one of our Qualifying Facilities or the Mt. Signal ProjectCo to comply with applicable regulatory requirements may result in the imposition of penalties as discussed further in “Business—Regulatory Matters.”

The Mt. Signal ProjectCo and any of the other owners of our project companies that have obtained or will obtain market-based rate authority from FERC under the FPA will be subject to certain market behavior rules as established and enforced by FERC, and if they are determined to have violated those rules, will be subject to potential disgorgement of profits associated with the violation, penalties, and suspension or revocation of their market-based rate authority. If such entities were to lose their market-based rate authority, they would be required to obtain FERC’s acceptance of a cost-of-service rate schedule for wholesale sales of electric energy, capacity and ancillary services and could become subject to significant accounting, record-keeping, and reporting requirements that are imposed on FERC-regulated public utilities with cost-based rate schedules.

Substantially all of our assets are also subject to the rules and regulations applicable to power generators generally, in particular the reliability standards of the North American Electric Reliability Corporation or similar standards in Canada, the United Kingdom and Chile. If we fail to comply with these mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, increased compliance obligations and disconnection from the grid.

 

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The regulatory environment for electric generation in the United States has undergone significant changes in the last several years due to state and federal policies affecting the wholesale and retail power markets and the creation of incentives for the addition of large amounts of new renewable generation, demand response resources and, in some cases, transmission assets. These changes are ongoing and we cannot predict the future design of the wholesale and retail power markets or the ultimate effect that the changing regulatory environment will have on our business. In addition, in some of these markets, interested parties have proposed material market design changes, including the elimination of a single clearing price mechanism, as well as made proposals to re-regulate the markets or require divestiture of electric generation assets by asset owners or operators to reduce their market share. Other proposals to re-regulate may be made and legislative or other attention to the electric power market restructuring process may delay or reverse the deregulation process. If competitive restructuring of the electric power markets is reversed, discontinued or delayed, our business prospects and financial results could be negatively impacted.

Similarly, we cannot predict if the significant increase in the installation of renewable energy projects in the other markets we operate in could result in modifications to applicable rules and regulations.

Laws, governmental regulations and policies supporting renewable energy, and specifically solar energy (including tax incentives), could change at any time, including as a result of new political leadership, and such changes may materially adversely affect our business and our growth strategy.

Renewable generation assets currently benefit from various federal, state and local governmental incentives. In the United States, these incentives include investment tax credits, or “ITCs,” cash grants in lieu of ITCs, loan guarantees, RPS programs, modified accelerated cost-recovery system of depreciation and bonus depreciation. For example, the United States Internal Revenue Code of 1986, as amended, or the “Code,” provides an ITC of 30% of the cost-basis of an eligible resource, including solar energy facilities placed in service prior to the end of 2016, which percentage is currently scheduled to be reduced to 10% for solar energy systems placed in service after December 31, 2016. The U.S. Congress could reduce the ITC to below 30% prior to the end of 2016, reduce the ITC to below 10% for periods after 2016 or replace the expected 10% ITC with an untested production tax credit of an unknown percentage. Any reduction in the ITC could materially and adversely affect our business, financial condition, results of operations and cash flows.

Many U.S. states have adopted RPS programs mandating that a specified percentage of electricity sales come from eligible sources of renewable energy. However, the regulations that govern the RPS programs, including pricing incentives for renewable energy, or reasonableness guidelines for pricing that increase valuation compared to conventional power (such as a projected value for carbon reduction or consideration of avoided integration costs), may change. If the RPS requirements are reduced or eliminated, it could lead to fewer future power contracts or lead to lower prices for the sale of power in future power contracts, which could have a material adverse effect on our future growth prospects. Such material adverse effects may result from decreased revenues, reduced economic returns on certain project company investments, increased financing costs and/or difficulty obtaining financing.

Renewable energy sources in Canada benefit from federal and provincial incentives, such as RPS programs, accelerated cost recovery deductions allowed for tax purposes, the availability of off-take agreements through RPS and the Ontario FiT program, and other commercially oriented incentives. Renewable energy sources in the United Kingdom benefit from renewable obligation certificates, climate change levy exemption certificates and embedded benefits. Renewable energy sources in Chile benefit from an RPS program. Any adverse change to, or the elimination of, these incentives could have a material adverse effect on our business and our future growth prospects.

 

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In addition, governmental regulations and policies could be changed to provide for new rate programs that undermine the economic returns for both new and existing distributed solar assets by charging additional, non-negotiable fixed or demand charges or other fees or reductions in the number of projects allowed under net metering policies. Our business could also be subject to new and burdensome interconnection processes, delays and upgrade costs or local permit and site restrictions.

If any of the laws or governmental regulations or policies that support renewable energy, including solar energy, change, or if we are subject to new and burdensome laws or regulations, such changes may have a material adverse effect on our business, financial condition, results of operations and cash flows.

We have a limited operating history and as a result there is no assurance we can operate on a profitable basis.

We have a relatively new portfolio of assets, including several projects that have only recently commenced operations or that we expect will commence operations prior to the end of 2015, and a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of operation, particularly in a rapidly evolving industry such as ours. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our Sponsor may incur additional costs or delays in completing the construction of certain generation facilities, which could materially adversely affect our growth strategy.

Our growth strategy is dependent to a significant degree on acquiring new solar energy projects from our Sponsor and third parties. Our Sponsor’s or such third parties’ failure to complete such projects in a timely manner, or at all, could have a material adverse effect on our growth strategy. The construction of solar energy facilities involves many risks including:

 

    delays in obtaining, or the inability to obtain, necessary permits and licenses;

 

    delays and increased costs related to the interconnection of new generation facilities to the transmission system;

 

    the inability to acquire or maintain land use and access rights;

 

    the failure to receive contracted third party services;

 

    interruptions to dispatch at our facilities;

 

    supply interruptions;

 

    work stoppages;

 

    labor disputes;

 

    weather interferences;

 

    unforeseen engineering, environmental and geological problems;

 

    unanticipated cost overruns in excess of budgeted contingencies;

 

    failure of contracting parties to perform under contracts, including engineering, procurement and construction contractors; and

 

    operations and maintenance costs not covered by warranties or that occur following expiration of warranties.

 

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Any of these risks could cause a delay in the completion of projects under development, which could have a material adverse effect on our growth strategy.

Maintenance, expansion and refurbishment of power generation facilities involve significant risks that could result in unplanned power outages or reduced output.

Our facilities may require periodic upgrading and improvement. Any unexpected operational or mechanical failure, including failure associated with breakdowns and forced outages, and any decreased operational or management performance, could reduce our facilities’ generating capacity below expected levels, reducing our revenues and jeopardizing our ability to pay dividends to holders of our Class A common stock at forecasted levels or at all. Degradation of the performance of our solar facilities above levels provided for in the related PPAs may also reduce our revenues. Unanticipated capital expenditures associated with maintaining, upgrading or repairing our facilities may also reduce profitability.

We may also choose to refurbish or upgrade our facilities based on our assessment that such activity will provide adequate financial returns. Such facilities require time for development and capital expenditures before COD, and key assumptions underpinning a decision to make such an investment may prove incorrect, including assumptions regarding construction costs, timing, available financing and future power prices. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our Sponsor and other developers of solar energy projects depend on a limited number of suppliers of solar panels, inverters, modules and other system components. Any shortage, delay or component price change from these suppliers could result in construction or installation delays, which could affect the number of solar projects we are able to acquire in the future.

Our solar projects are constructed with solar panels, inverters, modules and other system components from a limited number of suppliers, making us susceptible to quality issues, shortages and price changes. If our Sponsor or third parties from whom we may acquire solar projects or other clean power generation projects in the future fail to develop, maintain and expand relationships with these or other suppliers, or if they fail to identify suitable alternative suppliers in the event of a disruption with existing suppliers, the construction or installation of new solar energy projects or other clean power generation projects may be delayed or abandoned, which would reduce the number of available projects that we may have the opportunity to acquire in the future.

There have also been periods of industry-wide shortage of key components, including solar panels, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. In addition, the United States government has imposed tariffs on solar cells manufactured in China. Based on determinations by the United States government, the applicable anti-dumping tariff rates range from approximately 8% to 239%. To the extent that United States market participants experience harm from Chinese pricing practices, an additional tariff of approximately 15%-16% will be applied. If our Sponsor or other unaffiliated third parties purchase solar panels containing cells manufactured in China, our purchase price for projects would reflect the tariff penalties mentioned above. A shortage of key commodity materials could also lead to a reduction in the number of projects that we may have the opportunity to acquire in the future, or delay or increase the costs of acquisitions.

We may incur unexpected expenses if the suppliers of components in our solar energy projects default in their warranty obligations.

The solar panels, inverters, modules and other system components utilized in our solar energy projects are generally covered by manufacturers’ warranties, which typically range from 5 to 20 years.

 

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In the event any such components fail to operate as required, we may be able to make a claim against the applicable warranty to cover all or a portion of the expense associated with the faulty component. However, these suppliers could cease operations and no longer honor the warranties, which would leave us to cover the expense associated with the faulty component. Our business, financial condition, results of operations and cash flows could be materially adversely affected if we cannot make claims under warranties covering our projects.

We are subject to environmental, health and safety laws and regulations and related compliance expenditures and liabilities.

Our assets are subject to numerous and significant federal, state, local and foreign laws, including statutes, regulations, guidelines, policies, directives and other requirements governing or relating to, among other things: protection of wildlife, including threatened and endangered species and their habitat; air emissions; discharges into water; water use; the storage, handling, use, transportation and distribution of dangerous goods and hazardous, residual and other regulated materials, such as chemicals; the prevention of releases of hazardous materials into the environment; the prevention, investigation, monitoring and remediation of hazardous materials in soil and groundwater, both on and offsite; land use and zoning matters; and workers’ health and safety matters. Our facilities could experience incidents, malfunctions and other unplanned events, such as spills of hazardous materials that may result in personal injury, penalties and property damage. In addition, certain environmental laws may result in liability, regardless of fault, concerning contamination at a range of properties, including properties currently or formerly owned, leased or operated by us and properties where we disposed of, or arranged for disposal of, waste. As such, the operation of our facilities carries an inherent risk of environmental, health and safety liabilities (including potential civil actions, compliance or remediation orders, fines and other penalties), and may result in our involvement from time to time in administrative and judicial proceedings relating to such matters. While we have implemented environmental, health and safety management programs designed to continually improve environmental, health and safety performance, we cannot assure you that such liabilities, as well as the costs for complying with environmental laws and regulations, will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks that are beyond our control, including but not limited to acts of terrorism or related acts of war, natural disasters, hostile cyber intrusions, theft or other catastrophic events, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our solar energy generation facilities that we acquired in the Initial Asset Transfers or those that we otherwise acquire in the future, including the Call Right Projects and any ROFO Projects, and the properties of unaffiliated third parties on which they may be located may be targets of terrorist activities, as well as events occurring in response to or in connection with them, that could cause environmental repercussions and/or result in full or partial disruption of the facilities’ ability to generate, transmit, transport or distribute electricity or natural gas. Strategic targets, such as energy-related facilities, may be at greater risk of future terrorist activities than other domestic targets. Hostile cyber intrusions, including those targeting information systems as well as electronic control systems used at the generating plants and for the related distribution systems, could severely disrupt business operations and result in loss of service to customers, as well as create significant expense to repair security breaches or system damage.

Furthermore, certain of the projects that we acquired in the Initial Asset Transfers or the Call Right Projects are located in active earthquake zones in Chile, California and Arizona, and our Sponsor and unaffiliated third parties from whom we may seek to acquire projects in the future may conduct operations in the same region or in other locations that are susceptible to natural disasters. The occurrence of a natural disaster, such as an earthquake, drought, flood or localized extended outages

 

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of critical utilities or transportation systems, or any critical resource shortages, affecting us, SunEdison or third parties from whom we may seek to acquire projects in the future, could cause a significant interruption in our business, damage or destroy our facilities or those of our suppliers or the manufacturing equipment or inventory of our suppliers.

Additionally, certain of our power generation assets and equipment are at risk for theft and damage. Although theft of equipment is rare, its occurrence can be significantly disruptive to our operations. For example, because we utilize copper wire as an essential component in our electricity generation and transportation infrastructure, we are at risk for copper wire theft, especially at our international projects, due to an increased demand for copper in the United States and internationally. Theft of copper wire or solar panels can cause significant disruption to our operations for a period of months and can lead to operating losses at those locations.

Any such terrorist acts, environmental repercussions or disruptions, natural disasters or theft incidents could result in a significant decrease in revenues or significant reconstruction, remediation or replacement costs, beyond what could be recovered through insurance policies, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

International operations subject us to political and economic uncertainties.

Our initial portfolio consists of solar projects located in the United States and its unincorporated territories, Canada, the United Kingdom and Chile. We intend to rapidly expand and diversify our initial project portfolio by acquiring utility-scale and distributed clean generation assets located in the United States, Canada, Chile and the United Kingdom. As a result, our activities are subject to significant political and economic uncertainties that may adversely affect our operating and financial performance. These uncertainties include, but are not limited to:

 

    the risk of a change in renewable power pricing policies, possibly with retroactive effect;

 

    measures restricting the ability of our facilities to access the grid to deliver electricity at certain times or at all;

 

    the macroeconomic climate and levels of energy consumption in the countries where we have operations;

 

    the comparative cost of other sources of energy;

 

    changes in taxation policies and/or the regulatory environment in the countries in which we have operations, including reductions to renewable power incentive programs;

 

    the imposition of currency controls and foreign exchange rate fluctuations;

 

    high rates of inflation;

 

    protectionist and other adverse public policies, including local content requirements, import/export tariffs, increased regulations or capital investment requirements;

 

    changes to land use regulations and permitting requirements;

 

    difficulty in timely identifying, attracting and retaining qualified technical and other personnel;

 

    difficulty competing against competitors who may have greater financial resources and/or a more effective or established localized business presence;

 

    difficulty in developing any necessary partnerships with local businesses on commercially acceptable terms; and

 

    being subject to the jurisdiction of courts other than those of the United States, which courts may be less favorable to us.

 

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These uncertainties, many of which are beyond our control, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may expand our international operations into countries where we currently have no presence, which would subject us to risks that may be specific to those new markets.

Since solar energy generation is in its early stages and changing and developing rapidly, we could decide to expand into other international markets. Risks inherent in an expansion of operations into new international markets include the following:

 

    inability to work successfully with third parties having local expertise to develop and construct projects and operate plants;

 

    restrictions on repatriation of earnings and cash;

 

    multiple, conflicting and changing laws and regulations, including those relating to export and import, the power market, tax, the environment, labor and other government requirements, approvals, permits and licenses;

 

    difficulties in enforcing agreements in foreign legal systems;

 

    changes in general economic and political conditions, including changes in government-regulated rates and incentives relating to solar energy generation;

 

    political and economic instability, including wars, acts of terrorism, political unrest, boycotts, sanctions and other business restrictions;

 

    difficulties with, and extra-normal costs of, recruiting and retaining local individuals skilled in international business operations;

 

    international business practices that may conflict with other customs or legal requirements to which we are subject, including anti-bribery and anti-corruption laws;

 

    risk of nationalization or other expropriation of private enterprises and land;

 

    financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable;

 

    fluctuations in currency exchange rates;

 

    high rates of inflation;

 

    inability to obtain, maintain or enforce intellectual property rights; and

 

    inability to obtain adequate financing on attractive terms and conditions.

Doing business in new international markets, particularly emerging markets such as Chile, will require us to be able to respond to rapid changes in the particular market, legal and political conditions in these countries. While we have gained significant experience from our international operations to date, we may not be able to timely develop and implement policies and strategies that will be effective in each international jurisdiction where we may decide to conduct business.

Changes in foreign withholding taxes could adversely affect our results of operations.

We will conduct a portion of our operations in Canada, the United Kingdom and Chile, and may in the future expand our business into other foreign countries. We are subject to risks that foreign countries may impose additional withholding taxes or otherwise tax our foreign income. Currently, distributions of earnings and other payments, including interest, to us from our foreign projects could constitute ordinary dividend income taxable to the extent of our earnings and profits, which may be

 

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subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating. Any such withholding taxes will reduce the amount of after-tax cash we can receive. If those withholding taxes are increased, the amount of after-tax cash we receive will be further reduced.

We are exposed to foreign currency exchange risks because certain of our solar energy projects are located in foreign countries.

We generate a portion of our revenues and incur a portion of our expenses in currencies other than U.S. dollars. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations or expropriation. Because our financial results are reported in U.S. dollars, if we generate revenue or earnings in other currencies, the translation of those results into United States dollars can result in a significant increase or decrease in the amount of those revenues or earnings. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our profitability. Our debt service requirements are primarily in U.S. dollars even though a percentage of our cash flow is generated in other foreign currencies and therefore significant changes in the value of such foreign currencies relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on debts denominated in U.S. dollars. In addition to currency translation risks, we incur currency transaction risks whenever we or one of our projects enter into a purchase or sales transaction using a currency other than the local currency of the transacting entity.

Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction and/or translation risks. It is possible that volatility in currency exchange rates will have a material adverse effect on our financial condition or results of operations. We expect to experience economic losses and gains and negative and positive impacts on earnings as a result of foreign currency exchange rate fluctuations, particularly as a result of changes in the value of the Canadian Dollar, the British Pound and other currencies. We expect that the portion of our revenues denominated in non-U.S. dollar currencies will continue to increase in future periods.

Additionally, although a portion of our revenues and expenses are denominated in foreign currency, we will pay dividends to holders of our Class A common stock in U.S. dollars. The amount of U.S. dollar denominated dividends paid to our holders of our Class A common stock will therefore be exposed to currency exchange rate risk. Although we intend to enter into hedging arrangements to help mitigate some of this exchange rate risk, there can be no assurance that these arrangements will be sufficient. Changes in the foreign exchange rates could have a material adverse effect on our results of operations and may adversely affect the amount of cash dividends paid by us to holders of our Class A common stock.

Our international operations require us to comply with anti-corruption laws and regulations of the United States government and various non-U.S. jurisdictions.

Doing business in multiple countries requires us and our subsidiaries to comply with the laws and regulations of the United States government and various non-U.S. jurisdictions. Our failure to comply with these rules and regulations may expose us to liabilities. These laws and regulations may apply to us, our subsidiaries, individual directors, officers, employees and agents, and those of our Sponsor, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our non-U.S. operations are subject to United States and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act of 1977, or the “FCPA.” The FCPA prohibits United States companies and their officers, directors, employees and agents acting on their behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of

 

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influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately and fairly reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. As a result, business dealings between our or our Sponsor’s employees and any such foreign official could expose our company to the risk of violating anti-corruption laws even if such business practices may be customary or are not otherwise prohibited between our company and a private third party. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable United States and non-U.S. laws and regulations; however, we cannot assure you that these policies and procedures will completely eliminate the risk of a violation of these legal requirements, and any such violation (inadvertent or otherwise) could have a material adverse effect on our business, financial condition and results of operations.

In the future, we may acquire certain assets in which we have limited control over management decisions and our interests in such assets may be subject to transfer or other related restrictions.

We may seek to acquire additional assets in the future in which we own less than a majority of the related interests in the assets. In these investments, we will seek to exert a degree of influence with respect to the management and operation of assets in which we own less than a majority of the interests by negotiating to obtain positions on management committees or to receive certain limited governance rights, such as rights to veto significant actions. However, we may not always succeed in such negotiations, and we may be dependent on our co-venturers to operate such assets. Our co-venturers may not have the level of experience, technical expertise, human resources management and other attributes necessary to operate these assets optimally. In addition, conflicts of interest may arise in the future between us and our stockholders, on the one hand, and our co-venturers, on the other hand, where our co-venturers’ business interests are inconsistent with our interests and those of our stockholders. Further, disagreements or disputes between us and our co-venturers could result in litigation, which could increase our expenses and potentially limit the time and effort our officers and directors are able to devote to our business.

The approval of co-venturers also may be required for us to receive distributions of funds from assets or to sell, pledge, transfer, assign or otherwise convey our interest in such assets, or for us to acquire our Sponsor’s interests in such co-ventures as an initial matter. Alternatively, our co-venturers may have rights of first refusal or rights of first offer in the event of a proposed sale or transfer of our interests in such assets. These restrictions may limit the price or interest level for our interests in such assets, in the event we want to sell such interests.

Certain PPAs signed in connection with our utility-scale business are subject to public utility commission approval, and such approval may not be obtained or may be delayed.

As a solar energy provider in the United States, the PPAs associated with our utility-scale projects are generally subject to approval by the applicable state public utility commission. It cannot be assured that such public utility commission approval will be obtained, and in certain markets, including California and Nevada, the public utility commissions have recently demonstrated a heightened level of scrutiny on solar energy purchase agreements that have come before them for approval. If the required public utility commission approval is not obtained for any particular PPA, the utility counterparty may exercise its right to terminate such PPA, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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We may not be able to replace expiring PPAs with contracts on similar terms. If we are unable to replace an expired distributed generation PPA with an acceptable new contract, we may be required to remove the solar energy assets from the site or, alternatively, we may sell the assets to the site host.

We may not be able to replace an expiring PPA with a contract on equivalent terms and conditions, including at prices that permit operation of the related facility on a profitable basis. If we are unable to replace an expiring PPA with an acceptable new project, the affected site may temporarily or permanently cease operations. In the case of a distributed generation project that ceases operations, the PPA terms generally require that we remove the assets, including fixing or reimbursing the site owner for any damages caused by the assets or the removal of such assets. The cost of removing a significant number of distributed generation projects could be material. Alternatively, we may agree to sell the assets to the site owner, but we can offer no assurances as to the terms and conditions, including price, that we would receive in any sale, and the sale price may not be sufficient to replace the revenue previously generated by the project.

We may not be able to renew our sale-leasebacks on similar terms. If we are unable to renew a sale-leaseback on acceptable terms we may be required to remove the solar energy assets from the project site subject to the sale-leaseback transaction or, alternatively, we may be required to purchase the solar energy assets from the lessor at unfavorable terms.

Provided the lessee is not in default, customary end of lease term provisions for sale-leaseback transactions obligate the lessee to (a) renew the sale-leaseback assets at fair market value, (b) purchase the solar energy assets at fair market value or (c) return the solar energy assets to the lessor. The cost of acquiring or removing a significant number of solar energy assets could be material. Further, we may not be successful in obtaining the additional financing necessary to purchase such solar energy assets from the lessor. Failure to renew our sale-leaseback transactions as they expire may have a material adverse effect on our business, financial condition, results of operations and cash flows.

The accounting treatment for many aspects of our solar energy business is complex and any changes to the accounting interpretations or accounting rules governing our solar energy business could have a material adverse effect on our GAAP reported results of operations and financial results.

The accounting treatment for many aspects of our solar energy business is complex, and our future results could be adversely affected by changes in the accounting treatment applicable to our solar energy business. In particular, any changes to the accounting rules regarding the following matters may require us to change the manner in which we operate and finance our solar energy business:

 

    revenue recognition and related timing;

 

    intra-company contracts;

 

    operation and maintenance contracts;

 

    joint venture accounting, including the consolidation of joint venture entities and the inclusion or exclusion of their assets and liabilities on our balance sheet;

 

    long-term vendor agreements; and

 

    foreign holding company tax treatment.

Negative public or community response to solar energy projects could adversely affect construction of our projects.

Negative public or community response to solar energy projects could adversely affect our ability to construct and operate our projects. Among concerns often cited by local community and other

 

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interest groups are objections to the aesthetic effect of plants on rural sites near residential areas, reduction of farmland and the possible displacement or disruption of wildlife. We expect this type of opposition to continue as we complete existing projects and construct future projects. It is possible that we may also face resistance from aboriginal communities in connection with any proposed expansion onto sites that may be subject to land claims. Opposition to our requests for permits or successful challenges or appeals to permits issued to us could lead to legal, public relations and other drawbacks and costs that impede our ability to meet our growth targets, achieve commercial operations for a project on schedule and generate revenues.

The seasonality of our operations may affect our liquidity.

We will need to maintain sufficient financial liquidity to absorb the impact of seasonal variations in energy production or other significant events. Following the completion of this offering, we expect that our principal source of liquidity will be cash generated from our operating activities, the cash retained by us for working capital purposes out of the gross proceeds of this offering and borrowing capacity under our Term Loan and Revolver. Our quarterly results of operations may fluctuate significantly for various reasons, mostly related to economic incentives and weather patterns.

The amount of electricity our solar power generation assets produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months results in less irradiation, the generation of particular assets will vary depending on the season. Additionally, to the extent more of our power generation assets are located in the northern or southern hemisphere, overall generation of our entire asset portfolio could be impacted by seasonality. Further, time-of-day pricing factors vary seasonally which contributes to variability of revenues. We expect our initial portfolio of power generation assets to generate the lowest amount of electricity during the fourth quarter of each year. As a result, we expect our revenue and cash available for distribution to be lower during the fourth quarter. However, we expect aggregate seasonal variability to decrease if geographic diversity of our portfolio between the northern and southern hemisphere increases.

In addition, in Canada, the construction of solar energy systems may be concentrated during the second half of the calendar year, largely due to periodic reductions of the applicable minimum feed-in tariff and the fact that the coldest winter months are January through March, which impacts the amount of construction that occurs. In the United States, customers will sometimes make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. If we fail to adequately manage the fluctuations in the timing of our projects, our business, financial condition or results of operations could be materially affected. The seasonality of our energy production may create increased demands on our working capital reserves and borrowing capacity under our Revolver during periods where cash generated from operating activities are lower. In the event that our working capital reserves and borrowing capacity under our Revolver are insufficient to meet our financial requirements, or in the event that the restrictive covenants in our Revolver restrict our access to such facilities, we may require additional equity or debt financing to maintain our solvency. There can be no assurance that additional equity or debt financing will be available when required or available on commercially favorable terms or on terms that are otherwise satisfactory to us, in which event our financial condition may be materially adversely affected.

Changes in tax laws may limit the current benefits of solar energy investment.

We face risks related to potential changes in tax laws that may limit the current benefits of solar energy investment. As discussed below in “Industry—Government Incentives for Solar Energy,” government incentives provide significant support for renewable energy sources such as solar energy, and a decrease in these tax benefits could increase the costs of investment in solar energy. For example, in 2013 the Czech Republic and Spain announced retroactive taxes for solar energy producers. If these types of changes are enacted in other countries as well, the costs of solar energy may increase.

 

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Additionally, we receive grant payments for specified energy property from the U.S. Department of the Treasury in lieu of tax credits pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009, each, a “Section 1603 Grant.” As a condition to claiming a Section 1063 Grant, we are required to maintain compliance with the terms of the Section 1603 program for a period of five years beginning on the date the eligible solar energy property is placed in service. Failure to maintain compliance with the requirements of Section 1603 could result in recapture of all or a part of the amounts received under a Section 1603 Grant, plus interest. A decrease in tax benefits due to recapture of a Section 1603 Grant could increase the costs of investment in solar energy.

Risks Related to our Relationship with our Sponsor

Our Sponsor will be our controlling stockholder and will exercise substantial influence over TerraForm Power, and we are highly dependent on our Sponsor.

Our Sponsor will beneficially own all of our outstanding Class B common stock upon completion of this offering. Each share of our outstanding Class B common stock will entitle our Sponsor to 10 votes on all matters presented to our stockholders generally. As a result of its ownership of our Class B common stock, our Sponsor will possess approximately 95.2% (or approximately 94.6% if the underwriters exercise in full their option to purchase additional shares of Class A common stock) of the combined voting power of our Class A common stock and Class B common stock even though our Sponsor will own only 66.5% of our Class A common stock, Class B common stock and Class B1 common stock on a combined basis (or approximately 63.6% if the underwriters exercise in full their option to purchase additional shares of Class A common stock. We intend to use any net proceeds we receive as a result of the exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase Class B Units (and shares of Class B common stock) held by our Sponsor. However, our Sponsor will continue to have a controlling interest in our voting stock and has expressed its intention to maintain a controlling interest in us going forward. As a result of this ownership, our Sponsor will continue to have a substantial influence on our affairs and its voting power will constitute a large percentage of any quorum of our stockholders voting on any matter requiring the approval of our stockholders. Such matters include the election of directors, the adoption of amendments to our amended and restated certificate of incorporation and bylaws and approval of mergers or sale of all or substantially all of our assets. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. In addition, our Sponsor, for so long as it and its controlled affiliates possess a majority of the combined voting power, will have the power to appoint all of our directors. Our Sponsor will also have a right to specifically designate up to two additional directors to our board of directors until such time as our Sponsor and its controlled affiliates cease to own shares representing a majority voting power in us. Our Sponsor may cause corporate actions to be taken even if its interests conflict with the interests of our other stockholders (including holders of our Class A common stock). See “Certain Relationships and Related Party Transactions—Procedures for Review, Approval and Ratification of Related-Person Transactions; Conflicts of Interest.”

Furthermore, we will depend on the management and administration services provided by or under the direction of our Sponsor under the Management Services Agreement. Other than personnel designated as dedicated to us, SunEdison personnel and support staff that provide services to us under the Management Services Agreement will not be required to, and we do not expect that they will, have as their primary responsibility the management and administration of our business or act exclusively for us. Under the Management Services Agreement, our Sponsor will have the discretion to determine which of its employees, other than the designated TerraForm Power personnel, will perform assignments required to be provided to us under the Management Services Agreement. Any failure to

 

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effectively manage our operations or to implement our strategy could have a material adverse effect on our business, financial condition, results of operations and cash flows. The Management Services Agreement will continue in perpetuity, until terminated in accordance with its terms. The non-compete provisions of the Management Services Agreement will survive termination indefinitely.

The Support Agreement provides us the option to purchase additional solar projects that have Projected FTM CAFD of at least $75.0 million from the completion of this offering through the end of 2015 and $100.0 million during 2016, representing aggregate additional Projected FTM CAFD of $175.0 million. The Support Agreement also provides us a right of first offer with respect to the ROFO Projects. Additionally, we will depend upon our Sponsor for the provision of management and administration services at all of our facilities. Any failure by our Sponsor to perform its requirements under these arrangements or the failure by us to identify and contract with replacement service providers, if required, could adversely affect the operation of our facilities and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may not be able to consummate future acquisitions from our Sponsor.

Our ability to grow through acquisitions depends, in part, on our Sponsor’s ability to identify and present us with acquisition opportunities. While SunEdison established our company to hold and acquire a diversified suite of power generating assets, there are a number of factors which could materially and adversely impact the extent to which suitable acquisition opportunities are made available from our Sponsor.

In particular, the question of whether a particular asset is suitable is highly subjective and is dependent on a number of factors, including an assessment by our Sponsor relating to our liquidity position at the time, the risk profile of the opportunity and its fit with the balance of our portfolio. If our Sponsor determines that an opportunity is not suitable for us, it may still pursue such opportunity on its own behalf.

In making these determinations, our Sponsor may be influenced by factors that result in a misalignment or conflict of interest. See “Risks Related to our Business—We may not be able to effectively identify or consummate any future acquisitions on favorable terms, or at all. Additionally, even if we consummate acquisitions on terms that we believe are favorable, such acquisitions may in fact result in a decrease in cash available for distribution per Class A common share.”

The departure of some or all of our Sponsor’s employees, particularly executive officers or key employees, could prevent us from achieving our objectives.

Our growth strategy relies on our and our Sponsor’s executive officers and key employees for their strategic guidance and expertise in the selection of projects that we may acquire in the future. Because the solar power industry is relatively new, there is a scarcity of experienced executives and employees in the solar power industry. Our future success will depend on the continued service of these individuals. Our Sponsor has experienced departures of key professionals and personnel in the past and may do so in the future, and we cannot predict the impact that any such departures will have on our ability to achieve our objectives. The departure of a significant number of our Sponsor’s professionals or a material portion of its employees who perform services for us or on our behalf, or the failure to appoint qualified or effective successors in the event of such departures, could have a material adverse effect on our ability to achieve our objectives. The Management Services Agreement will not require our Sponsor to maintain the employment of any of its professionals or, except with respect to the dedicated TerraForm Power personnel, to cause any particular professional to provide services to us or on our behalf and our Sponsor may terminate the employment of any professional.

 

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Our organizational and ownership structure may create significant conflicts of interest that may be resolved in a manner that is not in our best interests or the best interests of holders of our Class A common stock and that may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our organizational and ownership structure involves a number of relationships that may give rise to certain conflicts of interest between us and holders of our Class A common stock, on the one hand, and our Sponsor, on the other hand. Immediately prior to the completion of this offering, we will enter into the Management Services Agreement with our Sponsor. Our executive officers will be employees of our Sponsor and certain of them will continue to have equity interests in our Sponsor and, accordingly, the benefit to our Sponsor from a transaction between us and our Sponsor will proportionately inure to their benefit as holders of equity interests in our Sponsor. Following the completion of this offering, our Sponsor will be a related party under the applicable securities laws governing related party transactions and may have interests which differ from our interests or those of holders of our Class A common stock, including with respect to the types of acquisitions made, the timing and amount of dividends by TerraForm Power, the reinvestment of returns generated by our operations, the use of leverage when making acquisitions and the appointment of outside advisors and service providers. Any material transaction between us and our Sponsor (including the acquisition of the Call Right Projects and any ROFO Projects) will be subject to our related party transaction policy, which will require prior approval of such transaction by our Corporate Governance and Conflicts Committee, as discussed in “Management—Committees of the Board of Directors—Corporate Governance and Conflicts Committee.” Those of our executive officers who will continue to have economic interests in our Sponsor following the completion of this offering may be conflicted when advising our Corporate Governance and Conflicts Committee or otherwise participating in the negotiation or approval of such transactions. These executive officers have significant project- and industry-specific expertise that could prove beneficial to our Corporate Governance and Conflicts Committee’s decision-making process and the absence of such strategic guidance could have a material adverse effect on the Corporate Governance and Conflicts Committee’s ability to evaluate any such transaction. Furthermore, the creation of our Corporate Governance and Conflicts Committee and our related party transaction approval policy may not insulate us from derivative claims related to related party transactions and the conflicts of interest described in this risk factor. Regardless of the merits of such claims, we may be required to expend significant management time and financial resources in the defense thereof. Additionally, to the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds and the willingness of counterparties to do business with us, all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The holder or holders of our IDRs may elect to cause Terra LLC to issue Class B1 units to it or them in connection with a resetting of target distribution levels related to the IDRs, without the approval of our Corporate Governance and Conflicts Committee or the holders of Terra LLC’s units, us as manager of Terra LLC, or our board of directors (or any committee thereof). This could result in lower distributions to holders of our Class A common stock.

The holder or holders of a majority of the IDRs (initially our Sponsor through a wholly owned subsidiary) have the right, if the Subordination Period (as defined herein) has expired and if we have made cash distributions in excess of the then-applicable Third Target Distribution for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on Terra LLC’s cash distribution levels at the time of the exercise of the reset election. The right to reset the target distribution levels may be exercised without the approval of the holders of Terra LLC’s units, us, as manager of Terra LLC, or our board of directors (or any committee thereof). Following a reset election, a baseline distribution amount will be calculated as an amount equal to the average cash distribution per Class A unit, Class B1 unit and Class B unit for the two consecutive fiscal quarters

 

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immediately preceding the reset election (such amount is referred to as the “Reset Minimum Quarterly Distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the Reset Minimum Quarterly Distribution.

In connection with the reset election, the holders of the IDRs will receive Terra LLC Class B1 units and shares of our Class B1 common stock. Therefore, the reset of the IDRs will dilute existing stockholders’ ownership. This dilution of ownership may cause dilution of future distributions per share as a higher percentage of distributions per share would go to our Sponsor or a future owner of the IDRs if the IDRs are sold.

We anticipate that our Sponsor would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions without such conversion. However, it is possible that our Sponsor (or another holder) could exercise this reset election at a time when Terra LLC is experiencing declines in aggregate cash distributions or is expected to experience declines in its aggregate cash distributions. In such situations, the holder of the IDRs may desire to be issued Class B1 units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause TerraForm Power (which will hold all of Terra LLC’s Class A units), and, in turn, holders of our Class A common stock to experience a reduction in the amount of cash distributions that they would have otherwise received had Terra LLC not issued new Class B1 units to the holders of the IDRs in connection with resetting the target distribution levels. See “Certain Relations and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

The IDRs may be transferred to a third party without the consent of holders of Terra LLC’s units, us, as manager of Terra LLC, or our board of directors (or any committee thereof).

Our Sponsor may not sell, transfer, exchange, pledge (other than as collateral under its credit facilities) or otherwise dispose of the IDRs to any third party (other than its controlled affiliates) until after it has satisfied its $175.0 million aggregate Projected FTM CAFD commitment to us in accordance with the Support Agreement. Our Sponsor will pledge the IDRs as collateral under its existing credit agreement concurrently with the consummation of this offering, but the IDRs may not be transferred upon foreclosure until after our sponsor has satisfied its Projected FTM CAFD commitment to us. After that period, our Sponsor may transfer the IDRs to a third party at any time without the consent of the holders of Terra LLC’s units, us, as manager of Terra LLC, or our board of directors (or any committee thereof). However, our Sponsor has granted us a right of first refusal with respect to any proposed sale of IDRs to a third party (other than its controlled affiliates), which we may exercise to purchase the IDRs proposed to be sold on the same terms offered to such third party at any time within 30 days after we receive written notice of the proposed sale and its terms. If our Sponsor transfers the IDRs to a third party, our Sponsor would not have the same incentive to grow our business and increase quarterly distributions to holders of Class A common stock over time. For example, a transfer of IDRs by our Sponsor could reduce the likelihood of our Sponsor accepting offers made by us relating to assets owned by our Sponsor, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our portfolio.

If we incur material tax liabilities, distributions to holders of our Class A common stock may be reduced, without any corresponding reduction in the amount of distributions paid to our Sponsor or other holders of the IDRs, Class B units and Class B1 units.

We are entirely dependent upon distributions we receive from Terra LLC in respect of the Class A units held by us for payment of our expenses and other liabilities. We must make provisions for the payment of our income tax liabilities, if any, before we can use the cash distributions we receive from Terra LLC to make distributions to our Class A common stockholders. If we incur material tax liabilities, our distributions to holders of our Class A common stock may be reduced. However, the cash available

 

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to make distributions to the holders of the Class B units and IDRs issued by Terra LLC (all of which will initially be held by our Sponsor), or to the holders of any Class B1 units that may be issued by Terra LLC in connection with an IDR reset or otherwise, will not be reduced by the amount of our tax liabilities. As a result, if we incur material tax liabilities, distributions to holders of our Class A common stock may be reduced, without any corresponding reduction in the amount of distributions paid to our Sponsor or other holders of the IDRs, Class B units and Class B1 units of Terra LLC.

Our ability to terminate the Management Services Agreement early will be limited.

The Management Services Agreement will provide that we may terminate the agreement upon 30 days prior written notice to our Sponsor upon the occurrence of any of the following: (i) our Sponsor defaults in the performance or observance of any material term, condition or covenant contained therein in a manner that results in material harm to us and the default continues unremedied for a period of 30 days after written notice thereof is given to our Sponsor; (ii) our Sponsor engages in any act of fraud, misappropriation of funds or embezzlement that results in material harm to us; (iii) our Sponsor is grossly negligent in the performance of its duties under the agreement and such negligence results in material harm to us; (iv) upon the happening of certain events relating to the bankruptcy or insolvency of our Sponsor; (v) upon the earlier to occur of the five-year anniversary of the date of the agreement and the end of any 12-month period ending on the last day of a calendar quarter during which we generated cash available for distribution in excess of $350 million; (vi) on such date as our Sponsor and its affiliates no longer beneficially hold more than 50% of the voting power of our capital stock; and (v) upon the date that our Sponsor experiences a change in control. Furthermore, if we request an amendment to the scope of services provided by our Sponsor under the Management Services Agreement and we are not able to agree with our Sponsor as to a change to the service fee resulting from a change in the scope of services within 180 days of the request, we will be able to terminate the agreement upon 30 days’ prior notice to our Sponsor.

We will not be able to terminate the agreement for any other reason, and the agreement continues in perpetuity until terminated in accordance with its terms. The Management Services Agreement includes non-compete provisions that will prohibit us from engaging in certain activities competitive with our Sponsor’s power project development and construction business. These non-compete provisions will survive termination indefinitely. If our Sponsor’s performance does not meet the expectations of investors, and we are unable to terminate the Management Services Agreement, the market price of our Class A common stock could suffer.

If our Sponsor terminates the Management Services Agreement or defaults in the performance of its obligations under the agreement we may be unable to contract with a substitute service provider on similar terms, or at all.

We will rely on our Sponsor to provide us with management services under the Management Services Agreement and will not have independent executive, senior management or other personnel. The Management Services Agreement will provide that our Sponsor may terminate the agreement upon 180 days prior written notice of termination to us if we default in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to our Sponsor and the default continues unremedied for a period of 30 days after written notice of the breach is given to us. If our Sponsor terminates the Management Services Agreement or defaults in the performance of its obligations under the agreement, we may be unable to contract with a substitute service provider on similar terms or at all, and the costs of substituting service providers may be substantial. In addition, in light of our Sponsor’s familiarity with our assets, a substitute service provider may not be able to provide the same level of service due to lack of pre-existing synergies. If we cannot locate a service provider that is able to provide us with substantially similar services as our Sponsor does under the Management Services Agreement on similar terms, it would likely have a material adverse effect on our business, financial condition, results of operation and cash flows.

 

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Our Sponsor may offer Unpriced Call Right Projects to third parties or remove Call Right Projects identified in the Support Agreement and we must still agree on a number of additional matters covered by the Support Agreement.

Pursuant to the Support Agreement, our Sponsor will provide us with the right, but not the obligation, to purchase for cash certain solar projects from its project pipeline with aggregate Projected FTM CAFD of at least $175.0 million by the end of 2016. The Support Agreement identifies certain of the Call Right Projects, which we believe will collectively satisfy a majority of the total Projected FTM CAFD commitment. Our Sponsor may, however, remove a project from the Call Right Project list effective upon notice to us, if, in its reasonable discretion, a project is unlikely to be successfully completed. In that case, the Sponsor will be required to replace such project with one or more additional reasonably equivalent projects that have a similar economic profile.

The Support Agreement also provides that our Sponsor is required to offer us additional qualifying Call Right Projects from its pipeline on a quarterly basis until we have acquired Call Right Projects that are projected to generate the specified minimum amount of Projected FTM CAFD for each of the periods covered by the Support Agreement. These additional Call Right Projects must satisfy certain criteria, include being subject to a fully-executed PPA with a counterparty that, in our reasonable discretion, is creditworthy. The price for each Unpriced Call Right Project will be the fair market value. The Support Agreement provides that we will work with our Sponsor to mutually agree on the fair market value and Projected FTM CAFD of each Unpriced Call Right Project within a reasonable time after it is added to the list of identified Call Right Projects. If we are unable to agree on the fair market value or Projected FTM CAFD for a project within 90 calendar days after it is added to the list (or such shorter period as will still allow us to complete the call right exercise process), we or our Sponsor, upon written notice from either party, will engage a third-party advisor to determine the disputed item so that such material economic terms reflect common practice in the relevant market. The other economic terms with respect to our purchase of a Call Right Project will also be determined by mutual agreement or, if we are unable to reach agreement, by a third-party advisor. We may not achieve all of the expected benefits from the Support Agreement if we are unable to mutually agree with our Sponsor with respect to these matters. Until the price for a Call Right Project is agreed or determined, in the event our Sponsor receives a bona fide offer for a Call Right Project from a third party, we have the right to match the price offered by such third party and acquire such Call Right Project on the terms our Sponsor could obtain from the third party. In addition, our effective remedies under the Support Agreement may also be limited in the event that a material dispute with our Sponsor arises under the terms of the Support Agreement.

In addition, our Sponsor has agreed to grant us a right of first offer on any of the ROFO Projects that it determines to sell or otherwise transfer during the six-year period following the completion of this offering. Under the terms of the Support Agreement, our Sponsor will agree to negotiate with us in good faith, for a period of 30 days, to reach an agreement with respect to any proposed sale of a ROFO Project for which we have exercised our right of first offer before it may sell or otherwise transfer such ROFO Project to a third party. However, our Sponsor will not be obligated to sell any of the ROFO Projects and, as a result, we do not know when, if ever, any ROFO Projects will be offered to us. Furthermore, in the event that our Sponsor elects to sell ROFO Projects, our Sponsor will not be required to accept any offer we make and may choose to sell the assets to a third party or not sell the assets at all.

 

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The liability of our Sponsor is limited under our arrangements with it and we have agreed to indemnify our Sponsor against claims that it may face in connection with such arrangements, which may lead it to assume greater risks when making decisions relating to us than it otherwise would if acting solely for its own account.

Under the Management Services Agreement, our Sponsor will not assume any responsibility other than to provide or arrange for the provision of the services described in the Management Services Agreement in good faith. In addition, under the Management Services Agreement, the liability of our Sponsor and its affiliates will be limited to the fullest extent permitted by law to conduct involving bad faith, fraud, willful misconduct or gross negligence or, in the case of a criminal matter, action that was known to have been unlawful. In addition, we will agree to indemnify our Sponsor to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses incurred by an indemnified person or threatened in connection with our operations, investments and activities or in respect of or arising from the Management Services Agreement or the services provided by our Sponsor, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the conduct in respect of which such persons have liability as described above. These protections may result in our Sponsor tolerating greater risks when making decisions than otherwise would be the case, including when determining whether to use leverage in connection with acquisitions. The indemnification arrangements to which our Sponsor is a party may also give rise to legal claims for indemnification that are adverse to us or holders of our Class A common stock.

Risks Inherent in an Investment in Us

We may not be able to continue paying comparable or growing cash dividends to holders of our Class A common stock in the future.

The amount of our cash available for distribution principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

    the level and timing of capital expenditures we make;

 

    the completion of our ongoing construction activities on time and on budget;

 

    the level of our operating and general and administrative expenses, including reimbursements to our Sponsor for services provided to us in accordance with the Management Services Agreement;

 

    seasonal variations in revenues generated by the business;

 

    our debt service requirements and other liabilities;

 

    fluctuations in our working capital needs;

 

    our ability to borrow funds and access capital markets;

 

    restrictions contained in our debt agreements (including our project-level financing and, if applicable, our Revolver); and

 

    other business risks affecting our cash levels.

As a result of all these factors, we cannot guarantee that we will have sufficient cash generated from operations to pay a specific level of cash dividends to holders of our Class A common stock. Furthermore, holders of our Class A common stock should be aware that the amount of cash available for distribution depends primarily on our cash flow, and is not solely a function of profitability, which is affected by non-cash items. We may incur other expenses or liabilities during a period that could

 

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significantly reduce or eliminate our cash available for distribution and, in turn, impair our ability to pay dividends to holders of our Class A common stock during the period. Because we are a holding company, our ability to pay dividends on our Class A common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make other distributions to us, including restrictions under the terms of the agreements governing project-level financing. Our project-level financing agreements generally prohibit distributions from the project entities prior to COD and thereafter prohibit distributions to us unless certain specific conditions are met, including the satisfaction of financial ratios. Our Term Loan and Revolver will also restrict our ability to declare and pay dividends if an event of default has occurred and is continuing or if the payment of the dividend would result in an event of default.

Terra LLC’s cash available for distribution will likely fluctuate from quarter to quarter, in some cases significantly, due to seasonality. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that Significantly Affect our Results of Operations and Business—Seasonality.” As result, we may cause Terra LLC to reduce the amount of cash it distributes to its members in a particular quarter to establish reserves to fund distributions to its members in future periods for which the cash distributions we would otherwise receive from Terra LLC would otherwise be insufficient to fund our quarterly dividend. If we fail to cause Terra LLC to establish sufficient reserves, we may not be able to maintain our quarterly dividend with respect to a quarter adversely affected by seasonality.

Finally, dividends to holders of our Class A common stock will be paid at the discretion of our board of directors. Our board of directors may decrease the level of or entirely discontinue payment of dividends. For a description of additional restrictions and factors that may affect our ability to pay cash dividends, please read “Cash Dividend Policy.”

The assumptions underlying the forecasts and targeted growth rate presented elsewhere in this prospectus are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution, in the aggregate and/or on a per-share basis, to differ materially from our forecasts.

The forecasts presented elsewhere in this prospectus only include projects that are in our initial portfolio and were prepared using assumptions that our management believes are reasonable. See “Cash Dividend Policy—Assumptions and Considerations.” These include assumptions regarding the future operating costs of our facilities, the dates that projects in our initial portfolio will reach COD, our facilities’ future level of power generation, interest rates, administrative expenses, tax treatment of income, future capital expenditure requirements, budget and the absence of material adverse changes in economic conditions or government regulations. They also include assumptions based on solar resource studies that take into account meteorological conditions and on the availability of our facilities. The forecasts assume that no unexpected risks materialize during the forecast periods. Any one or more than one of these assumptions may prove to be incorrect, in which case our actual results of operations will be different from, and possibly materially worse than, those contemplated by the forecasts. There can be no assurance that the assumptions underlying the forecasts presented elsewhere in this prospectus will prove to be accurate. Actual results for the forecast periods will likely vary from the forecast results and those variations may be material. We make no representation that actual results achieved in the forecast periods will be the same, in whole or in part, as those forecasted herein.

The factors described above may also impact our ability to achieve our targeted compound annual growth rate in CAFD per unit over the three-year period following the completion of this offering. This target assumes that no unexpected risks materialize over the next three years and is based on additional assumptions, including the market value of projects we acquire from third parties, our cost of capital, the ratio of debt to equity with respect to the financing of acquisitions and whether we have the financial

 

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resources to acquire Call Right Projects and the timing of such acquisitions. Even if the Projected FTM CAFD commitment is satisfied we may not achieve the targeted growth rate. The price for certain of the Call Right Projects will be determined in the future, and our Sponsor is not obligated to offer us any of the Unpriced Call Right Projects on terms that will allow us to achieve our targeted growth rate. Accordingly, we may not be able to consummate acquisitions with our Sponsor or unaffiliated third parties that enable us to achieve our targeted growth rate.

We are a holding company and our only material asset after completion of this offering will be our interest in Terra LLC, and we are accordingly dependent upon distributions from Terra LLC and its subsidiaries to pay dividends and taxes and other expenses.

TerraForm Power is a holding company and has no material assets other than its ownership of membership interests in Terra LLC, a holding company that will have no material assets other than its interest in Terra Operating LLC, whose sole material assets are the projects that have been or will be contributed to it by SunEdison in the Initial Asset Transfer and the projects that have been or will be acquired through the Acquisitions. None of TerraForm Power, Terra LLC or Terra Operating LLC have any independent means of generating revenue. We intend to cause Terra Operating LLC’s subsidiaries to make distributions to Terra Operating LLC and, in turn, make distributions to Terra LLC, and, Terra LLC, in turn, to make distributions to TerraForm Power in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by us. To the extent that we need funds to pay a quarterly cash dividend to holders of our Class A common stock or otherwise, and Terra Operating LLC or Terra LLC is restricted from making such distributions under applicable law or regulation or is otherwise unable to provide such funds (including as a result of Terra Operating LLC’s operating subsidiaries being unable to make distributions), it could materially adversely affect our liquidity and financial condition and limit our ability to pay dividends to holders of our Class A common stock.

Market interest rates may have an effect on the value of our Class A common stock.

One of the factors that will influence the price of shares of our Class A common stock will be the effective dividend yield of such shares (i.e., the yield as a percentage of the then market price of our shares) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our Class A common stock to expect a higher dividend yield. If market interest rates increase and we are unable to increase our dividend in response, including due to an increase in borrowing costs, insufficient cash available for distribution or otherwise, investors may seek alternative investments with higher yield, which would result in selling pressure on, and a decrease in the market price of, our Class A common stock. As a result, the price of our Class A common stock may decrease as market interest rates increase.

If you purchase shares of Class A common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution in the amount of $16.57 per share, because the assumed initial public offering price of $24.00 per share (which is the midpoint of the price range set forth on the cover of this prospectus) is substantially higher than the as adjusted net tangible book value per share of our outstanding Class A common stock on an as adjusted basis giving effect to the Organizational Transactions. The as adjusted net tangible book value of our Class A common stock is $7.43 per share. For additional information, see “Dilution.”

 

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If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete strategic acquisitions or effect combinations.

If we are deemed to be an investment company under the Investment Company Act of 1940, or the “Investment Company Act,” our business would be subject to applicable restrictions under the Investment Company Act, which could make it impractical for us to continue our business as contemplated.

We believe our company is not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily engaged in a non-investment company business, and we intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated.

Market volatility may affect the price of our Class A common stock and the value of your investment.

Following the completion of this offering, the market price for our Class A common stock is likely to be volatile, in part because our shares have not been previously traded publicly. We cannot predict the extent to which a trading market will develop or how liquid that market may become. If you purchase shares of our Class A common stock in this offering, you will pay a price that was not established in the public trading markets. The initial public offering price will be determined by negotiations between the underwriters and us. You may not be able to resell your shares above the initial public offering price and may suffer a loss on your investment. In addition, the market price of our Class A common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including general market and economic conditions, disruptions, downgrades, credit events and perceived problems in the credit markets; actual or anticipated variations in our quarterly operating results or dividends; changes in our investments or asset composition; write-downs or perceived credit or liquidity issues affecting our assets; market perception of our Sponsor, our business and our assets; our level of indebtedness and/or adverse market reaction to any indebtedness we incur in the future; our ability to raise capital on favorable terms or at all; loss of any major funding source; the termination of the Management Services Agreement or additions or departures of our Sponsor’s key personnel; changes in market valuations of similar power generation companies; and speculation in the press or investment community regarding us or our Sponsor.

In addition, securities markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. Any broad market fluctuations may adversely affect the trading price of our Class A common stock.

We are a “controlled company,” controlled by our Sponsor, whose interest in our business may be different from ours or yours.

Each share of our Class B common stock will entitle our Sponsor or its controlled affiliates to 10 votes on matters presented to our stockholders generally. Following the completion of this offering, our Sponsor will own all of our Class B common stock, representing 66.5% of our Class A common stock, Class B common stock and Class B1 common stock on a combined basis and representing approximately 95.2% of our combined voting power, based on the assumptions sets forth in “The Offering—Certain Assumptions,” including no exercise by the underwriters of their option to purchase additional shares. Therefore, our Sponsor will control a majority of the vote on all matters submitted to a vote of the stockholders including the election of our directors, for the foreseeable future following this offering even if its ownership of our Class B common stock represents less than 50% of the

 

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outstanding Class A common stock, Class B common stock and Class B1 common stock on a combined basis. As a result, we will be considered a “controlled company” for the purposes of the NASDAQ Global Select Market listing requirements. As a “controlled company,” we will be permitted to opt out of the NASDAQ Global Select Market listing requirements that would require (i) a majority of the members of our board of directors to be independent, (ii) that we establish a compensation committee and a nominating and governance committee, each comprised entirely of independent directors, or (iii) an annual performance evaluation of the nominating and governance and compensation committees. We intend to rely on exceptions with respect to having a majority of independent directors, establishing a compensation committee or nominating committee and annual performance evaluations of such committees.

The NASDAQ Global Select Market listing requirements are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. As further described above in “—Risks Related to our Relationship with our Sponsor,” it is possible that the interests of our Sponsor may in some circumstances conflict with our interests and the interests of holders of our Class A common stock. Should our Sponsor’s interests differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for publicly-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to holders of our Class A common stock, and could make it more difficult for you to change management.

Provisions of our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that holders of our Class A common stock may consider favorable, including transactions in which such stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove members of our management. These provisions include:

 

    a prohibition on stockholder action through written consent once our Sponsor ceases to hold a majority of the combined voting power of our common stock;

 

    a requirement that special meetings of stockholders be called upon a resolution approved by a majority of our directors then in office;

 

    the right of our Sponsor as the holder of our Class B common stock, to appoint up to two additional directors to our board of directors;

 

    advance notice requirements for stockholder proposals and nominations; and

 

    the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.

Section 203 of the Delaware General Corporation Law, or the “DGCL,” prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person that together with its affiliates owns or within the last three years has owned 15% of voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. As a result of these provisions in our charter documents following the completion of the Organizational Transactions and Delaware law, the price investors may be willing to pay in the future for shares of our Class A common stock may be limited. See “Description of Capital Stock—Antitakeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws.”

 

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Additionally, in order to ensure compliance with Section 203 of the FPA, our amended and restated certificate of incorporation will prohibit any person from acquiring, without prior FERC authorization or the written consent of our board of directors, through this offering or in subsequent purchases other than secondary market transactions (i) an amount of our Class A or Class B1 common stock that, after giving effect to such acquisition, would allow such purchaser together with its affiliates (as understood for purposes of FPA Section 203) to exercise 10% or more of the total voting power of the outstanding shares of our Class A, Class B and Class B1 common stock in the aggregate, or (ii) an amount of our Class A common stock or Class B1 common stock as otherwise determined by our board of directors sufficient to allow such purchaser together with its affiliates to exercise control over our company. Any acquisition of our Class A common stock or Class B1 common stock in violation of this prohibition shall not be effective to transfer record, beneficial, legal or any other ownership of such common stock, and the transferee shall not be entitled to any rights as a stockholder with respect to such common stock (including, without limitation, the right to vote or to receive dividends with respect thereto). While we do not anticipate that this offering will result in the acquisition of 10% or greater voting power or a change of control with respect to us or any of our solar generation project companies, any such acquisition of 10% or greater voting power or change of control could require prior authorization from FERC under Section 203 the FPA. Furthermore, a “holding company” (as defined in PUHCA) and its “affiliates” (as defined in PUHCA) may be subject to restrictions on the acquisition of our Class A common stock or Class B1 common stock in secondary market transactions to which other acquirors are not subject. A purchaser of our securities which is a “holding company” or an “affiliate” or “associate company” of such a “holding company” (as defined in PUHCA) should seek their own legal counsel to determine whether a given purchase of our securities may require prior FERC approval. See “Business—Regulatory Matters.”

You may experience dilution of your ownership interest due to the future issuance of additional shares of our Class A common stock.

We are in a capital intensive business, and may not have sufficient funds to finance the growth of our business, future acquisitions or to support our projected capital expenditures. As a result, we may require additional funds from further equity or debt financings, including tax equity financing transactions or sales of preferred shares or convertible debt to complete future acquisitions, expansions and capital expenditures and pay the general and administrative costs of our business. In the future, we may issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of purchasers of our Class A common stock offered hereby. Under our amended and restated certificate of incorporation, we will be authorized to issue 850,000,000 shares of Class A common stock, 140,000,000 shares of Class B common stock, 260,000,000 shares of Class B1 common stock and 50,000,000 shares of preferred stock with preferences and rights as determined by our board of directors. The potential issuance of additional shares of common stock or preferred stock or convertible debt may create downward pressure on the trading price of our Class A common stock. We may also issue additional shares of our Class A common stock or other securities that are convertible into or exercisable for our Class A common stock in future public offerings or private placements for capital raising purposes or for other business purposes, potentially at an offering price, conversion price or exercise price that is below the offering price for our Class A common stock in this offering.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the stock price and trading volume of our Class A common stock could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If

 

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any of the analysts who may cover us change their recommendation regarding our Class A common stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the stock price or trading volume of our Class A common stock to decline.

There is no existing market for our Class A common stock, and we do not know if one will develop with adequate liquidity to sell our Class A common stock at prices equal to or greater than the offering price.

Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NASDAQ Global Select Market or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling our Class A common stock that you purchase in this offering. The initial public offering price for our Class A common stock was determined by negotiations between us, SunEdison and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our Class A common stock at prices equal to or greater than the price you paid in this offering or at all.

Future sales of our common stock by our Sponsor, Riverstone or the Private Placement Investors may cause the price of our Class A common stock to fall.

The market price of our Class A common stock could decline as a result of sales by our Sponsor, Riverstone or the Private Placement purchasers of such shares (issuable to our Sponsor or Riverstone upon the exchange of some or all of its Class B units or Class B1 units of Terra LLC) in the market, or the perception that these sales could occur. After the completion of this offering, we will have 850,000,000 shares of Class A common stock authorized and 27,724,712 shares of Class A common stock outstanding. The number of outstanding shares includes 20,065,000 shares of Class A common stock that we are selling in this offering, which may be resold immediately in the public market. All of the remaining shares of Class A common stock, or approximately 7,659,712 shares, or 27.6% of our total outstanding shares of Class A common stock, and all of the outstanding shares of our Class B common stock, are restricted from immediate resale under the lock-up agreements entered into between the holders thereof, including our Sponsor, executive officers, directors, Riverstone and the Private Placement purchasers, and the underwriters as described in “Underwriting (Conflicts of Interest).” These shares (including shares of Class A common stock issuable to our Sponsor or Riverstone upon the exchange of some or all of its Terra LLC Class B units or Class B1 units) will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of Goldman, Sachs & Co., Barclays Capital Inc. and Citigroup Global Markets Inc., is 180 days after the date of the closing of this offering, subject to compliance with the applicable requirements of Rule 144 promulgated under the Securities Act.

The market price of our Class A common stock may also decline as a result of our Sponsor disposing or transferring some or all of our outstanding Class B common stock, which disposals or transfers would reduce our Sponsor’s ownership interest in, and voting control over, us. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

Our Sponsor, certain of its affiliates, Riverstone and the Private Placement Investors have certain demand and piggyback registration rights with respect to shares of our Class A common stock issuable upon the exchange of Class B units or Class B1 units of Terra LLC. The presence of additional shares of our Class A common stock trading in the public market, as a result of the exercise of such registration rights may have a material adverse effect on the market price of our securities. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements.”

 

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Our Sponsor has pledged the shares of Class B common stock that it owns to its lenders under its credit facility. If the lenders foreclose on these shares, the market price of our shares of Class A common stock could be materially adversely affected.

Our Sponsor has pledged all of the shares of Class B common stock that it owns to its lenders as security under its credit facility with Wells Fargo Bank, National Association, as administrative agent, Goldman Sachs Bank USA and Deutsche Bank Securities Inc., as joint lead arrangers and joint syndication agents, Goldman Sachs Bank USA, Deutsche Bank Securities Inc., Wells Fargo Securities, LLC and Macquarie Capital (USA) Inc., as joint bookrunners, and the lenders identified in the credit agreement. If SunEdison breaches certain covenants and obligations in its credit facility, an event of default could result and the lenders could exercise their right to accelerate all the debt under the credit facility and foreclose on the pledged shares (and a corresponding number of Class B units). While the pledged shares are subject to the 180-day lock-up restrictions described in “Shares Eligible for Future Sale—Lock-Up Agreements” and the restrictions on transfer described in “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Stock Lock-Up,” any future sale of the shares of Class A common stock received upon foreclosure of the pledged securities after the expiration of the lock-up periods could cause the market price of our Class A common stock to decline. In addition, because SunEdison owns a majority of the combined voting power of our common stock, the occurrence of an event of default, foreclosure, and a subsequent sale of all, or substantially all, of the the shares of Class A common stock received upon foreclosure of the pledged securities could result in a change of control, even when such change may not be in the best interest of our stockholders.

We will incur increased costs as a result of being a publicly traded company.

As a public company, we will incur additional legal, accounting and other expenses that have not been reflected in our predecessor’s historical financial statements or our pro forma financial statements. In addition, rules implemented by the SEC and the NASDAQ Global Select Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. These rules and regulations result in our incurring legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

Initially, our legal, accounting and other expenses relating to being a publicly traded company will be paid for by our Sponsor under the Management Services Agreement without a fee for 2014, and with the relevant service fees for 2015, 2016 and 2017 capped at $4.0 million, $7.0 million, and $9.0 million, respectively. The Management Services Agreement does not have a fixed term, but may be terminated by us in certain circumstances, including upon the earlier to occur of (i) the five-year anniversary of the date of the agreement and (ii) the end of any 12-month period ending on the last day of a calendar quarter during which we generated cash available for distribution in excess of $350 million. Following the termination of the Management Services Agreement we will be required to pay for these expenses directly.

Our failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act as a public company could have a material adverse effect on our business and share price.

Prior to completion of this offering, we have not operated as a public company and have not had to independently comply with Section 404(a) of the Sarbanes-Oxley Act. We anticipate being required

 

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to meet these standards in the course of preparing our financial statements as of and for the year ended December 31, 2014, and our management will be required to report on the effectiveness of our internal control over financial reporting for such year. Additionally, once we are no longer an emerging growth company, as defined by the JOBS Act, our independent registered public accounting firm will be required pursuant to Section 404(b) of the Sarbanes-Oxley Act to attest to the effectiveness of our internal control over financial reporting on an annual basis. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting, but we are not currently in compliance with, and we cannot be certain when we will be able to implement the requirements of Section 404(a). We may encounter problems or delays in implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation in connection with the attestation to be provided by our independent registered public accounting firm after we cease to be an emerging growth company. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls after we cease to be an emerging growth company, investors could lose confidence in our financial information and the price of our Class A common stock could decline.

Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause shareholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and share price.

We are an “emerging growth company” and have elected in this prospectus, and may elect in future SEC filings, to comply with reduced public company reporting requirements, which could make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined by the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In this prospectus, we have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation. In addition, Section 107(b) of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to “opt in” to such extended transition period election under Section 107(b). Therefore we are electing to delay adoption of new or revised

 

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accounting standards, and as a result, we may choose to not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.

We could be an emerging growth company for up to five years after the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2019. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have taken advantage of certain of the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to holders of our Class A common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our Class A common stock less attractive as a result of our reliance on these exemptions. If some investors find our Class A common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our Class A common stock and the price for our Class A common stock may be more volatile.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Risks Related to Taxation

In addition to reading the following risk factors, if you are a non-U.S. investor, please read “Material United States Federal Income Tax Consequences to Non-U.S. Holders” for a more complete discussion of the expected material United States federal income tax consequences of owning and disposing of shares of our Class A common stock.

Tax provisions and policies supporting renewable energy could change at any time, and such changes may result in a material increase in our estimated future income tax liability.

Renewable generation assets currently benefit from various federal, state and local tax incentives, including ITCs and a modified accelerated cost-recovery system of depreciation and bonus depreciation. The Code currently provides an ITC of 30% of the cost-basis of an eligible resource, including certain solar energy facilities placed in service prior to the end of 2016, which percentage is currently scheduled to be reduced to 10% for solar energy systems placed in service after December 31, 2016. The U.S. Congress could reduce, replace or eliminate the ITC. In addition, we benefit from an accelerated tax depreciation schedule for our eligible solar energy projects. The U.S. Congress could in the future eliminate or modify such accelerated depreciation. Moreover, the cost-basis of eligible resources and projects acquired from our Sponsor may be reduced if a tax authority were to successfully challenge our transfer prices as not reflecting arms’ length prices, in which case the amount of our expected ITC and depreciation deductions would be reduced. Additionally, we may be required to repay a Section 1603 Grant, with interest, if the U.S. Treasury were to successfully challenge a solar energy property for which such a Section 1603 Grant has been made as not complying with the requirements of Section 1603.

Any reduction in our ITCs or depreciation deductions as a result of a change in law or successful transfer pricing challenge, Section 1603 Grant challenge, or any elimination or modification of the

 

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accelerated tax depreciation schedule, may result in a material increase in our estimated future income tax liability and may negatively impact our business, financial condition and results of operations.

Our future tax liability may be greater than expected if we do not generate NOLs sufficient to offset taxable income.

We expect to generate NOLs and NOL carryforwards that we can utilize to offset future taxable income. Based on our current portfolio of assets that we expect will benefit from an accelerated tax depreciation schedule, and subject to tax obligations resulting from potential tax audits, we do not expect to pay significant United States federal income tax in the near term. However, in the event these losses are not generated as expected (including if our accelerated tax depreciation schedule for our eligible solar energy projects is eliminated or adversely modified), are successfully challenged by the United States Internal Revenue Service, or “IRS,” (in a tax audit or otherwise), or are subject to future limitations as a result of an “ownership change” as discussed below, our ability to realize these future tax benefits may be limited. Any such reduction, limitation, or challenge may result in a material increase in our estimated future income tax liability and may negatively impact our business, financial condition and operating results.

Our ability to use NOLs to offset future income may be limited.

Our ability to use NOLs generated in the future could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Code. In general, an ownership change occurs if the aggregate stock ownership of certain holders (generally 5% holders, applying certain look-through and aggregation rules) increases by more than 50% over such holders’ lowest percentage ownership over a rolling three-year period. If a corporation undergoes an ownership change, its ability to use its pre-change NOL carryforwards and other pre-change deferred tax attributes to offset its post-change income and taxes may be limited. Future sales of our Class A common stock by SunEdison, as well as future issuances by us, could contribute to a potential ownership change.

A valuation allowance may be required for our deferred tax assets.

Our expected NOLs will be reflected as a deferred tax asset as they are generated until utilized to offset income. Valuation allowances may need to be maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates and future taxable income levels and based on input from our auditors, tax advisors or regulatory authorities. In the event that we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made, which could have a material adverse impact on our financial condition and results of operations and our ability to maintain profitability.

Distributions to holders of our Class A common stock may be taxable as dividends.

If we make distributions from current or accumulated earnings and profits as computed for U.S. federal income tax purposes, such distributions will generally be taxable to holders of our Class A common stock in the current period as ordinary dividend income for U.S. federal income tax purposes, eligible under current law for the lower tax rates applicable to qualified dividend income of non-corporate taxpayers. While we expect that a portion of our distributions to holders of our Class A common stock may exceed our current and accumulated earnings and profits as computed for U.S. federal income tax purposes and therefore constitute a non-taxable return of capital to the extent of a holder’s basis in our Class A common stock, no assurance can be given that this will occur.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact included in this prospectus are forward-looking statements. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “will” and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this prospectus, including those entitled “Summary,” “Cash Dividend Policy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected.

The following factors, among others, could cause our actual results, performance or achievements to differ from those set forth in the forward-looking statements:

 

    counterparties to our offtake agreements willingness and ability to fulfill their obligations under such agreements;

 

    price fluctuations, termination provisions and buyout provisions related to our offtake agreements;

 

    our ability to enter into contracts to sell power on acceptable terms as our offtake agreements expire;

 

    delays or unexpected costs during the completion of construction of these projects;

 

    our ability to successfully identify, evaluate and consummate acquisitions;

 

    government regulation, including compliance with regulatory and permit requirements and changes in market rules, rates, tariffs and environmental laws;

 

    operating and financial restrictions placed on us and our subsidiaries related to agreements governing our indebtedness and other agreements of certain of our subsidiaries and project-level subsidiaries generally and in the revolving credit facility and term loan that we will enter into concurrently with the consummation of this offering;

 

    our ability to borrow additional funds and access capital markets, as well as our substantial indebtedness and the possibility that we may incur additional indebtedness going forward;

 

    our ability to compete against traditional and renewable energy companies;

 

    hazards customary to the power production industry and power generation operations such as unusual weather conditions, catastrophic weather-related or other damage to facilities, unscheduled generation outages, maintenance or repairs, interconnection problems or other developments, environmental incidents, or electric transmission constraints and the possibility that we may not have adequate insurance to cover losses as a result of such hazards;

 

    our ability to expand into new business segments or new geographies; and

 

    our ability to operate our businesses efficiently, manage capital expenditures and costs tightly, manage risks related to international operations and generate earnings and cash flows from our asset-based businesses in relation to our debt and other obligations.

 

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Additional factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this prospectus under the heading “Risk Factors,” as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

Assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, we expect to receive approximately $445.2 million of net proceeds from the sale of the Class A common stock offered hereby based upon the assumed initial public offering price of $24.00 per share, after deducting underwriting discounts and commissions and the structuring fee but before offering expenses. We will also receive gross proceeds of $65.0 million from the sale of shares of Class A common stock in connection with the Private Placements. If the underwriters exercise in full their option to purchase additional shares of Class A common stock, we estimate that additional net proceeds will be approximately $66.8 million, after deducting underwriting discounts and commissions and a pro rata portion of the structuring fee.

We will use $436.0 million of the net proceeds from this offering and the Private Placements to acquire newly-issued Class A units of Terra LLC directly from Terra LLC, and we will use all remaining net proceeds (including any proceeds received by us upon exercise of the underwriters’ option to purchase additional shares of our Class A common stock) to purchase Class B units (and Class B common stock) from our Sponsor at a price equal to the price per share in this offering, less underwriting discounts and commissions and a pro rata portion of the structuring fee, following which those Class B units (and the related shares of Class B common stock) will be cancelled and Terra LLC will issue to us an equal number of Class A units. These Class A units will collectively represent approximately 22.5% of Terra LLC’s outstanding membership units after this offering (calculated without regard to the IDRs) assuming the underwriters do not exercise their option to purchase additional shares, or approximately 25.5% if the underwriters exercise their option to purchase additional shares. TerraForm Power will not retain any of the net proceeds from this offering or the Private Placements and all such net proceeds in excess of $436.0 million will be paid to our Sponsor, as described above.

The following table illustrates the estimated sources and uses of funds, assuming the Organizational Transactions were completed as of March 31, 2014. Actual amounts may vary from estimated amounts.

 

Sources of Funds           Uses of Funds       

 

    

 

 
(in millions)  
Class A common stock offered hereby (1)    $ 445.2       Repayment of Bridge Facility    $ 400.0   

Private Placements

     65.0       General corporate purposes (4)      194.4   
Revolver (2)      —         Acquisitions consideration (5)      86.0   
Term Loan      300.0       Purchase of Class B units from Sponsor      74.2   

Release of Bridge Facility debt
service cash reserve (3)

     16.2      

Repayment of certain project-level debt

     47.0   
     

Estimated fees and expenses (6)

    
21.6
  
      Payment of Bridge Facility interest (3)      3.2   
  

 

 

       

 

 

 

Total sources

   $ 826.4       Total uses    $ 826.4   
  

 

 

       

 

 

 

 

(1) We expect to receive approximately $445.2 million of net proceeds from the sale of the Class A common stock offered hereby based upon the assumed initial public offering price of $24.00 per share, after deducting underwriting discounts and commissions and the structuring fee but before offering expenses.
(2) Concurrently with the completion of this offering, Terra Operating LLC plans to enter into the Revolver, which will provide for a revolving line of credit of $140.0 million. The closing of the Revolver will be conditioned upon completion of this offering, the implementation of our Organizational Transactions and other customary closing conditions. We do not expect to have any outstanding borrowings under the Revolver upon completion of this offering. See “Description of Certain Indebtedness—Term Loan and Revolving Credit Facility.”
(3) We are required under the Bridge Facility to maintain $16.2 million in cash to fund future interest payments. Terra LLC will use net proceeds, together with borrowings under the Term Loan, to repay all outstanding indebtedness (including accrued interest) under the Bridge Facility.

 

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(4) May include future acquisitions of solar assets from SunEdison pursuant to the Support Agreement or from unaffiliated third parties. As of the date of this prospectus, we have not identified any specific potential future acquisitions other than under the Support Agreement discussed elsewhere in this prospectus.
(5) Terra LLC will use approximately $86.0 million of net proceeds to pay for the acquisition and related milestone payments of certain projects included in our initial portfolio from our Sponsor.
(6) Includes fees and expenses related to entering into the Term Loan and Revolver as well as other expenses related to the Organizational Transactions and this offering not deducted from the proceeds of this offering when computing net proceeds.

The Bridge Facility will have outstanding indebtedness of approximately $400.0 million as of the completion of this offering but prior to its repayment. Indebtedness under the Bridge Facility bears interest at 7.0% and matures on the earlier of August 28, 2015 and the date all loans under the Bridge Facility become due and payable in full thereunder, whether by acceleration or otherwise. The approximately $9.0 million of project-level indebtedness of the U.S. Projects 2009-2013 to be repaid with a portion of the net proceeds of this offering bears interest at interest rates between 5.25-7.50% and matures at various times between 2016 and 2031. The approximately $38.0 million of project-level indebtedness of the Stonehenge Operating projects to be repaid with a portion of the net proceeds of this offering bears interest at interest rates between 3.75-4.51%, and matures in 2028.

Goldman, Sachs & Co. and/or its affiliates acted as arranger of, and is the administrative agent and one of the lenders under, our Bridge Facility. The remaining lenders are affiliates of Barclays Capital Inc., Citigroup Global Markets Inc., JPMorgan Chase Bank, N.A. and Santander Investment Securities Inc. Because affiliates of Goldman, Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Santander Investment Securities Inc. will receive more than 5% of the net proceeds of this offering due to the repayment of amounts outstanding under our Bridge Facility, Goldman, Sachs & Co., Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Santander Investment Securities Inc. are deemed to have a conflict of interest under FINRA Rule 5121. Accordingly, this offering is being made in compliance with the requirements of FINRA Rule 5121. See “Underwriting (Conflicts of Interest).”

If the initial public offering price in this offering exceeds $24.00 per share, we will make certain adjustments in our capital structure, as follows: (1) the number of shares of Class A Common Stock being issued by us in the Private Placements will decrease, such that the gross proceeds therefrom remain equal to $65.0 million; (2) the number of Class A units being purchased by us directly from Terra LLC will decrease such that the net proceeds received by Terra LLC from that purchase remains $436.0 million; (3) the number of Class B units and Class B1 units (and a corresponding number of shares of Class B common stock and Class B1 common stock) being issued to Silver Ridge on account of our acquisition of the Mt. Signal project will decrease such that the aggregate value of such securities based on the initial public offering price remains equal to $292.0 million; and (4) the number of Class B units (and corresponding shares of Class B common stock) being allocated to our Sponsor and the number of shares of Class A common stock being allocated to certain of our existing stockholders (including our President and Chief Executive Officer) in the Organizational Transactions on account of their existing ownership interest in Terra LLC will be correspondingly increased on a pro rata basis such that the aggregate number of shares of our common stock and the aggregate number of Terra LLC’s membership units outstanding following the completion of this offering will remain the same. As a result, if the price per share in this offering exceeds $24.00, the midpoint of the range listed on the cover of this prospectus, then upon completion of this offering, as compared to the ownership percentages specified in the ownership structure chart in “Prospectus Summary—Organizational Transactions,” (i) our Sponsor and our existing stockholders (including our President and Chief Executive Officer) will own a higher percentage interest in our business, (ii) the Private Placement Investors and Riverstone will own a lower percentage interest in our business and (iii) our public stockholders will own the same percentage interest in our business.

 

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Our Sponsor will not receive any of the net proceeds or other consideration in connection with this offering, other than: (i) the net proceeds used by us to purchase Class B units (and share of Class B common stock) from our Sponsor, including in the event the underwriters’ exercise their option to purchase additional shares; (ii) the Class B common stock, Class B units of Terra LLC and the IDRs issued to it in the Offering Transactions; and (iii) any proceeds it receives from our acquisition of certain projects at the completion of this offering (as described in ‘‘Summary—Organizational Transactions—Offering Transactions’’). The Class B common stock will not entitle our Sponsor to any economic interest in TerraForm Power and the Class B units will entitle our Sponsor, subject to certain limitations on distributions to holders of Class B units during the Subordination Period and the Distribution Forbearance Period, to a 66.5% economic interest in Terra LLC, based upon the assumed initial public offering price of $24.00 per share.

 

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CAPITALIZATION

The following table sets forth our predecessor’s cash and cash equivalents, restricted cash and consolidated capitalization as of March 31, 2014 on: (i) an historical basis; (ii) an as adjusted basis to give effect to the Acquisitions (including the additional borrowings under the Bridge Facility incurred to finance the Acquisitions); (iii) an as adjusted basis to give effect to the Formation Transactions; and (iv) an as further adjusted basis to give effect to the Offering Transactions, including this offering, and the application of the net proceeds of this offering in the manner set forth under the heading “Use of Proceeds,” based on an assumed initial public offering price of $24.00 per share. If the initial public offering price exceeds $24.00 per share, we will make certain adjustments to our capital structure as further described in “Use of Proceeds.”

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our combined consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    March 31, 2014  

(in thousands except share data)

  Actual     As Adjusted
for Acquisitions
    As Adjusted
for Formation
Transactions
    As Further
Adjusted for
Offering
Transactions
 
   

(unaudited)

 

Cash and restricted cash(1)

  $ 276,636      $ 183,576      $ 180,426      $ 450,981   
 

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt (including current portion):

       

Revolver(2)

  $      $      $      $   

Bridge Facility(3)(4)

    250,000        400,000        400,000          

Term Loan(4)

                         300,000   

Project-level debt(5)

    546,001        935,178        935,178        888,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt (including current portion)

  $ 796,001      $ 1,335,178      $ 1,335,178      $ 1,188,178   

Equity:

       

Net parent investment(6)

  $ 37,483      $ 198,483      $ 198,483      $   

Class A common stock, par value $0.01 per share, 850,000,000 shares authorized, no shares issued and outstanding, actual; 27,724,712 shares issued and outstanding, as adjusted(7)

                         277   

Class B common stock, par value $0.01 per share, 140,000,000 shares authorized, no shares issued and outstanding, actual; 67,210,944 shares issued and outstanding, as adjusted(7)

                         672   

Class B1 common stock, par value $0.01 per share, 260,000,000 shares authorized, no shares issued and outstanding, actual; 6,083,333 shares issued and outstanding, as adjusted

                         61   

Preferred stock, par value $0.01 per share, no shares authorized, issued and outstanding, actual; 50,000,000 authorized and no shares issued and outstanding, as adjusted

                           

Additional paid-in-capital

                         210,657   

Non-controlling interest

    12,962        255,569        255,569        669,140   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

  $ 50,445      $ 454,052      $ 454,052      $ 880,807   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 1,123,082      $ 1,972,806      $ 1,969,656      $ 2,519,966   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount includes non-current restricted cash of $6.6 million (actual) and $14.2 million (as adjusted for acquisitions).

 

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(2) Concurrently with the completion of this offering, Terra Operating LLC plans to enter into the Revolver, which will provide for a revolving line of credit of $140.0 million. The closing of the Revolver will be conditioned upon completion of this offering, the implementation of our Organizational Transactions and other customary closing conditions.
(3) We entered into the Bridge Facility on March 28, 2014, which provides for borrowings of $250.0 million, and increased the size of the loans available thereunder to $400.0 million on May 15, 2014. Borrowings under the Bridge Facility were used to finance the Acquisitions prior to the completion of this offering.
(4) Any borrowings that remain outstanding under the Bridge Facility after the completion of this offering will be refinanced under the Term Loan.
(5) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity—Project-Level Financing Arrangements.”
(6) The increase in net parent investment reflects our Sponsor’s interest in the predecessor and Mt. Signal. This interest will be reclassified to non-controlling interest at the closing of this offering and the other Organizational Transactions.
(7) These share numbers do not give effect to the exercise of the underwriters’ option to purchase additional shares of our Class A common stock. We intend to use any net proceeds we receive as a result of any such exercise to purchase Class B units (and shares of Class B common stock) held by our Sponsor at a price equal to the initial public offering price less the underwriting discounts and commissions and a pro rata portion of the structuring fee. In that event, the number of shares of Class B common stock will be reduced and the number of shares of Class A common stock will be increased by a corresponding amount.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of our Class A common stock sold in this offering will exceed the as adjusted net tangible book value per share of our Class A common stock after the offering. Net tangible book value per share of our Class A common stock as of a particular date represents the amount of our total tangible assets less our total liabilities divided by the number of shares of Class A common stock outstanding as of such date. As of March 31, 2014, after giving effect to the Formation Transactions, our net tangible book value would have been approximately $169.0 million, or $2.12 per share of Class A common stock, assuming that our Sponsor and Riverstone exchanged all of their Terra LLC Class B units and Class B1 units, as applicable, for newly-issued shares of our Class A common stock on a one-for-one basis. Purchasers of our Class A common stock in this offering will experience substantial and immediate dilution in net tangible book value per share of our Class A common stock for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per share

      $ 24.00  

Net tangible book value per share as of March 31, 2014 after giving effect to the Formation Transactions

   $ 2.12      

Increase in as adjusted net tangible book value per share attributable to purchasers in this offering and the Private Placements

     5.31      
  

 

 

    

Net tangible book value per share after giving effect to the Organizational Transactions, including this offering and the Private Placements and the use of proceeds therefrom

        7.43   
     

 

 

 

Immediate dilution in net tangible book value per share to purchasers in this offering and the Private Placements

      $ 16.57   
     

 

 

 

Because our Sponsor and Riverstone do not currently own any Class A common stock, we have presented dilution in net tangible book value per share of Class A common stock to investors in this offering assuming that our Sponsor and Riverstone exchanged their Terra LLC Class B units and Class B1 units, as applicable, for newly-issued shares of our Class A common stock on a one-for-one basis in order to more meaningfully present the dilutive impact on the purchasers in this offering.

If the underwriters exercise their option to purchase additional shares of our Class A common stock in full, the net tangible book value per share after giving effect to the offering would be $7.45 per share due to the decrease in Class B common stock owned by Sponsor and the equivalent increase in Class A common stock purchased by the underwriters. This represents an increase in net tangible book value of $5.31 per share to our existing stockholders and dilution in net tangible book value of $16.57 per share to purchasers in this offering.

 

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The following table sets forth, as of March 31, 2014, the differences among the number of shares of Class A common stock purchased, the total consideration paid or exchanged and the average price per share paid by (i) our Sponsor and the management stockholders, (ii) Riverstone and the purchasers in the Private Placements and (iii) purchasers of our Class A common stock in this offering, based on our assumed initial public offering price of $24.00 per share and assuming that our Sponsor and Riverstone exchanged all of their Terra LLC Class B units or Class B1 units, as applicable, for shares of our Class A common stock on a one-for-one basis and no exercise of the underwriters’ option to purchase additional shares of Class A common stock.

 

     Shares of Class A
Common Stock
    Total Consideration     Average Price  
     Number      Percent     Amount      Percent     Per Share  

Our Sponsor and management stockholders(1)

     71,264,871         70.5   $ 198,483        21.7   $ 2.79   

Riverstone and the Private Placement purchasers and affiliates

     9,689,118         9.6   $ 232,539         25.5   $ 24.00  

Purchasers in the offering

     20,065,000         19.9   $ 481,560        52.8   $ 24.00  

 

(1) The assets contributed by our Sponsor in the Initial Asset Transfers will be recorded at historical cost. The book value of the consideration to be provided by our Sponsor in the Initial Asset Transfers as of March 31, 2014 was approximately $198.5 million.

 

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CASH DIVIDEND POLICY

You should read the following discussion of our cash dividend policy in conjunction with “—Assumptions and Considerations” below, which includes the factors and assumptions upon which we base our cash dividend policy. In addition, you should read “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

This forecast of future operating results and cash available for distribution in future periods is based on the assumptions described below and other assumptions believed by us to be reasonable as of the date of this prospectus. However, we cannot assure you that any or all of these assumptions will be realized. These forward-looking statements are based upon estimates and assumptions about circumstances and events that have not yet occurred and are subject to all of the uncertainties inherent in making projections. This forecast should not be relied upon as fact or as an accurate representation of future results. Future results will be different from this forecast and the differences may be materially less favorable.

For additional information regarding our historical combined consolidated results of operations, you should refer to our audited historical combined consolidated financial statements as of and for the years ended December 31, 2012 and 2013 and unaudited historical combined consolidated financial statements as of and for the three months ended March 31, 2013 and 2014 included elsewhere in this prospectus.

General

We intend to pay regular quarterly cash dividends to holders of our Class A common stock. Our quarterly dividend will initially be set at $0.2257 per share of our Class A common stock, or $0.9028 per share on an annualized basis, and the amount may be changed in the future without advance notice. We established our initial quarterly dividend level based upon a targeted payout ratio by Terra LLC of approximately 85% of projected annual cash available for distribution. We expect to pay a quarterly dividend on or about the 75th day following the expiration of each fiscal quarter to holders of our Class A common stock of record on or about the 60th day following the last day of such fiscal quarter. With respect to our first dividend payable on December 15, 2014 to holders of record on December 1, 2014, assuming a completion date of July 23, 2014, we intend to pay a pro-rated initial dividend of $0.1717 per share.

We intend to cause Terra LLC to distribute approximately 85% of its CAFD to its members, including to us as the sole holder of the Class A units, to our Sponsor as the sole holder of the Class B units and to Riverstone as the holder of Class B1 units, pro rata based on the number of units held, and, if applicable, to the holders of the IDRs (all of which will initially be held by our Sponsor). However, during the Subordination Period described below, the Class B units held by our Sponsor are deemed “subordinated” because for a three-year period, the Class B units will not be entitled to receive any distributions from Terra LLC until the Class A units and Class B1 units have received quarterly distributions in an amount equal to $0.2257 per unit, or the “Minimum Quarterly Distribution,” plus any arrearages in the payment of the Minimum Quarterly Distribution from prior quarters. The practical effect of the subordination of the Class B units is to increase the likelihood that during the Subordination Period there will be sufficient CAFD to pay the Minimum Quarterly Distribution on the Class A units (and Class B1 units, if any).

Our Sponsor has further agreed to forego any distributions on its Class B units declared prior to March 31, 2015, and thereafter has agreed to a reduction of distributions on its Class B units until the expiration of the Distribution Forbearance Period. The amount of the distribution reduction during the

 

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Distribution Forbearance Period is based on the percentage of the As Delivered CAFD compared to the expected CAFD attributable to the Contributed Construction Projects. The practical effect of this forbearance is to ensure that the Class A units will not be affected by delays in completion of the Contributed Construction Projects. All of the projects in our initial portfolio have already reached COD or are expected to reach COD prior to the end of 2014, including the Contributed Construction Projects. For a description of the IDRs, the Subordination Period and the Distribution Forbearance Period, including the definitions of Subordination Period, As Delivered CAFD, Distribution Forbearance Period and CAFD Forbearance Threshold see “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

Rationale for our Dividend

We have established our initial quarterly dividend level after considering the amount of cash we expect to receive from Terra LLC as a result of our membership interest in Terra LLC after this offering. In accordance with its operating agreement and our capacity as the sole managing member, we intend to cause Terra LLC to make regular quarterly cash distributions to its members in an amount equal to cash available for distribution generated during a particular quarter, less reserves for working capital needs and the prudent conduct of our business, and to use the amount distributed to us to pay regular quarterly dividends to holders of our Class A common stock.

Our cash available for distribution is likely to fluctuate from quarter to quarter, in some cases significantly, as a result of the seasonality of our assets, and maintenance and outage schedules, among other factors. Accordingly, during quarters in which Terra LLC generates cash available for distribution in excess of the amount necessary to distribute to us to pay our stated quarterly dividend, we may cause it to reserve a portion of the excess to fund its cash distribution in future quarters. In quarters in which we do not generate sufficient cash available for distribution to fund our stated quarterly cash dividend, if our board of directors so determines, we may use sources of cash not included in our calculation of cash available for distribution, such as net cash provided by financing activities, receipts from network upgrade reimbursements from certain United States utility projects, all or any portion of the cash on hand or, if applicable, borrowings under our Revolver, to pay dividends to holders of our Class A common stock. Although these other sources of cash may be substantial and available to fund a dividend payment in a particular period, we exclude these items from our calculation of cash available for distribution because we consider them non-recurring or otherwise not representative of the operating cash flows we typically expect to generate.

Estimate of Future Cash Available for Distribution

We primarily considered forecasted cash available for distribution in assessing the amount of cash that we expect our assets will be able to generate for the purposes of our initial dividend. Accordingly, we believe that an understanding of cash available for distribution is useful to investors in evaluating our ability to pay dividends pursuant to our stated cash dividend policy. In general, we expect that “cash available for distribution” each quarter will equal net cash provided by (used in) operating activities of Terra LLC, calculated pursuant to GAAP,

 

    plus or minus changes in assets and liabilities as reflected on our statements of cash flows,

 

    minus deposits into (or plus withdrawals from) restricted cash accounts required by project financing arrangements to the extent they decrease (or increase) cash provided by operating activities,

 

    minus cash distributions paid to non-controlling interests in our projects, if any,

 

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    minus scheduled project-level and other debt service and payments and repayments in accordance with the related loan amortization schedules, to the extent they are paid from operating cash flows during a period,

 

    minus non-expansionary capital expenditures, if any, to the extent they are paid from operating cash flows during a period,

 

    plus operating costs and expenses paid by our Sponsor pursuant to the Management Services Agreement to the extent such costs or expenses exceed the fee payable by us pursuant to such agreement but otherwise reduce our net cash provided by operating activities,

 

    plus cash contributions from our Sponsor pursuant to the Interest Payment Agreement, and

 

    plus or minus operating items as necessary to present the cash flows we deem representative of our core business operations, with the approval of our audit committee.

Limitations on Cash Dividends and our Ability to Change our Cash Dividend Policy

There is no guarantee that we will pay quarterly cash dividends to holders of our Class A common stock. We do not have a legal obligation to pay our initial quarterly dividend or any other dividend. Our cash dividend policy may be changed at any time and is subject to certain restrictions and uncertainties, including the following:

 

    As the sole managing member of Terra LLC, we and, accordingly, our board of directors will have the authority to establish, or cause Terra LLC to establish, cash reserves for working capital needs and the prudent conduct of our business, and the establishment of or increase in those reserves could result in a reduction in cash dividends from levels we currently anticipate pursuant to our stated cash dividend policy. These reserves may account for the fact that our project-level cash flows may vary from year to year based on, among other things, changes in prices under offtake agreements for energy and renewable energy credits and other environmental attributes, other project contracts, changes in regulated transmission rates, compliance with the terms of non-recourse project-level financing, including debt repayment schedules, the transition to market or recontracted pricing following the expiration of offtake agreements, domestic and international tax laws and tax rates, working capital requirements and the operating performance of the assets. Furthermore, our board of directors may increase, or cause Terra LLC to increase reserves to account for the seasonality that has historically existed in our assets’ cash flows and the variances in the pattern and frequency of distributions to us from our assets during the year.

 

    Prior to Terra LLC making any cash distributions to its members, Terra LLC will reimburse our Sponsor and its affiliates for certain governmental charges they incur on our behalf pursuant to the Management Services Agreement. Terra LLC’s operating agreement will not limit the amount of governmental charges for which our Sponsor and its affiliates may be reimbursed. The Management Services Agreement will provide that our Sponsor will determine in good faith the governmental charges that are allocable to us. Accordingly, the reimbursement of governmental charges and payment of fees, if any, to our Sponsor and its affiliates will reduce the amount of our cash available for distribution.

 

    Section 170 of the DGCL allows our board of directors to declare and pay dividends on the shares of our Class A common stock either:

 

    out of its surplus, as defined in and computed in accordance with the DGCL; or

 

    in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

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    We may lack sufficient cash to pay dividends to holders of our Class A common stock due to cash flow shortfalls attributable to a number of operational, commercial or other factors, including low availability, as well as increases in our operating and/or general and administrative expenses, principal and interest payments on our outstanding debt, income tax expenses, working capital requirements or anticipated cash needs at our project-level subsidiaries.

 

    Terra LLC’s cash distributions to us and, as a result, our ability to pay or grow our dividends is dependent upon the performance of our subsidiaries and their ability to distribute cash to us. The ability of our project-level subsidiaries to make cash distributions to Terra LLC may be restricted by, among other things, the provisions of existing and future indebtedness, applicable state corporation laws and other laws and regulations.

Our Ability to Grow our Business and Dividend

We intend to grow our business primarily through the acquisition of contracted clean power generation assets, which, we believe, will facilitate the growth of our cash available for distribution and enable us to increase our dividend per share over time. However, the determination of the amount of cash dividends to be paid to holders of our Class A common stock will be made by our board of directors and will depend upon our financial condition, results of operations, cash flow, long-term prospects and any other matters that our board of directors deems relevant.

We expect that we will rely primarily upon external financing sources, including commercial bank borrowings and issuances of debt and equity securities, to fund any future growth capital expenditures. To the extent we are unable to finance growth externally, our cash dividend policy could significantly impair our ability to grow because we do not currently intend to reserve a substantial amount of cash generated from operations to fund growth opportunities. If external financing is not available to us on acceptable terms, our board of directors may decide to finance acquisitions with cash from operations, which would reduce or even eliminate our cash available for distribution and, in turn, impair our ability to pay dividends to holders of our Class A common stock. To the extent we issue additional shares of capital stock to fund growth capital expenditures, the payment of dividends on those additional shares may increase the risk that we will be unable to maintain or increase our per share dividend level. There are no limitations in our bylaws or certificate of incorporation (other than a specified number of authorized shares), and there will not be any limitations under our Revolver, on our ability to issue additional shares of capital stock, including preferred stock that would have priority over our Class A common stock with respect to the payment of dividends. Additionally, the incurrence of additional commercial bank borrowings or other debt to finance our growth would result in increased interest expense, which in turn may impact our cash available for distribution and, in turn, our ability to pay dividends to holders of our Class A common stock.

 

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Minimum Quarterly Distribution

Upon completion of this offering, the amended and restated operating agreement of Terra LLC will provide that, during the Subordination Period, the holders of Class A units (and Class B1 units, if any), will have the right to receive the “Minimum Quarterly Distribution” of $0.2257 per unit for each whole quarter, or $0.9028 per unit on an annualized basis, before any distributions are made to the holders of Class B units. The payment of the full Minimum Quarterly Distribution on all of the Class A units, Class B1 units and Class B units to be outstanding after completion of this offering would require Terra LLC to have CAFD of approximately $22.8 million per quarter, or $91.2 million per year (assuming an 85% payout ratio). Terra LLC’s ability to make cash distributions at the Minimum Quarterly Distribution rate will be subject to the factors described above under “—Limitations on Cash Dividends.” The table below sets forth the amount of Class A units, Class B units and Class B1 units that will be outstanding immediately after this offering and the CAFD needed to pay the aggregate Minimum Quarterly Distribution on all of such units for a single fiscal quarter and a four-quarter period (assuming no exercise and full exercise of the underwriters’ option to purchase additional shares of Class A common stock):

 

    No exercise of option to purchase additional
Class A common stock
    Full exercise of option to purchase additional
Class A common stock
 
    Aggregate minimum quarterly distributions     Aggregate minimum quarterly distributions  
    Number of
Units
    One
Quarter
    Four
Quarters
    Number of
Units
    One
Quarter
    Four
Quarters
 

Class A units

    27,724,712      $ 6,257,467      $ 25,029,870        30,734,462      $ 6,936,768      $ 27,747,072   

Class B units

    67,210,944        15,169,510        60,678,040        64,201,194        14,490,210        57,960,838   

Class B1 units

    6,083,333        1,373,008        5,492,033        6,083,333        1,373,008        5,492,033   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    101,018,990      $ 22,799,986      $ 91,199,944        101,018,990      $ 22,799,986      $ 91,199,944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We intend to use any net proceeds we receive as a result of the exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase Class B units (and Class B common stock) held by our Sponsor at a price equal to the initial public offering price less the underwriting discounts and commissions and a pro rata portion of the structuring fee, and immediately cancel such Class B units (and shares of Class B common stock) contemporaneously with Terra LLC issuing Class A units to us. When we purchase a Class B unit (and share of Class B stock) from our Sponsor and contemporaneously receive a Class A unit, the aggregate minimum quarterly distribution with respect to the Class A units and Class B units will increase or decrease, respectively, by $0.2257 per quarter and by $0.9028 per four quarters.

Subordination of Class B Units

During the Subordination Period, holders of the Class B units are not entitled to receive any distribution until the Class A units and Class B1 units (if any) have received the Minimum Quarterly Distribution for the current quarter plus any arrearages in the payment of the Minimum Quarterly Distribution from prior quarters. The Class B units will not accrue arrearages.

To the extent Terra LLC does not pay the Minimum Quarterly Distribution on the Class A units and Class B1 units, holders of such units will not be entitled to receive such payments in the future except during the Subordination Period. To the extent Terra LLC has CAFD in any future quarter during the Subordination Period in excess of the amount necessary to pay the Minimum Quarterly Distribution to holders of its Class A units and Class B1 units, Terra LLC will use this excess cash to pay any distribution arrearages on Class A units and Class B1 units related to prior quarters ending during the Subordination Period before any cash distribution is made to holders of Class B units. After

 

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the Subordination Period ends, Class A units and Class B1 units will not accrue arrearages. Please read “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions—Subordination Period.”

Distribution Forbearance Period

Our Sponsor has further agreed to forego any distributions on its Class B units with respect to the third or fourth quarter of 2014 (i.e., distributions declared on or prior to March 31, 2015), and thereafter has agreed to a reduction of distributions on its Class B units until the expiration of the Distribution Forbearance Period. The amount of the distribution reduction during the Distribution Forbearance Period is based on the percentage of the As Delivered CAFD compared to the expected CAFD from such Contributed Construction Projects attributable to the Contributed Construction Projects (and substitute projects contributed by our Sponsor). See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014

If we had completed the Organizational Transactions on January 1, 2013, our unaudited cash available for distribution for the year ended December 31, 2013 and the three months ended March 31, 2014 would have been approximately $23.0 million and $9.1 million, of which $5.4 million and $2.1 million, respectively, would have been distributed by Terra LLC to TerraForm Power as the holder of Class A units of Terra LLC. These amounts would have been insufficient to pay the full quarterly cash dividend on all of our Class A common stock to be outstanding immediately after completion of this offering based on our initial quarterly dividend of $0.2257 per share of our Class A common stock per quarter (or $0.9028 per share on an annualized basis).

Our calculation of unaudited pro forma cash available for distribution includes the management fee payable to our Sponsor under the Management Services Agreement. The calculation also reflects all costs of doing business, including all expenses paid by our Sponsor in excess of the payments required under the Management Services Agreement. These costs include incremental general and administrative expenses as a result of being a publicly traded company, including costs associated with SEC reporting requirements, independent auditor fees, investor relations activities, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation, because those expenses will be paid by our Sponsor under the Management Services Agreement.

Our unaudited pro forma consolidated financial statements, from which our unaudited cash available for distribution was derived, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. Furthermore, cash available for distribution is a cash method concept, while our predecessor’s historical financial statements were prepared on an accrual basis. We derived the amounts of unaudited cash available for distribution stated above in the manner shown in the table below. As a result, the amount of unaudited pro forma cash available should only be viewed as a general indicator of the amount of cash available for distribution that we might have generated had we been formed and completed the transactions contemplated in this prospectus in earlier periods.

 

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The footnotes to the table below provide additional information about the adjustments and should be read along with the table.

 

(in thousands except share and per share data)    Pro Forma
For the Year Ended
December 31, 2013
    Pro Forma
For the Three
Months Ended
March 31, 2014
 

Operating revenues

   $ 45,452      $ 24,751   

Operating costs and expenses:

    

Cost of operations

     5,816        2,474   

Depreciation and accretion

     15,495        10,771   

General and administration(1)

     18,090        5,188   
  

 

 

   

 

 

 

Total operating costs and expenses

     39,401        18,433   
  

 

 

   

 

 

 

Operating income

     6,051        6,318   

Other (income) expense:

    

Interest expense, net

     42,504        22,263   

Other (income) expense

     (873     370   
  

 

 

   

 

 

 

Total other expense

     41,631        22,633   
  

 

 

   

 

 

 

Income before income tax benefit

     (35,580     (16,315

Income tax benefit

     (15,202     (4,189
  

 

 

   

 

 

 

Net loss

     (20,378     (12,126
  

 

 

   

 

 

 

Add:

    

Depreciation, amortization and accretion

     22,102        13,534   

Interest expense, net

     42,504        22,263   

Income tax expense (benefit)

     (15,202     (4,189

Stock compensation expense

     7,981        2,223   
  

 

 

   

 

 

 

Adjusted EBITDA(2)

   $ 37,007      $ 21,705   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net income

     (20,378     (12,126

Depreciation, amortization, and accretion

     22,102        13,534   

Other non-cash items

     15,257        5,772   

Changes in assets and liabilities

     (37,360     7,969   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ (20,379   $ 15,149   
  

 

 

   

 

 

 

Adjustments to reconcile net cash provided by operating activities to cash available for distributions:

    

Net cash provided by operating activities

   $ (20,379   $ 15,149   

Changes in assets and liabilities

     37,360        (7,969

Deposits into/withdrawals from restricted cash accounts paid from operating cash flows

     —          —     

Cash distributions to non-controlling interests

     —          —     

Scheduled project-level and other debt service repayments

     (12,302     (2,663

Non-expansionary capital expenditures(3)

     —          —     

Contributions received pursuant to the Interest Payment Agreement with our Sponsor(4)

     18,283        4,571   

Other items

     —          —     
  

 

 

   

 

 

 

Estimated cash available for distribution

   $ 22,962      $ 9,088   
  

 

 

   

 

 

 

Estimated cash available for distribution to holders of Class A common stock(5)

   $ 6,302      $ 2,494   

Estimated aggregate annual dividend

   $ 5,357      $ 2,120   

Shares of Class A common stock

     27,724,712        27,724,712   

Estimated dividend per share of Class A common stock

   $ 0.1932      $ 0.0765   

 

(1) Reflects all costs of doing business, including all expenses paid by our Sponsor in excess of the payments required under the Management Services Agreement.

 

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(2) Adjusted EBITDA, and cash available for distribution are non-GAAP measures. You should not consider these measures as alternatives to net income (loss), determined in accordance with GAAP, or net cash provided by operating activities, determined in accordance with GAAP. For definitions of Adjusted EBITDA and cash available for distribution and a complete discussion of their limitations, see footnotes (1) and (2), respectively, under the heading “Summary Historical and Pro Forma Financial Data” elsewhere in this prospectus.
(3) Represents capital expenditures for maintenance and up-keep associated with our project portfolio.
(4) Represents contributions received from our Sponsor pursuant to the Interest Payment Agreement. These contributions are recurring for three years beginning with the origination of the Term Loan. See “Certain Relationships and Related Party Transactions—Interest Payment Agreement.”
(5) Does not give effect to any reductions of distributions on the Class B units during the Distribution Forbearance Period.

Estimated Cash Available for Distribution for the 12 Months Ending June 30, 2015 and December 31, 2015

We forecast that our cash available for distribution during the 12 months ending June 30, 2015 and December 31, 2015 will be approximately $89.5 million and $107.3 million, respectively, of which we forecast $25.0 million (on an annualized basis) will be distributed by Terra LLC to TerraForm Power as the holder of Class A units of Terra LLC for the 12 months ending June 30, 2015 and $25.0 million for 12 months ending December 31, 2015. This amount (together with our other sources of liquidity) would be sufficient to pay our initial quarterly dividend of $0.2257 per share on all outstanding shares of our Class A common stock immediately after completion of this offering for each quarter in the 12 months ending June 30, 2015 and December 31, 2015. Based on the assumptions described below, we forecast total available liquidity of $373.0 million (including $140.0 million of availability under the Revolver) as of December 31, 2015, assuming that we do not acquire any additional projects prior to that date.

We are providing this forecast to supplement our predecessor’s historical combined consolidated financial statements and to support our belief that we will have sufficient cash available for distribution to allow Terra LLC to make distributions to TerraForm Power as the holder of Class A units of Terra LLC in amounts sufficient to allow TerraForm Power to pay a regular quarterly dividend on all of our outstanding Class A common stock immediately after completion of this offering for each quarter in fiscal year 2014, at our initial quarterly dividend of $0.2257 per share (or $0.9028 per share on an annualized basis). Please read “—Assumptions and Considerations” for further information as to the assumptions we have made for the forecast.

Our forecast is a forward-looking statement and reflects our judgment as of the date of this prospectus of the conditions we expect to exist and the course of action we expect to take with respect to our initial portfolio of projects during each of the 12-month periods ending June 30, 2015 and December 31, 2015. Although acquisitions are an important part of our growth strategy, the forecast does not include the effects of, and we have not included any adjustments with respect to, any acquisitions we may complete during the period covered by our forecast. It should be read together with the historical combined financial statements and the accompanying notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We believe that we have a reasonable basis for these assumptions and that our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. The assumptions and estimates underlying the forecast, as described below under “—Assumptions and Considerations,” are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic, and competitive risks and uncertainties that could cause actual results to differ materially from forecasted results, including, among others, the risks and uncertainties described in “Risk Factors.” For purposes of our forecast, we have assumed that no unexpected risks will materialize during the forecast periods. Any of the risks discussed in this prospectus, to the extent they occur, could cause actual results of operations to vary significantly from

 

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those that would enable us to generate sufficient cash available for distribution to allow Terra LLC to make distributions in amounts sufficient to allow us to pay the aggregate annualized regular quarterly dividend on all outstanding shares of our Class A common stock for the 12-month periods ending June 30, 2015 and December 31, 2015, calculated at the initial quarterly dividend rate of $0.2257 per share per quarter (or $0.9028 per share on an annualized basis). Accordingly, there can be no assurance that the forecast will be indicative of our future performance or that actual results will not differ materially from those presented in the forecast. If our forecasted results are not achieved, we may not be able to pay a regular quarterly dividend to holders of our Class A common stock at our initial quarterly dividend level or at all. Inclusion of the forecast in this prospectus should not be regarded as a representation by us, the underwriters or any other person that the results contained in the forecast will be achieved.

The accompanying forecast was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to our forecast, nor have they expressed any opinion or any other form of assurance on our forecast or its achievability, and our independent auditors assume no responsibility for, and disclaim any association with, our forecast.

We do not undertake any obligation to release publicly any revisions or updates that we may make to the forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the date of this prospectus. In light of this, the statement that we believe that we will have sufficient cash available for distribution (together with our other sources of liquidity) to allow Terra LLC to make distributions to TerraForm Power as the holder of Class A units of Terra LLC in amounts sufficient to allow TerraForm Power to pay the full regular quarterly dividend on all of our Class A common stock outstanding immediately after the completion of this offering for each quarter in the 12-month periods ending June 30, 2015 and December 31, 2015 (based on our initial quarterly dividend rate of $0.2257 per share per quarter (or $0.9028 per share on an annualized basis) should not be regarded as a representation by us, the underwriters or any other person that we will pay such dividends. Therefore, you are cautioned not to place undue reliance on this information.

 

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TerraForm Power, Inc.

Estimated Cash Available for Distribution

 

     12 Months Ending  
(in thousands except share and per share data)    June 30, 2015     December 31, 2015  

Operating revenues

   $ 217,200      $ 234,700   

Operating costs and expenses:

    

Cost of operations

     34,800        36,400   

Depreciation, amortization and accretion

     70,900        76,500   

General and administration(1)

     12,800        11,800   
  

 

 

   

 

 

 

Total operating costs and expenses

     118,500        124,700   
  

 

 

   

 

 

 

Operating income

     98,700        110,000   

Interest expense, net

     73,700        73,100   
  

 

 

   

 

 

 

Income before income tax expense

     25,000        36,900   

Income tax expense

     9,700        14,400   
  

 

 

   

 

 

 

Net income

     15,300        22,500   
  

 

 

   

 

 

 

Add:

    

Depreciation, amortization and accretion

     70,900        76,500   

Interest expense, net

     73,700        73,100   

Income tax expense

     9,700        14,400   

Stock compensation expense

     7,400        6,300   
  

 

 

   

 

 

 

Adjusted EBITDA(2)

   $ 177,000      $ 192,800   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net income

   $ 15,300      $ 22,500   

Depreciation, amortization and accretion

     70,900        76,500   

Non cash items

     20,800        22,800   

Changes in assets and liabilities

     (10,300     6,300   

Other

     (500     (600
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 96,200      $ 127,500   
  

 

 

   

 

 

 

Adjustments to reconcile net cash provided by operating activities to cash available for distributions:

    

Net cash provided by operating activities

   $ 96,200      $ 127,500   

Changes in assets and liabilities

     10,300        (6,300

Deposits into/withdrawals from restricted cash accounts

     3,000        6,100   

Cash distributions to non-controlling interests

     (4,000     (6,400

Scheduled project-level and other debt service and repayments

     (26,900     (30,800

Non-expansionary capital expenditures(3)

     (600     (400

Contributions received pursuant to the Interest Payment Agreement with our Sponsor(4)

     15,700        15,600   

Other

     (4,200     2,000   
  

 

 

   

 

 

 

Estimated cash available for distribution

   $ 89,500      $ 107,300   
  

 

 

   

 

 

 

Estimated cash available for distribution to holders of Class A common stock(5)

   $ 24,563      $ 29,449   

Estimated aggregate annualized dividend

   $ 25,032      $ 25,032   

Shares of Class A common stock

     27,724,712        27,724,712   

Estimated annualized dividend per share of Class A common stock

   $ 0.9028      $ 0.9028   

 

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(1) Reflects all costs of doing business associated with the initial portfolio, including all expenses paid by our Sponsor in excess of the payments received under the Management Services Agreement, and stock compensation expense,
(2) Adjusted EBITDA and cash available for distribution are non-GAAP measures. You should not consider these measures as alternatives to net income (loss), determined in accordance with GAAP, or net cash provided by operating activities, determined in accordance with GAAP. For definitions of Adjusted EBITDA and cash available for distribution and a complete discussion of their limitations, see footnotes (1) and (2), respectively, under the heading “Summary Historical and Pro Forma Financial Data” elsewhere in this prospectus.
(3) Represents capital expenditures for maintenance and up-keep associated with our project portfolio.
(4) Represents contributions received from our Sponsor pursuant to the Interest Payment Agreement. These contributions are recurring for three years beginning with the origination of the Term Loan. See “Certain Relationships and Related Party Transactions—Interest Payment Agreement.”
(5) Does not give effect to any reductions of distributions on the Class B Units during the Distribution Forbearance Period.

Assumptions and Considerations

Set forth below are the material assumptions that we have made to demonstrate our ability to generate our estimated Adjusted EBITDA and estimated cash available for distribution for each of the 12 months ending June 30, 2015 and December 31, 2015. The forecast has been prepared by and is the responsibility of our management. Our forecast reflects our judgment of the conditions we expect to exist and the course of action we expect to take during the forecast period. While the assumptions disclosed in this prospectus are not all inclusive, such assumptions are those that we believe are material to our forecasted results of operations. We believe we have a reasonable basis for these assumptions. We believe that our historical results of operations will approximate those reflected in our forecast. However, we can give no assurance that our forecasted results will be achieved. We have assumed that no unexpected risks will materialize during the forecast periods. There will likely be differences between our forecasted and our historical results, and those differences may be material. If our forecast is not achieved, we may not be able to pay cash dividends on our Class A common stock at the initial quarterly dividend level or at all.

General Considerations

 

    The forecast assumes that in July 2014, we will raise net proceeds of $445.2 million in this offering (after deducting underwriting discounts and commissions) through the issuance of 20,065,000 of our shares of Class A common stock at a price of $24.00 per share and gross proceeds of $65.0 million of gross proceeds from the sale of 2,708,333 shares of our Class A common stock in the Private Placements. We have also assumed that immediately following the completion of this offering, Terra LLC will have 27,724,712 Class A units and 67,210,944 Class B units outstanding and that all of such Class A units will be held by TerraForm Power. The forecast also assumes that the proceeds of this offering will be used as described in “Use of Proceeds” elsewhere in this prospectus and that in connection with the completion of this offering, the other transactions contemplated upon under the heading “Summary—Organizational Transactions” will have been completed on or prior to the closing of this offering (other than the exercise by the underwriters of their option to purchase additional shares of our Class A common stock).

 

    The historical period for the 12 months ended December 31, 2013 includes the results for our U.S. Projects 2009-2013, which have a total nameplate capacity of 15.2 MW. The majority of these assets were operational for the full year ended December 31, 2013, except for 0.6 MW that achieved COD in March 2013 and 1.3 MW that achieved COD in September 2013. The historical period for the 12 months ended December 31, 2013 also includes Alamosa and SunE Solar Fund X, which have a total nameplate capacity of 8.2 MW and 8.8 MW, respectively. The historical period also includes five months of Enfinity, which has a total nameplate capacity of 15.7 MW.

 

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    The forecast periods include the results of the Stonehenge Q1, Stonehenge Operating and Norrington asset acquisitions in the U.K., the Marsh Hill asset acquisition and Summit Solar (Canada) in Canada and the Nellis, CalRENEW-1, Atwell Island, Summit Solar (US), MA Operating, and Mt. Signal acquisitions in the U.S., all of which are included in our initial portfolio. The Stonehenge Q1 project reflects a portfolio of three solar energy projects, which we expect to reach COD before the end of the second quarter of 2014. The Norrington project is expected to reach COD before the end of the second quarter of 2014, the Marsh Hill project is expected to achieve COD in the fourth quarter of 2014 and all other acquired projects are operational and will be included in the forecast from the date of acquisition.

 

    The forecast periods include the results of operations for contributed projects, which include Regulus Solar, U.S. Projects 2014, North Carolina Portfolio, SunE Perpetual Lindsay, Says Court, Crucis Farm, CAP and California Public Institutions projects. These projects either reached COD in the second quarter of 2014 or are expected to reach COD at various times during the second half of 2014.

 

    Revenues reflect the terms specified in the PPAs for 100% of energy production. The electricity pricing used in the forecast is based on our expected annual electricity generation and long-term, contracted sales under PPAs, including renewable energy certificates, or “RECs,” and renewables obligation certificates, or “ROCs.” The term “RECs” is used generically throughout this prospectus to include both renewable energy credits and solar renewable energy credits.

 

    Cost of operations and expenses are forecast based on historical experience, contracted service arrangements and other management estimates. We believe the forecast cost structure is reasonable based on leveraging our existing infrastructure, our experience in operating the projects, and expected economies of scale from the additional contributed and acquired projects.

 

    The forecast assumes our projects will operate within budgeted operating costs, including with respect to operations and maintenance activities pursuant to our O&M agreements and that there will be no unusual, non-recurring or unexpected operating, repair or maintenance charges.

 

    The historical period and the forecast periods only include projects that are in our initial portfolio and do not include any of the Call Right Projects.

Total Operating Revenue

We estimate that we will generate total operating revenue of $217.2 million for the 12 months ending June 30, 2015 and $234.7 million for the 12 months ending December 31, 2015, compared to $17.5 million for the year ended December 31, 2013. The increase in our forecasted periods compared to the historical period is attributed to higher generation as a result of the additional contributed and acquired projects referenced in the general considerations. We estimate Megawatts in operation will average 733 MW for the 12 months ending June 30, 2015 and will average 808 MW for the period ending December 31, 2015, compared to 32 MW for the period ending December 31, 2013. Our revenues are primarily a result of the energy produced at our projects and the rates for incentives and rates for sale of generation established under power purchase agreements for each project. We estimate 1,325,000 MWh’s of production for the 12 months ending June 30, 2015, and 1,450,000 MWh’s for the 12 months ending December 31, 2015, compared to 60,176 MWh’s for the 12 months ending December 31, 2013. We estimate that 22% and 20% of total operating revenues will come from incentives in the 12 month periods ending June 30, 2015 and December 31, 2015, respectively, compared to 49% for the period ending December 31, 2013. The decrease in the incentive revenue as a percent of total operating revenues is primarily due to the increase in MWh’s of operating projects and mix of countries without incentives in the forecast periods compared to the historical periods.

 

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Cost of Operations

We estimate that we will incur a cost for operations expense of $34.8 million for the 12 months ending June 30, 2015 and $36.4 million for the 12 months ending December 31, 2015, compared to $1.9 million for the year ended December 31, 2013. This increase in our forecasted periods from the historical period is primarily attributed to the additional contributed and acquired projects referenced in the general considerations.

Depreciation, Amortization and Accretion

We estimate that we will incur depreciation, amortization and accretion expense of $70.9 million for the 12 months ending June 30, 2015 and $76.5 million for the 12 months ending December 31, 2015 compared to $5.0 million for the year ended December 31, 2013. This increase in our forecasted periods from the historical period is primarily attributed to the additional contributed and acquired projects referenced in the general considerations. Forecasted depreciation, amortization and accretion expense reflects management’s estimates, which are based on consistent average depreciable asset lives and depreciation methodologies under GAAP. We have assumed that the average depreciable asset lives are 30 years for our solar energy systems.

General and Administration

We estimate that we will incur general and administration expenses of $12.8 million for the 12 months ending June 30, 2015 and $11.8 for the 12 months ended December 31, 2015, compared to $5.4 million for the year ended December 31, 2013. These expenses include stock compensation expense of $7.4 million and $6.3 million during the 12 months ended June 30, 2015 and December 31, 2015, respectively, and all costs of doing business, including all expenses paid by our Sponsor in excess of the payments required under the Management Services Agreement.

Capital Expenditures

We define growth capital expenditures as costs incurred by our Sponsor for contributed projects and payments to third parties for acquired projects. We estimate these costs to be $483.0 million for the 12 months ending June 30, 2015 and $0 million for the 12 months ending December 31, 2015, compared to $205.4 million for the year ended December 31, 2013.

Financing and Other

We estimate that interest expense will be $73.7 million for the 12 months ending June 30, 2015 and $73.2 million for the 12 months ending December 31, 2015, compared to $6.3 million for the year ended December 31, 2013. The increase is primarily attributed to additional project level debt and indebtedness borrowed under our Term Loan or Revolver to finance our growth capital expenditures. Forecasted interest expense is based on the following assumptions:

 

    we estimate that our debt level will be approximately $1,185 million as of June 30, 2015 and $1,164 million as of December 31, 2015; and

 

    we estimate that our borrowing costs will average 6.2% and 6.3% for the 12-month periods ending June 30, 2015 and December 31, 2015, respectively.

We estimate that principal amortization of indebtedness will be $26.9 million for the 12 months ending June 30, 2015 and $30.8 million for the 12 months ending December 31, 2015, compared to $3.5 million for the year ended December 31, 2013. The increase is primarily attributed to additional amortization following COD for projects in our initial portfolio and acquisitions.

 

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Our Projects

The forecast above assumes that our portfolio of projects will consist of our initial portfolio during the relevant periods. See “Summary—Our Initial Portfolio and the Call Right Projects.” We have assumed that each of the Contributed Construction Projects will be completed on schedule for the budgeted construction costs. We have assumed that we will not make any additional acquisitions during the forecast period, other than those included in our initial portfolio.

MWh Sold

Our ability to generate sufficient cash available for distribution to pay dividends to holders of our Class A common stock is primarily a function of the volume of electricity generated and sold by our solar energy projects as well as, to a lesser extent, where applicable, the sale of green energy certificates and other environmental attributes related to energy generation. The volume of electricity generated and sold by our projects during a particular period is also impacted by the number of projects that have commenced commercial operations, as well as both scheduled and unexpected repair and maintenance required to keep our projects operational. The volume of electricity generated and sold by our projects will be negatively impacted if any projects experience higher than normal downtime as a result of equipment failures, electrical grid disruption or curtailment, weather disruptions or other events beyond our control. We have assumed that unscheduled outages during the forecast periods will be consistent with our historical experience.

As of March 31, 2014, the weighted average (based on MW) remaining life of our PPAs was 20 years. Pricing under the PPAs is fixed for the duration of the contract for all projects other than those located in the United Kingdom or Massachusetts. In the case of our U.K. projects, the price for electricity is fixed for a specified period of time (typically four years), after which the price is subject to an adjustment based on the current market price (subject to a price floor). The prices for green energy certificates are fixed by U.K. laws or regulations, and certain other attributes are indexed to prices set by U.K. laws or regulations. In the case of our Massachusetts projects, a portion of the contracted revenue is fixed and the remainder is subject to an adjustment based on the current market price. Of the projects in our initial portfolio, approximately 83% of our nameplate MW capacity is represented by PPAs with fixed-pricing for the duration of the contract and approximately 17% of our nameplate MW capacity is represented by PPAs that contain price adjustments tied to energy market indices after a stated period of time. Fixed-pricing PPAs include those which have a fixed base price and are adjusted with an inflation index.

Regulatory, Industry and Economic Factors

Our estimated results of operations for the forecasted period are based on the following assumptions related to regulatory, industry and economic factors:

 

    no material nonperformance or credit-related defaults by customers, suppliers, our Sponsor or any of our customers;

 

    no new or material amendments to federal, state, local or foreign laws or regulations (including tax laws, tariffs and regulations), or interpretation or application of existing laws or regulations, relating to renewable energy generally, or solar energy specifically, that in either case will be materially adverse to our business or our suppliers’, our Sponsor’s or any of our customers’ businesses or operations;

 

    no material adverse effects to our business, industry or our suppliers’, our Sponsor’s or any of our customers’ businesses or operations on account of natural disasters;

 

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    no material adverse change resulting from supply disruptions, reduced demand for electricity or electrical grid or interconnection disruption or curtailment;

 

    no material adverse changes in market, regulatory and overall economic conditions; and

 

    no material adverse changes in the existing regulatory framework, such as regulations relating to net metering or third party ownership of electrical generation.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2013 and the three months ended March 31, 2014 have been derived from our accounting predecessor’s financial data (as derived from the historical condensed combined consolidated financial statements appearing elsewhere in this prospectus) and give pro forma effect to the Organizational Transactions, including the use of the estimated net proceeds from this offering and the Acquisitions, as if they had occurred on January 1, 2013. The unaudited pro forma condensed consolidated balance sheet as of March 31, 2014 gives effective to the Organizational Transactions, including the use of the estimated proceeds from this offering and the Acquisitions, as if they had occurred on such date. We derived the following unaudited pro forma condensed consolidated financial statements by applying pro forma adjustments to the historical condensed combined consolidated financial statements of our accounting predecessor, or the “Predecessor,” included elsewhere in this prospectus. The historical combined consolidated financial statements as of and for the year ended December 31, 2013 and the historical condensed combined consolidated financial statements as of and for the three months ended March 31, 2014 appearing elsewhere in this prospectus are intended to represent the financial results of our Sponsor’s solar assets that will be contributed to Terra LLC as part of the Initial Asset Transfers for that period.

The Formation Transactions for which we have made pro forma adjustments are as follows:

 

    the Initial Asset Transfers of the Contributed Projects;

 

    the Acquisitions considered probable, including our pending acquisition of the Mt. Signal project;

 

    Terra LLC’s entry into the new $250.0 million Bridge Facility on March 28, 2014 to fund the acquisition by Terra LLC of solar projects developed by unaffiliated third parties prior to the completion of this offering; and

 

    the amendment to the Bridge Facility to increase the aggregate principal amount to $400.0 million.

The Offering Transactions for which we have made pro forma adjustments are as follows:

 

    the amendment and restatement of TerraForm Power’s certificate of incorporation to provide for both Class A common stock, Class B common stock and Class B1 common stock, and the concurrent conversion of (i) SunEdison’s interest in TerraForm Power’s common equity into shares of Class B common stock and (ii) certain equity interests held by certain of our executives and other employees of SunEdison into shares of Class A common stock;

 

    the issuance of restricted stock units to be granted to several persons who have provided or are expected to provide services to us in connection with the completion of this offering, or the “IPO Grants”;

 

    the amendment of Terra LLC’s operating agreement to provide for Class A units, Class B units and Class B1 units and to convert SunEdison’s units into Class B units, issue the IDRs to our Sponsor and appoint TerraForm Power as the sole managing member of Terra LLC;

 

    the sale of 20,065,000 shares of our Class A common stock to the purchasers in this offering in exchange for net proceeds of approximately $445.2 million, after deducting underwriting discounts and commissions but before offering expenses;

 

    the sale of 2,708,333 shares of our Class A common stock to the purchasers in the Private Placements in exchange for gross proceeds of $65.0 million, after deducting fees payable to underwriters in connection with such shares but before expenses;

 

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    our use of $436.0 million of the net proceeds from this offering and the Private Placements to purchase newly- issued Class A units of Terra LLC directly from Terra LLC, and our use of all remaining net proceeds to purchase Class B units (and Class B common stock) from our Sponsor at a price equal to the price per share in this offering, less underwriting discounts and commissions and a pro rata portion of the structuring fee, following which those Class B units (and the related shares of Class B common stock) will be cancelled and Terra LLC will issue to us an equal number of Class A units, collectively representing 22.5% of Terra LLC’s outstanding membership units (or 25.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    Terra LLC’s use of such proceeds of $436.0 million to repay certain project-level indebtedness, to repay a portion of the Bridge Facility (including accrued interest), to pay fees for the Term Loan and Revolver and to fund the acquisition of certain projects from our Sponsor;

 

    Terra Operating LLC’s execution of a new $140.0 million Revolver, which will remain undrawn at the completion of this offering, and a $300.0 million Term Loan to refinance any remaining borrowings under the Bridge Facility; and

 

    our entering into the Management Services Agreement and Interest Payment Agreement with our Sponsor.

The pro forma adjustments we have made in respect of the Acquisitions are as follows:

 

    adjustments to reflect payment of cash to sellers, and to record acquired assets and assumed liabilities at their fair value;

 

    adjustments to reflect depreciation and amortization of fair value adjustments for acquired property, plant and equipment, and intangible assets, and debt assumed; and

 

    adjustments to reflect operating activity.

The Unaudited Pro Forma Condensed Consolidated Financial Statements, or the “pro forma financial statements,” combine the historical combined consolidated financial statements of the Predecessor and the Acquired Projects to illustrate the effect of the Acquisitions. The pro forma financial statements were based on, and should be read in conjunction with:

 

    the accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements;

 

    the combined consolidated financial statements of Predecessor for the year ended December 31, 2013 and for the three months ended March 31, 2014 and the notes relating thereto, included elsewhere in this prospectus; and

 

    the consolidated financial statements of Acquired Projects purchased from third parties for the year ended December 31, 2013 and for the three months ended March 31, 2014 and the notes relating thereto, included elsewhere in this prospectus.

The historical combined consolidated financial statements have been adjusted in the pro forma financial statements to give pro forma effect to events that are (1) directly attributable to the acquisition, (2) factually supportable and (3) with respect to the pro forma statements of operations, expected to have a continuing impact on the combined results.

As described in the accompanying notes, the unaudited condensed consolidated pro forma financial statements have been prepared using the acquisition method of accounting under existing United States generally accepted accounting principles, or GAAP. The Predecessor has been treated

 

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as the acquirer in the Acquisitions for accounting purposes. The purchase price will be allocated to the Acquired Projects’ assets and liabilities based upon their estimated fair values as of the date of completion of the applicable Acquisitions. The allocation is dependent on certain valuations and other studies that have not progressed to a stage where there is sufficient information to make a final definitive allocation. A final determination of the fair value of the Acquired Projects’ assets and liabilities, which cannot be made prior to the completion of the transactions, will be based on the actual net tangible and intangible assets of the Acquired Projects that existed as of the date of completion of the applicable Acquisitions. Accordingly, the pro forma purchase price adjustments are preliminary, subject to future adjustments, and have been made solely for the purpose of providing the unaudited pro forma condensed consolidated financial information presented below. Adjustments to these preliminary estimates are expected to occur and these adjustments could have a material impact on the accompanying unaudited pro forma financial statements, although we do not expect the adjustments to have a material effect on the combined company’s future results of operations and financial position.

The unaudited pro forma condensed consolidated financial statements are presented for informational purposes only. The unaudited pro forma condensed consolidated financial statements do not purport to represent what our results of operations or financial condition would have been had the transactions to which the pro forma adjustments relate actually occurred on the dates indicated, and they do not purport to project our results of operations or financial condition for any future period or as of any future date.

We have not made any pro forma adjustments to our historical combined consolidated statement of operations for the year ended December 31, 2013 and condensed combined consolidated financial statements as of and for the three months ended March 31, 2014 relating to the historical operations of the Stonehenge Q1, Marsh Hill and Norrington projects that will be part of our initial portfolio, as such projects have not yet commenced commercial operations and are not otherwise material as compared to our historical condensed combined consolidated financial statements.

The unaudited pro forma condensed consolidated balance sheet and statement of operations should be read in conjunction with the sections entitled “Summary—Organizational Transactions,” “Use of Proceeds,” “Capitalization,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

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Unaudited Pro Forma Consolidated Statement of Operations

for the Three Months Ended March 31, 2014

 

                Pro Forma Adjustments     TerraForm
Power, Inc.

Pro Forma
 
(in thousands except share
and per share data)
  Predecessor     Predecessor
Acquisitions(1)
    Acquisition
Adjustments
    Formation
Transactions
    Offering
Transactions
   

Statement of Operations Data:

           

Operating revenues:

           

Energy

  $ 10,174      $ 11,949      $ (4,934 )(2)   $ —        $ —        $ 17,189   

Incentives

    1,567        3,685        2,171 (2)      —          —          7,423   

Incentives—affiliate

    139        —          —          —          —          139   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    11,880        15,634        (2,763     —          —          24,751   

Operating costs and expenses:

           

Cost of operations

    460        1,595        —          —          —          2,056   

Cost of operations— affiliate

    352        66        —          —          —          418   

Depreciation, amortization and accretion

    3,241        9,764        (2,233 )(3)      —          —          10,771   

General and administrative

    98        1,277        —          124 (7)      2,099 (7)      3,598   

General and administrative —affiliate

    1,590        —          —          —          —          1,590   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    5,741        12,702        (2,233     124        2,099        18,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    6,139        2,932        (530     (124     (2,099     6,318   

Other (income) expense:

           

Interest expense, net

    7,082        10,664        (1,077 )(4)      5,594 (8)      —          22,263   

Loss (gain) on foreign currency exchange

    595        (225     —          —          —          370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense

    7,677        10,439        (1,077     5,594        —          22,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

    (1,538     (7,507     547        (5,718     (2,099     (16,315

Income tax benefit

    (457     (33     (728 )(5)      (2,173 )(5)      (798 )(5)      (4,189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (1,081     (7,474     1,275        (3,545     (1,301     (12,126

Less net (loss) income attributable to non-controlling interest

    (361     (4,934 )     1 (6)      (3,025 )(9)      —          (8,319
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to TerraForm Power

  $ (720   $ (2,540   $ 1,274      $ (520   $ (1,301   $ (3,807
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma basic and diluted loss per share(10)

    —         —         —          —          —        $ (0.14

Pro Forma weighted average shares outstanding(10)

    —         —         —          —          —          27,724,712   

 

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Notes to the Unaudited Pro Forma Consolidated Statements of Operations

 

(1) The following table represents the consolidating schedule of predecessor Acquired Projects results reflected in the unaudited pro forma consolidated statement of operations for the three months ended March 31, 2014.

 

(in thousands)   Nellis     CalRENEW-1     Atwell
Island
    Summit
Solar
    Stonehenge
Operating(a)
    Mt. Signal     All
Other
    Predecessor
Acquisitions
 

Statement of Operations Data:

               

Operating revenues:

               

Energy

  $ 154      $ 470      $ 864      $ 725      $ 341      $ 8,944      $ 451      $ 11,949   

Incentives

    1,524        —          —          742        562        —          857        3,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

    1,678        470        864        1,467        903        8,944        1,308        15,634   

Operating costs and expenses:

               

Cost of operations

    96        100        19        97        48        1,232        3        1,595   

Cost of operations—affiliate

   
—  
  
    —          —          —          66        —          —          66   

Depreciation, amortization, and accretion

    1,061        136        756        706        627        5,528        950        9,764   

General and administrative

    89        —          268        266        159        312        183        1,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    1,246        236        1,043        1,069        900        7,072        1,136        12,702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    432        234        (179     398        3        1,872        172        2,932   

Interest expense, net

    750        475        348        443        683        7,965        —          10,664   

Other expense (income)

    —          —          —          —          (225     —          —          (225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    750        475        348        443        458        7,965        —          10,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    (318     (241     (527     (45     (455     (6,093     172        (7,507

Income tax expense (benefit)

    —          —          —          —          (33     —          —          (33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (318     (241     (527     (45 )       (422     (6,093     172        (7,474

Less net loss attributable to non-controlling interest

    —          —          —          (1     —          (4,933     —          (4,934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to TerraForm Power

  $ (318   $ (241   $ (527   $ (44   $ (422   $ (1,160   $ 172      $ (2,540
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) The statements of operations for the three months ended March 31, 2014 have been translated from British pounds (GBP) to U.S. dollars (USD) at a rate of £1.655 GBP/USD.

 

(2) Amortization of power purchase agreements intangible—Represents $2.8 million of amortization of acquired off-market PPAs over the terms of such agreements resulting from fair value adjustments of the Acquired Projects and a $2.2 million reclassification of green energy credit revenue for Mt. Signal from energy revenues to incentive revenues. The estimate of the amortization of the PPA intangible is preliminary, subject to change and could vary materially from the actual adjustment at the time the acquisition is completed.

 

(3) Depreciation and amortization—Represents the net depreciation expense resulting from the fair value adjustments of the Acquired Projects’ property, plant and equipment. The fair values of property, plant and equipment acquired were valued primarily using a cost approach and limited to what is economically supportable as indicated by an income approach. Under this approach, the fair value approximates the current cost of replacing an asset with another of equivalent economic utility adjusted for functional obsolescence and physical depreciation. The estimate is preliminary, subject to change and could vary materially from the actual adjustment at the time the acquisition is completed. The estimated useful life of the property, plant and equipment acquired range from 24 to 29 years. Approximately  125 of the change in fair value adjustments to property, plant and equipment would be recognized annually.

 

(4) Interest expense—Represents the elimination of interest expense related to debt not assumed, the elimination of interest expense on terminated financing lease arrangements, and a reduction of interest expense related to purchase accounting fair value adjustments for debt assumed. The fair value of debt was estimated based on market rates for similar project-level debt.

 

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(5) Income taxes—Adjustment to record the tax effect of pro forma adjustments to revenue and expense, and to give pro forma effect to the conversion of the historical operations of the predecessor acquisitions from a non-taxable basis to a taxable basis, calculated using the Predecessor’s estimated combined statutory federal, foreign, and state tax rate of 38.0% applied to net loss after noncontrolling interest. The noncontrolling interest share of net loss is not subject to income tax.

 

(6) Represents the elimination of the earnings allocated to non-controlling interest for our acquisition of Summit Solar, which non-controlling interest was acquired by the seller prior to the acquisition.

 

(7) Represents stock compensation expense of approximately $0.1 million related to the grants of restricted stock to certain employees in connection with the formation of TerraForm Power, and $2.1 million of stock compensation expense related to the IPO Grants, which will be recognized over a three year service period.

 

(8) Interest expense is adjusted to include: (i) lower interest for debt repaid, (ii) higher interest for acquired debt (recognized at a market interest rate of 5.25% at the time of acquisition), and (iii) higher interest under the Term Loan. Total interest is estimated to be equal to approximately 5.25% of total pro forma indebtedness, less an estimate of capitalized interest, plus an estimate of amortization of debt issuance costs and discounts. The actual interest rates may vary from that estimate and a 1/8% variance in the estimated interest rate would result in a $0.4 million change in pro forma interest expense for the three months ended March 31, 2014.

 

(9) TerraForm Power will become the sole managing member of Terra LLC subsequent to completion of the Initial Asset Transfers. After completion of the Organizational Transactions, TerraForm Power will own less than 100% of the economic interests in Terra LLC but will have 100% of the voting power and control the management of Terra LLC. In addition, Terra LLC will own less than 100% of the consolidated project entities. Giving pro forma effect to the Organizational Transactions, including the use of proceeds from this offering as if each had occurred on January 1, 2013, the non-controlling interest would have been 72.6% of the net loss of Terra LLC, which received less than 100% of the income from the underlying consolidated project entities. The amount of net loss attributable to non-controlling interests in the project is unchanged from the historical owned and acquired results as such amounts are not effected by the Formation Transactions or the Offering Transactions.

 

(10) The pro forma basic and diluted loss per share is calculated as follows:

 

(in thousands except share and per share data)    Basic     Diluted  

EPS Numerator:

    

Net loss attributable to Class A common stock

   $ (3,807 )   $ (3,807 )
  

 

 

   

 

 

 

EPS Denominator:

    

Class A shares offered hereby

     20,065,000        20,065,000   

Private Placement of Class A shares

     2,708,333        2,708,333   

Restricted Class A shares

     4,951,379        4,951,379   
  

 

 

   

 

 

 

Total Class A shares

     27,724,712        27,724,712   
  

 

 

   

 

 

 

Loss per share

   $ (0.14   $ (0.14