424B3 1 d827028d424b3.htm 424B3 424B3
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-200829

PROSPECTUS

11,666,667 Shares

 

LOGO

TerraForm Power, Inc.

Class A Common Stock

 

 

This prospectus relates to the resale of up to 11,666,667 shares of our Class A common stock, which may be offered for sale from time to time by the selling stockholders named in this prospectus. The shares of our Class A common stock covered by this prospectus were issued by us to the selling stockholders in a private offering which closed on November 26, 2014, as more fully described in this prospectus.

The selling stockholders may from time to time sell, transfer or otherwise dispose of any or all of their shares of Class A common stock in a number of different ways and at varying prices. See “Plan of Distribution” beginning on page 230 of this prospectus for more information.

Our Class A common stock trades on the NASDAQ Global Select Market under the symbol “TERP.” The last reported trading price of shares of our Class A common stock on January 5, 2015 was $30.26.

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read this entire prospectus and any amendments or supplements carefully before you make your investment decision.

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 30 to read 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.

Prospectus Dated January 9, 2015.


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     30   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     77   

USE OF PROCEEDS

     79   

CAPITALIZATION

     80   

MARKET PRICE OF OUR CLASS A COMMON STOCK

     81   

CASH DIVIDEND POLICY

     82   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

     86   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     101   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     103   

INDUSTRY

     129   

BUSINESS

     137   

MANAGEMENT

     173   

EXECUTIVE OFFICER COMPENSATION

     179   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     185   

SELLING STOCKHOLDERS

     188   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     193   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     217   

DESCRIPTION OF CAPITAL STOCK

     222   

PLAN OF DISTRIBUTION

     230   

LEGAL MATTERS

     232   

EXPERTS

     232   

WHERE YOU CAN FIND MORE INFORMATION

     233   

We have not and the selling stockholders 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. The selling stockholders 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.

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 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

 

i


Table of Contents

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,” with respect to solar generation assets, and measurements of alternating current, or “AC,” with respect to wind generation assets.

Certain Defined Terms

Unless the context provides otherwise, references herein to:

 

    “COD” refers to commercial operations date;

 

    “IPO” refers to our initial public offering in July 2014;

 

    “PPAs” refers to our long-term power purchase agreements and energy hedge contracts;

 

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

 

    “Support Agreement” refers to the project support agreement entered into with our Sponsor in connection with our IPO;

 

    “Terra LLC” refers to TerraForm Power, LLC;

 

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

 

    “we,” “our,” “us,” “our company” and “TerraForm Power” refer to TerraForm Power, Inc., together with, where applicable, its consolidated subsidiaries.

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

 

ii


Table of Contents

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 third parties. Our business objective is to acquire high-quality contracted cash flow, primarily from owning solar and wind generation assets serving utility, commercial and residential customers. Over time, we intend to acquire other clean power generation assets, including natural gas and hydro-electricity facilities, 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 the increasing cost of producing electricity from fossil fuels caused by required investments in generation plants and transmission and distribution infrastructure and increasing regulatory costs, among other factors.

Our current portfolio consists of solar projects located in the United States, Canada, the United Kingdom and Chile with an aggregate nameplate capacity of 985.8 MW. As of our IPO, our portfolio consisted of projects with an aggregate nameplate capacity of 807.7 MW. Since then, we acquired several Call Right Projects from our Sponsor with a total net capacity of 75.1 MW and also completed the Hudson Energy Acquisition (as defined herein), in which we acquired 25.5 MW of operating solar power assets, and the Capital Dynamics Acquisition (as defined herein), in which we acquired an additional 77.6 MW of operating solar power assets. In November 2014, we agreed to acquire 521.1 MW of operating power assets, including 500.0 MW of wind power assets and 21.1 MW of solar power assets, in the First Wind Acquisition (as defined herein) for a total consideration of $862.0 million. If the First Wind Acquisition is consummated, our portfolio will include both solar and wind projects and will increase to a total nameplate capacity of 1,506.9 MW.

In addition to growing our current portfolio, our pipeline of call right projects has increased since the IPO. As of November 30, 2014, the Call Right Projects that are specifically identified pursuant to the Support Agreement have a total nameplate capacity of 1.7 GW. Additionally, in connection with the First Wind Acquisition, we entered into an Intercompany Agreement with our Sponsor, or the “Intercompany Agreement,” under which we will be granted additional call rights with respect to certain projects in the First Wind pipeline, which are expected to represent an additional 1.6 GW of wind and solar generation assets. If the First Wind Acquisition is consummated, the total nameplate capacity of the projects to which we have call rights under both the Intercompany Agreement and the Support Agreement will be over 3.3 GW. We anticipate the First Wind Acquisition will close in the first quarter of 2015. See “—Recent Developments—Acquisition Transactions.”

We intend to further expand and diversify our current project portfolio by acquiring utility-scale, distributed and residential assets located in the United States, Canada, the United Kingdom, Chile and

 

 

1


Table of Contents

any other mutually agreed upon jurisdiction, substantially all of which we expect will have a long-term PPA with a creditworthy counterparty. Substantially all of the projects we will acquire in the First Wind Acquisition have a long-term PPA with a creditworthy counterparty, and the weighted average (based on MW) remaining life of our PPAs if the First Wind Acquisition is consummated would be approximately 16 years as of September 30, 2014.

Further 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 third party developers and owners of clean generation assets in our core markets. As of September 30, 2014, our Sponsor had a 4.6 GW pipeline of development stage solar projects. An additional 1.6 GW pipeline of solar and wind development projects will be acquired by our Sponsor if the First Wind Acquisition is consummated. In addition, our Sponsor is a leading operator of solar power plants with approximately 3.0 GW of total nameplate capacity under management. Our Sponsor has provided 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 PPAs we have with creditworthy counterparties, our dedicated management team and our Sponsor’s project origination and asset management capabilities.

We entered into the Support Agreement with our Sponsor in connection with our IPO, which requires 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, or “CAFD,” during the first 12 months following the qualifying projects’ respective COD, 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 our IPO through the end of 2015, 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 COD; and

 

    during calendar year 2016, 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 COD.

If the amount of Projected FTM CAFD of the projects we acquire under the Support Agreement 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. Since our IPO, our Sponsor has updated the list of Call Right Projects, with projects representing a further 1.7 GW of total nameplate capacity identified as Call Right Projects as of November 30, 2014. We believe the currently identified Call Right Projects, along with the 75.1 MW of Call Right Projects we have acquired from our Sponsor since our IPO, will be sufficient to satisfy a majority of the Projected FTM CAFD commitment for 2015 and between 45% and 70% of the Projected FTM CAFD commitment for 2016 (depending on the amount of debt financing we use for such projects).

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, Canada, the United Kingdom, Chile and any other mutually agreed upon jurisdiction that our Sponsor decides to sell or otherwise transfer during the six-year period following the completion of our IPO. 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

 

 

2


Table of Contents

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.

In addition to the Call Right Projects under the Support Agreement, pursuant to the Intercompany Agreement we will have additional call rights with respect to certain projects in the First Wind pipeline, which are expected to represent an additional 1.6 GW of wind and solar generation assets from 2015 to 2017, subject to the consummation of the First Wind Acquisition. These additional call right projects will not count towards our Sponsor’s Projected FTM CAFD commitment under the Support Agreement.

 

 

3


Table of Contents

Our Portfolio and the Call Right Projects

The following table provides an overview of the assets that comprise our portfolio as of December 31, 2014:

 

                           

PPAs

 

Project Names

  Location   COD(1)   Nameplate
Capacity
(MW)(2)
    # of
Sites
    Project
Origin(3)
 

Counterparty

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

Distributed Generation:

               

CD DG Portfolio

  U.S.   2011-2014     77.6        39      A  

Various utilities and

commercial and

governmental entities

  A-, A3     19   

U.S. Projects 2014

  U.S.   Q2 2014-Q4
2014
    45.4        41      C   Various utilities, municipalities and commercial entities   A+, A1     20   

Hudson Energy

  U.S.   2011-2013     25.5        101      A   Various commercial, residential and governmental entities   A+, A1     15   

DG 2014 Portfolio 1

  U.S.   Q4 2014-Q2
2015
    23.1        19      S   Various commercial and governmental entities   A+, A1     20   

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+, A3     19   

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   

DG 2015 Portfolio 2

  U.S.   Q1 2015-Q3
2015
    2.6        2      S   Various municipalities   AA-, Aa3     20   
     

 

 

   

 

 

         

Subtotal

        263.0        369           

 

 

4


Table of Contents
                           

PPAs

 

Project Names

  Location   COD(1)   Nameplate
Capacity
(MW)(2)
    # of
Sites
    Project
Origin(3)
 

Counterparty

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

Utility:

               

Mt. Signal

  U.S.   Q1 2014     265.9        1      A   San Diego Gas & Electric   A, A1     24   

Regulus Solar

  U.S.   Q4 2014     81.6        1      C   Southern California Edison   BBB+, A2     20   

North Carolina Portfolio

  U.S.   Q4 2014-

Q1 2015

    26.0        4      C   Duke Energy Progress   BBB+, A1     15   

Atwell Island

  U.S.   Q1 2013     23.5        1      A   Pacific Gas & Electric Company   BBB, A3     23   

Nellis

  U.S.   Q4 2007     14.1        1      A   U.S. Government (PPA); Nevada Power Company (RECs)(6)   AA+, Aaa,
BBB+, Baa2
    13   

Alamosa

  U.S.   Q4 2007     8.2        1      C   Xcel Energy   A-, A3     13   

CalRENEW-1

  U.S.   Q2 2010     6.3        1      A   Pacific Gas & Electric Company   BBB, A3     16   

Marsh Hill

  Canada   Q2 2015     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

  U.K.   Q2 2014     41.1        3      A   Statkraft AS   A-, Baa1     15   

Crundale

  U.K.   Q4 2014     37.8        1      S   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   

Fairwinds

  U.K.   Q4 2014     12.2        1      S   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   Compañia Minera del Pacifico (CMP)   BBB-, NR     19   
     

 

 

   

 

 

         

Subtotal

        722.8        24           
     

 

 

   

 

 

         

Total Portfolio

        985.8        393           
     

 

 

   

 

 

         

 

(1) Represents actual or anticipated COD, as applicable, unless otherwise indicated.
(2) Nameplate capacity for solar projects 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.

 

 

5


Table of Contents
(3) Projects which were contributed by our Sponsor prior to our IPO, or “Contributed Projects,” are reflected in the Predecessor’s combined consolidated historical financial statements, and are identified with a “C” above. Projects which were acquired either contemporaneously with the completion of our IPO or in the period since our IPO are identified with an “A” above. Projects which have been sold to us by our Sponsor in the period since our IPO are identified with an “S” 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:

 

    CD DG Portfolio: 99%

 

    U.S. Projects 2014: 82%

 

    Hudson Energy: 54%

 

    DG 2014 Portfolio 1: 59%

 

    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%

 

    DG 2015 Portfolio 2: 38%

 

(5) Calculated as of September 30, 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 13 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—Current Portfolio—Utility Projects—CAP.”

The projects in our 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. Substantially all of the projects in our 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 flow to fund the regular quarterly cash dividends that we intend to continue to pay to holders of our Class A common stock. The Call Right Projects generally are not expected to reach COD until the first quarter of 2015 or later.

The Support Agreement has established an aggregate cash purchase price that, when taken together with applicable project-level debt, equals $850.1 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.

 

 

6


Table of Contents

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 further 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 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 identified pursuant to the Support Agreement as of December 31, 2014:

 

Project Names(1)

   Country    Estimated Acquisition
Date(2)
   Nameplate
Capacity
(MW)(3)
     # of Sites  

Priced Call Right Projects

           

Ontario 2015 projects

   Canada    Q2 2015 - Q2 2016      15.9         44   

UK projects #1-13

   UK    Q1 2015 - Q2 2015      179.4         13   

Chile project #1

   Chile    Q1 2015      41.7         1   

US DG 2015 projects

   US    Q1 2015 - Q4 2015      56.6         46   

Chile project #2

   Chile    Q1 2016      94.0         1   
        

 

 

    

 

 

 

Total Priced Call Right Projects

           387.6         105   

Unpriced Call Right Projects

           

US DG 2015 projects

   US    Q1 2015 - Q4 2015      61.5         68   

US AP North Lake I

   US    Q2 2015      24.1         1   

US Bluebird

   US    Q2 2015      7.8         1   

US River Mountains Solar

   US    Q4 2015      18.0         1   

US Kingfisher

   US    Q4 2015      6.5         1   

US Western project #1

   US    Q2 2016      156.0         1   

US Island project #1

   US    Q2 2016      65.0         1   

US Southwest project #1

   US    Q3 2016      100.0         1   

US Utah project #1

   US    Q3 2016      163.0         2   

US California project #1

   US    Q3 2016      55.0         1   

Tenaska Imperial Solar Energy Center West

   US    Q4 2016      72.5         1   

US California project #2

   US    Q4 2016      46.0         1   

US DG 2016 projects

   US    Q1 2016 - Q4 2016      54.5         12   

US California projects #3-4

   US    2016-2019      516.0         2   
        

 

 

    

 

 

 

Total Unpriced Call Right Projects

           1,344.0         94   

Total 2015 Projects

           411.5         176   

Total 2016 Projects

           1,322.0         23   
        

 

 

    

 

 

 

Total Call Right Projects

           1,733.5         199   

 

 

7


Table of Contents

The following table provides an overview of the projects that will become part of our portfolio upon consummation of the First Wind Acquisition. We may not be able to complete the First Wind Acquisition on a timely basis or at all, and none of the Acquisition Financing Transactions are conditioned upon the completion of the First Wind Acquisition. See “—Recent Developments—First Wind Acquisition.”

 

                                 

PPAs

 

Project Names

  Location     COD(1)     Nameplate
Capacity
(MW)(2)
    # of
Sites
    Project
Origin(3)
   

Counterparty

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

Wind:

               

Cohocton

    U.S.        2009        125.0        1        A      Citigroup Energy   A-, Baa2     6   

Rollins

    U.S.        2011        60.0        1        A      Central Maine Power; Bangor Hydro Electric   BBB+, A3; NR,
NR
    17, 17   

Stetson I

    U.S.        2009        57.0        1        A      Exelon Generation Company   BBB, Baa2     5   

Mars Hill

    U.S.        2007        42.0        1        A      New Brunswick Power(5)   A+, Aa2     <1   

Sheffield

    U.S.        2011        40.0        1        A      City of Burlington; Vermont Electric Cooperative; Washington Electric Cooperative   NR, NR; NR,
NR; NR, NR
    7, 17, 17   

Bull Hill

    U.S.        2012        34.5        1        A      NSTAR   A-, Baa1     13   

Kaheawa Wind Power I

    U.S.        2006        30.0        1        A      Maui Electric Company   BBB-, NR     12   

Kahuku

    U.S.        2011        30.0        1        A      Hawaiian Electric Company   BBB-, Baa1     16   

Stetson II

    U.S.        2010        25.5        1        A      Exelon Generation Company; Harvard University   BBB, Baa2;
NR, NR
    5, 11   

Kaheawa Wind Power II

    U.S.        2012        21.0        1        A      Maui Electric Company   BBB-, NR     18   

Steel Winds I

    U.S.        2007        20.0        1        A      Morgan Stanley Capital Group   A-, Baa2     5   

Steel Winds II

    U.S.        2012        15.0        1        A      Morgan Stanley Capital Group   A-, Baa2     5   
     

 

 

   

 

 

         

Subtotal

        500.0        12           

Solar:

               

MA Solar

    U.S.        2014        21.1        4        A      Various municipalities and universities   A+, A1(6)     24   
     

 

 

   

 

 

         

Subtotal

        21.1        4           
     

 

 

   

 

 

         

Total First Wind Portfolio

        521.1        16           
     

 

 

   

 

 

         

 

(1) Represents actual or anticipated COD, as applicable, unless otherwise indicated.
(2) Nameplate capacity for solar projects 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 any noncontrolling interests in a partnership). Nameplate capacity for wind facilities represents the manufacturer’s maximum nameplate generating capacity of each turbine multiplied by the number of turbines at a facility multiplied by our anticipated 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.
(3) Projects which will be acquired in connection with the First Wind Acquisition are identified with an “A” above.
(4) Calculated as of September 30, 2014. For distributed generation projects, the number represents a weighted average (based on nameplate capacity) of remaining duration.
(5) First Wind is currently in the process of negotiating an extension to the PPA with New Brunswick Power.
(6) 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 the MA Solar project is 39%.

 

 

8


Table of Contents

The following table provides an overview as of December 31, 2014 of the projects in the First Wind pipeline to which we expect to be granted additional call rights pursuant to the Intercompany Agreement:

 

Project Names

   Country      Estimated
Acquisition
Date(1)
     Nameplate
Capacity
(MW)(2)
     # of
Sites
 

Solar Projects

           

Mililani Solar I

     U.S.         Q4 2015         26.0         1   

Seven Sisters

     U.S.         Q4 2015         22.6         7   

Kawailoa Solar

     U.S.         Q4 2016         65.0         1   

Waiawa

     U.S.         Q4 2016         61.1         1   

Mililani Solar II

     U.S.         Q4 2016         19.5         1   

Four Brothers

     U.S.         Q4 2016         400.0         4   
        

 

 

    

 

 

 

Total Intercompany Solar Projects

           594.2         15   

Wind Projects

           

South Plains

     U.S.         Q4 2015         200.0         1   

Oakfield

     U.S.         Q4 2015         147.6         1   

South Plains II

     U.S.         Q4 2015         150.0         1   

Bingham

     U.S.         Q4 2016         184.8         1   

Hancock

     U.S.         Q4 2016         51.0         1   

Weaver

     U.S.         2017         73.6         1   

Rattlesnake

     U.S.         2017         62.0         1   

Route 66 II

     U.S.         2017         100.0         1   

Bowers

     U.S.         2017         48.0         1   
        

 

 

    

 

 

 

Total Intercompany Wind Projects

           1,017.0         9   

Total 2015 Projects

           546.2         11   

Total 2016 Projects

           781.4         9   

Total 2017 Projects

           283.6         4   
        

 

 

    

 

 

 

Total Intercompany Projects

           1,611.2         24   

The following table shows the total projects to which we expect to have call rights under both the Intercompany Agreement and the Support Agreement, if the First Wind Acquisition is consummated:

 

               Nameplate
Capacity
(MW)(2)
     # of
Sites
 

Total 2015 Projects

           957.7         187   

Total 2016 Projects

           2,103.4         32   

Total 2017 Projects

           283.6         4   
        

 

 

    

 

 

 

Total

           3,344.7         223   

 

(1) Represents date of anticipated acquisition. The acquisition date is subject to change, including to preserve the project’s eligibility for federal governmental incentives including Investment Tax Credits or Production Tax Credits.
(2)

Nameplate capacity for solar projects 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 any non-controlling interests in a partnership). Nameplate capacity for wind facilities represents

 

 

9


Table of Contents
  the manufacturer’s maximum nameplate generating capacity of each turbine multiplied by the number of turbines at a facility multiplied by our anticipated percentage ownership of that facility (disregarding any equity interests held by any tax equity investor or lessor under any sale-leaseback financing or any noncontrolling interests in a partnership). Generating capacity may vary based on a variety of factors discussed elsewhere in this prospectus.

 

 

10


Table of Contents

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 portfolio has, and we expect substantially all of the projects that we acquire from our Sponsor or others 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 flow consistent with our portfolio. We believe industry trends will support significant growth opportunities for long-term contracted power in the clean power generation segment as various markets in our target geographies 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 1.7 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. If the First Wind Acquisition is consummated, we will also be granted call rights with respect to projects in the First Wind pipeline expected to represent an additional 1.6 GW of wind and solar generation assets from 2015 to 2017. 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 classes. Our current focus is on the solar and wind energy segments because we believe they are currently the fastest growing segments of the clean power generation industry and offer attractive opportunities to own assets and deploy long-term capital due to the predictability of their cash flow. In particular, we believe the solar and wind segments are attractive because there is no associated fuel cost risk and the relevant technologies have become highly reliable. We also believe the declining levelized costs of energy for solar and wind projects will enable these asset classes to continue to add additional MW of completed projects to our portfolio and enable us to gain market share. Solar and wind projects also have an expected life which can exceed 30 years. In addition, the solar and wind energy generation projects in or to be added to our portfolio generally operate under long-term PPAs with terms, in some cases of up to 30 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 and wind generation assets in the United States, 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 include (i) a risk and credit policy focused on transacting with creditworthy counterparties, (ii) a financing policy focused on

 

 

11


Table of Contents

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 portfolio provides us with significant diversification in terms of market segment, counterparty and geography. Our operating projects, in the aggregate, represent 985.8 MW of nameplate capacity, which consist of 722.8 MW of nameplate capacity from utility projects and 263.0 MW of nameplate capacity of commercial, industrial, government and residential customers. If the First Wind Acquisition is consummated, our portfolio will include both solar and wind projects and will increase to an aggregate of 1,506.9 MW of nameplate capacity, consisting of 1,222.8 MW of nameplate capacity from utility projects and 284.1 MW of nameplate capacity of commercial, industrial, government and residential customers. Of the projects in our portfolio, no single project accounts for more than 20% of our total MW nameplate capacity assuming the First Wind Acquisition is consummated. 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. Over time, as we acquire additional projects from our Sponsor and third parties, we expect to become further diversified.

Stable, high-quality cash flow. Our portfolio of projects, together with the Call Right Projects, the projects to which we expect to have call rights under the Intercompany Agreement and third-party projects that we acquire, provide us with a stable, predictable cash flow profile. We sell substantially all of the electricity generated by our projects under long-term PPAs with creditworthy counterparties. The weighted average (based on MW) remaining life of our PPAs would be approximately 16 years, as of September 30, 2014, if the First Wind Acquisition is consummated. The weighted average credit rating (based on nameplate capacity) of the counterparties to the PPAs for the projects in our portfolio would be A-/A3, which includes only those counterparties that are rated by S&P, Moody’s or both (representing approximately 90% of the total MW of our portfolio) if the First Wind Acquisition is consummated. Based on our portfolio of projects, we do not expect to pay significant federal income taxes for at least the next several years.

Newly constructed solar portfolio. We benefit from a portfolio of relatively newly constructed solar assets, with most of the projects in our portfolio having achieved COD within the past three years. The projects in our 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 September 30, 2014, was constructing additional solar power generation assets expected to have an aggregate nameplate capacity of

 

 

12


Table of Contents
 

approximately 610 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 4.6 GW pipeline of development stage solar projects as of September 30, 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 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 September 30, 2014, our Sponsor had over 3.0 GW of projects under management across 20 countries. In addition, our Sponsor maintains four 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. If the First Wind Acquisition is consummated, we will also benefit from First Wind’s operational and management expertise as the First Wind team joins our Sponsor. To date, First Wind has constructed or acquired wind power generation assets with an aggregate nameplate capacity of 1.0 GW and, as of November 30, 2014, was constructing additional wind power generation assets expected to have an aggregate nameplate capacity of approximately 500 MW.

Dedicated management team. Under the Management Services Agreement, our Sponsor has provided 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 served as the President of SunEdison’s solar energy business from November 2009 to March 2013. Our management team also has access to the other significant management resources of our Sponsor to support the operational, financial, legal and regulatory aspects of our business.

Recent Developments

Acquisition Transactions

Hudson Energy Acquisition

On September 18, 2014, we entered into an agreement whereby we agreed to acquire from Hudson Energy Solar Corporation 25.5 MW of operating solar power assets (the “Hudson Energy Acquisition”) and SunEdison purchased 4.5 MW of developmental pipeline. In connection with the Hudson Energy Acquisition, we also entered into a right-of-first-offer agreement with Just Energy Group to acquire certain new operating solar power assets located in New Jersey, New York, Massachusetts and Pennsylvania. The total consideration for the Hudson Energy Acquisition was approximately $35 million, plus an estimate for working capital, and was funded with cash-on-hand. The Hudson Energy Acquisition closed on November 4, 2014.

 

 

13


Table of Contents

Crundale and Fairwinds Acquisitions

On November 4, 2014, we completed the acquisition of two Call Right Projects, Fairwinds and Crundale, from our Sponsor. The two utility scale power projects, with a total nameplate capacity of 50.0 MW, are located in the United Kingdom and reached COD in October 2014. The purchase price was approximately $32.2 million in cash, and we assumed approximately $63.7 million of project-level debt of the project companies. We expect to repay all of the outstanding project-level debt in the second quarter of 2015.

Capital Dynamics Acquisition and Increased Credit Facilities

On October 29, 2014, we entered into a securities purchase agreement whereby we agreed to acquire 77.6 MW of operating solar power assets located in California, Massachusetts, New Jersey, New York and Pennsylvania, or the “Capital Dynamics Acquisition,” from Capital Dynamics U.S. Solar Energy Fund, L.P. and its affiliates. The purchase price for the Capital Dynamics Acquisition was approximately $250 million and was funded through borrowings under our increased Term Loan (as defined herein). See “Description of Certain Indebtedness.” The Capital Dynamics Acquisition closed on December 18, 2014. On December 18, 2014 we obtained a $275.0 million new term loan, or the “Increased Term Loan,” and $75.0 million in new revolving commitments. The proceeds of the Increased Term Loan were used to fund the Capital Dynamics Acquisition and the new revolving commitments increase our liquidity.

First Wind Acquisition

On November 17, 2014, we entered into a purchase and sale agreement (the “First Wind Acquisition Agreement”), pursuant to which we agreed to acquire from First Wind Holdings, LLC (together with its subsidiaries, “First Wind”) 521.1 MW of operating power assets, including 500.0 MW of wind power assets and 21.1 MW of solar power assets (the “First Wind Acquisition”) located in Maine, New York, Hawaii, Vermont and Massachusetts. We will acquire the First Wind Assets for total consideration of $862.0 million, which includes the equity purchase price, the refinancing of certain existing indebtedness, certain swap and debt breakage fees and the purchase of a partner’s ownership stake in certain assets held by First Wind through a joint venture. In addition, pursuant to the First Wind Acquisition Agreement, SunEdison will purchase First Wind’s development platform, pipeline and projects in development, including over 1.6 GW of wind and solar generation assets to which we will be granted call rights pursuant to the Intercompany Agreement, as described below.

In addition to entering into the First Wind Acquisition Agreement, we and SunEdison entered into an Intercompany Agreement. The Intercompany Agreement sets forth the agreement among the parties with respect to, among other things, (i) contributions between, and allocations among, the parties and their respective affiliates of certain costs, expenses, indemnity payments and purchase price adjustments under the First Wind Acquisition Agreement and certain excess capital expenditures and operation and maintenance costs for operating projects following the closing of the First Wind Acquisition, (ii) the grant by SunEdison to us of certain additional call rights, and (iii) the modification of certain terms of the Interest Payment Agreement (as defined herein).

In connection with the First Wind Acquisition, SunEdison also intends to arrange up to $1.5 billion in debt and equity financing to fund the construction of projects with respect to which we will have call rights, including certain development projects to be acquired from First Wind.

The First Wind Acquisition is subject to customary closing conditions, including the receipt of regulatory approval by the Federal Energy Regulatory Commission and other public utility commissions. We expect the First Wind Acquisition to close during the first quarter of 2015.

 

 

14


Table of Contents

We may not be able to complete the First Wind Acquisition on a timely basis or at all. None of the Acquisition Financing Transactions are conditioned upon the completion of the First Wind Acquisition. See “Risk Factors—Risks Related to the First Wind Acquisition.”

Distributed Generation Acquisitions

In the fourth quarter of 2014, we acquired 26 MW of distributed generation solar power assets from subsidiaries of our Sponsor in a series of transactions valued at $47 million through the DG 2014 Portfolio 1 and the DG 2015 Portfolio 2 with tax equity participants. These projects were on our Call Right List. The DG 2014 Portfolio 1 is expected to have an aggregate capacity, upon completion of the fund, of approximately 42 MW, and the DG 2015 Portfolio 2 is expected to have an aggregate capacity, upon the completion of the fund, of approximately 55 MW. Both funds have operation and maintenance and asset management agreements with affiliates of our Sponsor. The projects have executed power purchase agreements with creditworthy offtakers consisting of corporate entities, municipalities, and school districts.

Acquisition Private Placement

On November 26, 2014, we completed the sale of a total of 11,666,667 shares of our Class A common stock in a private placement (the “Acquisition Private Placement”) to certain eligible investors (the “Acquisition Private Placement Purchasers”) for an aggregate purchase price of $350.0 million. We intend to use the net proceeds from the Acquisition Private Placement to fund a portion of the consideration payable by us in the First Wind Acquisition.

In connection with the Acquisition Private Placement, we entered into a registration rights agreement with the Acquisition Private Placement Purchasers, pursuant to which we have filed a registration statement with the SEC covering the resale of the purchased shares of which this prospectus forms a part.

Acquisition Financing

We intend to fund the consideration payable by us in the First Wind Acquisition through a combination of the net proceeds from a public equity offering, the net proceeds from the issuance of newly issued senior unsecured notes and cash on hand (including cash from the Acquisition Private Placement).

The consolidated combined pro forma financial information included in this prospectus reflects an assumed issuance of $800.0 million of senior notes and the use of the net proceeds therefrom to pay a portion of the purchase price payable by us in the First Wind Acquisition and to repay certain existing debt. To the extent we obtain financing in excess of the amount needed to fund the First Wind Acquisition, we will use the excess proceeds from the public equity offering for working capital and general corporate purposes. We may not be able to obtain any such debt financing on acceptable terms or at all.

 

 

15


Table of Contents

Relationship with 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 operation. 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 September 30, 2014, our Sponsor had a development pipeline of approximately 4.6 GW and solar power generation assets under management of approximately 3.0 GW, comprised of approximately 1,200 solar generation facilities across 20 countries. These projects were managed by a dedicated team using four renewable energy operation centers globally. As of September 30, 2014, our Sponsor had approximately 2,400 employees. Our Sponsor owns 100.0% of Terra LLC’s outstanding Class B units and holds all of the IDRs (as defined herein).

If the First Wind Acquisition is consummated, our Sponsor will become a wind industry leader, with a development pipeline of approximately 1.0 GW of wind generation assets and approximately 1.0 GW of wind generation assets under management, and we will benefit from our Sponsor’s expertise in wind technology.

On September 29, 2014, our Sponsor announced that it confidentially submitted a draft registration statement to the SEC relating to the proposed initial public offering of the common stock of a yieldco vehicle focused on contracted clean power generation assets in emerging markets, primarily in Asia (excluding Japan) and Africa. If this initial public offering is completed, our Sponsor would have obligations to present opportunities in these or other emerging markets to the other yieldco vehicle, or may otherwise determine that certain opportunities are more appropriate for the other yieldco vehicle than they are for us. Because our primary target markets do not include the expected primary target markets of the other yieldco vehicle, we do not expect any significant competition for project opportunities with the other yieldco vehicle. Our Sponsor’s development pipeline of approximately 4.6 GW as of September 30, 2014 represents its total development pipeline, including projects under development in emerging markets that would be offered to the other yieldco vehicle.

While our relationship with our Sponsor and its subsidiaries is a significant strength, it is also a source of potential conflicts. 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 or of the assets which we may elect to acquire from our Sponsor, 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 Projects and ROFO Projects) to us, in our targeted geographies, to the other yieldco vehicle in its targeted geographies, or to itself or third parties and will not be prohibited from acquiring operating assets of the kind that we seek to acquire.

For a discussion of certain agreements we have with our Sponsor, 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.”

 

 

16


Table of Contents

Organizational Structure

The following diagram depicts certain relevant aspects of our ownership structure and principal indebtedness, as of January 5, 2015, after giving effect to the Acquisition Financing Transactions: (1)

 

LOGO

 

(1) Assumes the issuance of 11,566,424 shares of Class A common stock in the public equity offering, which reflects gross proceeds of the Issuer of $350 million at an assumed price to the public of $30.26 per share, which was the closing price of our Class A common stock on January 5, 2015
(2) Our Sponsor’s economic interest is subject to certain limitations on distributions to holders of Class B units during the Subordination Period (as defined herein) and the Distribution Forbearance Period (as defined herein). 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.
(3) 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 “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

 

 

17


Table of Contents
(4) 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 are currently 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—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.
(5) Represents project-level indebtedness as of September 30, 2014. For additional information regarding our project-level indebtedness, see “Description of Certain Indebtedness—Project-Level Financing Arrangements.”

Our Initial Public Offering and Related Transactions

On July 23, 2014, we closed our IPO of 20,065,000 shares of our Class A common stock at a price to the public of $25.00 per share, or the “IPO Price.” In addition, the underwriters exercised in full their option to purchase an additional 3,009,750 shares of Class A common stock at the IPO price. Concurrently with our IPO, we sold an aggregate of 2,600,000 shares of our Class A common stock at the IPO Price to Altai Capital Master Fund, Ltd., or “ACMF” and Everstream Opportunities Fund I, LLC, or “Everstream Opportunities” (the “IPO Private Placements”). In addition, on July 23, 2014, as consideration for the acquisition of the Mt. Signal project from Silver Ridge at an aggregate purchase price of $292.0 million, Terra LLC issued to Silver Ridge 5,840,000 Class B units (and we issued a corresponding number of shares of Class B common stock) and 5,840,000 Class B1 units (and we issued a corresponding number of shares of Class B1 common stock). Silver Ridge distributed the Class B shares and units to SunEdison and the Class B1 shares and units to R/C US Solar Investment Partnership, L.P., or “Riverstone”, the owners of Silver Ridge.

We received $533.5 million of net proceeds from our IPO (including the net proceeds from the underwriters exercise in full of their option to purchase additional shares of Class A common stock in our IPO), after deducting underwriting discounts, commissions and offering expenses. We also received $65.0 million of net proceeds from the IPO Private Placements.

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 flow 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 the First Wind Acquisition include, among others:

 

    completion of the First Wind Acquisition is subject to conditions and if these conditions are not satisfied or waived, the First Wind Acquisition will not be completed;

 

    integrating the assets we intend to acquire in the First Wind Acquisition may be more difficult, costly or time consuming than expected and the anticipated benefits of the First Wind Acquisition may not be realized; and

 

    in connection with the First Wind Acquisition, we expect to incur significant additional indebtedness and may also assume certain of First Wind’s outstanding indebtedness, which could adversely affect us, including by decreasing our business flexibility, and will increase our interest expense.

 

 

18


Table of Contents

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 flow;

 

    a portion of the revenues under the PPAs for the U.K. projects in our 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 flow may be materially and adversely affected;

 

    certain of the PPAs for power generation projects in our portfolio and that we may acquire in the future contain or will contain provisions that allow the offtake purchaser to terminate or buyout a portion of the project upon the occurrence of certain events; if such 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 from our Sponsor and unaffiliated third parties at favorable prices.

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

 

    our Sponsor is our controlling stockholder and exercises 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;

 

    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 flow;

 

    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

 

    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 controls a majority of the vote on all matters submitted to a vote of our stockholders for the foreseeable future.

Risks related to an investment in the Class A common stock 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;

 

    we are a holding company and our only material asset is 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; and

 

    we are an “emerging growth company” and have elected, 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.

 

 

19


Table of Contents

Corporate Information

Our principal executive offices are located at 7550 Wisconsin Avenue, 9th, Floor, Bethesda, Maryland 20814. Our telephone number is (240) 762-7700. 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 currently 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.

 

 

20


Table of Contents

THE OFFERING

 

Shares of Class A common stock offered by the selling stockholders

11,666,667 shares of our Class A common stock.

 

Shares of Class A common stock outstanding prior to any resale

42,319,003 shares of our Class A common stock.

 

Shares of Class B common stock outstanding

64,526,654 shares of our Class B common stock, all of which are beneficially owned by our Sponsor.

 

Class A units and Class B units of Terra LLC outstanding prior to any resale

42,319,003 Class A units and 64,526,654 Class B units of Terra LLC.

 

Shares of Class B1 common stock and Class B1 units outstanding

5,840,000 shares of our Class B1 common stock and 5,840,000 Class B1 units of Terra LLC.

 

Use of proceeds

The selling stockholders will receive all of the proceeds from the sale of any shares of Class A common stock sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. See “Use of Proceeds.”

 

Voting rights and stock lock up

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

 

 

All of our Class B common stock is held by our Sponsor or its controlled affiliates. Each share of our Class B common stock entitles our Sponsor to 10 votes on matters presented to our stockholders generally. Our Sponsor, as the holder of our Class B common stock, retains control over a majority of the vote on all matters submitted to a vote of stockholders for the foreseeable future. Additionally, Terra LLC’s amended and restated operating agreement provides 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 the IPO until the earlier of: (i) three years from the completion of our IPO 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). 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

 

 

21


Table of Contents
 

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.”

 

Economic interest

Prior to any resale, subject to the right of holders of IDRs to receive a portion of distributions after certain thresholds are met, holders of our Class A common stock will own in the aggregate a 37.6% economic interest in our business through our ownership of Class A units of Terra LLC, our Sponsor will own a 57.3% economic interest in our business through its ownership of Class B units of Terra LLC and Riverstone will own a 5.2% economic interest in our business through its ownership of Class B1 units of Terra LLC. See “Certain Relationships and Related Party Transactions—Amended and Restated Operating Agreement of Terra LLC—Distributions.”

 

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, is 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 entered into with our Sponsor and Riverstone. 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. 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

 

 

22


Table of Contents
 

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.”

 

  Pursuant to registration rights agreements that we entered into with our Sponsor and Riverstone, we agreed 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.

 

  In addition, pursuant to the registration rights agreement we entered into in connection with our Acquisition Private Placement, we have filed a registration statement for the sale of the shares of our Class A common stock that were sold thereby, of which this prospectus forms a part. See “—Recent Developments—Acquisition Private Placement.”

Cash dividends:

 

Class A common stock

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. On December 22, 2014, we declared a quarterly dividend of $0.27 per share on our outstanding Class A common stock that will be paid on March 16, 2015 to holders of record on March 2, 2015.

 

  We believe, based on our financial forecast and related assumptions 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.”

 

 

23


Table of Contents

Class B common stock

Holders of our Class B common stock do 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 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 is 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.”

 

Class B1 common stock

Holders of our Class B1 common do 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 also hold Class B1 units issued by Terra LLC. As a result of holding Class B1 units, such holders are 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.”

 

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 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.”

 

Stock exchange listing

Our Class A common stock is listed on the NASDAQ Global Select Market under the symbol “TERP.”

 

Controlled company exemption

We are 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.

 

 

24


Table of Contents

Certain Assumptions

The number of shares of our common stock and the number of units of Terra LLC to be outstanding prior to any resale, the combined voting power that identified stockholders will hold prior to any resale and the economic interest in our business that identified stockholders will hold prior to any resale are based on 42,319,003 shares of our Class A common stock, 64,526,654 shares of our Class B common stock, 5,840,000 shares of our Class B1 common stock, 42,319,003 Class A units of Terra LLC, 64,526,654 Class B units of Terra LLC and 5,840,000 Class B1 units of Terra LLC outstanding as of January 5, 2015 and excludes 3,710,048 shares of our Class A common stock reserved for future issuance under our 2014 Incentive Plan.

 

 

25


Table of Contents

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 nine months ended September 30, 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. The summary historical financial data as of and for the nine months ended September 30, 2014, have been derived from the unaudited condensed consolidated financial statements of TerraForm Power, Inc. 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, and as of September 30, 2013 and for the nine months then ended, are intended to represent the financial results of SunEdison’s contracted renewable energy assets that have been contributed to Terra LLC as part of our initial portfolio.

The summary unaudited pro forma financial data have been derived by the application of pro forma adjustments to the historical 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 nine months ended September 30, 2014 give pro forma effect to (i) certain historical items related to the IPO, and (ii) the Acquisition Transactions and the Acquisition Financing Transactions (each as defined under “Unaudited Pro Forma Condensed Consolidated Financial Statements”) as if they had occurred on January 1, 2013. The summary unaudited pro forma balance sheet data as of September 30, 2014 give effect to the Acquisition Transactions and the Acquisition Financing Transactions as if each had occurred on September 30, 2014. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for additional information.

The following table should be read together with, and is qualified in its entirety by reference to, the historical financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical 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.”

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.

 

 

26


Table of Contents

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.

 

          Pro Forma           Pro Forma  
    For the Year Ended
December 31,
    For the
Year
Ended
December 31,
2013
    For the Nine Months
Ended

September 30,
    For the
Nine Months
Ended

September 30,
2014
 
(in thousands, except operational data)   2012     2013       2013     2014    
                (unaudited)     (unaudited)     (unaudited)  

Statement of Operations Data:

           

Operating revenue

           

Energy

  $ 8,193      $ 8,928      $ 119,168      $ 6,884      $ 59,692      $ 143,432   

Incentives

    5,930        7,608        45,271        5,409        22,832        55,274   

Incentives-affiliate

    1,571        933        933        746        774        774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    15,694        17,469        165,372        13,039        83,298        199,480   

Operating costs and expenses:

           

Cost of operations

    837        1,024        56,911        780        6,051        59,636   

Cost of operations-affiliate

    680        911        911        478        3,911        3,911   

General and administrative

    177        289        13,028        92        3,767        14,430   

General and administrative-affiliate

    4,425        5,158        5,158        3,568        8,783        8,783   

Acquisition costs

    —          —          —          —          2,537        —     

Acquisition costs-affiliate

    —          —          —          —          2,826        —     

Formation and offering related fees and expenses

    —          —          —          —          3,399        3,399   

Depreciation, amortization and accretion

    4,267        4,961        60,636        3,542        21,053        69,601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    10,386        12,343        136,644        8,460        52,327        159,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    5,308        5,126        28,728        4,579        30,971        39,720   

Other (income) expense:

           

Interest expense, net

    5,702        6,267        75,828        4,716        53,217        102,268   

(Gain) loss on extinguishment of debt, net

    —          —          —          —          (7,635     (7,635

(Gain) loss on foreign currency exchange

    —          (771     (771     —          6,914        7,103   

Other (income) loss, net

    —          —          (36,648     (1     582        13,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    5,702        5,496        38,409        4,715        53,078        115,209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

    (394     (370     (9,681     (136     (22,107     (75,489

Income tax (benefit) provision

    (1,270     (88     —          (60     (4,069     (33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 876      $ (282     (9,681   $ (76     (18,038     (75,456
 

 

 

   

 

 

     

 

 

     

Less: Predecessor loss prior to initial public offering on July 23, 2014

            (10,357  
         

 

 

   

Net loss subsequent to initial public offering

            (7,681  

Less net income (loss) attributable to non-controlling interests

        11,599          (3,667     (47,541
     

 

 

     

 

 

   

 

 

 

Net loss attributable to TerraForm Power, Inc.

      $ (21,280     $ (4,014   $ (27,915
     

 

 

     

 

 

   

 

 

 

Other Financial Data: (unaudited)

           

Adjusted EBITDA(1)

  $ 14,000      $ 15,245      $ 95,275      $ 11,690      $ 74,112      $ 122,046   

Loss per share:

           

Class A common stock — Basic and Diluted

      $ (0.42     $ (0.15   $ (0.55

Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

  $ 2,890      $ (7,202     $ (44,111   $ 27,567     

Investing activities

    (410     (264,239       (5,534     (969,592  

Financing activities

    (2,477     272,482          50,047        1,200,686     

Balance Sheet Data (at period end):

           

Cash and cash equivalents

  $ 3      $ 1,044        $ 405      $ 259,363      $ 231,396   

Restricted cash(2)

    8,828        69,722          14,204        74,839        113,677   

Property and equipment, net

    111,697        407,356          211,385        1,848,635        2,945,221   

Total assets

    158,955        566,877          267,245        2,613,080        4,039,069   

Total liabilities

    128,926        551,425          222,671        1,481,795        2,124,477   

Total equity

    30,029        15,452          44,574        1,131,285        1,896,740   

Operating Data (for the period):

           

MWh sold(3) (unaudited)

    52,325        60,176          42,250        439,683     

 

 

27


Table of Contents

 

(1) Adjusted EBITDA is a measurement that is not recognized in accordance with U.S. Generally Accepted Accounting Procedures, or “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.

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 represents 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 Nine
Months Ended

September 30,
    For the
Nine Months
Ended

September 30,
2014
 
(in thousands)   2012     2013       2013     2014    
                (unaudited)     (unaudited)     (unaudited)  

Net income (loss)

  $ 876      $ (282   $ (9,681   $ (76   $ (18,038   $ (75,456

Add:

           

Depreciation, amortization and accretion

    4,267        4,961        60,636        3,542        24,611        69,601   

Interest expense, net(a)

    5,702        6,267        75,828        4,716        53,217        102,268   

Income tax benefit

    (1,270     (88     —          (60     (4,069     (33

General and administrative—affiliate(b)

    4,425        5,158        5,158        3,568        8,783        8,783   

Stock compensation expense

    —          —          —          —          1,567        1,567   

Acquisition costs, including affiliate(c)

    —          —          —          —          5,363        —     

Formation and offering related fees and expenses(d)

    —          —          —          —          3,399        3,399   

Gain on extinguishment of debt(e)

    —          —          —          —          (7,635     (7,635

(Gain) Loss on foreign currency exchange(f)

    —          (771     (771     —          6,914        7,103   

Other—First Wind(g)

    —          —          (35,895     —          —          12,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 14,000      $ 15,245      $ 95,275      $ 11,690      $ 74,112      $ 122,046   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

Immediately prior to the completion of the IPO, Terra LLC and Terra Operating LLC entered into an interest payment agreement (the “Interest Payment Agreement”) with SunEdison and its wholly owned subsidiary, SunEdison Holdings Corporation, pursuant to which SunEdison has agreed to pay all of the scheduled interest on our term loan facility, or the “Term Loan,” through the third anniversary of Terra LLC and Terra Operating LLC entering into the Term Loan, up to an aggregate of $48.0 million over such period (plus any interest due on any payment not remitted when due).

 

 

28


Table of Contents
  During the period from July 24, 2014 to September 30, 2014, we received a $1.5 million equity contribution from SunEdison pursuant to the Interest Payment Agreement. There was no cash consideration paid to SunEdison for these services for the period from July 24, 2014 through September 30, 2014. Total actual costs for these services during the period from July 24, 2014 to September 30, 2014 of $5.1 million is reflected in the consolidated statement of operations and has been treated as an equity contribution from SunEdison. Pursuant to the Intercompany Agreement, Terra LLC and SunEdison have agreed that the Interest Payment Agreement shall be amended to provide that SunEdison’s interest payment obligations will apply to any replacement financing for the Term Loan up to the same maximum aggregate amount for the same period of time.
  (b) Represents the non-cash allocation of SunEdison’s corporate overhead. In conjunction with the closing of the IPO, we entered into the Management Services Agreement with SunEdison, pursuant to which SunEdison provides or arranges for other service providers to provide management and administrative services to us. There will be no cash payments to SunEdison for these services during 2014, and in subsequent years, the cash fees payable to SunEdison will be capped at $4.0 million in 2015, $7.0 million in 2016 and $9.0 million in 2017.
  (c) Represents transaction related costs, including affiliate acquisition costs, associated with the acquisitions completed during the three and nine month periods ended September 30, 2014. There were no such costs during the same periods in the prior year.
  (d) Represents non-recurring professional fees for legal, tax and accounting services incurred in connection with the IPO.
  (e) We recognized a net gain on extinguishment of debt of $7.6 million for the nine months ended September 30, 2014, due primarily to the termination of our capital lease obligations upon acquiring the lessor interest in the SunE Solar Fund X solar generation assets.
  (f) We incurred a loss on foreign currency exchange of $6.9 million during the nine months ended September 30, 2014. These losses are driven by unrealized losses of $4.3 million during the nine months ended September 30, 2014, on the remeasurement of intercompany loans which are denominated in British pounds. We also realized a $2.8 million loss on the payment of outstanding Chilean peso denominated payables related to the construction of the CAP project in Chile, which were paid subsequent to the project reaching commercial operations in March 2014.
  (g) Represents gains or losses on the sale of assets, losses on disposal and impairment of assets, losses on early extinguishments of debt, settlements, and other income included in the historical financial results of First Wind. These amounts are added or subtracted from Adjusted EBITDA as they are not representative of acquired operations.

 

(2) Restricted cash includes current restricted cash and non-current restricted cash included in “Other assets” in the consolidated financial statements.
(3) For any period presented, MWh sold represents the amount of electricity measured in MWh that our projects generated and sold.

 

 

29


Table of Contents

RISK FACTORS

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 flow 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 the First Wind Acquisition

Completion of the First Wind Acquisition is subject to conditions and if these conditions are not satisfied or waived, the First Wind Acquisition will not be completed.

Completion of the First Wind Acquisition is subject to satisfaction or waiver of a number of conditions, including certain regulatory approvals. The closing of the First Wind Acquisition is not a condition precedent to, or condition subsequent of, any of the Acquisition Financing Transactions. Each party’s obligation to complete the First Wind Acquisition is subject to the satisfaction or waiver (to the extent permitted under applicable law) of certain other conditions, the accuracy of the representations and warranties of the other party under the First Wind Acquisition Agreement (subject to the materiality standards set forth in the First Wind Acquisition Agreement), the performance by the other party of its respective obligations under the First Wind Acquisition Agreement in all material respects and delivery of officer certificates by the other party certifying satisfaction of the preceding conditions.

The failure to satisfy all of the required conditions could delay the completion of the First Wind Acquisition for a significant period of time or prevent it from occurring. Any delay in completing the First Wind Acquisition could cause us not to realize some or all of the benefits that we expect to achieve if the First Wind Acquisition is successfully completed within its expected timeframe. The conditions to the closing of the First Wind Acquisition may not be satisfied or waived and the First Wind Acquisition may not be completed. Investors should not make an investment in the shares of Class A common stock offered hereby in reliance on the expectation that the First Wind Acquisition will be completed on the currently anticipated timeframe, or at all.

Integrating the assets we intend to acquire in the First Wind Acquisition may be more difficult, costly or time consuming than expected and the anticipated benefits of the First Wind Acquisition may not be realized.

Until the completion of the First Wind Acquisition, we will continue to operate independently from the assets to be acquired in the First Wind Acquisition. The success of the First Wind Acquisition, including anticipated benefits, will depend, in part, on our ability to successfully combine and integrate those assets with our existing operations. In addition, the acquisition of the wind projects represents a substantial change in the nature of our business, and we may not be able to adapt to such change in a timely manner, or at all. It is possible that the pendency of the First Wind Acquisition or the integration process could result in the loss of key employees, higher than expected costs, diversion of management attention and resources, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the First Wind Acquisition. If we experience difficulties with the integration process, the anticipated benefits of the First Wind Acquisition may not be realized fully or at all, or may take longer to realize than expected. Management continues to refine its integration plan, which may vary from plans previously disclosed. These integration matters could have an adverse effect during this transition period and for an undetermined period after completion of the First Wind Acquisition.

 

30


Table of Contents

In connection with the First Wind Acquisition, we expect to incur significant additional indebtedness and may also assume certain of First Wind’s outstanding indebtedness, which could adversely affect us, including by decreasing our business flexibility, and will increase our interest expense.

We will have substantially increased indebtedness following completion of the First Wind Acquisition in comparison to our indebtedness on a recent historical basis, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. We will also incur various costs and expenses associated with the financing. The amount of cash required to pay interest on our increased indebtedness following completion of the First Wind Acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flow required to service our indebtedness prior to the transaction. The increased levels of indebtedness following completion of the First Wind Acquisition could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits from the First Wind Acquisition, or if our financial performance after completion of the First Wind Acquisition does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.

In connection with the debt financing for the First Wind Acquisition, we anticipate seeking ratings of our indebtedness from one or more nationally recognized statistical rating organizations. We may not achieve a particular rating or maintain a particular rating in the future. Our credit ratings may affect the cost and availability of future borrowings and our cost of capital.

Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We may not be able to obtain additional financing or refinancing on terms acceptable to us or at all.

The agreements that will govern the senior unsecured notes we expect to issue in connection with the First Wind Acquisition, or any indebtedness of First Wind we may assume, are expected to contain various covenants that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our businesses.

The agreements that will govern the senior unsecured notes we expect to issue in connection with the First Wind Acquisition, or any indebtedness of First Wind we may assume, are expected to contain various affirmative and negative covenants that may, subject to certain significant exceptions, restrict our and certain of our subsidiaries ability to, among other things, have liens on our property, change the nature of our business, and/or acquire, merge or consolidate with any other person or sell or convey certain of our assets to any one person. Our and our subsidiaries ability to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations.

The First Wind Acquisition will involve substantial costs.

We have incurred, and expect to continue to incur, a number of non-recurring costs associated with the First Wind Acquisition. The substantial majority of non-recurring expenses will be comprised of transaction and regulatory costs related to the First Wind Acquisition. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the First Wind Acquisition.

 

31


Table of Contents

Risks Related to our Business

The Risk Factors below describe both the risks to our business as it currently exists and the risks to our business if the Acquisition Transactions are consummated.

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 flow.

Substantially all of the electric power generated by our current portfolio of projects is sold under long-term PPAs with public utilities or commercial, industrial or government end-users or is hedged pursuant to hedge agreements with investment banks and creditworthy counterparties. We expect the Call Right Projects will also have long-term PPAs. If, for any reason, any purchaser of power under these contracts is unable or unwilling to fulfill their related contractual obligations or if they refuse to accept delivery of power delivered thereunder or otherwise terminate such agreements prior to the expiration thereof, our assets, liabilities, business, financial condition, results of operations and cash flow could be materially adversely affected. Furthermore, to the extent any of our power purchasers are, or are controlled by, governmental entities, legislative or other political action may impair the results we achieve from the corresponding facilities in our portfolio.

A portion of the revenues under the PPAs for the U.K. projects included in our 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 flow may be materially and adversely affected.

The PPAs for the U.K. projects included in our portfolio 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 then 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 renewable obligation certificates, or “ROCs,” under the PPAs for the U.K. projects is fixed by U.K. laws or regulations for the entire term of the PPA. A decrease in the market price of electricity, including due to 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. 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 flow.

Certain of the PPAs for power generation projects in our portfolio and that we may acquire in the future contain or will contain provisions that allow the offtake purchaser to terminate the PPA or buy out a portion of the project upon the occurrence of certain events. If such 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 portfolio and that we may acquire in the future allow the offtake purchaser to purchase all or 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 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 COD under such PPA, 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

 

32


Table of Contents

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 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. Certain of the PPAs associated with distributed generation projects also allow the offtaker to terminate the PPA by paying an early termination fee. In the event a PPA for one or more of our projects is terminated, 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 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 flow.

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, and is therefore sensitive to the cost of both other clean energy and conventional 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.

A reduction in utility retail electricity prices would make the purchase of solar or wind 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.

 

33


Table of Contents

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

Certain of the projects in our 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 flow. Additionally, the remedies available to us under the applicable engineering, procurement and construction, or “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.

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. 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 flow 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 approximately 9% ownership) of all of our capital stock outstanding on such date, or, in some cases 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 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 flow.

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 revenue contract, 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

 

34


Table of Contents

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 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.

First Wind’s Mars Hill project’s PPA is expiring in February 2015, and First Wind is currently negotiating for an extension of the PPA. If the PPA is not extended or replaced, Mars Hill may be able to sell into the wholesale markets administered by ISO New England Inc., or “ISO-NE,” only by building approximately 15 miles of transmission line, or buying firm transmission rights, if available. The Mars Hill PPA may not be extended or replaced, and the project may not be able to sell into the ISO-NE markets or may only be able to sell into the ISO-NE markets at costs that make such sales uneconomic.

Projects in the First Wind portfolio located in Maine have experienced curtailment issues which may adversely affect revenues.

First Wind’s Stetson and Rollins projects have experienced significant curtailment starting in February 2012 due to a combination of construction on the Maine Power Reliability Project, or “MPRP,” a large transmission upgrade project affecting generation and transmission throughout Maine and adjoining areas, and transmission export limits at the Keane Road transmission interface, or “Keane Road.” These projects in the aggregate have had curtailment of approximately 58 GWh for each of 2012 and 2013, attributable in the aggregate to each of the MPRP and Keane Road. First Wind currently expects the MPRP to be completed in 2015, although it may not be able to be completed on this timeline or at all. First Wind also is currently pursuing several different solutions that may help to eliminate the Keane Road issue in 2015, including implementation of (i) General Electric “Fast Stop” software/firmware, which is designed to detect system instability and shut down turbines when needed, (ii) various market efficiencies, with the cost absorbed by ISO-NE, and (iii) elective transmission upgrades with the cost absorbed by First Wind. Together with our Sponsor, we expect to continue to pursue these solutions after the closing of the First Wind Acquisition. However, such solutions may not ameliorate or eliminate the Keane Road curtailment issues.

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 (and, if the First Wind Acquisition is consummated, the additional projects to which we expect to have call rights pursuant to the Intercompany Agreement), 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 or the Intercompany Agreement; and

 

35


Table of Contents
    our failure to exercise our rights under the Support Agreement or the Intercompany 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. Future acquisitions may not 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 flow and ability to pay dividends to holders of our Class A common stock.

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 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 our revolving credit facility, or the “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, or may make it difficult for us to obtain the funding we require to acquire such projects. 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 flow.

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 future acquisition opportunities for renewable energy projects is limited. While our Sponsor has granted 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 future 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.

 

36


Table of Contents

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 clean 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 sponsor’s ability to construct and our ability to operate a project. In addition, we cannot predict whether the permits will attract significant opposition or whether the 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 was 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

 

37


Table of Contents

to maintain or increase our per share dividend. There are 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 September 30, 2014, we had approximately $299.3 million of indebtedness and an additional $140.0 million available for future borrowings under our Revolver. In addition, we expect to incur a significant amount of additional debt in connection with the Acquisition Transactions. Our substantial debt 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;

 

    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 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 flow. 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, and we expect project financings incurred or assumed on future projects we acquire to 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

 

38


Table of Contents

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.

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 flow may be materially adversely affected.

Our Revolver includes a letter of credit facility to support project-level contractual obligations. This letter of credit facility will need to be renewed as of July 23, 2017, 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 flow. 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.

 

39


Table of Contents

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 flow.

Our ability to generate revenue from certain utility solar and wind 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 or any other clean energy project we acquire, including the projects we expect to acquire as part of the First Wind Acquisition, is terminated 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 our existing solar energy projects, or projects we acquire, 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.

 

40


Table of Contents

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 flow. 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, and the broader renewable energy industry, including wind, 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 electricity they offer is higher than ours. In addition, a majority of traditional utilities’ sources of electricity is non-solar and non-renewable, which may allow them to sell electricity more cheaply than electricity generated by our solar energy systems and other types of clean energy systems we acquire, including the projects we expect to acquire through the First Wind Acquisition.

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

 

41


Table of Contents

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 operational reasons at no cost to the power purchaser, including to prevent damage to transmission systems and for system emergencies, force majeure, safety, reliability, maintenance and other operational reasons. Such curtailment would reduce revenues to at no cost to the purchaser including, in addition to certain of the general types noted above, events in which energy purchases would result in costs greater than those which the purchaser would incur if it did not make such purchases but instead generated an equivalent amount of energy (provided that such curtailment is due to operational reasons and does not occur solely as a consequence of purchaser’s filed avoided energy cost being lower than the agreement rates or purchasing less-expensive energy from another facility). Even though the Hawaii purchasers are required to take reasonable steps to minimize the number and duration of curtailment events, and that such curtailments will generally be made in reverse chronological order based upon Hawaii utility commission approval (which is beneficial to older projects such as Kaheawa Wind Power I, or “KWP I”), such curtailments could still occur and reduce revenues to the Hawaii wind projects. 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

 

42


Table of Contents

purchases or payments under such arrangements, our revenues and our decisions regarding development of additional projects may be adversely affected.

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 PPA 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 flow 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 and wind energy sources depends heavily on suitable meteorological conditions. If solar or wind 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 and any wind facilities that we may acquire as part of the First Wind Acquisition or otherwise are highly dependent on suitable solar and wind conditions and associated weather conditions, which are beyond our control. Furthermore, components of our system, such as solar panels and inverters or wind turbines, could be damaged by severe weather, such as hailstorms, tornadoes or lightning strikes. We generally will be obligated to bear the expense of repairing the damaged solar energy systems and wind projects 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 flow. 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 and any wind facilities that we may acquire as part of the First Wind Acquisition or otherwise on the findings of related solar and wind 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 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 flow. In particular, the electricity produced and revenues generated by a wind energy project depend heavily on wind conditions, which are variable and difficult to predict. In assessing the merits of undertaking the First Wind Acquisition, we considered the operating history of the wind facilities we expect to acquire as part of that transaction. Operating results for wind projects can vary significantly from period to period depending on the wind conditions during the periods in

 

43


Table of Contents

question and are estimated based on long-term wind and other meteorological studies. Actual wind conditions and future operating results, however, may not conform to these studies and may be affected by variations in weather patterns, including any potential impact of climate change. Therefore, the electricity generated by the wind projects we expect to acquire as part of the First Wind Acquisition may not meet our anticipated production levels or the expected capacity of the turbines, which could adversely affect our business, financial condition and results of operations. If the wind resources at a project are below the average level we expect, our rate of return for the project would be below our expectations and we could be adversely affected. Projections of wind resources also rely upon assumptions about turbine placement, interference between turbines and the effects of vegetation, land use and terrain, which involve uncertainty and require us to exercise considerable judgment. Any of these factors could cause any of the wind projects to have less wind potential than we expected, which could cause the return on our investment in these projects to be lower than expected.

Our hedging activities and those related to the First Wind assets that we intend to acquire may not adequately manage our exposure to commodity and financial risk, which could result in significant losses or require us to use cash collateral to meet margin requirements, each of which could have a material adverse effect on our business, financial condition, results of operations and liquidity, which could impair our ability to execute favorable financial hedges in the future.

First Wind has entered into, and, after the First Wind Acquisition, we may enter into, financial swaps or other hedging arrangements. We may also acquire additional assets with similar hedging arrangements in the future. Under the terms of First Wind’s existing financial swaps, the projects are not obligated to physically deliver or purchase electricity. Instead, they receive payments for specified quantities of electricity based on a fixed-price and are obligated to pay the counterparty the market price for the same quantities of electricity. These financial swaps cover quantities of electricity that First Wind estimates are highly likely to be produced. As a result, gains or losses under the financial swaps are designed to be offset by decreases or increases in a project’s revenues from spot sales of electricity in liquid ISO markets. However, the actual amount of electricity a project generates from operations may be materially different from First Wind’s estimates for a variety of reasons, including variable wind conditions and wind turbine availability. If a project does not generate the volume of electricity covered by the associated swap contract, we could incur significant losses if electricity prices in the market rise substantially above the fixed-price provided for in the swap. If a project generates more electricity than is contracted in the swap, the excess production will not be hedged and the related revenues will be exposed to market-price fluctuations.

We sometimes seek to sell forward a portion of our RECs or other environmental attributes to fix the revenues from those attributes and hedge against future declines in prices of RECs or other environmental attributes. If our projects do not generate the amount of electricity required to earn the RECs or other environmental attributes sold forward or if for any reason the electricity we generate does not produce RECs or other environmental attributes for a particular state, we may be required to make up the shortfall of RECs or other environmental attributes through purchases on the open market or make payments of liquidated damages. Further, current market conditions may limit our ability to hedge sufficient volumes of our anticipated RECs or other environmental attributes, leaving us exposed to the risk of falling prices for RECs or other environmental attributes. Future prices for RECs or other environmental attributes are also subject to the risk that regulatory changes will adversely affect prices.

 

44


Table of Contents

While we currently own only solar energy projects, we intend to acquire a number of wind energy projects in the First Wind Acquisition and in the future we may decide to further 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 flow.

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

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 flow. 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 efficiently operate our solar energy assets and the wind assets we intend to acquire from First Wind, 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 flow. 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

 

45


Table of Contents

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 flow. 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 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 flow.

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, the Regulus project and certain of the projects we intend to acquire as part of the First Wind Acquisition, all of the U.S. Projects in our 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.” Depending upon the power production capacity of the project in question, our Qualifying Facilities and their immediate project company owners may be entitled to 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.

Each of the Mt. Signal ProjectCo, the Regulus ProjectCo and the majority of project company owners of the projects we intend to acquire in the First Wind Acquisition (such First Wind entities the “EWG ProjectCos”) have filed to be an “Exempt Wholesale Generator” as defined in PUHCA, which has the effect of exempting it and us (for purposes of our ownership of each such company) from the federal books and access provisions of PUHCA. The projects owned by certain of the EWG ProjectCos are Qualifying Facilities and in one instance the EWG ProjectCo that owns it may receive exemptions from regulation as “public utilities” under certain provisions of the FPA. However, the Mt. Signal ProjectCo, the Regulus ProjectCo and the EWG Project Cos are subject to regulation for most purposes as a “public utility” under the FPA, including regulation of their rates and their issuances of securities. Each of the Mt. Signal ProjectCo, the Regulus ProjectCo and the EWG ProjectCos has obtained “market-based rate authorization” and associated blanket authorizations and waivers from FERC under the FPA, which allows it to sell electric energy, capacity and ancillary services at wholesale at negotiated, market-based rates, instead of cost-of-service rates, as well as waivers of, and blanket authorizations under, certain FERC regulations that are commonly granted to market based rate sellers, including blanket authorizations to issue securities.

The failure of the project company owners of our Qualifying Facilities to maintain available exemptions under PURPA may result in their becoming subject to significant additional regulatory requirements. In addition, the failure of the Mt. Signal ProjectCo, the Regulus ProjectCo, the EWG ProjectCos, or other project company owners of our Qualifying Facilities to comply with applicable regulatory requirements may result in the imposition of penalties as discussed further in “Business—Regulatory Matters.”

 

46


Table of Contents

In particular, the Mt. Signal ProjectCo, the Regulus ProjectCo, the EWG ProjectCos and any of the other owners of our project companies that obtain market-based rate authority from FERC under the FPA are or 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.

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 and wind 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,” production tax credits, or “PTCs,” loan guarantees, RPS programs and modified accelerated cost-recovery system of 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 amount. Any reduction in the ITC could materially and adversely affect our business, financial condition, results of operations and cash flow. PTCs, which are federal income tax credits related to the quantity of renewable energy produced and sold during a taxable year, or ITCs in lieu of PTCs, are available only for wind energy projects that began construction on or prior to December 31, 2014. PTCs and accelerated tax depreciation benefits generated by operating projects can be monetized by

 

47


Table of Contents

entering into tax equity financing agreements with investors that can utilize the tax benefits, which have been a key financing tool for wind energy projects. The growth of our wind energy business may be dependent on the U.S. Congress further extending the expiration date of, renewing or replacing PTCs, without which the market for tax equity financing for wind projects would likely cease to exist. Recent legislative efforts to extend or renew PTCs have failed, and we cannot assure that current or any subsequent efforts to extend, renew or replace PTCs will be successful. Any failure to further extend, renew or replace PTCs could materially and adversely affect our business, financial condition, results of operations and cash flow.

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 Feed-in Tariff, or “FiT” program, and other commercially oriented incentives. Renewable energy sources in the United Kingdom benefit from renewable obligation certificates, climate change levy exemption certificates, embedded benefits and contracts for difference. 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.

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 flow.

We have a limited operating history and as a result we may not 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 in the near future, 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 flow.

 

48


Table of Contents

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 and wind energy facilities, including those development stage facilities our Sponsor intends to acquire as part of the First Wind Acquisition 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.

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.

Moreover, our Sponsor intends to acquire substantially all of the assets, business and operations of First Wind, other than the operating projects we intend to acquire in the First Wind Acquisition. Our Sponsor does not have independent expertise in developing, constructing or operating wind energy assets. This inexperience may impact the ability of our Sponsor to complete wind projects, including those wind projects to which we expect to have call rights pursuant to the Intercompany Agreement.

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

 

49


Table of Contents

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 flow.

Moreover, spare parts for wind turbines and solar facilities and key pieces of equipment may be hard to acquire or unavailable to us. Sources of some significant spare parts and other equipment are located outside of North America. If we were to experience a shortage of or inability to acquire critical spare parts we could incur significant delays in returning facilities to full operation, which could negatively impact our business financial condition, results of operations and cash flow.

First Wind’s KWP II project is required under its PPA to install and maintain a battery energy storage system, the manufacturer of which is in bankruptcy and no longer operational. If First Wind is unable to source acceptable replacement batteries, this could result in a default under, or termination of, KWP II’s PPA.

First Wind’s Kaheawa Wind Power II, or “KWP II” project is required under its PPA to install and maintain a battery energy storage system, or “BESS,” for electric grid stability and system reliability purposes. The manufacturer of the BESS, Xtreme Power, is in bankruptcy and is no longer providing replacement batteries and other components for the BESS. First Wind is sourcing replacement batteries from a new supplier that we expect will be installed and tested in the near future, but such replacement batteries may not be sufficient for the system to operate as designed or may not be available in the quantities or at a price that permit the KWP II to operate economically or in compliance with its PPA. First Wind’s Kahuku project had a similar BESS that was required to be operated under its PPA, but the BESS was destroyed in a catastrophic fire. The project installed a Dynamic Volt-Amp Reactive System, or “D-Var,” as a replacement for the BESS under the Kahuku project PPA, which D-Var has been operating as designed. If the BESS system at KWP II was damaged or could no longer operate due to a lack of sufficient batteries or other system components, a D-Var could not be used at the KWP II project as a replacement to the BESS due to technical constraints, and another replacement system may not be compatible or available at a price that would allow the project to operate economically. Failure to maintain the battery system constitutes a default under KWP II’s PPA and could result in the termination of KWP II’s PPA, which could negatively impact our business financial condition, results of operations and cash flow.

Certain of the wind projects use equipment originally produced and supplied by Clipper, which no longer manufactures, warrants or services the wind turbine it produced. If Clipper equipment experiences defects in the future, we will not have the benefit of a manufacturer’s warranty on such original equipment, may not be able to obtain replacement components and will need to self fund the correction or replacement of such equipment.

Certain of the wind projects use equipment originally produced and supplied by Clipper Windpower, LLC, or its affiliates, or “Clipper,” which no longer manufactures, warrants or services the wind turbine it produced that are owned by First Wind. Such equipment has experienced certain technical issues with its wind turbine technology and may continue to experience similar issues.

The Cohocton, Kahuku, Sheffield, and Steel Winds I and II projects operate ninety two Liberty turbines (230 MW) supplied by Clipper. Since initial deployment, Clipper has announced and remediated various defects affecting the Liberty turbines deployed by First Wind in its wind projects and by other customers that resulted in prolonged downtime for turbines at various projects.

Beginning in 2012, First Wind and Clipper engaged in a number of litigation and arbitration proceedings concerning the performance of the Liberty turbines. On February 12, 2013, all such disputes were settled pursuant to a Settlement, Release and O&M Transition Agreement among

 

50


Table of Contents

certain First Wind and Clipper entities, or the “Settlement Agreement.” Pursuant to the Settlement Agreement, First Wind has, among other things, released Clipper of all of its warranty obligations with respect to the equipment supplied by Clipper, and the obligations under the related operation and maintenance contracts, and has been granted by Clipper a non-exclusive, royalty-free, perpetual, irrevocable license to make, improve and modify any Clipper-supplied equipment and to create derivative works from such equipment.

As a result, if Clipper equipment experiences defects in the future, we will not have the benefit of a manufacturer’s warranty on such original equipment, may not be able to obtain replacement components and will need to self fund the correction or replacement of such equipment, which could negatively impact our business financial condition, results of operations and cash flow.

Our Sponsor and other developers of solar energy projects and other clean energy projects depend on a limited number of suppliers of solar panels, inverters, modules turbines, towers and other system components and turbines and other equipment associated with wind energy facilities. Any shortage, delay or component price change from these suppliers could result in construction or installation delays, which could affect the number of 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, including any wind and solar projects we intend to acquire from First Wind, 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 and wind turbines, 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 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. When purchasing wind turbines, the purchaser will enter into warranty agreements with the manufacturer which typically expire within two to five years after the turbine delivery date. 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

 

51


Table of Contents

leave us to cover the expense associated with the faulty component. Our business, financial condition, results of operations and cash flow could be materially adversely affected if we cannot make claims under warranties covering our projects.

Decommissioning costs must be paid or accrued in advance in many cases.

Both wind energy systems and solar systems must be authorized by permits or other governmental approvals that, in many cases, are conditioned upon establishing financial assurance (in the form of a trust fund or security device, such as a letter of credit) to assure the payment of estimated decommissioning costs. The amounts of such estimates can vary over time and could rise to levels that are not expected at this time. Accrual or payment into such trust fund, or security device, or posting of letters of credit, can involve material costs that adversely affect the financial performance of our projects. In addition, the amounts of such trust fund or security devices, or letters of credit, vary depending upon the estimates of the net costs of decommissioning (taking into account the revenue obtained from selling the project equipment at the end of the project’s commercial life). Additional decommissioning deposits, payments or security instruments may be required at a later time, depending on the estimates for scrap value recovery and changing requirements for demolition. Decommissioning costs, and required accruals, payments or security devices could generate new or unplanned costs that could have a material adverse effect on our business, financial condition and results of operations.

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; workers’ health and safety matters or other potential nuisances such as the flickering effect caused when rotating wind turbine blades periodically cast shadows through openings such as the windows of neighboring buildings, which is known as shadow flicker; and the presence or discovery of archaeological, religious or cultural resources at or near project operations. Our facilities and any wind facilities that we may acquire from First Wind 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 and other hazardous materials. 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 including significant required capital expenditures, 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 flow.

 

52


Table of Contents

We may be required to take action or restrict operations to mitigate hazards to air navigation and interference with other air space users.

Wind energy towers and turbines can physically interfere with air navigation, and solar facilities can generate glare that may have a distracting effect on pilots. Although First Wind is required to notify the Federal Aviation Administration, or “FAA,” of the location of its wind towers and facilities, they may not have correctly notified the FAA in all cases. There is some chance that the facilities we expect to acquire as part of the First Wind Acquisition could result in adverse effects on air safety, or that we could be ordered to mark our facilities or modify operations to avoid such effects. In addition, we could incur fines or penalties in connection with the failure to property notify the FAA or otherwise fail to comply with regulations relating to hazardous to air navigation. In addition, wind energy facilities can interfere with military radar operations or telecommunications. If such interference occurs, we may be required to modify our operations to avoid such interference. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

Harming of protected species can result in curtailment of wind project operations.

The construction and operation of energy projects can adversely affect endangered, threatened or otherwise protected animal species. Wind projects, in particular, involve a risk that protected species will be harmed, as the turbine blades travel at a high rate of speed and may strike flying animals (birds or bats) that happen to travel into the path of spinning blades. While pre-construction studies are conducted to avoid siting wind projects in areas where protected species are highly concentrated, there is often a level of unavoidable risk that flying species will be harmed by project operation.

First Wind’s wind energy projects that we intend to acquire are known to strike and kill bats and birds, and occasionally strike and kill endangered or protected species, including protected golden or bald eagles. As a result, we will attempt to observe all industry guidelines and governmentally-recommended best practices to avoid harm to protected species, such as avoiding structures with perches, avoiding guy wires that may kill birds or bats in flight, or avoiding lighting that may attract protected species at night. In addition, we will attempt to reduce the attractiveness of a site to predatory birds by site maintenance (e.g., by mowing or removal of animal and bird carcasses).

Where possible, we will obtain permits for incidental take of protected species. First Wind holds such permits for some of its wind projects, particularly in Hawaii, where several species are endangered and protected by law. First Wind is currently in discussions with the U.S. Fish & Wildlife Service, or “USFWS,” about obtaining incidental take permits for bald and golden eagles at locations with low to moderate risk of such events. First Wind is also discussing with USFWS amending its incidental take permits for certain wind projects in Hawaii, where observed endangered species mortality has exceeded prior estimates and may exceed permit limits on such takings.

Excessive taking of protected species can result in requirements to implement mitigation strategies, including curtailment of operations. First Wind’s projects in Hawaii that we intend to acquire, several of which hold incidental take permits to authorize the incidental taking of small numbers of protected species, are subject to curtailment (i.e., reduction in operations) if excessive taking of protected species is detected through monitoring. At some of the projects in Hawaii, curtailment has been implemented, but not at levels that materially reduce electricity generation or revenues. Such curtailments (to protect bats) have reduced nighttime operation and limited operation to times when wind speeds are high enough to prevent bats from flying into a project’s blades. Based on continuing concerns about species other than bats, however, additional curtailments are possible at those locations.

 

53


Table of Contents

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 flow.

Our solar energy generation facilities that we acquired for our initial portfolio or those that we otherwise acquire in the future, including the Call Right Projects and any ROFO Projects and the wind and solar projects we intend to acquire through the First Wind Acquisition, 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 for our Initial Portfolio 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 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 flow.

Our use and enjoyment of real property rights for our projects may be adversely affected by the rights of lienholders and leaseholders that are superior to those of the grantors of those real property rights to us.

Solar and wind projects generally are and are likely to be located on land occupied by the project pursuant to long-term easements and leases. The ownership interests in the land subject to these easements and leases may be subject to mortgages securing loans or other liens (such as tax liens) and other easement and lease rights of third parties (such as leases of oil or mineral rights) that were created prior to the project’s easements and leases. As a result, the project’s rights under these easements or leases may be subject, and subordinate, to the rights of those third parties. We perform title searches and obtain title insurance to protect ourselves against these risks. Such measures may, however, be inadequate to protect us against all risk of loss of our rights to use the land on which the

 

54


Table of Contents

solar and wind projects are located, which could have a material adverse effect on our business, financial condition and results of operations.

Current or future litigation or administrative proceedings could have a material adverse effect on our business, financial condition and results of operations.

We have and continue to be involved in legal proceedings, administrative proceedings, claims and other litigation that arise in the ordinary course of business of operating our projects, and we will likely become subject to similar litigation when we acquire the wind projects upon consummation of the First Wind Acquisition. Individuals and interest groups may sue to challenge the issuance of a permit for a solar or wind energy project. In addition, a project may be subject to legal proceedings or claims contesting the operation of the wind projects. Unfavorable outcomes or developments relating to these proceedings, such as judgments for monetary damages, injunctions or denial or revocation of permits, could have a material adverse effect on our business, financial condition and results of operations. In addition, settlement of claims could adversely affect our financial condition and results of operations.

International operations subject us to political and economic uncertainties.

Our 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 current project portfolio by acquiring utility-scale and distributed clean generation assets located in the United States, Canada, the United Kingdom and Chile. 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.

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 flow.

 

55


Table of Contents

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 and other forms of clean energy are in the early stages of development and the industry is evolving 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 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 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 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.

 

56


Table of Contents

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 U.S. 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 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, these arrangements may not 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 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

 

57


Table of Contents

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 renewable 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 renewable 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 flow.

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 (i) renew the sale-leaseback assets at fair market value, (ii) purchase

 

58


Table of Contents

the solar energy assets at fair market value, or (iii) 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 flow.

The accounting treatment for many aspects of our solar energy business, and the wind business we expect to acquire upon consummation of the First Wind Acquisition, is complex and any changes to the accounting interpretations or accounting rules governing solar and wind energy businesses could have a material adverse effect on our GAAP reported results of operations and financial results.

The accounting treatment for many aspects of solar and wind energy businesses is complex, and our future results could be adversely affected by changes in the accounting treatment applicable to solar and wind energy businesses. 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 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 energy projects could adversely affect construction of our projects.

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

Some of our and First Wind’s projects are and have been challenged at the development stage in administrative or judicial challenges from groups opposed to wind or solar energy projects on the basis of potential environmental, health or aesthetic impacts, noise or adverse effects on property values. In addition, continuing Public opposition exists at some of our and First Wind’s projects, or has existed in the past. Our experience is that such opposition subsides over time after projects are completed and are operating, but there are cases where opposition, disputes and even litigation continue into the operating period and could lead to curtailment of a project or other project modifications.

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. Prior to any resale, we expect that our principal source of

 

59


Table of Contents

liquidity will be cash generated from our operating activities, the cash retained by us for working capital purposes out of the gross proceeds of the public equity 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.

For instance, 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. Also, we expect the output from the North American wind projects which we expect to acquire in connection with the First Wind Acquisition to vary seasonally. We expect our 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. Additional equity or debt financing may not 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.

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.

 

60


Table of Contents

Risks Related to our Relationship with our Sponsor

Our Sponsor is our controlling stockholder and exercises substantial influence over TerraForm Power, and we are highly dependent on our Sponsor.

Our Sponsor beneficially owns all of our outstanding Class B common stock. Each share of our outstanding Class B common stock entitles our Sponsor to 10 votes on all matters presented to our stockholders generally. Prior to any resale, as a result of its ownership of our Class B common stock, our Sponsor will possess approximately 93.1% of the combined voting power of our Class A common stock and Class B common stock even though our Sponsor will own only 57.3% of our Class A common stock, Class B common stock and Class B1 common stock on a combined basis. Our Sponsor has expressed its intention to maintain a controlling interest in us going forward. As a result of this ownership, our Sponsor has 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, has the power to appoint all of our directors. Our Sponsor also has 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 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 are not 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 has 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 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 flow. 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. In addition, in connection with its financing activities, including relating to its acquisition of First Wind assets, our Sponsor has pursued and may pursue various transactions that may impact us or the value of our shares of Common Stock, including pledges of our Common Stock held by the Sponsor or its affiliates to secure debt or other obligations. In addition, our Sponsor may enter into agreements with financing entities for the construction and operation of Call Right Projects that could include obligations by us to purchase Call Right Projects in certain limited circumstances. See “Certain Relationships and Related Party Transactions.”

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 our IPO 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 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

 

61


Table of Contents

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 flow.

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 addition, on September 29, 2014, our Sponsor announced that it confidentially submitted a draft registration statement to the SEC relating to the proposed initial public offering of the common stock of a yieldco vehicle focused on owning contracted clean power generation assets in emerging markets, primarily in Asia (excluding Japan) and Africa. If this initial public offering is completed, our Sponsor would have obligations to present opportunities in these or other emerging markets to the other yieldco vehicle, or may otherwise determine that certain opportunities are more appropriate for the other yieldco vehicle than they are for us.

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.”

Certain PPAs signed in connection with our Sponsor’s 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 Sponsor’s utility-scale projects, including any developmental-stage wind projects our Sponsor acquires, as part of the First Wind Acquisition, are generally subject to approval by the applicable state public utility commission. Such public utility commission approval may not 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 Sponsor’s business, financial condition, results of operations and cash flow.

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 and the clean energy industry more widely. Our future success will depend on the continued service of these individuals, including any key executives or employees who join our Sponsor as part of the expected acquisition of First Wind and who are expected to contribute key wind energy experience to our Sponsor. Our Sponsor has experienced departures of key professionals and

 

62


Table of Contents

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 does 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.

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 flow.

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. We have entered into the Management Services Agreement with our Sponsor. Our executive officers are 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. Our Sponsor is 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) are 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 continue to have economic interests in our Sponsor 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 flow.

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 (currently our Sponsor through a wholly owned subsidiary) have the right, if the Subordination Period has expired and if we have made cash

 

63


Table of Contents

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 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 holds 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 has pledged 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. 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.

 

64


Table of Contents

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 to make distributions to the holders of the Class B units and IDRs issued by Terra LLC (all of which are currently 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 provides 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 (vii) 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 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 provides 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

 

65


Table of Contents

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 preexisting 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 flow.

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 has provided 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 our IPO. Under the terms of the Support Agreement, our Sponsor agrees 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

 

66


Table of Contents

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.

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 have agreed 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 TerraForm Power, Inc.

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.

 

67


Table of Contents

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 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 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.”

We are a holding company and our only material asset is 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 comprise our portfolio and the projects that we subsequently acquire. 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 influences 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

 

68


Table of Contents

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 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.

The market price and marketability of our shares may from time to time be significantly affected by numerous factors beyond our control, which may adversely affect our ability to raise capital through future equity financings.

The market price of our shares may fluctuate significantly. Many factors that are beyond our control may significantly affect the market price and marketability of our shares and may adversely affect our ability to raise capital through equity financings. These factors include, but are not limited to, the following:

 

    price and volume fluctuations in the stock markets generally;

 

    significant volatility in the market price and trading volume of securities of registered investment companies, business development companies or companies in our sectors, which may not be related to the operating performance of these companies;

 

    changes in our earnings or variations in operating results;

 

    changes in regulatory policies or tax law;

 

    operating performance of companies comparable to us; and

 

    loss of funding sources.

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 entitles our Sponsor or its controlled affiliates to 10 votes on matters presented to our stockholders generally. Our Sponsor owns all of our Class B common stock, representing 57.3% of our Class A common stock, Class B common stock and Class B1 common stock on a combined basis and representing approximately 93.1% of our combined voting power, based on the assumptions sets forth in “The Offering—Certain Assumptions.” Therefore,

 

69


Table of Contents

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 even if its ownership of our Class B common stock represents less than 50% of the outstanding Class A common stock, Class B common stock and Class B1 common stock on a combined basis. As a result, we are and will likely continue to be considered a “controlled company” for the purposes of the NASDAQ Global Select Market listing requirements. As a “controlled company,” we are permitted to opt out of the NASDAQ Global Select Market listing requirements that 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, and (iii) an annual performance evaluation of the nominating and governance and compensation committees. We 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 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.”

 

70


Table of Contents

Additionally, in order to ensure compliance with Section 203 of the FPA, our amended and restated certificate of incorporation prohibits 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 are 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.

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 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

 

71


Table of Contents

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.

Future sales of our common stock by our Sponsor, Riverstone or the Private Placement Purchasers 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 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,) by our Sponsor, Riverstone or the purchasers of shares in the private placements of our Class A common stock consummated concurrently with our IPO, or the “IPO Private Placement Purchasers” in the market, or the perception that these sales could occur. Prior to any resale, we will have 850,000,000 shares of Class A common stock authorized and 42,319,003 shares of Class A common stock outstanding. Approximately 7,659,712 shares, or 18.1% 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 IPO Private Placement Purchasers, and the underwriters of the public equity offering. 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 the representatives of the underwriters of the public equity offering, is expected to be 90 days after the date of the closing of such 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. In connection with the First Wind Acquisition, our Sponsor is expected to issue $340.0 million of seller notes that, pursuant to their terms, may be converted into shares of our Class A common stock that are issued in exchange for Class B units and Class B common stock currently held by our Sponsor.

Our Sponsor, certain of its affiliates, Riverstone and the IPO Private Placement Purchasers have certain registration rights with respect to shares of our Class A common stock issued or 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, including 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.”

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

 

72


Table of Contents

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 90-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 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 incur increased costs as a result of being a publicly traded company.

As a public company, we incur additional legal, accounting and other expenses that have not been reflected in our predecessor’s historical 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 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.

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 our IPO on July 23, 2014, we had not operated as a public company and had not had to independently comply with Section 404(a) of the Sarbanes-Oxley Act. We are required 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 is 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

 

73


Table of Contents

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.

A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 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.

In 2012, First Wind identified a material weakness in its tax accounting processes. First Wind determined during the 2013 audit process that the material weakness in its tax accounting processes had not yet been remediated. Management has continued to implement the remediation plan it commenced during 2012 to address the material weakness. However, there can be no assurance as to when or whether we will remediate any remaining material weaknesses in First Wind’s internal control over financial reporting following the First Wind Acquisition.

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 accounting standards, and as a result, we may choose to not comply with new or revised accounting

 

74


Table of Contents

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

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, PTCs and a modified accelerated cost-recovery system of 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. PTCs, or ITCs in lieu of PTCs, for wind generation assets apply only to projects the construction of which began prior to the end of 2014 and, the U.S. Congress could fail to extend the termination of, renew or replace such incentives. 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, PTCs or depreciation deductions as a result of a change in law or successful transfer pricing challenge, or any elimination or modification of the 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.

 

75


Table of Contents

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 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, this may not occur.

 

76


Table of Contents

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 complete the First Wind Acquisition and integrate the assets we intend to acquire in the First Wind Acquisition;

 

    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 our Revolver and Term Loan;

 

    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 flow from our asset-based businesses in relation to our debt and other obligations.

 

77


Table of Contents

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.

 

78


Table of Contents

USE OF PROCEEDS

We will not receive any proceeds from the sale of any shares of Class A common stock by the selling stockholders.

The selling stockholders will receive all of the net proceeds from the sale of any shares of Class A common stock offered by them under this prospectus. The selling stockholders will pay any underwriting discounts and commissions and expenses incurred by the selling stockholders for brokerage, accounting, tax, legal services or any other expenses incurred by the selling stockholders in disposing of these shares. We will bear all other costs, fees and expenses incurred in effecting the registration of the shares of Class A common stock covered by this prospectus.

 

79


Table of Contents

CAPITALIZATION

The following table sets forth our predecessor’s cash and cash equivalents, restricted cash and consolidated capitalization as of September 30, 2014 on: (i) an historical basis, and (ii) a pro forma basis to give effect to the Acquisition Transactions, the Acquisition Financing Transactions and the other adjustments described in the unaudited Pro Forma Consolidated Financial Statements set out herein.

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

 

     September 30, 2014  
(in thousands, except share data)    Actual     Pro Forma  
     (unaudited)  

Cash and restricted cash(1)

   $ 334,202      $ 345,073   
  

 

 

   

 

 

 

Long-term debt (including current portion):

    

Revolver

   $ —        $ —     

Term Loan

     299,250        —     

Project-level debt(2)

     1,004,784        1,093,046   

Senior Notes

     —          800,000   
  

 

 

   

 

 

 

Total long-term debt (including current portion)

   $ 1,304,034      $ 1,893,046   

Shareholders’ Equity:

    

Class A common stock, par value $0.01 per share, 850,000,000 shares authorized, 30,652,336 shares issued and outstanding, actual;
53,612,969 shares issued and outstanding, as adjusted

   $ 271      $ 504   

Class B common stock, par value $0.01 per share, 140,000,000 shares authorized, 64,526,654 shares issued and outstanding, actual and as adjusted

     645        645   

Class B1 common stock, par value $0.01 per share, 260,000,000 shares authorized, 5,840,000 shares issued and outstanding, actual and as adjusted

     58        58   

Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, none issued and outstanding, actual and as adjusted

     —          —     

Additional paid-in-capital

     317,482        992,749   

Accumulated Deficit

     (4,014     (36,585

Accumulated Other Comprehensive Income (Loss)

     (931     (937

Non-controlling interests

     817,774        940,306   
  

 

 

   

 

 

 

Total equity

   $ 1,131,285      $ 1,896,740   
  

 

 

   

 

 

 

Total capitalization

   $ 2,435,319      $ 3,789,786   
  

 

 

   

 

 

 

 

(1) Amount includes non-current restricted cash of $7.3 million actual and pro forma.
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity—Project-Level Financing Arrangements.”

 

80


Table of Contents

MARKET PRICE OF OUR CLASS A COMMON STOCK

Our Class A common stock began trading on the NASDAQ Global Select Market under the symbol “TERP” on July 18, 2014. Prior to that, there was no public market for our Class A common stock. The table below sets forth, for the periods indicated, the high and low sale prices per share of our Class A common stock since July 18, 2014.

 

Period   High     Low  

Third Quarter 2014 (July 18, 2014 to September 30, 2014)

  $ 34.34      $ 28.53   

Fourth Quarter 2014

  $ 33.99      $ 21.58   

First Quarter 2015 (through January 5, 2015)

  $ 31.11      $ 29.17   

The last reported trading price of our Class A common stock on January 5, 2015 was $30.26. As of January 5, 2015, we had approximately 49 holders of record of our Class A common stock. This number excludes owners for whom Class A common stock may be held in “street” name.

 

81


Table of Contents

CASH DIVIDEND POLICY

You should read the following discussion of our cash dividend policy in conjunction with “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.

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 nine months ended September 30, 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. 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. On December 22, 2014, we declared a quarterly dividend of $0.27 per share on our outstanding Class A common stock that will be paid on March 16, 2015 to holders of record on March 2, 2015.

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 are currently 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 Distribution Forbearance Period is based on the percentage of the As Delivered CAFD compared to the expected CAFD attributable to the projects in our initial portfolio as of the IPO which were contributed by our Sponsor. 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. 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.”

 

82


Table of Contents

Rationale for our Dividend

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 flow we typically expect to generate.

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 flow may vary from year to year based on, among other things, changes in prices under offtake agreements for energy and RECs 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 flow 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 provides 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.

 

83


Table of Contents
    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.

 

    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), or 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, such as in connection with the Acquisition Financing Transactions, will 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.

 

84


Table of Contents

Minimum Quarterly Distribution

The amended and restated operating agreement of Terra LLC provides 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 prior to any resale would require Terra LLC to have CAFD of approximately $29.9 million per quarter, or $119.7 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 prior to any resale 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:

 

     Aggregate minimum quarterly distributions  
     Number of
Units
     One Quarter      Four Quarters  

Class A units

     42,319,003       $ 9,551,399       $ 38,205,596   

Class B units

     64,526,654         14,563,666         58,254,663   

Class B1 units

     5,840,000         1,318,088         5,272,352   
  

 

 

    

 

 

    

 

 

 

Total

     112,685,657         25,433,153         101,732,611   
  

 

 

    

 

 

    

 

 

 

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 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.”

 

85


Table of Contents

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2013 and the nine months ended September 30, 2014 have been derived from the financial data of TerraForm Power, Inc. and its Predecessor (as derived from historical financial statements appearing elsewhere in this prospectus) and give pro forma effect to (i) certain historical items relating to the IPO, and (ii) the Acquisition Transactions (as defined below) and the Acquisition Financing Transactions (as defined below) as if they had occurred on January 1, 2013. The Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2014 gives effect to the Acquisition Transactions and the Acquisition Financing Transactions as if they had occurred on such date.

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

 

    the acquisition of the Fairwinds and Crundale Call Right Projects from SunEdison, or the “Acquired Call Right Projects”;

 

    the acquisition of certain assets from third parties, including the Capital Dynamics Acquisition, the Hudson Energy Acquisition and the First Wind Acqusition (the “Acquired Projects” and, together with the Acquired Call Right Projects, the “Acquisition Transactions”).

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

 

    adjustments to reflect the payment of approximately $35 million, plus an estimate for working capital, for the Hudson Energy Acquisition, which we financed with available cash on hand;

 

    adjustments to reflect the payment of approximately $250 million, plus an estimate for working capital, for the Capital Dynamics Acquisition;

 

    adjustments to reflect the $275 million increase of the Term Loan;

 

    adjustments to reflect the payment of approximately $850 million for the First Wind Acquisition, plus approximately $12 million of debt breakage fees; and

 

    adjustments to reflect estimated net proceeds of approximately $338 million from the public equity offering, $338 million of net proceeds from the Acquisition Private Placement, and the assumed issuance of $800 million of senior unsecured notes (“Senior Notes”) (collectively, the “First Wind Acquisition Financing” and, together with the Capital Dynamics Acquisition Financing, the “Acquisition Financing Transactions”).

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

 

    adjustments 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, intangible assets, and debt assumed; and

 

    adjustments to reflect operating activity.

The pro forma financial statements were based on, and should be read in conjunction with:

 

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

 

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

 

    the consolidated financial statements of TerraForm Power, Inc. for the nine months ended September 30, 2014 and the notes relating thereto, included elsewhere in this prospectus; and

 

86


Table of Contents
    the consolidated financial statements of Acquired Projects purchased from third parties for the year ended December 31, 2013 and for the periods indicated in Note 2 of the Unaudited Pro Forma Consolidated Statements of Operations for the nine months ended September 30, 2014, and the notes relating thereto, included elsewhere in this prospectus.

The historical consolidated financial statements have been adjusted in the pro forma financial statements to give pro forma effect to events that are (i) directly attributable to the items described above, (ii) factually supportable and (iii) with respect to the pro forma statements of operations, expected to have a continuing impact on the consolidated results.

As described in the accompanying notes, the Unaudited Consolidated Pro Forma Financial Statements have been prepared using the acquisition method of accounting under existing GAAP. The purchase price will be allocated to the assets and liabilities acquired based upon their estimated fair values as of the date of completion of the applicable Acquisition Transactions. 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 Acquisition 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 Acquisition Transactions. Accordingly, the pro forma purchase price adjustments are preliminary, subject to future adjustments, and have been made solely for the purpose of providing the pro forma financial information presented below. Adjustments to these preliminary estimates are expected to occur and these adjustments could have a material impact on the accompanying pro forma financial statements, although we do not expect the adjustments to have a material effect on the Company’s future results of operations and financial position.

The pro forma financial statements are presented for informational purposes only. The pro forma financial statements do not purport to represent what our results of operations or financial condition would have been had the Acquisition 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.

The unaudited pro forma consolidated balance sheet and statement of operations should be read in conjunction with the sections entitled “Recent Developments,” “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 consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

87


Table of Contents

Unaudited Pro Forma Consolidated Statement of Operations

For the Nine Months Ended September 30, 2014

 

                      Pro Forma Adjustments     TerraForm
Power, Inc.
Pro Forma
 
(in thousands, except shares and per share
data)
  TerraForm
Power,
Inc.
    Combined
Acquired
Call Right
Projects(1)
    Combined
Acquired
3rd Party
Projects(2)
    Acquisition
Adjustments
    Acquisition
Financing
Transactions
   

Statement of Operations Data:

           

Operating revenues:

           

Energy

  $ 59,692      $ 893      $ 121,348      $ (38,501 )(3)    $ —        $ 143,432   

Incentives

    22,832        —          8,275        24,167 (3)      —          55,274   

Incentives—affiliate

    774        —          —          —          —          774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    83,298        893        129,623        (14,334     —          199,480   

Operating costs and expenses:

           

Cost of operations

    6,051        —          53,585        —          —          59,636   

Cost of operations—affiliate

    3,911        —          —          —          —          3,911   

General and administrative

    3,767        —          10,663        —          —          14,430   

General and administrative—affiliate

    8,783        —          —          —          —          8,783   

Acquisition costs

    2,537        —          —          (2,537 )(4)      —          —     

Acquisition costs—affiliate

    2,826        —          —          (2,826 )(4)      —          —     

Formation and offering related fees and expenses

    3,399        —          —          —          —          3,399   

Depreciation, amortization and accretion

    21,053        353        61,830        (13,635 )(5)      —          69,601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    52,327        353        126,078        (18,998     —          159,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    30,971        540        3,545        4,664        —          39,720   

Other (income) expense:

           

Interest expense, net

    53,217        —          60,903        (37,582 )(6)      25,730 (9)      102,268   

Loss/(Gain) on extinguishment of debt, net

    (7,635     —          —          —          —          (7,635

Loss on foreign currency exchange, net

    6,914        —          189        —          —          7,103   

Other, net

    582        —          12,891        —          —          13,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense

    53,078        —          73,983        (37,582     25,730        115,209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

    (22,107     540        (70,438     42,246        (25,730     (75,489

Income tax benefit

    (4,069     —          698        3,338 (7)      —          (33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (18,038     540        (71,136     38,908        (25,730     (75,456

Less net loss attributable to non-controlling interests

    (3,667     —          (18,029     (25,845 )(8)      —          (47,541 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to TerraForm Power, Inc.

  $ (14,371   $ 540      $ (53,107   $ 64,753      $ (25,730   $ (27,915
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma basic and diluted loss per share(10)

            $ (0.55)   
           

 

 

 

Pro Forma weighted average shares outstanding(10)

              50,299,253   
           

 

 

 

 

88


Table of Contents

Notes to the Unaudited Pro Forma Consolidated Statements of Operations

 

(1) Represents the acquisition of Fairwinds and Crundale Call Rights projects from SunEdison.
(2) The following table represents the consolidating schedule of Acquired Projects results reflected in the Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended September 30, 2014:

 

    For the Period Ended(a)     Combined
Acquired
3rd Party
Projects
 
    3/31/14     3/31/14     3/31/14     3/31/14     3/31/14     6/30/2014     9/30/2014          
(in thousands)   Nellis     CalRenew-1     Atwell
Island
    Summit
Solar
    Stonehenge
Group(b)
    Mt.
Signal
    First
Wind
    All
Other(c)
   

Statement of Operations Data:

                 

Operating Revenues

                 

Energy Revenues

  $ 154      $ 470      $ 864      $ 725      $ 341      $ 23,032      $ 70,662      $ 25,100      $ 121,348   

Incentive Revenues

    1,524        —          —          742        562        —          —          5,447        8,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    1,678        470        864        1,467        903        23,032        70,662        30,547        129,623   

Operating costs and expenses:

                 

Cost of operations

    96        100        19        97        114        4,783        40,216        8,160        53,585   

Depreciation and accretion

    1,061        136        756        706        627        11,440        33,947        13,157        61,830   

General and administrative

    89        —          268        266        159        714        5,074        4,093        10,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    1,246        236        1,043        1,069        900        16,937        79,237        25,410        126,078   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    432        234        (179     398        3        6,095        (8,575     5,137        3,545   

Other expense (income):

                 

Interest expense, net

    750        475        348        443        683        19,631        28,402        10,171        60,903   

Other (income) expense

    —          —          —          —          (225     189        12,449 (d)      667        13,080   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    750        475        348        443        458        19,820        40,851        10,838        73,983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income benefit

    (318     (241     (527     (45     (455     (13,725     (49,426     (5,701     (70,438

Income tax expense (benefit)

    —          —          —          —          (33     —          —          731        698   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (318     (241     (527     (45     (422     (13,725     (49,426     (6,432     (71,136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less net loss attributable to non-controlling interests

    —          —          —          (1     —          (12,807     (2,110     (3,111     (18,029
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to TerraForm Power, Inc.

  $ (318   $ (241   $ (527   $ (44   $ (422   $ (918   $ (47,316   $ (3,321   $ (53,107
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Periods presented are for the interim period through the quarter end date prior to acquisition.
  (b) 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 USD/GBP.
  (c) Represents the combined results of operations of individually insignificant acquisitions for periods prior to acquisition
  (d) Represents the net of gains or losses on the sale of assets, losses on disposal and impairment of assets, losses on early extinguishments of debt, settlements, and other income reflected in the historical results of First Wind.

 

(3) Amortization of power purchase agreements intangible—Represents amortization of acquired off-market PPAs and incentive arrangements over the terms of such agreements resulting from fair value adjustments of the Acquired Projects, and a reclassification of green energy credit revenue for Acquired Projects from energy revenues to incentive revenues to conform accounting policies. 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.

 

(4) Acquisition costs—Represents adjustments to remove acquisition costs reflected in the historical financial statements.

 

89


Table of Contents
(5) 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 1/25 of the change in fair value adjustments to property, plant and equipment would be recognized annually.

 

(6) 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.

 

(7) Income taxes—Represents an adjustment to eliminate federal and state tax benefits from net losses. A valuation allowance is recognized for all tax benefits until it becomes more likely than not the benefits will be realized by the Company.

 

(8) Non-controlling interests— Adjustment to allocate pro forma net loss to non-controlling interests. This adjustment includes project-level interests and interests in Terra LLC held by Riverstone and SunEdison.

 

(9) Interest expense is adjusted to include the estimated impact of the issuance of the Senior Notes at an assumed interest rate per annum of 6.25%, plus an estimate of amortization of debt issuance costs and discounts. The actual interest expense may vary from that estimate and a 1/8% variance in the estimated interest rate would result in a $0.6 million change in pro forma interest expense for the nine months ended September 30, 2014.

 

(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

   $ (27,915   $ (27,915
  

 

 

   

 

 

 

EPS Denominator:

    

Class A shares offered in the public equity offering(a)

     11,566,424        11,566,424   

Class A shares—IPO

     23,074,750        23,074,750   

Acquisition Private Placement

     11,666,667        11,666,667   

IPO Private Placement

     2,600,000        2,600,000   

Restricted Class A shares

     1,391,412        1,391,412   
  

 

 

   

 

 

 

Total Class A shares

     50,299,253        50,299,253   
  

 

 

   

 

 

 

Loss per share

   $ (0.55   $ (0.55
  

 

 

   

 

 

 

 

  (a) Assumes the issuance of 11,566,424 shares of Class A common stock in the public equity offering, which reflects gross proceeds to the issuer of $350 million at an assumed price to the public of $30.26 per share, which was the closing price of our Class A common stock on January 5, 2015.

 

90


Table of Contents

Unaudited Pro Forma Consolidated Statement of Operations

for the Year Ended December 31, 2013

 

                Pro Forma Adjustments  
(in thousands, except shares and per share
data)
  TerraForm
Power
(Predecessor)
    Combined
Acquired
3rd Party
Projects(1)
    Acquisition
Adjustments
    Acquisition
Financing
Transactions
    TerraForm
Power, Inc.
Pro Forma
 

Statement of Operations Data:

         

Operating revenues:

         

Energy

  $ 8,928      $ 148,096      $ (37,856 )(2)    $ —        $ 119,168   

Incentives

    7,608        19,907        17,756 (2)      —          45,271   

Incentives—affiliate

    933        —          —          —          933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    17,469        168,003        (20,100     —          165,372   

Operating costs and expenses:

         

Cost of operations

    1,024        55,887        —          —          56,911   

Cost of operations—affiliate

    911        —          —          —          911   

General and administrative

    289        12,739        —          —          13,028   

General and administrative—affiliate

    5,158        —          —          —          5,158   

Depreciation, amortization and accretion

    4,961        69,127        (13,452 )(3)      —          60,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    12,343        137,753        (13,452     —          136,644   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    5,126        30,250        (6,648     —          28,728   

Other expense (income):

         

Interest expense, net

    6,267        59,865        (43,360 )(4)      53,056 (7)      75,828   

Gain on foreign currency exchange

    (771     —          —          —          (771

Other, net

    —          (36,648     —          —          (36,648
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense (income)

    5,496        23,217        (43,360     53,056        38,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Income before income tax (benefit)/provision

    (370     7,033        36,712        (53,056     (9,681

Income tax (benefit)

    (88     484        (396 )(5)      —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (282     6,549        37,108        (53,056     (9,681

Less net (loss) income attributable to non-controlling interests

    —          10,605        994 (6)      —          11,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to TerraForm Power, Inc.

  $ (282   $ (4,056   $ 36,114      $ (53,056   $ (21,280
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma basic and diluted loss per share(8)

          $ (0.42
         

 

 

 

Pro Forma weighted average shares outstanding(8)

            50,299,253   
         

 

 

 

 

91


Table of Contents

Notes to the Unaudited Pro Forma Consolidated Statements of Operations

 

(1) The following table represents the consolidating schedule of Predecessor Acquired Projects reflected in the Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2013:

 

(in thousands)   Nellis     CalRenew-1     Atwell
Island
    Summit
Solar
Combined
    Stonehenge
Group(a)
    Mt.
Signal
    First
Wind
    All
Other(b)
    Combined
Acquired
3rd Party
Projects
 

Statement of Operations Data:

                 

Operating revenues:

                 

Energy

  $ 698      $ 2,628      $ 5,371      $ 5,327      $ 1,467      $ 1,777      $ 96,453      $ 34,375      $ 148,096   

Incentives

    6,920        —          —          4,501        2,619        —          —          5,867        19,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    7,618        2,628        5,371        9,828        4,086        1,777        96,453        40,242        168,003   

Operating costs and expenses:

                 

Cost of operations

    435        372        79        1,706        305        536        45,924        6,530        55,887   

General and administrative

    314        —          1,123        260        546        1,209        5,926        3,361        12,739   

Depreciation, amortization and accretion

    4,241        538        2,266        2,726        1,791        2,012        43,650        11,903        69,127   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    4,990        910        3,468        4,692        2,642        3,757        95,500        21,794        137,753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    2,628        1,718        1,903        5,136        1,444        (1,980     953        18,448        30,250   

Other (income) expense:

                 

Interest expense, net

    3,079        1,447        1,393        1,485        2,822        8,351        33,496        7,792        59,865   

Other, net

    —          —          3        —          (108     3        (35,895 )(c)      (651     (36,648
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense

    3,079        1,447        1,396        1,485        2,714        8,354        (2,399     7,141        23,217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

    (451     271        507        3,651        (1,270     (10,334     3,352        11,307        7,033   

Income tax benefit

      —          —          —          53        —          —          431        484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (451     271        507        3,651        (1,323     (10,334     3,352        10,876        6,549   

Less net (loss) income attributable to non-controlling interests

    —          —          —          39        —          4,425        2,692        3,449        10,605   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Acquired 3rd Party Projects

  $ (451   $ 271      $ 507      $ 3,612      $ (1,323   $ (14,759   $ 660      $ 7,427      $ (4,056
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) The statements of operations for the year ended December 31, 2013 have been translated from British pounds (GBP) to U.S. dollars (USD) at a rate of $1.564 USD/GBP.
  (b) Represents the combined results of operations of individually insignificant acquisitions for periods prior to acquisition.
  (c) Represents gains or losses on the sale of assets, losses on disposal and impairment of assets, losses on early extinguishments of debt, settlements, and other income reflected in the historical results of First Wind.

 

(2) Amortization of power purchase agreements intangible—Represents amortization of acquired off-market PPAs and incentive arrangements over the terms of such agreements resulting from fair value adjustments of the Acquired Projects, and a reclassification of of green energy credit revenue for Acquired Projects from energy revenues to incentive revenues to conform accounting policies. 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.

 

92


Table of Contents
(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. 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 lives of the property, plant and equipment acquired range from 24 to 29 years.

 

(4) Interest expense—Represents the elimination of interest expense related to debt not assumed, the elimination of interest expense on terminated financing lease agreements, 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.

 

(5) Income taxes—Represents an adjustment to eliminate federal and state tax benefits from net losses. A valuation allowance is recognized for all federal and state tax benefits until it becomes more likely than not the benefits will be realized by the Company.

 

(6) Non-controlling interests—Represents the allocation of pro forma net loss to non-controlling interests. This adjustment includes project level interests and interests in Terra LLC held by Riverstone and SunEdison.

 

(7) Interest expense is adjusted to include the estimated impact of the issuance of the Senior Notes at an assumed interest rate per annum of 6.25%, plus an estimate of amortization of debt issuance costs and discounts. The actual interest expense may vary from that estimate and a 1/8% variance in the estimated interest rate would result in a $1.0 million change in pro forma interest expense for the year ended December 31, 2013.

 

(8) 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

   $ (21,280   $ (21,280
  

 

 

   

 

 

 

EPS Denominator:

    

Class A shares offered in the public equity offering(a)

     11,566,424        11,566,424   

Class A shares - IPO

     23,074,750        23,074,750   

Acquisition Private Placement

     11,666,667        11,666,667   

IPO Private Placement

     2,600,000        2,600,000   

Restricted Class A shares

     1,391,412        1,391,412   
  

 

 

   

 

 

 

Total Class A shares

     50,299,253        50,299,253   
  

 

 

   

 

 

 

Loss per share

   $ (0.42   $ (0.42
  

 

 

   

 

 

 

 

  (a) Assumes the issuance of 11,566,424 shares of Class A common stock in the public equity offering, which reflects gross proceeds to the issuer of $350 million at an assumed price to the public of $30.26 per share, which was the closing price of our Class A common stock on January 5, 2015.

 

93


Table of Contents

Unaudited Pro Forma Consolidated Balance Sheet

As of September 30, 2014

 

                      Pro Forma Adjustments        
(in thousands, except share data)   TerraForm
Power, Inc.
    Combined
Acquired
Call Right
Projects(1)
    Combined
Acquired
3rd Party
Projects(2)
    Acquisition
Adjustments
    Acquisition
Financing
Transactions(18)
    Consideration
for
Acquisitions
and
Refinancing
of Term Loan
    TerraForm
Power,

Inc.
Pro Forma
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 259,363      $ 11      $ 19,138      $ (21,250 )(3)    $ 1,724,936      $ (1,750,802 )(19)    $ 231,396   

Restricted cash

    67,567        —          38,838        —          —          —          106,405   

Accounts receivable

    50,028        882        16,026        —          —          —          66,936   

Deferred income taxes

    —          192        1,369        (1,369 )(4)      —          —          192   

Due from affiliates

    —          —          6,166        (6,166 )(5)      —          —          —     

Prepayments and other current assets

    51,720        —          11,960        (1,544 )(6)      —          —          62,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total currents assets

    428,678        1,085        93,497        (30,329     1,724,936        (1,750,802     467,065   

Property and equipment, net

    1,848,635        95,478        1,295,794        (294,686 )(7)      —          —          2,945,221   

Intangible assets

    289,209        —          —          217,582 (8)      —          —          506,790   

Goodwill

    —          —          —          16,200 (9)      —          —          16,200   

Deferred financing costs, net

    36,081        3,121        19,847        (19,847 )(10)      25,564        (11,861 )(19)      52,905   

Other assets

    10,477        —          75,802        (35,392 )(11)      —          —          50,887   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,613,080      $ 99,684      $ 1,484,940      $ (146,473   $ 1,750,500      $ (1,762,663   $ 4,039,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

             

Current liabilities:

             

Current portion of long-term debt

  $ 270,900      $ —        $ 52,584      $ (51,373 )(12)    $ 2,750      $ (5,750 )(19)    $ 269,111   

Accounts payable and other current liabilities

    87,718        266        18,535        (1,725 )(13)      —          —          104,794   

Deferred revenue

    7,245        —          18,519        (18,519 )(14)      —          —          7,245   

Due to parents and affiliates

    1,507        —          —          —          —          —          1,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    367,370        266        89,638        (71,617     2,750        (5,750     382,657   

Long-term debt

    1,033,134        63,716        527,335        (504,000 )(12)      1,072,250        (568,500 )(19)      1,623,935   

Deferred revenue

    35,840        —          27,112        (27,112 )(14)      —          —          35,840   

Deferred income taxes

    702        —          4,073        (4,073 )(4)      —          —          702   

Other long-term liabilities

    —          —          12,736        (519 )(15)      —          —          12,217   

Asset retirement obligations

    44,749        4,617        19,759        —          —          —          69,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,481,795        68,599        680,653        (607,321     1,075,000        (574,250     2,124,476   

Redeemable interest in subsidiaries

      —          85,761        (67,909 )(16)      —          —          17,852   

Equity:

             

Members’ equity

    —          33,000        595,275        548,277 (17)      —          (1,176,552 )(19)      —     

Class A common stock, par value $0.01 per share, 850,000,000 shares authorized, 30,652,336 shares issued and outstanding, actual; 53,612,969 shares issued and outstanding, as adjusted

    271        —          —          —          233        —          504   

Class B common stock, par value $0.01 per share, 140,000,000 shares authorized, 64,526,654 shares issued and outstanding, actual and as adjusted

    645        —          —          —          —          —          645   

Class B1 common stock, par value $0.01 per share, 260,000,000 shares authorized, 5,840,000 shares issued and outstanding, actual and as adjusted

    58        —          —          —          —          —          58   

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, actual and as adjusted

    —          —          —          —          —          —          —     

Additional paid-in-capital

    317,482        —          —          —          675,267        —          992,749   

Accumulated deficit

    (4,014     540        —          (21,250 )(3)      —          (11,861 )(20)      (36,585

Accumulated OCI

    (931     (6     —          —          —          —          (937
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total TerraForm Power Stockholders’ equity

    313,511        33,534        595,275        527,027        675,500        (1,188,413     956,434   

Non-controlling interests

    817,774        (2,449     123,251        1,730        —          —          940,306   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    1,131,285        31,085        718,526        528,757        675,500        (1,188,413     1,896,740   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 2,613,080      $ 99,684      $ 1,484,940      $ (146,473   $ 1,750,500      $ (1,762,663   $ 4,039,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

94


Table of Contents

Notes to the Unaudited Pro Forma Consolidated Balance Sheet

 

(1) Represents the acquisition of Fairwinds and Crundale Call Right projects from SunEdison. On January 7, 2015, the Company announced the acquisition of 26 MW of additional Call Rights Projects from SunEdison through a series of transactions valued at $47 million. These projects have not been reflected in the Pro Forma Consolidated Financial Statements and had no operations during the periods presented.

 

(2) The following table represents the consolidating schedule of Acquired Projects reflected in the Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2014:

 

(in thousands)    First Wind      All
Other
     Combined
Acquired 3rd
Party Projects
 

Assets

        

Current assets:

        

Cash and cash equivalents

   $ 15,699       $ 3,439       $ 19,138   

Restricted cash

     35,803         3,035         38,838   

Accounts receivable

     10,572         5,454         16,026   

Deferred income taxes

     —           1,369         1,369   

Due from affiliates

     —           6,166         6,166   

Prepayments and other current assets

     9,829         2,131         11,960   
  

 

 

    

 

 

    

 

 

 

Total currents assets

     71,903         21,594         93,497   

Property and equipment, net

     938,470         357,324         1,295,794   

Deferred financing costs, net

     18,015         1,832         19,847   

Other assets

     57,766         18,036         75,802   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,086,154       $ 398,786       $ 1,484,940