Dear Mr. Wuebbels:
Thank you for making time to meet with us briefly at the Morgan Stanley YieldCo Conference last Wednesday. As noted in the meeting (and in our previous letter), Appaloosa has a considerable investment in TerraForm Power, Inc. (“TERP”, or the “Company”), which surely demonstrates our commitment and belief that the Company can regain its balance. Such normalization can only occur, however, with independent leadership that is determined to honor the Company’s mandate (as again stated in its most recent 10-Q) to “acquire, operate and own renewable energy generation assets serving utility and commercial customers that generate high-quality contracted cash flows”. Once again, this will require an arm’s length relationship with SunEdison (“SUNE”) and adherence to proper (and lawful) governance procedures and principles.
As discussed, we view the proposed Vivint transaction as just one (albeit the most egregious) breach of these governance standards. Notwithstanding the assurances you say you have received from the Seller’s (i.e., SUNE’s) attorneys, we do not believe that the Purchase Agreement between TERP and SUNE reflects a valid, arm’s length commercial arrangement. We thus question its legal enforceability for the following reasons:
•In the first place, the Agreement was struck between an affiliated subsidiary and its controlling parent. Under well-established Delaware law, we believe the validity of this Agreement (and the conduct of the officers and directors who approved it) would be evaluated under the entire fairness doctrine, not the business judgement rule. Thus, the burden of proof as to fairness falls on the Company’s Board of Directors, who must establish that the Purchase Agreement was fair to TERP from a commercial standpoint, and that the procedures by which it was adopted were also fair.
•Second, the basic terms of the transaction are by no means fair to TERP. The effective purchase price, approaching $1.84 per watt including transaction costs, is high by market standards of last July and even higher by today’s standards. As we’ve already noted, acquiring these assets (particularly in such massive a quantity) deviates from TERP’s business mandate and serves to benefit only SUNE. SUNE clearly covets the Vivint development operations that it needs to offset defects in its own capabilities and market position, which it has ceded to competitors such as Solar City, SunRun, and others. The Purchase Agreement thus facilitates SUNE’s acquisition of the capabilities it lacks, and forces TERP to acquire inferior rooftop assets at an inflated price in order to subsidize the cost of the SUNE/Vivint merger.
•Additionally, the basic terms of the Purchase Agreement are certainly not market-based or representative of an arm’s length transaction. TERP is burdened with specific performance provisions in the document and is not permitted the benefit of significant seller representations, fiduciary review, break-up fee, or other protective provisions that might normally be negotiated between an unaffiliated buyer and seller.
•Moreover, the obligations under the Agreement are not mutual. SUNE/Vivint is held to few, if any, standards of performance and is even permitted to fail in delivering the contracted assets at the effective date. Instead, the seller (i.e., SUNE) can issue an unsecured note to TERP as a substitute for any deficiency – technically, in an amount up to 100% of the purchase commitment. Based on public information, it appears that this provision will be invoked. Therefore, the below market interest rate on the note (8% vs. a 15% all-in yield on a note issued to Goldman Sachs at the time of the deal, and an average yield of more than 20% on SUNE’s bonds at current market prices) and SUNE’s precarious financial position become material contractual defects.
•More to the point, given SUNE’s over-extended financial condition, it is doubtful that TERP will ever be able to collect on the note and receive equivalent value for its purchase.
The Vivint transaction poses a serious threat to the Company’s prospects and should be vigorously resisted by you, as CEO, and the Governance and Conflicts Committee, as the unaffiliated shareholders’ advocate. We look to the both of you to fulfill your obligations and expect to see clear evidence of the steps you will take toward this end.
James E. Bolin,
cc: David Tepper