TerraForm Power shares surged in early trading this morning, touching $9 per share briefly after climbing by more than 30% before settling just under $9 per share, as of this writing. David Tepper’s Appaloosa Management has taken an interest in the solar YieldCo and has sent a letter to its board of directors. Also this morning, Oppenheimer analysts said they upgraded the stock because they think the current valuation is too low.
Shares of SunEdison, the renewable energy company TerraForm serves as the YieldCo of, climbed by as much as 3.13% to $3.29 per share in morning trading.
Tepper writes against TerraForm Power’s new strategic focus
In Appaloosa’s letter to TerraForm Power’s management, a copy of which was obtained by ValueWalk partner Activist Stocks, Tepper said he sees “little apparent benefit” for the company’s shareholders in the recent shift toward acquiring projects from its “Sponsor” (a.k.a., SunEdison). Also the activist investor said the shift “raises concern for obvious conflicts between the interests of TERP and its ‘Sponsor.'”
As mentioned earlier, TerraForm Power has been acting as a YieldCo for SunEdison, which basically means it holds and finances SunEdison’s developed solar and wind power assets. Having a YieldCo like TerraForm has become a trend in the renewable energy industry. Under the standard YieldCo model, long-term purchase agreements for power with “large, investment-grade corporate counterparties” support those developed projects.
Vivint Solar acquisition presents a problem, says Appaloosa
Appaloosa adds that this standard YieldCo business model made sense for both TerraForm and SunEdison. However, Appaloosa management believevs the acquisition of Vivint Solar marks an “unfortunate departure” from it and “appears to serve the sole purpose of promoting SUNE’s desire to acquire VSLR’s development and operating assets, rather than enhancing the quality and value of TERP’s holdings.
You may remember that earlier this month, regulatory filings revealed that Dan Loeb’s Third Point exited its position in TerraForm, while David Einhorn’s Greenlight Capital trimmed its position in the stock. The timing indicates that these moves might have come around the time the Vivint acquisition was announced in July, although we don’t know exactly when during the third quarter the firms made them
Vivint’s focus is on the residential solar market, which Appaloosa believes brings “weaker counterparties” and a greater risk profile as a result, thus presenting a major downside risk to Terraform. The firm wants more “precise details” of the Vivint acquisition plan and stands against SunEdison’s plan to put 500 megawatts per year of residential assets into TerraForm over the next five years.
Also Appaloosa is unhappy with the “reconfiguration” of the Invenergy acquisition deal, which he thinks benefits SunEdison much more than TerraForm Power. Further, Moody’s recently downgraded TerraForm’s debt to a B2 rating, which is extremely speculative.
Oppenheimer upgrades TerraForm
In addition to David Tepper’s involvement in TerraForm, the company received a big upgrade from Oppenheimer analysts Colin Rusch and Noah Kaye to Outperform and a new price target of $10 per share. Their report runs counter to Appaloosa’s letter, as apparently they think TerraForm Power is doing things right.
They think the firm’s share price is currently lower than its asset portfolio’s “intrinsic value” and that the risk/ reward profile currently is “substantially weighted to the upside.” Further, they think the selloff due to the recent management changes was overdone and provided a “compelling entry point” for interested investors.
Oppenheimer disagrees with Appaloosa
The Oppenheimer team assumes that the acquisitions of Vivint Solar and Invenergy close and note that there are still some concerns about governance. However, they think those concerns are also overdone. Investors (including Tepper’s Appaloosa, as per the letter outlined above), are worried about “arm’s-length dealing between TERP and SUNE despite the formal arrangements to ensure fairness. Rusch and Kaye, however, are only “somewhat cautious” on this issue.
They disagree on the topic of TerraForm’s debt as well, as they discount the firm’s future dividends by 10% and believe its cash flows are “investment-grade” and that they should “trade in line with similar asset rates. Even with a 5% discount rate, they add that TerraForm stock climbs to $13 per share. They’ve used a 10% discount rate because of the uncertainty about the firm’s liquidity resources and worries about corporate governance.