Q&A: Carlos Domenech, TerraForm Power
Carlos Domenech, ceo and president of TerraForm Power, sat down with Managing Editor Holly Fletcher on his trip to New York to ring the bell at NASDAQ, anointing the public arrival of SunEdison’s maiden yield company.
Domenech talked about SunEdison and Beltsville, Md.-based TerraForm’s decision to have separate management teams, why it was best to not be the first yieldco and the company’s strategy for bringing other fuel types to the TerraForm portfolio. “We felt that it was important for other companies to go first. We wanted to understand. We didn’t want to be the tenth yieldco but we didn’t want to be the first three or four either,” Domenech said.
PFR: Tell me about TerraForm Process and how you saw investor interest evolve in the process of taking it public.
Domenech: It was really overwhelming. The amount of interest in solar and the amount of interest in what I would call a one-of-a-kind structure has really been fabulous. In many ways I feel that we are educating a lot of folks and the reception is that every time we tell a story, it’s almost like ‘converted.’
I think it has to do with the very essence of what the company does. At the end of the day we’re packaging long-term contracts with high quality offtakers that have a pretty high degree of predictability. There is very little risk with solar as a resource and that creates a lot of interest. So I think that people like the growth profile. I’d say that we’re on the upper end. We’ve said that we’ll grow the cash available for distribution by 15% at the dividend level for the next three years.
PFR: When you say the structure is one-of-a-kind, how does it compare with some of the yieldcos that are out there?
Domenech: We think that there is no one single thing that makes us unique. It’s really the aggregate of how we built the company that makes us unique. First, we have a dedicated team, which many other yieldcos don’t have so we have a group of folks that are originating. We have a group of folks that are structuring capital. We have a group of folks that are managing the power plants. We believe that’s important because over time you can differentiate yourselves and get a better return for your shareholders when you’ve got people waking up every day to look after you.
Second, I would say is that we have an unprecedented commitment by the sponsor. SunEdison has committed $175 million for [cash available for distribution]. If you look at growth implied it’s 62% CAGR so we say 15% for three-years but the reality is that SunEdison is committing a lot more capital for distribution. So for 2015 it’s $75 million and for 2016 it’s $100 million. That’s pretty material. We call that the ‘call rights projects.’
Also SunEdison is making a six-year ROFO on the countries that we operate in today—that’s U.S., Canada, Chile and the U.K. That’s pretty compelling and yet on top of that SunEdison is providing 99% uptime guarantee on the systems, which means they are responsible for the system running, call it almost all the time, which is really again an unprecedented commitment.
You put all those things together and it’s just really amazing that a company has done that. Why would SunEdison do that? SunEdison has done that because it has a view that over time more value gets retained through either ownership of TerraForm or the IDR structure, which again I call that unique. The incentive distribution right which only one other yieldco has and we believe is critical to align long-term incentives with the sponsor. We set the first distribution up at 50%. Most MLPs are set up at 15% so yet another example of a commitment that SunEdison has made to the vehicle.
The third thing I will say is we are not just a U.S. company. We will always be North America centric but we are in other countries and we believe this provides a nice portfolio diversification for investors while we still retain the U.S-centric risk profile. We believe that’s also an important element. We are today the only pure play solar company. That’s another point of differentiation. We have said that we will do other fuel types. That will come in due time.
PFR: On the public earnings calls it seemed that deliberation over whether to do a yieldco started pretty early.
Domenech: The yieldco thought process started in 2008. It started even when SunEdison was a private company. We evaluated MLPs, REITs and really different forms of asset ownership to optimize value. When yieldcos started to emerge SunEdison had already been working pretty hard to launch its own well before it was announced. Simply because it was a continuation.
PFR: It’s really an evolution of what’s next in the pursuit of capital.
Domenech: That’s a very good way to put how both SunEdison and TerraForm approach capital formation. It really is an evolution—an evolution that is defined by innovation and this is no different than other things that SunEdison and TerraForm have done.
In terms of ‘why now?’ Well, it was the perfect timing. We felt that it was important for other companies to go first. We wanted to understand. We didn’t want to be the tenth yieldco but we didn’t want to be the first three or four either.
The timing worked well for us because we got to see, for example how NRG Energy came out with the [operating company] structure, which is a common structure. They also proved the concept of yieldco. They don’t have a dedicated team, fine.
Next, folks at NextEra Energy brought in the IDRs. We felt like we needed to have a dedicated team but also we liked the IDRs.
Then Abengoa went and found that it is okay to go outside the U.S. if you have the right risk profile, the right counterparties and if you’re in U.S. dollars. For us, that brought in the international element. We were then like, ‘this is perfect.’ All the concepts that we wanted to include are there. Those are reflected in how we are constructed. Then we launched.
PFR: As energy storage gets a bigger market share and given that it aligns with renewables, is that something you would consider?
We are very excited about energy storage simply because it provides a broader set of solutions to customers that helps you firm power. For solar it’s great because you can size up the system and size it up to provide for you 24-7. It’s really the juxtaposition of wind, solar, battery storage, maybe hydro and I think it’s really exciting about where renewables are going to go in the next few years.
PFR: In terms of other types of renewables, SunEdison was historically a solar developer and MEMC did other things before the acquisition but do you think you’d be in the market to acquire developed assets or do you think you have the in-house expertise to branch off into development?
Domenech: You should think of SunEdison as a solutions provider. An innovator. Keep in mind that prior to that SunEdison, previously MEMC, was a technology company. There’s been 50 years of R&D. SunEdison today does have a small group of folks that are looking in to hybrid solutions. It does have the expertise to do that and originate that. It’s a very simple answer.
You’d be surprised also that both in SunEdison and TerraForm there are people that have expertise in other renewable types. I like to think that both SunEdison and TerraForm are more of an energy companies than a solar company that is solutions-focused. At the end of the day, I ran SunEdison for a number of years. I’ve taken many of the folks that worked with me in building the company into TerraForm. There is a very strong and collegiate relationship between the two companies as you can imagine. But the DNA is the same. It’s innovation. It’s coming up with solutions for customers. Obviously SunEdison is in the business of development, PPAs and contracts. We are in the business of managing and optimizing asset performance and packaging those solutions into long-term contracts.
Now it might be easier for TerraForm on the outset to work with other third parties because it is our mandate to really go out there and grow and integrate, whether it’s wind, battery storage or hydro, with solar. Eventually, and I think SunEdison made it clear on the last earnings call, that it is looking into hybrid solutions.
PFR: The team that that works with SunEdison and the team that works with TerraForm—there is overlap and a relationship but they are different people?
Domenech: Yes, different people. Chris Bailey who ran project finance for SunEdison is now on my team and Ryan Bennett, who was on Chris’s team, now runs project finance for North America. They worked together before but now they work together on the different, dedicated teams. The expertise on both sides in my view is second to none.
PFR: Dedicated yieldco teams is a point that has come up from tax equity investors. It seems that they are more comfortable with yieldcos that have a dedicated team. What’s your experience?
Domenech: At the end of the day the most important thing we could do with SunEdison is optimize value for both shareholders. For SunEdison shareholders they are going to continue to invest in projects aggressively and obviously we benefit from that. Because we are the equity at the end of the day it’s really on us to find the best way to structure capital. In some cases it makes sense for SunEdison to be doing the structuring because they are further out, head-on with the PPAs and so on. In some cases investors will only want to talk to TerraForm because at the end of the day we will be the equity party. This applies not only to tax investors but also to debt investors. Or co-partners on the equity side or even the customer. It isn’t really controversial with us. I think we make it really fluid. If a tax equity investor wants to get involved with TerraForm then I think it’s pretty easily done.
PFR: Is there anything that you can say about the plan to form an emerging markets yieldco, which was announced earlier this month and how it will differ from TerraForm?
Domenech: The design of TerraForm was really focused on OECD countries and it has to do with our thesis on risk-return profiles. In other words, we want investors to get rewarded for the risk that they take and we believe that OECD companies have a certain profile and a certain set of investors. SunEdison obviously is a global company and works in many countries around the world including China and India and so it was important for us, as a company, to create that vehicle to give facility to capital offtake for those projects. That’s where the emerging markets yieldco came into place.
It was important for us, as a company, to create that vehicle to again give facility to capital offtake for those projects. That’s where the emerging markets yieldco came in to place. If you ask ‘well, do they compete?’ I would say no. In fact, there are many benefits. There are companies out there that will be M&A opportunities, where companies might have development pipeline assets and operating projects in multiple countries. It is really hard for a company that is only an OECD company to acquire such a company. If you have the three pieces, i.e. SunEdison taking development risk, Terraform taking OECD countries and an emerging markets yieldco that is happy to do projects in places that I wouldn’t do, then you can unlock that value and that creates synergies for those three companies.
PFR: You saw that structure in a planned acquisition of Hudson Solar, where SunEdison will take on the development pipeline and Terraform will take the operating assets. In the near-term, do you see more opportunity at utility scale or distributed generation?
Domenech: Both. We like distributed generation because the PPAs tend be a lot higher. As you’ve seen in the announcement, we were able to buy it at a 14% equity return. If you look at comps, most folks will be at 9% or less, call it 7% to 10%. It’s a great deal for us. We’re able to do it because there are few companies that can digest 100 projects. Think about it, 100 little power plants. We see a tremendous opportunity in aggregating that fragmented space. With the SunEdison machine enabling us to do the back end, with our capital structure, the way we’re designed, we’re able to unlock that value. We do see some interesting projects out there. To be quite honest, I don’t see my competitors as much you might think. We don’t really run into them at this stage. PFR: What characteristics are you looking for in third party acquisitions?
Domenech: Same as I would for SunEdison projects, projects that have good, solid offtakers, that are well built, that are de-risked. We’re not in the business of taking risk. We don’t like to do one-offs, because they tend not to be as efficient. For example, with Hudson Energy, which is a subsidiary of Just Energy, if you look at that press release, it’s actually quite exciting. We have a ROFO on the states that those projects are on. That’s a cue for you to understand that that creates continuity. We also point to the 4 million customers that they have. This means that if we have a relationship with someone that maybe has a residential view of the world, and we have a ROFO that’s at least a C&I, that’s an opportunity for us to work with that company, to make it scalable. Repeatability in our business is important because it drives the scalability.
PFR: We’ve been doing a lot of coverage of these community solar projects that you’re seeing in Denver and also the City of Palo Alto. Would assets like that, with an interesting structure of who pays whom and who does the ownership, also fit into a yieldco?
Domenech: Yes and it’s so exciting. It’s a wonderful question because what a yieldco does at the end of the day is package long-term contracts. That’s it. You want to make it very predictable and boring. But what’s exciting is, by doing that, what yieldcos enable: adoption of technology, faster adoption of technology, new ideas, new solutions, new structures. If you think about the cost of solar going down, over the next three years, and the little penetration that solar has in the markets, the opportunity for me is really fabulous. It’s really great to see all of these structures emerge and we’re happy to work with people, not just SunEdison, but to work with other parties and partners.
PFR: What sort of leverage or debt TerraForm could be looking for, not just in the next six months, but beyond? How do you see it being structured and who do you turn to for that?
Domenech: We said that we would be about .65 debt-to-equity and a 9% equity target return. Right now, we believe the debt market is still extremely liquid both at the project level and at the corporate level. There are many participants out there that we have great relationships with, that we’ve worked with in the past and that we look forward to continue working with. We are excited to continue to work with our partners.
PFR: Is there anything that stands out to you as interesting, but hasn’t been brought to light in recent conversations?
Domenech: Yes, what people have not realized, until last week, is how able we are to do third party acquisitions. Because we have access to such greenfield projects that have been developed by SunEdison, we have not been talking as much about acquisitions. Some folks said ‘Well, I guess you’re not going to do acquisitions.’ Last week hopefully underlined that, yes, we will. If you look at our earnings call, I did highlight that we have seen a significant ramp up of third party opportunities. That’s the one area where people perhaps didn’t give us the credit that I believe we deserve for third party transactions.
PFR: Why do you think they kind of brush that to the side?
Domenech: Because we’re not really talking about it. We simply said ‘I’ve got the projects here. Why do I need to go find other projects? I’ve got great projects that here that we developed, that we understand, that are greenfield. There’s no need to go out there and get other projects.
In other yieldcos’ situations, their ability to grow is not so much tied to an origination engine. It’s tied to a balance sheet as in ‘I developed these projects and I’m going to drop them down.’ I think my predecessors did focus on that more than I had to, simply because I didn’t have to. I’ve got a perpetual growth engine. I’m not pointing to an eroding set of assets, I’m pointing to a growing origination engine that is going feed me for the foreseeable future. If I want to do third party transactions, I can and I’ll be picky just like we showed you last week.
PFR: How did the name TerraForm come about?
Domenech: I never get asked this question. In two ways: when I thought about the purpose of what we’re trying to do, I just thought that transforming the planet is at the core of what we’re trying to do. ‘Terra’ had such an earthy feel to it that it seemed like it almost came to mind right away. ‘Form’ is to indicate an action that is active and evolving, that is dynamic, and that also seemed logical. We chose ‘Power,’ because we want to do that through power. Our little logo has fuel types built into it, we just wanted to emulate and point to the fact that company is dynamic, it is all about the planet, it is all about making a difference.
At the end of the day, we think we bring great value to our shareholders. As a team, as a company, we are mission and purpose driven. It is truly exciting to do this and bring a lot of goodness to the planet with innovative solutions.