2016 was rough for TerraForm Power Inc (TERP), as its sponsor, SunEdison, went bankrupt and the dividend was suspended. Even with everything that's happened, there are still a few risks for the company that investors will want to be careful of going forward.
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SunEdison maintains control
No single factor is hurting TerraForm Power more right now than its association with SunEdison. The company's sponsor currently owns all 48.2 million Class B shares outstanding compared to 91.3 million A shares. And the separate class of shares gives the company control over operations.
This has had a string of effects this year. The first is that TerraForm Power used SunEdison's back-office systems like accounting, which is what led to a long delay in filing financial statements, something that's only recently begun to be remedied with reports current through Q1 2016. Early in the year, there was also concern than SunEdison's control would allow the sponsor to use TerraForm Power as a piggybank to stay afloat, as it did when it sold $231 million of incomplete projects to TerraForm Global. At the end of the day, the conflict of interest with the sponsor has led to some negative side effects.
Potential buyers have emerged like Blackstone, Appaloosa, and D.E. Shaw, but no company has been able to make a deal. Creditors who control the bankruptcy price likely want more than third parties are willing to pay, which could keep SunEdison in control of TerraForm Power longer than shareholders would like.
The dividend disappoints (or doesn't return at all)
The whole point of owning TerraForm Power stock in the first place was supposed to be for the dividend. But the dividend has been suspended for yearly a year and investors are speculating what it will be when it returns.
It's impossible to know exactly what the dividend will be when fully reinstated, but we have some clues. 2016 EBITDA is estimated to be $517 million to $532 million, interest expense is expected to be $281 million, and general and administrative expenses not included in EBITDA were $77 million. What's left is $166.5 million at the midpoint of the EBITDA range. That's a ballpark estimate of cash available for distribution and if 85% is paid as a dividend (the company's previous policy) it would mean a dividend of $1.19 per share. That's a 9.2% dividend yield, which is high even by yieldco standards. 8point3 Energy Partners (CAFD), for example, yields 7.6% at today's stock price.
The risk here is that the $1.19 per share dividend is about as high as the company could go. A high debt load needs to eventually be paid down and 58% of assets have power purchase agreements of 15 years or less, meaning cash flows are only guaranteed at the current level for so long. New contracts in renewable energy will be significantly lower than in the past, so management may choose to take on debt rather than pay a high dividend. And if that's the case, investors may be disappointed and the stock could fall.
Debt could be hard to come by
At the end of Q1 2016, TerraForm Power had $4.1 billion in debt, a very high debt load for a company with 3 gigawatts (GW) of generating assets. To put the debt load into perspective, TerraForm Power has $1.38 per watt in debt compared to 8point3 Energy Partners' 530 megawatts (MW) of assets and $362.7 million of debt, or $0.68 per watt.
At the end of Q1 2016, TerraForm Power's debt had an interest rate of 5.72%, which is almost surely higher today given agreements with creditors to allow delays in filing financial statements. High debt costs are bad for a yieldco because they take money that could be used to pay a dividend and pay creditors. At this point, management is going to need to start thinking about how to maintain enough cash to pay down $1.25 billion in notes due in 2023 and 2025 as well.
To top it off, if debt costs are high, it will make it difficult to buy projects that could add to dividend growth and help shore up the balance sheet. How creditors and TerraForm Power navigate through 2017 will tell investors a lot about how much of the company's cash flow will be eaten up by the cost of debt.
Lots of risk ahead
Given the uncertainty and high debt load exhibited by TerraForm Power, this is still a stock I would be very careful betting too big on. There are a lot of reasons the stock could fall, despite the seeming stability of the company's cash flows. And without a dividend to fall back on, investors don't quite know where the value lies today.
