SunEdison selling just over half of TerraForm Power Inc (TERP) to Brookfield Asset Management (BN 1.81%) has seemed to give investors a lot of confidence in the company's future. Shares are trading above the buyout price ($11.46 per share), indicating that shareholders want to convert as many of their shares into new shares in a post-transaction TerraForm Power.
On the debt side, the company has more certainty than at any time in nearly two years. Debt coming due or under default may be able to be rolled over, and Brookfield can use its vast resources to prop up the company's finances. But there are still some concerns about TerraForm Power that investors should keep in mind.
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Defaults and debt are a big worry
There continue to be project-level defaults for TerraForm Power, and that restricts the company's cash and puts risk on operations. These defaults are "generally curable" -- meaning they could be resolved but aren't currently -- and are related to SunEdison's bankruptcy, but they're still something to worry about. If the Brookfield acquisition falls through for some reason, the defaults will be harder to resolve. Any time management is worrying about defaulting on debt, it's a bad sign for the company.
Cash available for distribution is declining
The point of a yieldco is to pay investors a consistent dividend year after year. And that dividend should grow over time as the asset base and contracted power purchase agreements grow. But TerraForm Power is heading in the opposite direction.
In 2015, TerraForm Power said it generated $228 million in cash available for distribution (CAFD). We don't have final 2016 numbers to compare that to, but Q3 2016 CAFD fell 65% to $34 million, and 2017 CAFD guidance is for just $120 million to $160 million. The trend of falling CAFD is bad for any yieldco, and when you look at the numbers, there may not be a very impressive dividend for investors, either.
Dividends won't be what investors expect
One of the biggest revelations of a recent acquisition presentation is that management said it "now expect[s] 2017 CAFD to be closer to the low end of our last published estimate range of $120M-160M." If share count stays flat at 139.3 million shares outstanding, and if 85% of $120 million in CAFD is paid out, the dividend would be $0.73 per share. If shareholders convert current shares into new shares after the Brookfield transaction, that's just a $0.73-per-share dividend, or a 7% dividend yield.
The problem for investors is that 8point3 Energy Partners, Pattern Energy Group, and Hannon Armstrong Sustainable Infrastructure all have higher dividend yields than 7% today, and yieldcos like NRG Yield and NextEra Energy Partners have yields close to that level with dividend growth ahead.
There are simply better options for investors than betting on TerraForm Power's projected dividend yield given the defaults and falling CAFD.
