SunEdison (SUNEQ) has finally spunoff its YieldCo, TerraForm Power (TERP), which hit the market on Friday sharply higher than its $25 per share initial public offering price. The company is just the latest YieldCo to hit the market, intended to own renewable energy projects and give investors a chance to generate yield without taking the risk they normally take with solar manufacturers.
What TerraForm Power does that previous YieldCos haven't done is give investors a way to invest in only solar projects. Most other YieldCos also include some wind, energy efficiency, and even fossil fuel assets.
TerraForm Power will own SunEdison projects like this one in Chile. Source: SunEdison.
What investors are getting in TerraForm Power
The first thing to understand is the share of the company investors are getting. Once shares are issued they'll be used to purchase Class B units of Terra LLC and if all 23.1 million shares are issued, including the underwriter's overallotment, shareholders will own 26.1% of the outstanding membership units in Terra LLC.
At the end of the day, 30.8% of Terra LLC's membership units will be in TerraForm Power's Class A units, 61.9% will be Class B units owned by SunEdison, and the rest will be owned by Silver Ridge Power LLC.
The company will then own a number of solar projects and their corresponding cash flows. For simplicity sake, I've listed the projects from the S-1 below.
Per TerraForm Power S-1. Source: SEC.
Once the IPO is completed and TerraForm Power enters normal operations the plan is to pay a quarterly dividend and grow assets and corresponding cash flow with returns from existing assets. Management intends to grow cash flow 15% for the first three years of operations.
The dividend is initially planned to be $0.2257 per share per quarter, which equates to a 2.7% dividend yield with the stock at $33.71 per share as I'm writing. That's similar to other YieldCos on the market.
Should you buy this YieldCo?
What's important to understand is that like many MLPs investors have little control of what happens in the YieldCo and are really just hoping for a steadily increasing yield. SunEdison holds almost all of the voting power and as the company pushing assets down to the YieldCo they also have an incentive to get the best price for those projects.
I think YieldCos in general will be a good asset class for investors looking for cash flow but owning a basket is probably better than betting on just one.
