Do Yieldcos Now Trade At Bargain Basement Prices?

Image: SunEdison.

I've had my questions about the future of SunEdison (NYSE: SUNE) given the company's financial position and continued losses for quite a while. The development company built what I think is a house of cards on top of yieldcos TerraForm Power (NASDAQ: TERP) and TerraForm Global (NASDAQ: GLBL), which were supposed to buy projects indefinitely from their parent company.

But that narrative has fallen apart as the stock of all three companies has dropped in the last six months. Yet, both yieldcos should have stable businesses and with TerraForm Power yielding 16.7% in dividends and TerraForm Global yielding 23.1% it would seem that there's some value left in their shares even if SunEdison is headed for the worst.

Yieldcos should be where safe money goes
The whole idea of a yieldco is it's a company that owns renewable energy projects with long-term cash flows that will result in a stable dividend for investors. Wind and solar projects produce about the same amount of energy each year and the projects have long-term contracts with utilities to buy that energy, so the business seems safe on the surface.

Below, you can see that both TerraForm Power and TerraForm Global have businesses that generate real revenue and real cash flow from operations.

Source: Yahoo! Finance and SEC filings.

It seems like a business that can generate a significant amount of cash each quarter should be worth something, particularly given the huge dividend payout. But these are no ordinary dividend stocks.

The problem with SunEdison's yieldcos
What complicates both of SunEdison's yieldcos is their strange relationship with SunEdison itself. If you look at the income statement of both companies, TerraForm Power spent $14.6 million on general and administrative costs from its affiliate (SunEdison) last quarter and TerraForm Global spent $6.3 million on the same line item. These costs are added back to cash from operations when calculating cash available for distribution, boosting the appearance of available cash for shareholders.

It makes sense that net income would be lower than cash available for distribution, because cash for distribution pulls out non-cash depreciation expenses, but cash available for distribution is what determines a yieldco's dividend and right now both are paying out more than they're taking in from operations. 

This discrepancy between cash flows and cash paid to shareholders also makes it hard for me to call a bottom in yieldco stocks. Dividend yields of 14.6% at TerraForm Power and 21.1% for TerraForm Global seem amazing but the numbers never seem to be as straightforward as they should be and with $2.5 billion in debt hanging over TerraForm Power and $1.2 billion in debt at TerraForm Global both companies have more uncertainty than I'd like at the moment.

Value is there, but at what price?
TerraForm Power and TerraForm Global have value for investors and I think they're far from dead. The questions is: What price is fair for both?

Right now, yields in double digits seem amazing, but I'm worried about paying out more cash than both are bringing in and the costs of being associated with SunEdison. Over the next year we'll be able to see both slow down acquisitions and become more stable companies, giving investors a good idea of what their cash flows will be long-term.

Once we see that stability in operations I may be more likely to jump into these stocks. I'd rather see both companies become steady cash flow machines rather than the growth companies they still talk about being. Until then, I'm taking the safe route and watching them from a distance.