All things considered, 2016 wasn't as bad as it may have seemed for yieldco TerraForm Power Inc (TERP +0.00%). In fact, it's outperformed competing yieldcos NRG Yield (NYLD 2.20%) and 8point3 Energy Partners (CAFD +0.00%).
As we look forward to 2017, is the future getting brighter for this yieldco, or is the market still rocky ahead?
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The positive steps TerraForm Power is taking
In just the last week TerraForm Power started filing quarterly reports, which had been delayed since SunEdison started to get into financial trouble. We've learned that 2015 revenue was $470 million, and adjusted EBITDA was $358 million for the year.
The company also reported that 2016 full-year adjusted revenue is expected to be $697 million to $712 million, while adjusted EBITDA is expected to be $517 million to $532 million. Just the fact that we're getting these numbers is a huge improvement for TerraForm Power, and is a sign that operations are starting to break free of SunEdison. And that's a key step if it's ever going to be an independent company.
We still don't know what cash available for distribution -- the metric that determines dividends -- will be, except that it's going to be "substantially lower than pre-SunEdison bankruptcy estimates due to various factors, including loss of financial and operational support from SunEdison, increased debt service costs and uncertainty regarding the resolution of project-level restrictions on dividends and other payments." But we're starting to get some information about the company's operations.
The challenge going forward
We don't know exactly what the balance sheet looks like, which will be very important going forward, but we know that on March 31, 2016 unrestricted cash stood at $603.5 million and total debt was $4.11 billion.
To put the financial position into perspective, TerraForm Power's debt/EBITDA ratio for the year will be 5.9 if debt levels remain unchanged from the first quarter. By comparison, NRG Yield's ratio is 6.4, and 8point3 Energy Partners' ratio is 4.9.
The level of debt is within reason, but investors will want to see that debt markets are still open to the company, which may not be the case given the last year of upheaval. Current senior notes due 2023 and 2025 hold interest rates of 5.88% and 6.13% respectively, which are higher than NRG Yield's 5.375% and 5% interest rates on 2024 and 2026 senior notes. And 8point3 Energy Partners pays just 2.52% on its term loan, although that's shorter term than corporate debt at TerraForm or NRG Yield.
Maintaining low interest rates on debt is crucial for yieldcos, and TerraForm Power still has a fairly high debt load and hasn't instilled a lot of confidence in the past year. That could be a challenge going forward.
Is this going to be a great year for TerraForm Power?
If you add up TerraForm Power's Total Capital (Market Capitalization plus Total Debt) and divide by EBITDA, you get a ratio of 11.4x, which is at the bottom end of EBITDA guidance. That's a hefty price to pay for a company that's still behind on financial filings and has higher interest rates on debt than competitors.
That isn't to say 2017 won't be a decent year for its shares, but NRG Yield and 8point3 Energy Partners are more stable and have dividend yields of 6.7% and 7.7% respectively. I think they're both in better positions than TerraForm Power, and they're better stock picks than betting on TerraForm's recovery.
