TerraForm Power Inc.'s Worst Move of 2017 So Far

The yieldco of bankrupt SunEdison sold a controlling stake in itself to a new sponsor. That wasn't the error. The error involved the price.

Travis Hoium
Travis Hoium
Jun 20, 2017 at 8:11AM
Energy, Materials, and Utilities

The last 24 months have been a rough ride for TerraForm Power Inc. (NASDAQ:TERP) It went from being a darling of the renewable energy industry to floundering amid the uncertainty brought on by the bankruptcy of its sponsor, SunEdison. During the stock's fall from a high of more than $40 per share to the $12 or so where it trades today, TerraForm Power made some mistake that it could have avoided, but also suffered from other woes that were out of its hands. 

This year has actually brought more stability than the yieldco has had in a while, particularly after the agreement to sell a 51% stake to Brookfield Asset Management (NYSE:BAM). But there's one big mistake that sticks out more than others. 

Solar panels with a wind turbine in the background.

Image source: Getty Images.

The frustration with TerraForm Power in 2017

We knew coming into 2017 that a likely outcome for TerraForm Power was a sale of the company. Whether or not the whole yieldco would be bought out or whether just a portion would be sold was unclear, but it simply wasn't feasible that bankrupt SunEdison would remain its sponsor. 

For TerraForm Power to get anything close to the highest possible valuation in a sale, it was going to need to give investors a full look at its financials. Unfortunately, thanks to SUNE's demise, it's latest quarterly filing only gives results through September 30, 2016. The company is more than two quarters behind schedule in filing financial reports. 

This is a key for public investors and any potential acquirers because delayed financial reports and weak accounting standards are a risk factor that will lead inevitably investors to discount the stock price or any buyout offer. When Brookfield made its offer, you can bet it took into account the fact that it will now be responsible for cleaning up the company's financial reporting, which won't be easy. Whatever premium they might have been willing to pay for the stock would have been reduced as a result.

Brookfield brings much-needed stability to TerraForm Power

If Brookfield's buyout works as planned, it will be able to stabilize the company's accounting and back office (which previously depended on SunEdison) and give the market confidence the yieldco can operate consistently, as planned. In theory, that should lower its borrowing costs and lead to more cash available for distribution to shareholders or to finance new growth projects. 

But the accounting and back-office uncertainties that Brookfield is going to bring stability to didn't need to be factors at all. If financial results were up to date, investors could have known better how to value the company and would have had more confidence in its performance. After more than a year of dealing with SunEdison's financial woes and inadequate accounting oversight, failing to get up to date on its own reporting was an expensive unforced error on the part of TerraForm Power.

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A yieldco worth getting onboard? 

Even in the wake of Brookfield's deal to take a controlling stake, which will close later this year, there are a lot of unanswered questions for TerraForm Power. We don't know what its annual cash available for distribution results will look like once operations return to a more steady state. We also don't know how current project-level debt defaults will be resolved, or if Brookfield will be able to meaningfully lower borrowing costs. And with $4.9 billion of implied debt on the buyout, the answers to these questions will impact the company's performance in a big way. TerraForm Power could be a big winner long term, but it's far from a sure bet, even with a better sponsor at the helm.