Shares of TerraForm Power Inc (TERP) have finally stabilized after Brookfield Asset Management (BN -1.10%) agreed to buy a majority stake in the company and become its sponsor. SunEdison, which founded TerraForm Power, went bankrupt last year, leaving the yieldco with an uncertain future and unable to file quarterly reports, since it shared back-office functions with SunEdison, leaving investors with little information on the stock.
Brookfield will bring stability to the company's operations and its finances, which should help the yieldco after the buyout closes. Technical defaults will be cleared up and frozen cash on the balance sheet (because of defaults) should be freed to pay down debt, buy growth projects, or pay a dividend. And getting regular quarterly reports will give investors confidence in the company once again.
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Stability is back
The biggest stabilizing factor investors should look forward to is knowing what operational cash flow should be. Expected cash available for distribution (CAFD) has fluctuated over the past year as the company struggled with defaults and financing options dried up. Management even said, "We anticipate Brookfield's strength as a sponsor should help us to improve our fleet operations, grow the company, and increase our cash flows."
Brookfield may also be able to help refinance debt, ensuring defaults don't happen in the future and even lowering borrowing rates. Projects with long-term cash flows should be easy to finance in 2017, so look for this to be an early move when Brookfield takes control.
A return of TerraForm Power's dividend
When operations return to normal, we should see TerraForm Power begin paying a dividend again. It's uncertain where management will set the dividend, but there are some clues. A recent presentation said 2017 CAFD would be $120 million to $160 million and if we use the implied $1.7 billion equity value that's been given, we can assume the dividend yield would be 7.1% to 9.4% if all of CAFD is paid as a dividend.
That's a very high implied dividend yield, and even if the payout is set a little lower, the stock will be fine. I think we can expect a dividend yield of at least 5%, and if it's set low enough, we may even see the company grow again.
A growth portfolio to draw from
The whole point of a yieldco is to use its stock, along with newly issued debt, to buy projects that add to the dividend long-term. If the dividend is low this is easy to do, but if it's too high the projects won't add to the dividend, which makes growth difficult.
Brookfield at least gives TerraForm Power a chance at long-term growth. It has promised its new yieldco a 3.5 GW right of first offer (ROFO) portfolio and $500 million in acquisition financing. That'll be a good start as TerraForm Power gets back to regular operations.
Brighter days are ahead
When Brookfield takes over TerraForm Power, it will be the most stable time in the company's short history. SunEdison used the yieldco as a piggy bank, but now we'll have a sponsor with similar long-term goals to individual investors. That gives me confidence the best days are still ahead for TerraForm Power.
