2017 was a transitional year for TerraForm Power Inc. (TERP), going from being controlled by the bankrupt SunEdison to being majority-owned by Brookfield Asset Management (BN 1.59%). Brookfield has a long history of successful renewable energy investments, something it could replicate in turning around TerraForm Power.
In 2018, the yieldco should enter a more stable operating environment. Here's what investors should expect next year.
Image source: Getty Images.
The return of a dividend
TerraForm Power hasn't started paying a dividend again, but it projects paying a $0.72 dividend per share from cash available for distribution (CAFD). Projected 2017 CAFD of $95-$115 million isn't enough to cover the dividend for 148 million shares outstanding given the expected 80%-85% CAFD payout ratio, but operational improvements should cover the shortfall.
Management expects $10 million of operational cost savings by reducing overhead at a corporate level by bringing some of the back-office functions in-house instead of paying another company for the work, something TerraForm Power used to pay SunEdison for. In the second phase of cost reductions, Brookfield expects another $15 million of annual operating savings, but those won't be realized until 2019 and beyond.
A little bit of growth
TerraForm Power still needs to acquire renewable projects to grow its dividend long term, and 2018 may be when the yieldco begins to acquire projects again. Brookfield is providing a $500 million subordinated acquisition facility and a 3,500 MW portfolio that TerraForm Power has the right of first offer.
Management projects that it will be able to grow the dividend 5%-8% long term and some of that growth will come from organic acquisitions using the 15%-20% of cash available for distribution to fund growth. If there are opportunities to buy projects that are accretive to the dividend, TerraForm Power may begin doing so in 2018.
A return to normalcy
For over a year, TerraForm Power has been under the cloud of SunEdison's bankruptcy. It couldn't do its quarterly or annual filings with the Securities and Exchange Commission on time and was even technically in default of some of its debt. Even the dividend was suspended.
Having Brookfield Asset Management as a sponsor will bring a level of normalcy to TerraForm Power. We've already seen quarterly filings come out at a more appropriate time and the dividend should begin to be paid again soon.
What investors should consider is that the expectations for TerraForm Power have changed slightly. Instead of being a company that expects to grow its dividend 12%-15% per year, it now projects 5%-8% growth. Slower growth expectations will put less stress on the company and allow for organic growth, rather than growth by issuing shares to fund acquisitions. But it's a different company than it was a couple of years ago.
I think 2018 will be a solid year for TerraForm Power and this is finally a stock worth holding long term. That's a big change from a tumultuous 2017.
