2017 was a transformational year for TerraForm Power Inc (TERP), even if it wasn't the best for the stock's performance, falling 6.6% on the year. Brookfield Asset Management (BN -2.52%) took over as the company's sponsor, replacing the bankrupt SunEdison, setting a clear path forward and ensuring financing for future growth.
In 2018, we'll likely see TerraForm Power take some more big steps, including reinstating a dividend that's key to any yieldco investment. And the stock may have more upside ahead.
Brookfield takes over for SunEdison
On Oct. 16, 2017, Brookfield Asset Management took over as the sponsor and TerraForm Power's majority shareholder, ending a year and a half of uncertainty for the company. It quickly outlined a plan for operating the company in a much more frugal way than SunEdison had.
For 2018, the target dividend was set at $0.72 per share, which would yield 6.4% based on today's stock price. Management expects the dividend to grow 5% to 8% annually, primarily by using excess cash flow to acquire growth projects. That's well below a target dividend growth rate of up to 15% while TerraForm Power was under SunEdison's control, a figure that stretched the balance sheet to its limit.
Where TerraForm Power may feel Brookfield's influence most is by giving debt investors more confidence in the business. In early 2016, TerraForm Power had to raise debt at a rate of LIBOR + 10% with a floor of 11%, an insanely high rate for any company. With the help of Brookfield, TerraForm Power raised $500 million of debt due 2023 with an interest rate of 4.25% as part of a $1.2 billion financing round.
TerraForm Power's growth plan
Growing cash available for distribution won't be all about adding renewable energy projects. Last year, Brookfield laid out a cost reduction plan that will help grow cash flow from existing operations.
The first phase is a $10 million annual cost reduction plan that involves reducing headcount, setting up a flatter organizational structure, and in-sourcing back-office functions that were once handled by SunEdison.
The second phase will take two to three years but will involve more in-sourcing and replace current operating and maintenance contracts. Management said this will add $15 million of cash flow to the business per year.
From a project acquisition standpoint, Brookfield is providing TerraForm Power with 3,500 MW of right of first offer projects and access to another 500 MW of third-party projects. There's already $700 million of liquidity to fund these acquisitions, so the 5% to 8% growth rate for the dividend shouldn't be too much of a problem.
Bringing stability to TerraForm Power
2017 was a year to remember because it was when TerraForm Power began to move out from behind the shadow of SunEdison and became part of the Brookfield Asset Management family. Brookfield has a long history of creating value in the energy sector through conservative management and prudent capital allocation, so this should be a long-term win for investors.
The changes made in 2017 also give me the confidence to add an outperform call for TerraForm Power's stock on My CAPS page. This energy company has a bright future indeed.