Yieldco TerraForm Power Inc. (TERP) should be about as safe as they come on the stock market. It owns renewable energy assets with long-term contracts and should be able to easily predict its cash flows long-term.
But TerraForm Power's stock is much more complicated than that. It has suffered from a general decline in the yieldco market, and its affiliation with SunEdison (SUNEQ) is starting to become a real drag. Which of course begs the question: just how safe is TERP stock, in reality?
Leverage is a big question mark
The last time TerraForm Power reported earnings was for the quarter that ended Sept. 30. It has delayed its fourth-quarter release because of "material weakness" in SunEdison's internal controls.
But at the end of the third quarter, the company had $1.12 billion in cash on hand and $1.16 billion in long-term debt. Since then, it has acquired assets from Invenergy Wind as part of SunEdison's acquisition of that company, which ate up $744 million in cash and added $1.22 billion in debt. If those are the only assets it's acquired since Sept. 30, its balance sheet would have about $376 million in cash and $2.38 billion in debt.
We won't know much about TerraForm Power's balance sheet beyond those figures until the 2015 10-K (annual earnings report) comes out. It's quite possible that it's generating strong returns on the billions it has invested, but because of the turmoil at SunEdison, the market isn't giving TerraForm the benefit of the doubt.
SunEdison is a big drag
It's now likely that SunEdison will eventually be dragged into bankruptcy. If that happens, there could be (as-yet unknown) repercussions for TerraForm Power. Moody's highlighted this when it downgraded TerraForm Power's debt.
The more immediate drag on the stock price is that SunEdison's internal systems are used by TerraForm Power, which is what's delaying the 10-K filing. Without up-to-date financial statements, investors don't know what to expect from either company, so they're pricing in the worst.
And let's not forget that SunEdison has been tying itself more and more closely to its yieldcos, controlling their management teams and board of directors. If TerraForm Power lacks independent oversight, SunEdison could drag the yieldco down with it.
There may be a light at the end of the tunnel
While there are negatives to TerraForm Power's outlook, there have been some positive developments lately. Its Latin America Power acquisition was canceled, and there were no costs for TerraForm Power in the settlement. Better yet, the Vivint Solar acquisition is now off, and it's likely SunEdison would bear the brunt of any potential lawsuit that might arise from that deal's unraveling.
All of this has reduced TerraForm Power's financial commitments to buy more assets, and could give it a path out of its current mess. It'll need to avoid cross-default if SunEdison goes into bankruptcy, and build a more independent business, but if it can, the stock could be a long-term winner.
Proceed with caution
TerraForm Power could be a great investment long-term if SunEdison doesn't bring it down, and it starts to lower its debt load. But those are big "ifs" for a company that was once the bellwether for all yieldcos. Proceed with caution, investors.