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After struggling under the mismanagement of its former parent SunEdison, TerraForm Power (NASDAQ: TERP) appears to have found a happy home with Brookfield Asset Management. The new parent has a long history of creating shareholder value by underpromising and overdelivering -- one of the best possible attributes individual investors can look for in a management team. The hope is that it rubs off on the renewable yieldco.
It's too early to tell for sure, but having competent support has breathed new life into TerraForm Power. In 2017 it restructured its debt to significantly lower interest expenses, and made headway to slash corporate overhead by $10 million. It even recently reinstated its distribution -- last paid in 2015 -- which yields a healthy 6.5%.
That eye-popping yield, coupled with plans for steady growth over the next several years, could pique the interest of income-seeking investors. But a history of severe losses might make investors think twice. Given all the moving parts right now, is TerraForm Power a buy?
Image source: Getty Images.
By the numbers
A quick glance at operating results may give the impression that the renewable yieldco didn't have much to brag about last year. But that's mostly because several important moves were too recent to be reflected in 2017 results.
| Metric | 2017 | 2016 | % Change |
|---|---|---|---|
| Revenue | $610.4 million | $654.5 million | (6.8%) |
| Operating income | $40.7 million | $88.9 million | (54.2%) |
| Interest expense | $262.0 million | $310.3 million | (15.6%) |
| Adjusted EBITDA | $443 million | $479 million | (7.5%) |
| Cash available for distribution (CAFD) | $88 million | $152 million | (42.1%) |
| Generation | 7,167 MWh | 7,373 MWh | (2.8%) |
Source: Press release, SEC filing.
Investors should expect improved financial performance as quarterly improvements roll in this year, the results of several transactions designed to deleverage the balance sheet and improve long-term cash flow. Since merging with Brookfield Asset Management, TerraForm Power has:
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Refinanced and extended the maturity dates on $1.6 billion worth of long-term debt. As a result of these transactions, the company has no significant debt maturities in the next five years and will save tens of millions of dollars per year in interest expense.
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Issued a quarterly dividend payment of $0.19 per share, or $0.76 per share on an annualized basis. That's 6% higher than the company's intended reinstatement target of $0.72 per share.
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Announced the intention to acquire Spanish renewable power generator Saeta Yield for up to $1.2 billion. The move would increase TerraForm Power's production capacity 40% and result in a 24% increase in CAFD on a pro forma basis, which was a crucial consideration for reinstating the dividend in the first place. The expectation is to fund the acquisition with debt and a $400 million equity offering, with Brookfield Asset Management providing a backstop at $10.66 per share.