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    Dividend and Equity Growth – TerraForm Power (TERP) and TerraForm Global (GLBL) Investing in Solar Energy

       (4 reviews)

    dydo

    End of the last year was a year of a broken record for solar and this year seems to be the same. Oil, the nonsensical measure against the solar energy struck again. The commodity prices lost a shirt for fossil fuel companies and managed to pull solar stocks down. I think by now someone must have written a book on limited-to-none connection of oil to electricity in the US, with all efforts in vain.

    Today the story of solar is a story of healthy industry with some sick players caught up in the global downturn.  While one can see the value, the herd mentality keeps it subdued with funds and individuals equally selling without much of differentiation, but perhaps First Solar.

    So how is solar investor able to set apart from the anguish? Only, by doing something to receive tangible benefit in the duration, and in my opinion, such a benefit is in yieldcos and their dividend.

    Members of the panic team would immediately point out to Energy (fossil fuel based) MLPs, and their failing structures as a red flag and, of course, the fragility of the company like SunEdison, something nobody risk-averse would get engaged.  While one needs emotional endurance to see end, one way or the other, to SunEdison, both, TerraForm Power Inc (NASDAQ: TERP) and TerraForm Global Inc (NASDAQ: GLBL), are an opportunity, which has been created by the crumbling of this company. Yes, without weak SunEdison we would not be able to see such a low prices in its yieldcos.

    SunEdison has been hurt by perception and,  to a degree, reality of liquidity problems, with many casually and wrongly connecting yieldcos to those conditions. Now, when insolvency is being quoted in relationship to SunEdison it is important to note as per the company’s disclosure what separates them:

    “We include both entities in our consolidated financial statements on the basis that we control of TERP and GLBL. However, TERP and GLBL and their subsidiaries are separate legal entities with their creditors and other stakeholders. The renewable energy generation assets that TERP and GLBL and its subsidiaries have acquired and expect to acquire in the future are and will be legally owned by those entities and are not available to satisfy claims of creditors of SunEdison or our other non-TERP or GLBL subsidiaries. Except to the extent provided in certain agreements entered into with TERP and GLBL and its subsidiaries with respect to acquisitions and for the receipt of selected services and financial support from SunEdison, SunEdison has no obligations with respect to TERP or GLBL or for the benefit of its creditors.”

    This legal statement does not control the market’s behavior even though it offers a comforting message if insolvency proceedings took place. If something bad happened to SunEdison, the tremors would affect prices of all, but in a long term, yieldcos would be measured by own assets and value of dividends, and none of them could be taken to cover for SunEdison mishaps.

     What about the dividend and collapse of the MLP?

    The collapse of MLP is a result of the commodity prices and how revenues are generated. Price of oil has clear connection to the level of income, and the commodity pricing has, if not immediate than delayed, impact on dividend levels. The fluctuation of energy generation and their costs in yieldco structure with solar or wind is not susceptible to cost shifts, as there is no cost variation. The sources of energy (sun and wind) are free, and the upfront infrastructure costs and maintenance are the only ones measured. This is why utilities do well in the cheap commodities’ market and MLPs in high one. Renewable yieldcos should do well in both, in fact, they are utilities themselves without ownership of grid infrastructure (for some that is the case like Abengoa Yield)

    Therefore, the dividend of the renewable yieldco is secured, and change to it is only available to management’s discretion rather than forced by the market conditions like in case of MLP.  The same stability also creates dependable borrowing profile. All those things are new to establishment and individual investors. In general, the market is even more limited to appreciate those subtle details when distressed sponsor dominates the news.

    Depending on the outcome of injunction, TerraForm Power may end up with over 3GW of renewable assets having slightly greater solar content in 2016. Global on the other hand, including some recent commitments, would be expected to reach closer to 2GW.  The level of cash available for contribution today offers $1.40 today for TERP and $1.10 for GLBL in yearly dividend, yielding 16% and 39% respectively. Those yields are reflective of fear and misconception about the equity of those companies. By the definition and by the design, they are not riskier than any other yieldco on the market. Already mentioned Abengoa Yield is a living proof of having a sponsor in legal receivership which has not prevented the company`s equity to be at $16 per share and yielding around 11% on its dividend. Value of 8point3 Energy Partners LP is summoned by strength of its sponsors, First Solar, and SunPower, the market perhaps embellishing quality of the renewable assets and level of cash available for distribution in this case, but giving it the yield at normal level of 5%. In a corresponding comparison of assets, locations, PPAs, and timelines it is not hard to notice TERP superiority, besides already established massive scale, but here the company is shadowed by crippled SunEdison opposite to First Solar strength.

    I anticipate that the fourth quarter results, which are expected this week, will confirm the independence from the SunEdison troubles and to speculate further, embrace dividend program, therefore boosting value of equity profile of both companies. Of course, there are legal debacles, and there is a matter of Vivint acquisition for TerraForm. Once more they are some of the turbulence one should consider before investing. While I belong to the camp hoping that injunction will take place, a loss of this ruling is not an end to TerraForm Power potential. In my article published on SA, I have considered what may happen when either outcomes are out. In a summary, I concluded, and still hold this belief today that investment in TerraForm Power, and adding Global now, can weather the storms of legal debacles and in a long term be very profitable.

    Edited by odyd

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    Thanks Odyd.  I think both GLBL and TERP should be trading close to 2x their current level based on large promised dividend.  Although both companies originally envisioned increasing the dividend yr/yr, I will be overjoyed if they simply maintain the promised dividend.  I think this is easier for TERP than GLBL should disaster (continue to) strike SUNE, since SUNE has promised payments to GLBL which it might not be able to fulfill. 

    I am curious about "promised" projects for both that SUNE is developing.  If SUNE runs aground, my understanding is that TERP and GLBL have right of first offer (rofo) to buy projects, but that they are not required to purchase future projects (in general--GLBL may be on the hook for some SUNE projects still being developed in India it has already partially purchased). 

    Assuming my understanding of future obligations is true, at what point do you think it might make sense for TERP or GLBL to buyback shares? Given the dividend yield of their stock prices are significantly above the expected returns of solar projects, do you think a share buyback at these levels makes sense vs. using the same cash to buy lower yielding projects? or do you view this current low stock price just some bizarre temporary blip (month long?) and both should stay focused on buying solar projects? 

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    Thank you for your comment Disdaniel.

    Yeah, I think it does for a company like GLBL to do a buyback. Closing at 2.78 its $1.10 yield is rated at 40%.  Let’ assume that GLBL buys off the market around 10M shares, which are worth $27.8M. The dividend paid by the company, is around $11M, so for the span of 5 years, this reflects saving of $55M and the price has made them $27M.  This alone allows investing precisely the same amount in another project, get its CAFD and for the 5 years produce add-on to dividend.  Of course issue complicates if SUNE pulls the IPA on them.  I do not think this is the case, but in that circumstance, with some $181M in interest to be paid by SUNE, I would imagine money is better spent on servicing debt. I think SUNE guarantees level of dividend and is subordinated till 2017 to receive dividend, but they do not pay it. Maybe I am wrong.  

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