TerraForm Will Survive, But Needs To Slow Down
Summary TerraForm Power’s stock has plunged 70% year to date. The market value was high due to its aggressive expansion plan. The company will survive, but needs to slow down. If you’ve believed in SunEdison (NYSE: SUNE ) and TerraForm Power Inc.’s (NASDAQ: TERP ) growth story and have been a shareholder of either company, you’ve probably had a hard time falling asleep at night. It’s been devastating for TerraForm’s shareholders, as the shares have plunged over 70% year to date. So, what makes investors worried even when the company has been able to grow its CAFD (cash available for distribution) and raise dividends consistently since it went public in July 2014? (click to enlarge) (Source: TerraForm Power Investor Presentation) TerraForm only had 808 MW in projects generating $107 million in CAFD initially. After only one year, the company now has over 1900 MW in assets, with a projected $225 CAFD in 2015. The project pipeline and cash flow distribution growth are impressive, but not the stock price. Expansion comes at a price. Clearly, the market now focuses on TerraForm’s liquidity and balance sheet, believing the company’s rapid expansion is sustainable. First of all, I would like to estimate how much money the company is obligated to pay (up to December 2016), based on its scheduled debt repayment, projected dividend distribution and committed funds for acquisitions. Current portion of long-term debt and lease obligation: $115 million (to be paid by September 2016) Invenergy acquisition: $2.05 billion Vivint Solar (NYSE: VSLR ) deal: $962 million Payments (2016) on maturities of long-term debt as of September 30: $58 million Dividend payment: $112 million (based on 80 million class A common stock outstanding) Interest payment and some other payments, based on its agreement with SunEdison (IDRs) In total, TerraForm needs to come up with approximately $ 3.3 billion for its acquisitions, debt repayment, lease obligations, dividend payment and other payments in the next 12 months. To put it in perspective, the company generated $105 million cash from operating activities in the first nine months, and it expects to generate $225 million of CAFD for 2015. So, the question is: Has TerraForm addressed funding shortfalls, if there are any? Let’s take a look at the company’s current financing plan: Unrestricted cash: $821 million (including $160 million in UK refinancing proceeds) Revolver: $725 million Project debt (CA Ridge): $174 million TERP Holdco Capital: $388 million Assumed project debt: $358 million (subject to lender consent) Project debt/Term loan/Holdco bonds/Warehouse facilities: $1.27 billion (in progress) Including the $1.27 million financing options in progress, TerraForm has about $3.6 billion available to fund its commitments and fulfill other obligations, if needed. The management is quite confident that all financing will be made available by Q1 2016. This seems quite desperate, as the company plans to deplete all its cash and most likely its revolver for acquisition and debt repayment. TERP’s unrestricted cash on-hand is approximately $800 million and our liquidity available is approximately $1.5 billion. We have earmarked this cash and liquidity to fund our existing commitments, including the pending Invenergy and Vivint acquisitions. – TerraForm Power Q3 Earnings Call Transcript While TerraForm is capable of funding its obligations and acquisitions given listed options, this will further bury the company in heavy debt. Let’s not forget, the company still has about $2.4 billion long-term debt outstanding as of September 30, 2015. Senior debt 2023 – $950 million (Issued for First Wind and previous revolver repayment) Senior debt 2025 – $300 million (issued for Invenergy) Other project debt and construction financing – $1.28 billion After its acquisition of Vivint and Invenergy assets, TerraForm will have over $4 billion in debt, with little cash on hand. It will be difficult for the company to further grow its pipeline given its highly leveraged balance sheet and the current market sentiment. Even if TerraForm can obtain the needed capital in the near future, it will likely pay a much higher interest rate. Debt is usually cheaper than equity, but only to a certain point. Investors may argue that TerraForm will add another 1.4GW to its pipeline once the acquisition is completed. However, for companies like TerraForm, the payback does not happen overnight. If the company grows its CAFD 70% in 2016 (management refuses to provide a guidance for 2016, saying it will focus on closing deals first), it should generate approximately $95 million CAFD each quarter to pay dividend, interest expense and other obligations. Conclusion Financially and strategically, TerraForm Power went too far, too fast (following SunEdison’s path), and it needs to slow down. Corporate governance is another issue given its connection with SunEdison. As I am writing this, David Tepper, the founder of Appaloosa Management, just sent a letter raising concerns regarding conflict of interests between TerraForm and SunEdison. This is another important issue that investors need to pay attention to. TerraForm had financing lined up for its committed acquisitions, and should not have problems paying liabilities in the next few years. But it will have little room to grow in the short term given its highly leveraged balance sheet and depressed stock price. Clearly, investors now focuses more on the company’s financial strength rather than how fast it can grow its dividend and pipeline. Going forward, TerraForm should focus on the profitability of projects rather than blindly expanding by acquiring assets regardless of project quality. Sometimes we need to take a break and slow down, and I hope TerraForm has learnt this lesson.