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TerraForm Power: Go Long On Renewable Energy

Summary TerraForm’s assets are new and efficient. Dividend guided by management to increase over 50% by 2017; yield on cost of 8% at currrent prices. Yieldco structure gives the company a highly visibile pipeline, external wind power acquisitions change the game. Shares are heavily undervalued at current prices. I’m long and you should be too. TerraForm Power, Inc. (NASDAQ: TERP ) is one of a few relatively new yieldcos trading in the market today. The company was set up to operate SunEdison (NYSE: SUNE ) assets in solar energy, but has since expanded to offer wind energy production as well. The current portfolio totaled 1,883 MW at the end of Q2 2015, but there has been 788MW worth of acquisitions already announced in 2015 and the company has call rights on 3,716MW of production that is under construction by SunEdison. Currently, the majority of assets are held in the United States (71%) and the United Kingdom (20%). From a management perspective, the relationship between TerraForm and SunEdison means that investors stand to benefit from SunEdison’s expertise as a large player in renewable energy design and downstream operations. The majority of TerraForm Power management worked at SunEdison so there is deep industry knowledge in the management suite in regards to predicting capital expenditures and industry ties to other third parties in the industry. Yieldcos have increased in popularity over the past few years, especially within the renewable energy space. Investors new to the concept can view a yieldco in a similar light to the more familiar master limited partnership (MLP) structure. Yieldcos do not pay corporate taxes and only completed, revenue-generating assets are held within the structure, attracting investors seeking low risk and stable cash flow. In return, parent companies get access to lower costs-of-capital while still retaining the majority voting interest on their assets. (click to enlarge) Shares have taken a dive in July and now trade below the initial IPO price in 2014. Is this warranted or does the company present a substantial opportunity at current prices? What steps has management taken over the past year and how does the asset pipeline look? Wind Diversification TerraForm has significantly diversified its power generation into wind assets in 2015. Starting with the FirstWind acquisition that closed in 2015 (500 MW), the company acquired an additional 1,451MW of wind energy from Atlantic Power and Invenergy in June/July 2015. By the end of 2015, all these transactions will have closed and TerraForm will be one of the largest wind power providers in the United States from basically having no wind assets just a year ago. In fact, starting in 2016 TerraForm will derive more power generation from wind than solar. This was a big deal for the company and these transactions catapulted TerraForm forward in the renewable energy markets. I like these acquisitions as they diversify the revenue base and will enhance scale in what currently is a highly fragmented renewable energy market. For a company that many viewed a year ago as just a depository for SunEdison solar assets, this has been a major change and management has a vision for the future. High Leverage Does Present Risks Due to the capital-intensive nature of the business and the corporate structure, traditional metrics like net debt/EBITDA and others are high. Current net debt/run-rate EBITDA stands at 5.1x, which should be something investors weigh before opening a position. Recent cash raises in the equity/debt markets have been all but used up to fund the recent transformative acquisitions mentioned. Current liquidity stands at just $646M (only $50M cash-on-hand plus the open revolver balance). Going forward in the short term, TerraForm’s large transactions are over in my opinion and the company will switch gears to focus on integration and cultivating existing production. Dividend Growth and Eventual Share Price The 2015 dividend is set to be $1.35/share, an annual rate of 4.46% at current prices. However, management has guided for the dividend to increase to $1.75/share in 2016 and $2.05/share in 2017. (click to enlarge) * TerraForm Investor Presentation At current prices of $25.33/share as of this writing, a dividend of $2.05/share in 2017 would give you a yield on cost of over 8% on your original investment. This is extremely solid and I think the market must either not understand the company or believe it cannot meet its dividend growth goals, which have been reiterated quite often in calls. Analysts have been quite direct on management’s view of share value and whether issuing further equity in the pipeline, to which Management has responded adamantly that they view the shares as undervalued at current prices and do not wish to raise capital this way. I think it is unlikely that current shareholders get diluted at current prices. Conclusion Shares are undervalued at current prices and the market sell-off from $40/share to current lows has been overdone. I picked up some shares at current prices today (to go along with my other two utility plays, Calpine Corporation (NYSE: CPN ) and AES Corporation (NYSE: AES )). In general, I think investors in utilities should seek out companies with young power plants with significant holdings in the next generation of power generation (natural gas, wind, solar) at cheap prices. TerraForm fits the bill. Disclosure: I am/we are long TERP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

TerraForm Power – A Great Mix Of Growth And Yield

Summary Once again increased dividend guidance to $1.75 per share and $2.05 per share for 2016 and 2017. In a better position to support growth which is 24% CAGR currently. The recent acquisition of Vivint Solar will further strengthen TERP’s position in residential rooftop space. TerraForm Power Inc. (NASDAQ: TERP ), the yieldco formed by SunEdison (NYSE: SUNE ) should benefit from the leadership position of SunEdison in the industry today. SUNE is aggressively adding projects to its portfolio, which makes the investment case for TERP even stronger. TerraForm Power is in a good position to acquire projects from SunEdison. The recent acquisition of Vivint Solar (NYSE: VSLR ) will further strengthen the yieldco’s residential solar portfolio. TerraForm has been frequently increasing its dividend and CAFD guidance which is a good sign for the investors. I remain highly bullish on the stock, given the rate at which SunEdison is transferring quality projects to its yieldco. Why I like TerraForm Power 1) Strong Portfolio of projects – The inventory of project dropdowns have increased three times to 3.6 GW since the IPO, which is expected to grow by another 2.9 GW in 2016 and furthermore in the future. Not only there are transfers from its solar sponsor SunEdison, there have been acquisition from third parties as well amounting to ~1.4 GW since the IPO. The project conversions from SunEdison more than doubled from 6 GW to 14 GW in the last one year. TERP will leverage from the strong presence of SunEdison in the downstream project business. The portfolio of projects include utility projects in wind and solar energy and distributed generation projects. TerraForm currently has 17% of DG projects by installations, but they contribute to about 30% by cash flow. The recent announcement of Vivint Solar acquisition will further strengthen the yieldco’s residential portfolio, with TERP buying 523 MW of rooftop projects worth $922 million. The portfolio has expanded from 808 MW in the last year to almost 1.7 GW currently. The potential for growth in dividend per share also increases with increase in the dropdown inventory. 2) Diversifying into wind energy – As already mentioned, 30% of the assets in the total portfolio comprises of wind energy assets. This will help the yieldco benefit from the any slowdown in the solar markets. It acquired 521 MW of five wind farms from Atlantic Power, with an annual CAFD of ~$44 million. However, these assets are not dropped down in the vehicle immediately, but are stored in “warehouse”. 3) Q1 Performance was good – Revenue during the quarter was $75 million and adjusted EBITDA was $52 million. Cash available for distribution was $39 million as at the end of Q1 2015 as compared to $17 million as at the end of Q4 2014, which was in line with expectation. Drop downs from SunEdison were 167 MW in the first quarter, representing $17 million of CAFD opportunity in 2015. 4) Improved Credit & Liquidity – TerraForm Power increased the size of its revolver by $100 million to $650 million. There is sufficient liquidity in the form of cash and revolver credit to fund acquisitions. (click to enlarge) Source: TerraForm IR 5) Improved Dividend Guidance – TerraForm increased its dividend guidance to $1.35 per share from $0.90 per share at the time of its IPO and also provided a dividend growth target of 24% over the next five years. TerraForm achieved its full year DPS in the first quarter itself. The guidance has improved as a result of SunEdison accelerating the rate of dropdowns to TERP and effective conversion of the pipeline. The CAFD guidance has almost doubled since the time of the IPO. This is a very good sign of growth for TERP, since cash available for distribution is an important metric to measure the success of a yieldco. In addition, TERP has also increased its dividend per share guidance from $1.70 to $1.75 and from $2.00 to $2.05 for the years 2016 and 2017 respectively. (click to enlarge) Source: TerraForm IR Risks USA centric – Most of TERP projects are located in the USA which is increasingly moving towards solar energy. However, the recent rate of return in US projects are declining. Austin Energy in Texas got 1.2 GW of solar bids for just less than 4 cents . This might be a cause of concern for installers and developers. With improving technologies and declining cost, the prices are further expected to go down. Source: TerraForm IR Stock Performance & Valuation Currently the stock is trading at ~$31, which is very close to its 52 week low price. The market capitalization value is $3.8 billion . The P/B of 5.5x is lower than its peer 8point3 Energy Partners (NASDAQ: CAFD ) at 9.1x. TERP stock has come down due to the fall in oil prices. Most of the solar stock prices have come down due to this factor. However, falling oil prices are having absolutely no major fundamental effect on the growth of the solar energy markets worldwide. Note oil is mostly used for transportation and hardly anyone uses it for electricity power generation. Conclusion TerraForm is planning to expand into other geographies like Japan and Mexico and is also looking at new opportunities like the storage market. The company has a strong growth potential due to the aggressive expansion by its sponsor as well as from third-party M&A. The investors should like the translation of acquisitions into dividends and returns. TerraForm is also looking at expanding into the residential segment, where the dollar per megawatt is higher. I remain highly bullish on this stock and would recommend adding on dips. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

YLCO – Leveraging On The Growth Of The YieldCo Investment Class

Summary YieldCos are an emerging asset class of yield vehicles, providing stable and growing dividend income from renewable energy assets. The ETF portfolio consists of high quality yieldco securities. The Global X YieldCo Index ETF is a low risk way to play the high growth renewable energy. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is a new ETF investing in yieldcos as the underlying asset. It was formed by the Global X Funds, one of the largest issuers of ETFs providing investment opportunities across the global markets. This ETF provides a good opportunity for investors looking to invest in the renewable energy sector including solar and wind companies. YieldCos are becoming important especially in the solar industry. Many big solar companies have made plans to form a yieldco. YieldCos are dividend growth oriented public companies, providing stable cash flows and distributing the cash amongst its shareholders as dividends. YLCO will be the first YieldCo ETF available to U.S. investors. ETF Details The fund started on May 27, 2015 and has an expense ratio of 0.65%. The ETF follows the Indxx Global YieldCo Index, which is the underlying index. It will have to invest at least 80% of its total assets in the securities of the underlying index. It follows a replication strategy, where investment in securities will be done in the same proportion as the underlying asset; not trying to outperform or underperform. Since the Global YieldCo Index focuses on the energy sector, the new ETF will also concentrate on the energy sector. The Global YieldCo Index currently has a yield of over 3%. This fund is different from the rest as it seeks to invest in yieldcos. Why should you invest in a Renewable Energy YieldCo 1) Renewable Energy is growing rapidly Renewable energy usage has been scaling up in recent times. With solar energy reaching grid parity in a number of places, it is now becoming more economical to use solar power rather fossil fuels. Countries are focusing on reducing their carbon footprint by using more renewable energy. Developing countries like China and India have made aggressive plans to shift their energy mix from coal to more cleaner and efficient energy sources like wind and solar. Energy companies are bound to benefit in the future from these long term trends. According to Solar PV roadmap by IEA, solar energy capacity will grow to 3000 GW by 2050 up from 184 GW now. 2) YieldCos are becoming popular YieldCos are fast gaining traction in the renewable energy space. It is created by a parent company to lower the cost of capital, as renewable energy projects are capital intensive. Green energy does not require fuel and most of the cost is front loaded. The capital cost is the most crucial variable in determining the levelized cost of electricity (LCOE). The income from these yieldcos is considered reliable and some of the yieldcos are also growing rapidly e.g. Terraform Power (NASDAQ: TERP ). YieldCos distribute the cash amongst investors in the form of dividends. YieldCos have become extremely popular in this industry today. They enter into long term contracts and thus provide stable cash flows. This industry currently has a combined market capitalization value of $39 billion currently and 11 more IPOs are in the pipeline. 3) Top 10 Fund Holding The fund holds 20 securities with the top holding Terraform Power Inc. accounting for as much as 12%. TERP was the first yieldco formed by SunEdison (NYSE: SUNE ) in the solar energy space, which revolutionized the whole industry. The company’s portfolio has grown from 808 MW since its IPO in July 2014 to 1,675 MW. It has plans to diversify into natural gas, geothermal and hydro power. The CAFD guidance more than doubled to $225 million for 2015 . Another big holding is Brookfield Renewable Energy Partners which owns $20 billion in renewable power assets and is a leading operator of renewable projects across North America, Latin America and Europe. It has installed more than 7GW capacity predominantly in the hydroelectric space. The 3rd largest holding is NextEra Energy Partners (NYSE: NEP ) which owns clean energy projects particularly wind and solar energy in North America with stable, long-term cash flows. It declared $100-120 million as its CAFD guidance for 2015 and is expecting a 12-15% annual growth in dividend distribution over the next five years. Data from Global X Funds 4) Geographic Diversification Though the fund has a global footprint, the focus in mainly on the developed countries. The main reason for this concentration is the fact that yieldcos have been launched mainly in these regions. Emerging markets do not have major yieldcos as of now. As time passes, I expect yieldcos to emerge in the developing markets as well. Data from Global X Funds Index Characteristics (click to enlarge) Source: Indxx Risks One of the concerns of investing in this ETF could be the fact that the underlying assets are not fully under the control of its management. They are dependent on their sponsors. For example, if the sponsors do not have a healthy project pipeline, they will be unable to transfer the assets to their underlying yieldco which may adversely affect the yieldco’s performance and in turn the ETF’s. Other than this, it is a relatively new concept in the industry and like any other new venture there is this risk of whether it will be a success or a failure. But given the high quality stocks in the Global X YieldCo portfolio, I do not think it should be a major concern. Stock performance The Global X YieldCo Index ETF was launched on May 27, 2015 at $15.35 and is currently trading at ~$15. Conclusion Investing in renewable energy stocks is sometimes regarded as risky given the volatile nature of the sector. ETFs are a good way to diversify individual stock risks and are regarded as less risky. The Global X YieldCo Index ETF is a good and balanced way to stay invested in the green space, giving exposure to the growing yieldco market. It is a relatively new concept in the market now and has been launched by one of the fastest growing issuers of ETFs. I think it’s a smart way of investing in the renewable energy space as it is less risky and involves a portfolio of growing stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.