Will 2018 Be TerraForm Power, Inc's Best Year Yet?

When discussing the best year ever for TerraForm Power Inc (NASDAQ: TERP), there isn't a lot of competition. The company went public in 2014 and has been in a decline for most of the time since then, driven by a massive drop late in 2015 when its sponsor SunEdison ran into financial trouble.

But in 2017 the company got a new sponsor in Brookfield Asset Management (NYSE: BAM), a manager with a long history of generating value in the renewable energy sector. That could change the company's fortunes and make 2018 its best year yet.

The return of "normal"

TerraForm Power's dividend has been suspended since former sponsor SunEdison nearly brought the company to its knees. When SunEdison went bankrupt, the pain spilled over to TerraForm Power by affecting its back-office operations -- which SunEdison handled -- and putting the company into technical default on some loans.

Since Brookfield took control, those pain points should be over, and TerraForm Power should return to normal operations. Management expects dividends of $0.72 per share in 2018, implying a 6.2% dividend yield on the stock. And the dividend is expected to grow 5% to 8% beyond that, mostly organically because it will keep 15% to 20% of cash available for distribution.

Stability is arguably the most important thing for yieldcos, and TerraForm Power should be one of the most stable yieldcos on the market going forward.

Deleveraging a levered balance sheet

While returning to paying a dividend is important, it's also likely Brookfield will focus on improving TerraForm Power's balance sheet in 2018. At the end of the third quarter, total debt for TerraForm Power was $3.58 billion, a level Brookfield would like to reduce by both selling off noncore assets and using excess cash to pay down debt.

There will be a natural deleveraging of $1.78 billion in project debt as of the second quarter of 2017 to $1.21 billion at the end of 2021 just from normal amortization. There's also the potential to add project-level debt to projects that don't already have it to reduce high-interest-rate corporate level debt.

Debt can't be overlooked as an important driver of value in TerraForm Power. At its depths, the company had to take on debt with an interest rate of LIBOR plus 10% with an 11% floor, an insanely high interest rate for a yieldco. Recently, the company offered $1.2 billion in senior notes with interest rates of 4.25% (for 2023 notes) and 5% (for 2028 notes) in order to pay down a revolving credit facility. If moves like that continue, it will free up cash that'll be available for distribution or deleveraging, which will be a big plus for shareholders long-term.

Slow and steady could win the race

TerraForm Power doesn't have to be a growth stock or make any wild moves in 2018 to create value for shareholders. The company just needs to slowly improve operations and reduce leverage, freeing up cash for a dividend that should be very sustainable long-term. 2017 was a step in the right direction, and if Brookfield can take small steps toward its strategic goals in 2018, including restarting the dividend, this will be a great stock for long-term investors.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.