On Monday, Terraform Power (NASDAQ:TERP) released the first financial information since it's third quarter 2015 report last November. This information was released at the request of bondholders, and follows a similar release of information from its sister Yieldco, Terraform Global (NASDAQ:GLBL).
I provided a quick valuation of Terraform Global based on its presentation last week. This article uses the same methodologies to value Terraform Power based on the new information.
As with Terraform Global (GLBL), the presentation contains warnings that it is "preliminary and unaudited. Financial information may change materially as a result of the completion of the audit for fiscal year 2015," but it's a world better than the nothing we had before. Also like GLBL, TERP has announced that it is "working with [bankrupt parent company] SunEdison (OTCPK:SUNEQ) to explore potential value creating options for SunEdison's interests in the Company."
That said, Terraform Global is clearly no longer SunEdison's lapdog. On Monday, it announced "a stockholder protection rights agreement in response to the potential sale by SunEdison and the announced accumulation of Terraform Power's Class A shares by third parties." Such a "poison pill" agreement gives considerable power to Terraform Power's board to decide if a merger or acquisition is in its best interest. Since SunEdison is in bankruptcy, it has an interest in an expidited sale process, while TERP shareholders have an interest in maximizing the value of their shares, even if that process takes longer than SunEdison would like.
The "accumulation of [TERP] shares by third parties" clearly refers to Brookfield Asset Management (NYSE:BAM) and Appaloosa Management, LP, which recently disclosed large (12% and 10%) stakes in TERP, as well as an agreement to work together when bidding for Terraform Power.
What Is TERP Worth?
Using the data from the presentation, I will attempt two methods of per-share valuation for TERP, which is trading at $12.83 as I write. The first will be based on the company's assets, and would be most important in the sale of the company in whole or part. The second will be based on cash flow available for distribution (NASDAQ:CAFD), which should produce an estimate of future potential dividends. Combined with some appropriate market yield, that can be used to arrive at a fair share price.
Share Classes and IDR
Terraform Power has 92.2 million class A shares outstanding and 48.2 million class B shares currently owned by SunEdison. SunEdison also has Incentive Distribution Rights (IDRs), which give it an additional 15% of distributions above $0.3375 per quarter, increasing to 25% when class A shares receive over $0.395 and 50% when A shares receive more than $0.45. TERP's last dividend was $0.35 in November 2015, so the IDR has begun to take effect. The IDR can be transferred, and only requires the recipient to own some of the B shares. That said, the intent of this article is to value the publicly traded A shares, and so the details of the relationship between B share ownership and the IDR are not particularly relevant.
Below are the quarterly IDR payments at various A-share distributions, assuming the number of A shares outstanding does not change from the current 92 million:
|TERP Quarterly Distribution||Quarterly IDR||IDR Value at 12% discount rate, no growth|
|$0.40||$1.1 million||$36 million|
|$0.45||$2.6 million||$88 million|
|$0.50||$7.2 million||$241 million|
|$0.55||$11.8 million||$395 million|
Asset Based Valuation
According to the presentation, Terraform Power currently owns 2,967 MW of wind and solar as of June 30th. The company had $501M of unrestricted cash on March 31st. June 30th cash was not given, nor was debt, but the slides discuss a total of $795 million of draws on debt facilities through December 2015. The company has $2,550 million in debt previously, for total debt of $3,345 million in debt on March 31st. Subtracting cash, net debt was $2,050 million.
To value the renewable energy assets, untroubled solar Yieldco 8point3 Energy Partners (CAFD) has an Enterprise Value (EV, calculated as Debt + Equity- Cash) of $672M for a 525 MW portfolio, or $1.28 per Watt. Wind Yieldco Pattern Energy Group (PEGI) has an EV of $3.53 billion for 2,554 MW, for an EV of $1.38 per Watt. Terraform has a mix of solar and wind, so its assets should be valued somewhere between these numbers to give us a total Enterprise Value. Each A share should be worth somewhere between 80% and 95% of each B share depending on how quickly we expect distributions to grow, so I combine these to get the valuations below.
| Asset valuation |
| Enterprise Value |
| Equity Value |
|IDR Value||A share Valuations|
Note that the more Terraform's assets are worth, the more the IDR is likely to be worth. Hence, there is a trade-off between higher overall valuations and the value of the IDR. High IDR valuations are also inappropriate for an asset-based valuation because such valuations ignore future growth, and much of the IDR's value lies in future growth.
The underlined valuations along the diagonal represent this trade off. Likely valuations range from $11 to $13.50.
Terraform Power's preliminary results show the company producing $58 to $66 million CAFD for the first quarter, and $224 to $234 million in 2015. First quarter 2015 CAFD was $39 million. Both wind and solar have seasonal production, so I feel annual CAFD is more useful for this sort of estimate than quarterly.
If we assume that each quarter in 2016 also increased CAFD by $19 million to $27 million over 2015, we get a 2016 CAFD of $300 million to $342 million. Assuming an 85% payout ratio, this translates to the following distributions per share:
|Annual CAFD||A Share Quarterly Distribution||Quarterly IDR|
|$301 million||$0.44||$2.3 million|
|$310 million||$0.45||$2.6 million|
|$321 million||$0.46||$3.5 million|
|$331 million||$0.47||$4.5 million|
|$343 million||$0.48||$5.4 million|
Predicted TERP Valuation By Yield
Most Yieldcos currently trade at distribution yields between 5% and 7%, but until the uncertainty surrounding the bankruptcy of its sponsor is dealt with, TERP should trade at a higher implied yield, most likely in the 8% to 10% range. This gives the following predicted TERP share prices:
|TERP distribution yield|
Obviously there is significant uncertainty in these valuations, not least because all the numbers are preliminary and my numerous estimates. We also do not know when Terraform Power might start to pay a dividend again, or if the company would pay the second quarter dividend (which has not yet been paid) in arrears.
No valuation measure is perfect, and the asset-based valuations are markedly lower than the CAFD valuations. Something in the middle seems most likely. Hence, I arrive at a valuation range of $12 to $20 per share.
Disclosure: I am/we are long TERP,GLBL,CAFD, PEGI.
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.
Additional disclosure: Tom Konrad manages and invests in The Green Global Equity Income Portfolio, which owns TERP, GLBL, PEGI and CAFD.
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