Popping Corks at Yieldco

TerraForm Global (GLBL:  Nasdaq) closed out the old year with a deal  -  a final deal to merge with Brookfield Asset Management (BAM:  NYSE).   The transaction had been in the works for some time and had only just closed the last week in 2017.  Through one of its affiliated companies, Brookfield paid $5.10 per share for TerraForm Global.  Earlier in the year Brookfield had acquired controlling interest in TerraForm Power (TERP:  Nasdaq) in a deal that eventually gave TERP shareholders a choice on cash or stock, with those electing to receive cash getting as much as $9.52 per share.

TerraForm shareholders welcomed Brookfield’s attentions like shy high schoolers with no date for the prom.  TerraForm’s parent SunEdison filed for bankruptcy in 2016, leaving its ‘yieldco’ affiliates on shaky ground in the capital markets.  The yieldco business model is highly leveraged on the cash flows from operating power plants.  Access to cheap debt capital is critical for yieldcos.  SunEdison’s bankruptcy caused the debt costs to skyrocket for TerraForm and its yieldco siblings. 

As a more stable company, Brookfield could help restore TerraForm’s credibility with bond investors.  It is noteworthy that Brookfield recently closed on a complementary acquisition of a Texas-based investment advisor focused on energy infrastructure investments.  The investment advisor should give Brookfield better access to capital through the advisor’s client base.  As it is Brookfield has over $17 billion in third-party private fund commitments and $9 billion in liquidity from undrawn committed credit facilities.

Alto Sertao Wind Farm - Brazil

A second reason for TerraForm shareholders to be celebrating as 2017 came to a close is Brookfield’s track record of renewable energy development and acquisition.  Yieldcos need new income producing power plants to expand income.  In early November 2016, when Brookfield announced financial results for the quarter ending September 2016, the company claimed to have over 1,000 megawatts of renewable power projects in development. 

There seem to be so many reasons for TerraForm to celebrate a tie-up with Brookfield.   Is there any cause for Brookfield shareholders to be popping champagne corks? 

On the surface it does not appear Brookfield is in a winning position.  TerraForm Global generated $159.2 million in revenue in the first nine months of 2017, resulting in a net loss of $56.4 million.  The operation used $44.9 million in cash to support operations, in large part for the pay down of $50.9 million in outstanding payables and a sequestration of $50.0 million for restricted cash from insurance proceeds. 

A strong balance sheet is helping TerraForm Global weather the tough times.  At the end of September 2017, the company had $631.6 million in total cash and equivalents on its balance sheet.  There is another $127 million in restricted cash supporting contractual commitments.  As impressive as the bank balance might seem, it is important to also acknowledge the $1.1 billion in debt TerraForm has accumulated to build its portfolio of wind and solar power assets.

The power assets are most likely what sparked Brookfield management.  Valuable assets refinanced with low-cost capital could be a plus for Brookfield.  TerraForm Global carries a $1.5 billion in wind and solar power plant assets on its balance sheet or $1.3 billion net of depreciation.  The power plants, with a net capacity of 919.2 megawatts (989.5 MW nameplate capacity), are scattered around the globe in Brazil, China, India, Malaysia, South Africa, Thailand and Uruguay.  The largest plant is a wind farm in Brazil with nameplate capacity of 203.2 megawatts.  The portfolio of assets is subject to power purchase agreements with an average remaining life of sixteen years.  Now that is worth popping a cork!

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.