Last year, leading alternative asset manager Brookfield Asset Management (BN -0.79%) bought a controlling stake in struggling renewable power company TerraForm Power (TERP). Its aim was two-fold: Generate more cash out of TerraForm's existing portfolio and grow its platform to create more value for investors. While they are still in the early days of this transformation, the initial results are very encouraging. That's evident by taking a closer look at TerraForm's first-quarter report.
Digging into the quarter
As the table below shows, TerraForm's first-quarter results were solid overall:
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$96 million |
$103 million |
-6.8% |
|
Cash available for distribution (CAFD) |
$23 million |
$19 million |
21.1% |
|
CAFD per share |
$0.16 |
$0.14 |
14.3% |
Data source: TerraForm Power.
Image source: Getty Images.
While EBITDA slipped versus the year-ago period, that was mainly due to an outage at its wind facility in Raleigh, which it had to shut down after a faulty blade caused a tower to collapse. The company has completed its inspection of each turbine and returned them all to service. Without that issue, EBITDA would have been roughly flat year over year at $102 million, while CAFD would have been even higher at $29 million, or $0.20 per share.
Meanwhile, the growth in CAFD reflects the company's efforts at driving down costs. TerraForm has been working to squeeze an additional $10 million of annualized expenses out of its business this year, which it's on pace to achieve by the end of the second quarter. In addition to that, the company is working on a comprehensive long-term service agreement covering its wind fleet, which it expects will drive an additional $15 million in cost savings over the next two to three years. It's already in advanced negotiations on that contract, positioning it to start seeing some of the benefits in the second half of this year. The increased cash flow from those cost-saving initiatives alone has the potential to power 6% compound annual dividend growth through 2020.
Image source: Getty Images.
This is only the beginning
TerraForm plans to complement its self-help efforts by expanding its renewable power platform through organic expansion projects and acquisitions. The company already has a needle-moving deal in the works after agreeing to pay $1.2 billion for Saeta, which is a wind and solar operator based in Spain. The company recently received regulatory approval for the deal, which it expects to close by mid-summer. Once complete, the transaction will significantly increase cash flow, while also reducing the company's leverage metrics down to its target range of 4.0 to 5.0 times debt-to-EBITDA, which gets it closer to achieving an investment grade credit rating. Meanwhile, even after completing that deal, it will have $1 billion of liquidity to make additional acquisitions.
The company already has several other transactions in the works. It's in late-stage negotiations to buy a portfolio of solar assets in California and New Jersey as part of a right of first offer granted to it from a previous acquisition. Meanwhile, it has the right of first offer on several other assets from the same seller that it might exercise over the next nine to 18 months. In addition to that, the company is working on opportunities with developers in North America and Europe to provide funding for some shovel-ready development projects and add-on acquisitions. Finally, it's in discussions with a renewable power developer in Europe to help fund a strategy that will consolidate small, regulated solar facilities in Spain.
These transactions and opportunities put the company well on its way toward achieving its five-year plan to grow the dividend at a 5% to 8% yearly rate through 2022. At the midpoint, that forecast would increase the payout from the current annual level of $0.72 per share -- a 7.1% yield -- up to $0.90 per share in 2022, which implies a yield of 8.3% in five years.
Full speed ahead
TerraForm Power's first-quarter results show that the Brookfield-led turnaround plan is working. Because of that, its cash flow is on pace to improve significantly in future quarters, positioning the company to not only pay a generous dividend, but grow it at a healthy rate for at least the next several years. That income with upside makes it an excellent income stock to hold for the long term.
