TerraForm Power (NASDAQ:TERP) exploded onto the scene a few years ago, gaining nearly 30% in under a year after coming public in May of 2014. Powering that brisk growth was a string of acquisitions that quickly turned it into a large-scale renewable energy producer. However, it started falling off the rails later that year due to the financial troubles of its former parent, which affected its ability to finance expansion while paying a high-yielding dividend.
The bankruptcy of its former parent enabled Brookfield Asset Management (NYSE:BAM) to swoop in and take control last year. Brookfield has quickly helped stabilize TerraForm's financial situation, which positions it to start growing again. Overall, Brookfield sees three distinct ways TerraForm can grow shareholder value in the coming years, which could make it a great growth stock once again.
1. Internal growth initiatives
Last year, TerraForm Power generated $126 million, or $0.85 per share, in cash available for distribution (CAFD), which is money it could pay out in dividends. The company believes there's significant embedded opportunity within its existing portfolio to grow that number over the next few years.
One of Brookfield's initial focuses since taking control has been to improve TerraForm's margins by reducing costs. The company is currently targeting $25 million in cost savings, which should boost CAFD by $0.05 to $0.07 per share in the near term. In addition to that, the company has identified several improvements it can make to improve the power generation of its existing assets. These moves have the potential to bolster CAFD by $20 million, or $0.09 to $0.11 per share, in the medium term. Add it up, and that's a roughly 20% improvement in CAFD with minimal effort.
2. Organic growth initiatives
The next step in the company's growth plan is organically expanding around its legacy portfolio. The company sees four drivers of organic growth.
First, the company has the right of first offer (ROFO) to acquire an extensive portfolio of wind and solar power assets from both Brookfield and third-party sellers. For example, the company noted in its first-quarter letter to investors that it was in late-stage negotiations to buy six megawatts (MW) of distributed solar assets in California and New Jersey via a ROFO from a prior acquisition. In addition to that, it has the ROFO for an additional 15 MW of solar assets from the same seller that it might exercise in phases over the next year and a half. The company could generate $10 million in incremental CAFD by investing $88 million in these types of acquisitions.
Second, the company has the potential to repower some of its existing wind farms by installing larger towers. A $92 million investment could generate $11 million in CAFD, according to the company's estimates. Third, TerraForm has the option to buy out minority investors in some of its facilities, which would give it a larger share of the CAFD generated by these assets. A small $28 million investment could yield $4 million of incremental CAFD.
Finally, TerraForm could make small add-on acquisitions of third-party assets near its existing facilities. In its first-quarter letter to shareholders, the company noted that it's progressing several opportunities where it might provide capital to fund shovel-ready development projects or add-on acquisitions. The company sees the potential to invest up to $227 million in these small deals, which could add $26 million in CAFD.
Subtract financing and other costs, and these organic growth initiatives could add $0.12 to $0.16 per share to CAFD over the next five years.
3. Opportunistic acquisitions
The third leg of the Brookfield-led growth strategy will be to make opportunistic acquisitions. TerraForm Power recently made its first deal with the help of Brookfield, buying Saeta Yield for $1.12 billion to expand into Western Europe. That deal bolstered TerraForm's renewable power generating capacity by 40%, improved its financial profile, and should add $0.06 to $0.08 per share to CAFD over the next few years.
It's likely the first of many large-scale deals completed by the two companies in the coming years. Brookfield sees significant potential to buy wind and solar assets thanks to the amount of capital the industry expects to spend on installing new wind and solar facilities in the next few years, which could create opportunities for TerraForm to buy more mature assets so that developers can fund construction projects. These future deals could be needle-movers much like Saeta.
A clear path to growth, with ample upside to the plan
TerraForm Power's base plan of internal and organic growth initiatives would see it grow CAFD to between $234 million to $251 million by 2022, or $1.12 to $1.20 per share. That would enable the company to increase its 6.5%-yielding dividend at a 5% to 8% yearly pace. This base forecast alone positions the company to deliver double-digit total annual returns from here.
Meanwhile, opportunistic acquisitions, as well as the potential for it to outperform the base plan by capturing more organic growth than expected, could move the needle even further in the future. That growth potential makes TerraForm Power look like a compelling stock to consider buying these days.