TerraForm Power's (TERP +0.00%) decision to buy European renewable power company Saeta is beginning to pay big dividends, which was evident in the company's third-quarter report. That acquisition powered significant earnings and cash flow growth for the company during the period and positioned it for more success in the future. Add to that the continued progress of the company's strategic cost-saving initiatives, and TerraForm's turnaround is gaining steam.
Digging into the numbers
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Generation |
2,006 GWh |
1,378 GWh |
45.6% |
|
Adjusted EBITDA |
$197 million |
$110 million |
79.1% |
|
Cash available for distribution (CAFD) |
$46 million |
$19 million |
142.1% |
|
CAFD per share |
$0.22 |
$0.13 |
69.2% |
Data source: TerraForm Power Inc. GWh = gigawatt hours. YOY = year over year.
TerraForm Power benefited from a full quarter's contribution of the Saeta acquisition, which closed this past summer. That transaction significantly bolstered the company's power generation capacity, which helped drive earnings and cash flow higher. In addition, the company continued working on several cost-saving initiatives to generate more cash flow out of its existing assets, which also paid dividends during the quarter.
The company noted that it has been working with General Electric (GE +2.10%) to implement their service agreement across TerraForm's North American wind fleet. It expects the contract with GE to produce significant cost savings while improving the performance of its fleet, as well as increase its wind production by deploying GE's proprietary technology. The company expects to begin realizing the full benefits of this agreement in the first half of next year.
TerraForm is working on securing a similar agreement to cover its newly acquired wind fleet in Europe. The company recently launched a bidding process and hopes to sign long-term service contracts by year-end that should generate 15% savings compared with its current costs. Meanwhile, the company is making progress on its plan to improve performance in its solar operations. TerraForm noted that it had identified ways to increase its production by at least 52 GWh and is working to implement a strategy to capture these opportunities.
Image source: Getty Images.
A look at what's ahead
In addition to continuing to achieve the aims of its cost-saving initiatives to improve the cash flow of its existing fleet, TerraForm Power is also working to expand its portfolio further. The company believes that there are opportunities for consolidation in the Spanish renewables market, which it pointed out was very fragmented, with many assets owned by private developers that need capital. Because of that, the company believes it can acquire assets in the country at good prices that could yield attractive returns as it integrates them into its existing European platform.
TerraForm also noted that it's evaluating several opportunities to invest in the Mexican renewables market following that country's recent election. The company pointed out that the recent rejection of a new airport in Mexico City had caused greater investment uncertainty in the country, which could open the door for the company to capture attractive opportunities.
The company is also continuing to explore organic expansions of its existing portfolio. One of the opportunities it's working on is repowering some of its wind assets by replacing older turbines with larger, more powerful ones that would generate more electricity and cash flow. It's also exploring the potential to expand existing sites, as well as buy out some of the minority investors in its assets.
TerraForm Power believes that its combination of cost-saving and growth initiatives will enable it to grow its dividend at a 5% to 8% annual rate during the course of its current five-year plan.
The strategy is paying dividends
TerraForm Power's third-quarter results are evidence that its turnaround strategy is working. The company's dual focus on generating more cash from its existing assets while adding new ones into the fold enabled it to produce much stronger financial results. That keeps the company on track to achieve the aims of its five-year dividend growth plan, which has the potential to generate double-digit total annual returns when factoring in the company's attractive 6.4%-yielding dividend.
