This past year has been a bit of a transitional one for TerraForm Power (TERP). In late 2017, Brookfield Asset Management (BN) took control of the wind and solar company and started implementing a turnaround plan to improve TerraForm's operations and financial profile. That strategy began paying dividends during 2018.
However, despite the progress last year, TerraForm's stock price slumped more than 10%, largely due to the market's sell-off at the end of the year. Because of that, the company appears poised for a big year in 2019, which is among the many reasons why I think it's the top choice among renewable options for investors in the coming year.
The transformation started paying dividends during 2018
TerraForm Power accomplished a lot during 2018. The company got off to a great start to the year by working with Brookfield Asset Management to acquire Spanish wind and solar power company Saeta Yield for $1.2 billion. That transaction not only expanded operations into western Europe but accelerated its balance sheet improvement plan because it used equity to fund a large portion of the deal -- which it sold to Brookfield's renewable arm Brookfield Renewable Partners (NYSE: BEP) -- to quickly reduce its leverage ratio. Another benefit of the deal is that it enabled TerraForm Power to reinstitute its dividend at a 6% higher rate than it initially anticipated given how much Saeta moved the needle for the company.
Another highlight during 2018 was that TerraForm Power signed a long-term contract with General Electric (GE -0.79%), which will maintain and operate its North American wind fleet. The partnership with GE will save TerraForm Power about $20 million per year, which it should begin realizing in the first half of 2019.
Finally, the company worked on several other initiatives to both reduce costs and boost revenue. For example, it ran scans of its entire North American solar portfolio during 2018, which led it to begin forming a plan to improve those operations that should boost revenue by $7.5 million. The company also signed an agreement with one developer to expand an existing solar site while also agreeing to acquire a small portfolio of solar assets and buying out a partner in another small portfolio. Meanwhile, it's working on securing another long-term service contract for its wind portfolio in western Europe to save money.
Why TerraForm appears poised to shine in 2019
TerraForm's turnaround progress started becoming apparent by the third quarter of 2018 when cash flow per share surged nearly 70% year over year thanks to the addition of Saeta as well as the company's internal initiatives to reduce costs and boost earnings. That high-powered growth should continue during 2019 as TerraForm further integrates Saeta into the fold as well as benefits from its contract with GE and its other expense reduction initiatives.
In addition to those internal growth drivers, TerraForm Power appears well positioned to continue making acquisitions. The company completed several financing transactions during 2018 that not only reduced its interest expenses but boosted its liquidity. By the end of the third quarter, it had more than $900 million of cash and available credit, which provided it with ample capital to invest in attractive opportunities that might arise.
TerraForm has a large pipeline of potential acquisitions already lined up as it holds the right of first offer on a 3,500 MW portfolio of wind and solar projects controlled by Brookfield Asset Management and 500 MW of assets operated by third parties. That's a massive opportunity set considering that TerraForm Power's current portfolio had 3,640 MW of renewable assets in late 2018.
In addition to its ability to purchase those assets, TerraForm has the capital and backing from Brookfield to make another major acquisition that could further accelerate its turnaround plan. The company noted that it's looking at expanding into Mexico as well as continuing to build its presence in western Europe, the U.S., and Canada.
Set up for strong returns in 2019
After dipping by double digits during 2018, TerraForm Power enters the new year with a much cheaper valuation, especially given how much earnings expanded during the year. In the meantime, the company's profits should continue to rise in 2019 as it pushes forward on its strategic turnaround plan, which should see its expenses decline as its agreement with GE begins paying off while earnings increase due to both Saeta as well as its other growth-focused initiatives. Add that upside to its 7%-yielding dividend -- which TerraForm Power aims to increase 5% to 8% per year -- and the company could generate a total return of more than 20% in the coming year.