TerraForm Power (TERP) made significant progress on its turnaround initiatives during 2018, which was evident in its fourth-quarter report. The renewable power company reduced costs, shored up its balance sheet, improved the performance of its existing fleet of wind and solar assets, and added new ones to its portfolio. The company's success on these initiatives has it well positioned to deliver continued growth in 2019 and beyond.
A look at the numbers
|
Metric |
Q4 2018 |
Q4 2017 |
YOY Change |
|---|---|---|---|
|
Generation |
2,214 GWh |
1,852 GWh |
19.5% |
|
Adjusted EBITDA |
$170 million |
$110 million |
54.5% |
|
Cash available for distribution (CAFD) |
$27 million |
$26 million |
3.8% |
|
CAFD per share |
$0.13 |
$0.18 |
-27.8% |
Data source: TerraForm Power. YOY = year over year. GWh = gigawatt-hours.
TerraForm Power generated nearly 20% more electricity than in the year-ago period due solely to the acquisition of Spanish wind and solar power company Saeta earlier in the year. That helped the company more than offset a range of issues, including poor wind resources and transmission grid problems that affected production at its legacy fleet. The acquisition of Saeta also helped boost profitability and cash flow. However, the company did issue a significant number of new shares to help pay for that transaction, to both its parent Brookfield Asset Management (BN 1.59%) and its sibling Brookfield Renewable Partners (BEP 1.40%), which negatively affected cash flow per share. As a result, Brookfield Asset Management now controls a 65% stake in TerraForm, with Brookfield Renewable directly holding a 30% interest.
One of the benefits of selling more stock to pay for that deal is that it significantly improved TerraForm's financial profile. That enabled the company to receive a credit rating upgrade, though it remains below investment grade. However, the higher rating and improved financial profile enabled the company to complete several debt refinancing transactions during the year, which will reduce future interest expenses and improve its liquidity.
For the full year, TerraForm Power's generation rose 13% thanks to the addition of Saeta. That helped propel a 44% increase in CAFD, or 11% on a per-share basis, after factoring in the dilution from the stock sales to Brookfield.
Check out the latest earnings call transcript for TerraForm Power.
Image source: Getty Images.
A look at what's ahead
While the acquisition of Saeta was the big story last year, TerraForm Power did several little things that should help boost results in 2019 and beyond. One of the more meaningful accomplishments was signing a long-term service agreement with GE (GE 1.44%) for its North American wind fleet. The company has been slowly transitioning its fleet to GE, which should result in annual cost savings of $20 million. TerraForm had hoped to sign a similar agreement for its European wind fleet. Instead the company intends to replace the current operators of those assets with their turbine manufacturers. This change should save the company about $6 million in annual operating costs, which should start showing up in the second half of this year.
In addition to working on ways to cut costs, the company also initiated several efforts to boost the revenue of its existing assets. TerraForm completed its solar performance improvement plan, which should improve annual production by 61 gigawatt-hours, adding $11 million of incremental revenue. The company is also working on implementing GE's Power Up turbine optimization technology across its entire wind fleet, which could generate $2 million in additional revenue.
TerraForm invested $28 million on a range of growth initiatives last year. For example, the company exercised its rights of first offer to buy some solar assets in the U.S. and purchased another solar asset in Spain as it started working on consolidating that market following the Saeta deal. TerraForm also invested money to expand one of its solar farms as well as on a battery energy storage project. Finally, the company started working on repowering its wind farms in New York State to take advantage of the state's strong support for renewables. The company intends to replace its existing turbines with newer, more powerful ones to increase production and cash flow. It's also looking at a similar project for its wind farm in Hawaii.
A bright future
TerraForm Power has made excellent progress on its turnaround plan, spurred on by the support of majority shareholder Brookfield, which took control of the company in late 2017. Over the last year, the company has cut costs, increased the revenue of its existing fleet, shored up its balance sheet, made a needle-moving acquisition, and reinstated its dividend -- which it raised 6% for 2019 -- all while positioning itself for future growth. That tremendous success and brightening outlook make it one of the top energy stocks to buy these days.
