TerraForm Power’s Turnaround Plan Paid Dividends in Q1

TerraForm Power (TERP) has been working on a variety of self-help initiatives aimed at improving the profitability of its legacy assets. Those actions, when combined with the needle-moving acquisition of a western European wind and solar company last year, helped power strong results in the first quarter. That kept the renewable energy company well on track with its long-term dividend growth plan.

A look at the numbers

Data source: TerraForm Power.

TerraForm Power generated high-powered growth in earnings and cash flow during the first quarter. It benefited from three factors this quarter: the acquisition of wind and solar power company Saeta, improved availability of its wind fleet, and the contribution of its initiatives to improve margins. That trio more than offset below-average wind resources in Europe as well as weaker wind and solar production in North America due to blade repairs and icing.

One of the highlights during the quarter was the progress of the company's initiatives to improve the profitability of its assets. TerraForm transferred 10 of its 16 wind farms in North America to GE (GE 1.43%), which has taken over their operation and maintenance. The company expects to hand over the remaining sites to GE in July. These actions should save the company $20 million per year.

TerraForm also transferred the operations of its Spanish wind fleet to its original equipment manufacturers and amended the existing agreements for its assets in Portugal and Uruguay. These initiatives should save it another $4 million per year. Finally, the company generated about $2 million of incremental revenue as a result of its solar performance improvement plan.

"During the first quarter of 2019, we made significant progress completing our margin enhancement initiatives," said CEO John Stinebaugh in the earnings release. He pointed out that these actions alone "will cover approximately 75% of the growth required to achieve our 5% to 8% annual dividend-increase target through 2022 with a payout ratio of 80% to 85% of CAFD."

The company also made some moves to bolster its balance sheet. It closed the refinancing of its wind farm in Uruguay, raising $65 million in incremental proceeds. The company also continued its progress on securing $350 million in debt as part of its financing plan for the Saeta acquisition. It expects to close its third project financing this month to raise $100 million and the final one by the end of the second quarter. These initiatives will reduce the balance on the company's credit facility by more than $300 million, which will help push its leverage ratio down to its target of between 4 to 5 times debt-to-cash-flow by the end of this year.

Image source: Getty Images.

A look at what's ahead

TerraForm Power only needs to secure a "modest amount of organic growth investments ... to fill the remaining gap" in its dividend growth plan, according to Stinebaugh. Overall, the company estimates that it requires about $180 million of growth initiatives and add-on acquisitions to deliver the incremental cash flow to support the plan. The company believes it can fully fund that investment level with excess cash retained after paying its high-yielding dividend.

It took some steps toward achieving that goal during the quarter. In March, the company entered exclusive negotiations with the seller of a four-project, 15 MW solar portfolio in Massachusetts. TerraForm currently operates these assets and holds the right of first offer to acquire them. If successful, the company would pay $24 million to buy the portfolio in two phases, which would close in July and December of this year. It also completed the acquisition of a tax equity interest in an existing solar portfolio in Ohio and California and a minority interest in a solar asset in Nevada for a total of $6 million. Overall, the company made progress on securing $30 million of investments during the first quarter, which puts it well on its way to achieving the targeted investment level.

The turnaround plan is delivering results

TerraForm Power is off to a great start in 2019. The actions it has taken to improve its profitability are starting to pay off, and will supply a significant portion of the incremental cash flow needed to support its dividend growth plan. On top of that, the company made progress on its other initiatives to improve its financial profile and secure growth investments. Those factors should give TerraForm the power to generate market-beating total returns, making it a top renewable energy stock for the long term.