TerraForm Power (TERP) is working on implementing a multipronged strategy to grow its cash flow. That plan would allow the renewable energy producer to increase its 4.9%-yielding dividend at a 5% to 8% annual pace through at least 2022. That growing income stream is what makes it such a great stock for dividend-seekers to buy and hold over the long haul.
The company continued making progress on all aspects of its strategy during the second quarter, which improves the probability that it can deliver on its dividend growth goal.
A look at the numbers
|
Metric |
Q2 2019 |
Q2 2018 |
Change |
|---|---|---|---|
|
Generation |
2,450 GWh |
2,036 GWh |
20.3% |
|
Adjusted EBITDA |
$196 million |
$128 million |
53.1% |
|
Cash available for distribution (CAFD) |
$47 million |
$30 million |
56.7% |
|
CAFD per share |
$0.22 |
$0.19 |
15.8% |
|
Dividend payout ratio |
91.5% |
100% |
9.3% |
Data source: TerraForm Power. GWh = Gigawatt hours.
TerraForm Power's production jumped more than 20% compared to last year's second quarter, due primarily to its acquisition of Spanish wind and solar power company Saeta. That deal enabled the company to easily offset the headwinds it faced during the quarter. One of the biggest was weaker wind conditions across North America, which were 8% below the long-term average. It also experienced lower results in its solar business due to below-average conditions and some maintenance-related downtime at some of its wind farms.
Those headwinds also impacted earnings and cash flow during the quarter. However, several positive factors enabled the company to overcome those issues. In addition to the boost from the Saeta acquisition, the company delivered strong performance across its European operations and benefited from higher power prices in the U.S., with those last two factors combining to add $7 million of incremental CAFD during the period.
TerraForm's cost-cutting initiatives also continued paying dividends. The company turned over the operations of 15 of its 16 North American wind farms to GE as part of its long-term service agreement with the industrial giant. Meanwhile, it transitioned service and maintenance operations of its European fleet to their respective turbine makers. These and other moves enabled TerraForm to generate about $5 million of incremental CAFD during the quarter. The company is also working on an outsourcing agreement for its North American solar fleet, which should reduce costs by another $5 million per year. Overall, its margin enhancement activities should boost its CAFD by $53 million per year once fully implemented.
Image source: Getty Images.
A look at what's ahead
"During the quarter, we made significant progress executing our growth strategy," according to CEO John Stinebaugh. The highlight was a deal to acquire a 320 MW portfolio of U.S. distributed generation assets, which are smaller solar projects such as those on residential rooftops. The company is paying $720 million for this portfolio, which will provide a modest boost to CAFD in 2020 as well as over the next five years. Aside from the initial uplift from the acquisition, TerraForm expects to generate incremental CAFD as it leverages its larger scale to reduce costs.
The company plans to pay for this deal by selling a minority interest in its North American wind assets. That will enable it to realize some of the value created by increasing the profitability of those assets, while also enhancing its balance sheet.
TerraForm also made progress on projects to repower three of its existing wind farms. It received permits for two projects in New York State that will allow it to install new turbines that can produce 25% to 30% more power. In the meantime, it's working on securing a new power purchase contract with a utility in Hawaii to support its repowering project in that state. This progress has the company on pace to complete these projects by 2021.
TerraForm's acquisition of the solar portfolio and progress on the repowering projects keep it well on track with its dividend growth plan.
Another excellent quarter
TerraForm Power's multipronged strategy to improve the profitability of its existing assets while also acquiring new ones that move the needle is paying dividends. The company was able to generate significantly more cash during the second quarter even though it experienced some headwinds. That's helping increase the long-term sustainability of its growing dividend. With further progress on securing new growth during the quarter, the company looks like it should have no problem achieving its five-year dividend growth plan. That increases its appeal as an ideal stock for income seekers to buy and hold for the long term.
