TerraForm Power (TERP) has burned investors in the past. The renewable energy company went on an aggressive buying spree during its first few years as a public company, putting its finances in a precarious position. The company consequently had to stop paying a dividend so that it could get its balance sheet back on solid ground.
The wind and solar power producer, however, has turned things around in recent years. It even made enough progress in repairing its financial profile so that it could start paying a dividend again last year. By recently taking additional steps to further firm up its balance sheet, it's becoming a much better option for retirement-focused investors.
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Getting better on step at a time
TerraForm Power's turnaround began in late 2017. That's when leading alternative asset manager Brookfield Asset Management (BN 1.06%) bought control of the company from its bankrupt parent. Brookfield has since helped guide the turnaround strategy, which included assisting it with making a needle-moving acquisition last year. The deal, when combined with initiatives to reduce costs, has helped boost the company's cash flow. That gave it more financial flexibility, enabling it to refinance some debt. The company made so much progress that a credit rating agency upgraded its credit rating last year, though it's still below investment grade.
TerraForm has continued to take steps to improve its financial profile this year. During the second quarter, for example, it was able to secure some new financing on three of its legacy solar assets, which brought in $101 million in cash. This helped boost the company's liquidity position to $840 million, which then provided financial flexibility to make another acquisition -- it paid $720 million for a portfolio of U.S. solar assets. That will give it more power to achieve its plan to grow its dividend at a 5% to 8% annual rate through 2022.
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Taking two more big leaps forward
TerraForm recently made two more noteworthy moves to bolster its financial position. First, it cashed in on its sizzling stock price by selling some shares. It raised $251 million in a public offering and another $50 million in a concurrent private offering with Brookfield. TerraForm also priced $700 million of new debt due in 2030 at a rate of 4.75%. The company plans to use those funds to pay off $300 million of notes due in 2025 that had an interest rate of 6.63% as well as a $344.8 million term loan due in 2022 with a 4.4% interest rate.
These moves will enhance the company's liquidity, push out its debt maturities, and reduce its interest expenses. As a result, it's now in an even stronger financial position.
While TerraForm has already made excellent progress in improving its balance sheet this year, it plans to continue working on further enhancing its financial profile. One way it intends to do that is by selling a stake in some of its North American wind farms. That would allow it to finance its most recent acquisition to investment-grade credit metrics. In the company's estimation, these sales should bring in about $245 million in cash. That eventual sale would also help refresh the company's liquidity, giving it a bit more flexibility to capitalize on future investment opportunities. It might even convince credit rating agencies to upgrade the company to an investment-grade level, which would further lower its borrowing costs and risk level.
A lower-risk, high-yield stock
When TerraForm Power reinstituted its dividend last year, it had a bold goal. It wanted to grow its payout by 5% to 8% annually through at least 2022 even as it improved its financial profile. The company has done an excellent job executing this strategy, making it increasingly likely that it will deliver its planned dividend growth. Because of that, TerraForm has become a much better option for retirement-focused investors who are looking for a lower risk income growth stock.
