TerraForm Power (TERP +0.00%) continued to grow during the third quarter. While the renewable energy company's growth rate slowed considerably from the second quarter, that's due entirely to the roll-off of the impact from its acquisition of Spanish wind and solar power company Saeta. Instead, the company benefited from the incremental gains it's making to boost the profitability of its legacy assets. That enabled the company to generate more than enough cash to pay its 5%-yielding dividend.
A look at TerraForm Power's third-quarter results
|
Metric |
Q3 2019 |
Q3 2018 |
Change |
|---|---|---|---|
|
Generation |
2,063 GWh |
2,006 GWh |
2.8% |
|
Adjusted EBITDA |
$195 million |
$197 million |
(1%) |
|
Cash available for distribution (CAFD) |
$48 million |
$46 million |
4.3% |
|
CAFD per share |
$0.23 |
$0.22 |
4.5% |
|
Dividend payout ratio |
87.6% |
86% |
1.9% |
Data source: TerraForm Power. GWh = gigawatt hours.
TerraForm Power's earnings dipped slightly during the third quarter, mainly due to lower market prices in Spain. The company also lost money on a power hedging contract in Texas due to weaker wind conditions during a period of extreme heat.
Cash flow, on the other hand, continued growing. That's due in part to lower distributions to noncontrolling interests because of timing and buying out some of its partners.
Overall, the company's balanced portfolio of wind and solar assets performed well during the third quarter:
Data source: TerraForm Power.
TerraForm's contract wind business -- which consists of its North American wind portfolio as well as assets in Portugal and Uruguay -- grew earnings by about 3% year over year. The main drivers were the implementation of the company's cost-saving initiatives along with higher generation and prices in its international assets. Electricity production, however, was 9% below the long-term average due to issues in its Central and Texas portfolios. That's mainly because the company had to take some of those turbines offline to repair blades as well as complete other maintenance activities.
The company's contract solar operations, meanwhile, grew its earnings by 7% versus the prior year. That's largely due to higher power prices and the benefit of a small acquisition it completed during the third quarter.
Finally, earnings in the company's regulated wind and solar assets, which consist of those in Spain it acquired with Saeta, declined by about 11% year over year, again mainly due to lower market prices in Spain.
Image source: Getty Images.
A look at what's ahead for TerraForm Power
TerraForm's growth rate should reaccelerate during the fourth quarter. Driving that view is the recent closure of a $720 million acquisition of a 320 MW portfolio of distributed generation (DG) assets in the U.S., which is power produced near end users (i.e., rooftop solar). Long-term contracts support these facilities, which will provide TerraForm with predictable cash flow. As a result, the deal should provide a modest boost to its CAFD in the coming quarters.
Meanwhile, the company took several steps in recent weeks to firm up its financial position. Not only did it sell some stock, but it also issued some low-cost debt. These moves bolstered the company's available liquidity to $1.2 billion.
That gives it plenty of financial flexibility to continue investing in growing its portfolio and cash flow. On the organic side, TerraForm continues to make progress on three projects to repower some of its existing U.S. wind farms. Meanwhile, the company has several other acquisition opportunities in the pipeline, including being in advanced-stage negotiations to invest more than $150 million to buy nearly 150 MW of solar assets in Spain. It's also looking for opportunities to continue building out its DG platform in North America.
Right on track with the plan
TerraForm Power continues to make progress with its growth plan. While its rate slowed during the third quarter, it should reaccelerate in the coming quarters as the company benefits from its most recent acquisition as well as potentially from those it has in the pipeline. Because of that, there's increasing visibility that the company can deliver on its plan to grow its 5%-yielding dividend at a 5% to 8% annual rate through at least 2022. That growing income stream makes TerraForm an excellent option for income-seeking investors.
