TerraForm Power (NASDAQ: TERP) has been scorching hot this year, with shares of the high-yielding renewable energy company up nearly 20% already. That surge is due in large part to the success of its turnaround strategy, which was on full display during the fourth quarter.
The continued progress of that plan could provide even more power to the company's stock price. That's why it's the main thing to watch when TerraForm reports its first-quarter results later this week.
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The strategy has been on point so far
Brookfield Asset Management (NYSE: BAM) and its renewable arm Brookfield Renewable Partners (NYSE: BEP) took control of TerraForm in 2017. Since then they've helped the company implement a turnaround strategy focused on three things:
- Improve the profitability of its legacy assets.
- Strengthen its balance sheet.
- Invest in high-return growth opportunities.
The companies supercharged that strategy last year, as Brookfield helped TerraForm Power acquire a Spanish wind and solar company. That deal not only enabled TerraForm to deliver needle-moving growth, but it also helped bolster the company's financial profile.
In addition, TerraForm has been working on several self-help initiatives to improve the underlying profitability of its legacy assets. For example, the company signed a deal with General Electric (NYSE: GE) to enhance the operations of its North American wind portfolio. The GE deal alone will save the company about $20 million in annual operating costs per year. In addition to that, GE expects to improve the output of TerraForm's fleet so that the company should be able to generate $15 million in incremental revenue.
Keep an eye out for continued progress
TerraForm Power still has a few more self-help initiatives underway that investors should keep an eye on this quarter. For example, it's working on signing agreements covering its European wind and North American solar assets that should deliver additional cost savings. Overall, the company aims to capture $6 million in annual expense reductions by the middle of this year. On top of that, TerraForm is implementing GE's Power Up technology on its wind fleet, which, along with some other initiatives, should provide it with another $2 million in incremental annual revenue starting later this year. Ideally, the company will remain on target with these goals during the first quarter.
Another key area to watch this quarter is the TerraForm's progress on investing in additional high-return growth opportunities. In particular, investors should look for any news on its proposed wind repowering projects, which would see it replace older turbines with newer, more powerful ones. The company had three opportunities in development -- two in New York state and one in Hawaii -- that it could approve in the near term.
On top of that, the company has the potential to continue making acquisitions to help power more growth. For example, TerraForm holds the right to acquire more than 500 MW of wind assets as part of previous deals. It also sees an opportunity to buy additional renewable assets in Spain as it continues consolidating that market following last year's acquisition. Success in securing these or other growth opportunities will improve the likelihood that TerraForm Power can achieve its dividend growth plan. The company currently needs to invest an estimated $180 million on expansion opportunities through 2022 to support its aim to grow the dividend at a 5% to 8% annual rate over that time frame.
All eyes on continued progress
TerraForm Power has already come a long way thanks to the guidance of Brookfield. However, the company has a few more self-help initiatives it needs to complete, as well as more expansion opportunities, to line up in support of its dividend growth plan. Ideally, it will continue making progress in those areas during the first quarter, which could give shares more power to continue rising.
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Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Renewable Partners L.P., General Electric, and TerraForm Power. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.