5 Reasons This High-Yield Renewable Energy Stock Is Confident in Its Growth Strategy

After several tough years, TerraForm Power (NASDAQ: TERP) has started turning things around, which was evident in its first-quarter results. As a result, CEO John Stinebaugh sees even better days ahead for the company as it executes its growth strategy. In TerraForm's Q1 earnings call, he outlined five points that make him confident that the wind and solar power company can achieve its five-year plan.

1. Internal initiatives will drive the bulk of our growth

Stinebaugh started off the call by noting that volatility had returned to the market over the past few months, which will make it harder for some companies to raise the debt and equity capital they need to grow. However, he made it clear that the increased volatility wouldn't hinder TerraForm, because "we developed a business plan that will be primarily driven by executing on cost savings and organic growth initiatives over the next five years."

2. We have minimal market risk

Stinebaugh then pointed out that "our five-year business plan only requires the issuance of up to $100 million of equity following the expected close of Saeta," which is a small amount for what will be a $7 billion company. Because of that, "it is not dependent on favorable equity market conditions" to drive growth. Instead, TerraForm Power can pick its spots to raise that incremental capital, which it would use to make highly accretive acquisitions. Furthermore, he noted that "approximately 85% of our existing debt is either fixed-rate or swapped," making the company "largely insulated from interest rate risk."

3. We've already made tremendous strides in our strategy

TerraForm Power went right to work implementing the key components of its strategy and had already started making headway. One of the initiatives has been to secure a long-term service agreement for its wind fleet to cut costs. Stinebaugh noted that the company is "currently in advanced negotiations" with a vendor to provide these services and that it "anticipate[s] finalizing the agreement within the next few weeks." As a result, the company "should begin realizing cost savings in the second half of 2018." This deal, when combined with the company's other cost-saving initiatives, should reduce expenses by $25 million per year over the next two to three years. Those cost savings alone would be enough to support dividend increases at a 6% annual rate through 2020.

4. Our financial situation has improved dramatically

In addition to squeezing more cash flow out of its existing portfolio, another key component of TerraForm's plan has been to improve its balance sheet. The company is well on its way toward achieving that aim. Stinebaugh noted that once the company completes its acquisition of Saeta, its "debt-to-cash flow ratio will decline to within our 4.0 times to 5.0 times goal, furthering our long-term plan to establish an investment grade rating." Meanwhile, he pointed out that "with a strong balance sheet and nearly $1 billion of available liquidity under committed facilities after the acquisition closes, we would be well-positioned to make opportunistic acquisitions in this period of market turbulence should they arise."

5. We're pursuing multiple growth opportunities

That liquidity could come in handy because "we are looking for ways to take advantage of investment opportunities within our existing portfolio and to build our pipeline of organic growth opportunities," according to Stinebaugh. He noted that TerraForm Power is already in late-stage negotiations to acquire some solar assets as part of the right of first offer it holds from a previous acquisition. Meanwhile, the company has the right of first offer on some other solar assets that "we may be able to exercise in phases over the next nine to 18 months," the CEO said. Furthermore, he noted that the company was "also progressing a number of opportunities to establish relationships with developers in North America and Europe, whereby we may provide capital to fund their pipeline of shovel-ready development projects or add-on acquisitions." Meanwhile, he stated that "we are in discussions with a renewable power developer in Europe in which we would commit capital to fund a strategy to consolidate small regulated solar facilities in Spain." In other words, the company has no shortage of opportunities to make the investments needed to deliver on its growth objectives over the next five years.

Everything's in place to create value

TerraForm Power developed a growth plan that largely insulates it from market volatility. Due to that, the company remains well-positioned to increase cash flow at a healthy pace over the next five years and support dividend growth of 5% to 8% per year, "irrespective of macroeconomic factors or capital market volatility," according to Stinebaugh. That low-risk growth makes this renewable energy stock a top one to consider buying for the long term.

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Matthew DiLallo owns shares of TerraForm Power. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.