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8point3 Energy Partners LP (CAFD)

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I can't believe the downgrade that came out today from UBS saying CAFD's premium is 'unsustainable'. They came up with a target price of $11! I don't think they understand this model.

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The model is not overly complicated. Figure  total cash generation from the assets over a 35 year estimation less debt and interest and opex to get total cash generation from the assets for distributions. Then If this cash generation of assets  is greater than expected rate of returns in equity investments + the equity invested then that is the price needed. So where is this price? UBS suggests it is at $11, 

By my estimates $11/share at 5% dividend should return $20.65 over 35 years including the initial equity of $11. At a purchase of $1.75/watt one can buy 6.28watts per share at $11. That is close to the wattage per share as of today. Debt service estimated on that wattage is $7.82 over 20 years with existing debt and draws on credit lines expected.. That wattage can generate ~$30 over 35 years at a PPA of $0.10 and  @ a 90%  for future cash. Opex at 5% of revenue is $1.50. Total cash generation required over 35 years = 20.65+7.82++ 1.50=$29.97. The $11 based on future cash flows and dividend payouts looks about right for current assets.

 

Edited by SCSolar

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Well, I think the way you put it is even more complicated and you're not even accounting for growth. Let's simplify it based on the latest actual numbers and going for just the duration of their PPAs (20 yrs). 8Point3 has 432MW of operational assets that are expected to produce ~$70m in CAFD every year. They still have about $233m in liquidity left under their remaining revolver + cash on hand, so using the latest price they paid for the latest drop-down project (Kern @ $1.75/W - and this is high for the common utility sale prices) I'd say that gives them around 133MW of additional capacity without tapping the equity markets. The latest project (Kern) yields 7.7% so assuming a similar rate on the additional 133MW (~$10M of additional CAFD), I would say their total CAFD could end up @ $80m per year. What's the multiple an investor should pay for that? Well the current 20yr Treasury Note yields around 2.27% (to match the duration of their PPAs) and the S&P 500 long-term average earnings yield is 4.86%, using the CAPM model and assuming you give 8Point3 a higher beta than the market (let's say 1.5 even though yieldcos will be very stable vehicles with very stable streams of cash flows with minimal O&M expenses but let's give it a big margin of safety) it gives you an expected equity rate of return of 6.16%  or a multiple of 16.23x (I'm not even considering debt which is usually cheaper and the interest tax-deductible), if you apply that multiple to the expected CAFD you get $1,298m that divided by the 71m shares outstanding gives you a fair price of $18.29 per share. Is that close to $11, even $13 based on the UBS's yield model? Not even by a mile. I'm not even considering if there could possibly be some value left on the panels after the existing PPAs expire. I think the way they are modeling the yieldco is way off base. Once investors realize this yieldcos prices will adjust upward. The model also works for growth if the equity is highly valued. 

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This yieldco is in a whole other level. Superb management, with complete transparency and aligned perfectly with the interests of the shareholders; an independent conflicts committee; and very strong sponsors. Based on the market price of the stock they are following a very prudent acquisitions pace and conservative capital management to wait for better times so they can raise equity at better financing terms. They just announced two more acquisitions to be funded without the need of additional equity raise and will delay further acquisitions well beyond 2017, yet continuing to increase the div distribution between 12-15% per year.

With the recent acquisitions I'd expect 8Point3 to generate around $81.8m CAFD per year, and using their current yield of 6.2% the stock should be valued around $18.6, with an excellent dividend coverage of 4.55x at least until 2018. 

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Are you tracking those results today Ravalos?

Is this all in revenue?

The problem operating income is negative, I find that unhealthy. Also the net income made out of deductions of loss to non-controlling interest does not sound convincing.

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11 hours ago, odyd said:

Are you tracking those results today Ravalos?

Is this all in revenue?

The problem operating income is negative, I find that unhealthy. Also the net income made out of deductions of loss to non-controlling interest does not sound convincing.

I did Robert, it was a pretty top-notch quarter to be honest (and I'm trying to not be biased here). I don't even know where to start. Operating Income SHOULD be negative, as they are using accelerated depreciation in order to shield income from tax. The expectation is to do so indefinitely (to follow the model of the MLP, which management said they have the legislative advantage but they wonder how long that will last). With the current portfolio + 3 recent acquisitions, they expect this tax shield to last for the next 15yrs minimally. 

The deductions from non-controlling interests must be so since in some projects they own only 49%. As such, although they account for revenue, depreciation, etc, they must deduct the equity part from non-controlling parties. 

Revenue will be lumpy, as they disclosed how solar is seasonal (they did a good job disclosing the %s of solar generation for each quarter in order to model the cash flows correctly). They still won't have to access capital markets at least until end of 2016 or 2017, if REALLY needed (they don't need that as they have the distribution plus 12-15% annual increase covered with the current portfolio until 2017). They did state however that a premise for the model to work is access to capital markets, as we all know already, however they intend to attract investors by following a conservative approach in terms of financial structure; they aim at increasing the float so the vehicle can be more liquid for investors. Also, in terms of debt, their long-term goal is debt NOT to exceed 4x annual CAFD, which is pretty good.

They also covered how they assess pricing for the projects they acquire, in order to address the governance issues that have arisen as a result of the SUNE malaise. They explained very well how their 3 independent directors engage in the negotiations, how they rely on external financial advisory and legal counsel, and how the opposite sponsor co-interacts with them in reviewing a project from the other sponsor in order to do an arm's length transaction. In general, they've been asked (the sponsors) quite frequently if they try to sell their projects at a premium or discount to 8Point3, for which they say they never sell at a premium, they try to sell at fair market value and on occasion at a discount since they intend to use 8Point3 as a long term vehicle of value. 

Also, they are still in forbearance period so the sponsors do not receive distributions yet. That should start happening in one to 2 quarters.  

I think these were the most important aspects of the quarter. I can't think of anything else other than handling this for the very long term. Good liquidity, good operating projects, enough CAFD to cover distributions, excellent governance, and prudent growth. They also changed the plan for the ROFO as they were initially front-loaded as a result of the ITC expiration, but now that it has been extended, they did modifications to align the ROFO projects with the conservative growth of the yieldco (and to give more time to establish investors' confidence and delay any equity raise).  

Edited by ravalos
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Also, take a look at the following chart, this was shared by them in the previous Qtr which I find EXTREMELY informative, considering that some in these board also own yieldcos with significant Wind assets.

 

Solar Risk Return Profile.jpg

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Thank you, an excellent update. Let me gather some observations and ask later.

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Thank you again for the great update. I appreciate details about the accelerated depreciation as well other points made. I had CAFD at one point around $15 and sold it around $16. I look at their balance sheet, and I do not see a lot of strength there versus the size of projects to be dropped. I understand they can delay those (sponsors), but I think they will be looking for more equity soon. PEGI has a higher yield and I would like to see 6% on it. At this point it appears a good value to me.

I am trying to preserve as much money as possible to be ready to get more Jinko and perhaps CSIQ by the end of Q2.

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I cannot think of anything negative in particular, but I do not follow CAFD closely. Does it relate to solar markets and sponsors?

I think for most parts they should be separated. I think it may be considered an opportunity but again I do not have a lot of research on this. 

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report seemed okay to me, market must not like no new acquisitions in H1 2017. 

Also available cash seemed pretty low.  (maybe that is why they are dialing back acquisitions for a bit?) investors must assume a share issue is in the works. 

That is the only reason I can see for the drop.  I'm surprised how volatile these dividend stocks are...

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44 minutes ago, disdaniel said:

report seemed okay to me, market must not like no new acquisitions in H1 2017. 

FSLR & SPWR certainly don't like it today.  If they won't be dropping to CAFD in 1H 2017.  Was this a surprise?  I didn't see anything in the Q3 FSLR transcript about 2017 purchases by CAFD.

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There is not a lot of money available for drop downs. $14M in cash and about $62M in the revolver. it would have been interesting to know their cost of capital, but perhaps this s the issue at hand.

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1 hour ago, odyd said:

There is not a lot of money available for drop downs.

Also in the news today, FSLR changed the terms of their credit agreement with Chase bank:

http://investor.firstsolar.com/secfiling.cfm?filingID=1274494-17-2&CIK=1274494

On January 20, 2017, First Solar, Inc. (the “Company”) entered into a Sixth Amendment (the “Amendment”) to the Amended and Restated Credit Agreement dated as of October 15, 2010, as amended by the First Amendment dated as of May 6, 2011, the Second Amendment dated as of June 30, 2011, the Third Amendment dated as of October 23, 2012, the Fourth Amendment dated as of July 15, 2013, and the Fifth Amendment dated as of June 3, 2015, by and among the Company, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (as amended by the Amendment, the “Amended Credit Agreement”). The Amendment modified certain financial condition covenants to remove the requirement to maintain a minimum Consolidated EBITDA, as defined in the Amended Credit Agreement, and to increase the Liquidity Availability, as defined in the Amended Credit Agreement, required to be maintained from $400,000,000 to $800,000,000.

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Maybe SPWR is too troubled to add sponsor value to CAFD? Would it help CAFD to achieve lower yield if FSLR buy out SPWR?

 

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58 minutes ago, explo said:

Maybe SPWR is too troubled to add sponsor value to CAFD? Would it help CAFD to achieve lower yield if FSLR buy out SPWR?

 

Interesting conclusion. I am not sure if FSLR is interested in CAFD that much as an investment, but what we know, both are interested in selling to it.

I have a concern about the pricing mechanisms for future projects. 

If both companies are looking for cash flows, granted, SPWR is looking like it needs it more, CAFD could appear vulnerable.  The shuffling of the projects was simply an announcement, in my view showing that CAFD is the instrument only to be played as needed.

I am not saying that intentions are to abuse CAFD by sponsors, it is more of perception, showing the company is not controlling the future. Perceptions are the alternative facts of the stock market. 

I think that growth and acquisitions are the likely statements to support yieldcos on the market. The combination of those with dividend growth should influence the sentiment. Despite dividend growth, NEP was disliked in last hour. My doubts here are the financial vehicle appearance of NEP among business of NEE' companies. Change in IDR is positive but it simply happens.It is "on-paper" company, good one, but still.

CAFD confirmed solar industry is struggling, and we already know that both its sponsors are going to struggle the most. Without the financial strength to expand, questions being raised about the value of international pipelines, repetitive highlighting of the US projects over any other ones, it put pressure on the trio.

Rightfully so yieldcos are measured by the strength of own sponsors, CAFD is experiencing what the other two feel or the market made that clear.

 

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I read the cc now, the borrowing structure for CAFD has non-amortizing debt which is all due in mid of 2020, some $732M. Not having interest rate locked, mind you 45% of it is hedged, can be seen also as a weakness in a current environment. Getting to a corporate debt, perhaps as a small snug as the company does not have investment grade rating. This could, as it had affected PEGI, cost them.

Finally not paying down principle now, and doing so in the future, could be seen as the impact on distributions.  When you think of principle payment on $732M in 20 years that is more than they are paying in dividend now, I guess CAFD looks a lot less attractive to me than before.

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7 hours ago, odyd said:

I read the cc now, the borrowing structure for CAFD has non-amortizing debt which is all due in mid of 2020, some $732M. Not having interest rate locked, mind you 45% of it is hedged, can be seen also as a weakness in a current environment. Getting to a corporate debt, perhaps as a small snug as the company does not have investment grade rating. This could, as it had affected PEGI, cost them.

Finally not paying down principle now, and doing so in the future, could be seen as the impact on distributions.  When you think of principle payment on $732M in 20 years that is more than they are paying in dividend now, I guess CAFD looks a lot less attractive to me than before.

What do they do with the CAFD? The Class A dividend  is only a small portion of the total. Do they give the rest to the Parent or do they keep it for running the business?

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4 hours ago, SCSolar said:

What do they do with the CAFD? The Class A dividend  is only a small portion of the total. Do they give the rest to the Parent or do they keep it for running the business?

CAFD is the non-GAAP representation of potential payout. It is calculated differently by each yieldco, or almost differently unfortunately to us mortals. CAFD is not a pool of money in an account. it is a statement of different results pooled to show availability of liquidity. All accounts and statements are of yieldco. Nothing is given to parents unless it is in a form of payments or IDRs.

CAFD calls it "Reconciliation of Net Income (Loss) to Adjusted EBITDA and Cash Available for Distribution (CAFD)"

PEGI does it as "non-GAAP net cash provided by operating activities to cash available for distribution and net loss to adjusted EBITDA".

Payment of a dividend is considered a financing activity. One made to A shareholders was $20M, Sponsors got $12M, CAFD was about $73M, os 32/73=43% payout. not bad. But as mention, no principle payments are made. 

PEGI pays 88% of CAFD, but if I put their principle payments back,, hey are about 62%. 

 

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8 hours ago, odyd said:

 

CAFD calls it "Reconciliation of Net Income (Loss) to Adjusted EBITDA and Cash Available for Distribution (CAFD)"

Payment of a dividend is considered a financing activity. One made to A shareholders was $20M, Sponsors got $12M, CAFD was about $73M, os 32/73=43% payout. not bad. But as mention, no principle payments are made. 

 

 

I am trying to wrap my hands around CAFD.

Do you know what percentage of the CAFD is distributed to the tax equity partners(TEP) of the projects?  The TEP get monthly and quarterly distributions that is distributed by the Sponsors operating the OpCo.

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2 hours ago, SCSolar said:

I am trying to wrap my hands around CAFD.

Do you know what percentage of the CAFD is distributed to the tax equity partners(TEP) of the projects?  The TEP get monthly and quarterly distributions that is distributed by the Sponsors operating the OpCo.

There is a line for tax equity on financing activity netting about $3M

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Looks like CAFD filed to sell $125M of shares ,

Sent from my HTC One_M8 using Tapatalk

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On 1/27/2017 at 11:00 AM, disdaniel said:

investors must assume a share issue is in the works. 

Hope no one is surprised...

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52 minutes ago, disdaniel said:

Hope no one is surprised...

Good call Daniel

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