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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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