Image: SunPower.
8point3 Energy Partners (CAFD +0.00%) continues to be the "slow and steady wins the race" solar yieldco, and after fiscal fourth-quarter 2015 results, it's hard to argue with the company's progress. Cash generation is exceeding the company's projections, dividends are growing as expected, and its conservative balance sheet has left the company with more options for growth than most competitors.
Except for the fact that the stock price is down since its IPO, the yieldco is performing as SunPower (SPWR +0.00%) and First Solar (FSLR 1.34%) imagined when they launched the company.
CAFD beats expectations
The most important number to look at when 8point3 Energy Partners reports earnings is cash available for distribution (CAFD). This is the cash projects generate by selling electricity to utilities or customers, and it's what the company uses to pay dividends.
When fiscal third quarter results were released, management said it expected CAFD of $14.8 million to $15.2 million in Q4. Actual CAFD came in at $16.3 million, helping drive the distribution to $0.217 per share in Q1 and an expected $0.224 in Q1 of this year.
Just as important as the performance last year, management laid out its plans for growth in 2016, even if the stock price doesn't recover.
Lots of options for growth
One of the challenges of the yieldco model is that you need a high stock price and low dividend yield to grow. The idea would be to offer shares to the public with a certain dividend yield and then buy projects that have a higher yield, allowing for growth. 8point3's current implied dividend yield of 5.8% isn't low enough to justify offering new shares and then buying projects that may have a 7% or 8% rate of return.
Until the stock moves higher, management has nearly $250 million in debt capacity and another $250 million in the credit facility accordion. It could also offer debt on a project level to generate cash to buy more projects. That's not something the conservative management team or sponsors would like to do, but it's an option if the stock doesn't recover.
Another option is to utilize the balance sheets of SunPower and First Solar to house projects until the time is right for 8point3 to buy them. For example, 51% of a project's cash flows and about 99% of its tax equity could be sold to a partner, paying for a majority of the construction cost. Then the 49% of cash flows left could be held at the sponsor level or dropped down to 8point3 all at once or even in tranches.
The point is that unlike many yieldcos on the market today, 8point3 Energy Partners has a lot of options for growth. It would like to sell shares to fund further acquisitions, but if that's not available, it and its sponsors have flexibility that allows the company to add long-term value to partners.
8point3 Energy Partners just acquired a number of carports, like this one. Image: SunPower.
Speaking of growth
Another project acquisition was announced on Wednesday that will help growth in 2016. Twenty-two megawatts of carport projects in Kern County, Calif.'s school district were acquired for $35 million. The systems are expected to generate $3.3 million in annual CAFD for the first 10 years and an average of $2.7 million per year over 20 years. The projects are part of a partnership SunPower and Wells Fargo, with the bank acquiring most of the tax equity, as in the example mentioned above.
ITC and other benefits flow to sponsors
One thing that's clear with the extension of the investment tax credit and the fall of competitors such as SunEdison, Abengoa, Yingli Green Energy, and others that could have been developing projects is that margins for the industry's strong players should go up in the next couple of years. But most of that margin will accrue to First Solar and SunPower, not to 8point3 Energy Partners.
Management said that market prices for solar projects haven't changed significantly as market turmoil erupted, and we may have lost some of the more aggressive companies that were paying below market price. So if you're looking for a beneficiary from the ITC or market turmoil, look at SunPower and First Solar, not 8point3 Energy Partners.
A rock-solid energy dividend
8point3 Energy Partners continues with its CAFD growth strategy and plans to grow its dividend 12%-15% annually for the foreseeable future. Starting with a 5.8% dividend yield, that's a great deal for investors, and it's backed up by solar projects with contracts of 20 years or longer.
I think this is one of the best dividends on the market today, and given time, the stock has a lot of growth potential as well.
