Taking a Look at NEW MLP 8point3 Energy Partners LP
By: Tim McPartland,
When giant solar panel manufacturing companies First Solar (ticker:FSLR) and Sunpower (ticker:SPWR) get together on a project, investors need to sit up and pay attention. These 2 companies have gotten together on a venture that has huge potential down the road and we are considering being a part of it (by buying shares).
Before we walk through some of the details on new issue 8point3 Energy Partners LP (ticker:CAFD) we have to disclose that we have a real love for the concept of solar energy–always have had–always will have. That doesn’t necessarily mean that it will be a great investment, but certainly it is great conceptually.
Essentially CAFD is about owning solar assets and selling the power generated under long term contracts to major utilities, universities and homeowners. I look at the solar ‘farms’ as power plants–and owning shares in CAFD is all about paying a decent yield to their owners with a steady cash flow from the power plants.
8point3 Energy Partners LP came public on June 18, 2015 offering 20 million shares at $21/unit. Since that time the shares have traded continually lower, closing today at a price of $17.90–just 15 cents above the low since trading began. The shares were sold with a announced minimum quarterly distribution of .2097 cents/unit–a yield of about 4% on the offering price. Now with the fall in price the yield moves to 4.7%–much better as far as we are concerned.
With the IPO the public has purchased around a 28% interest in CAFD while First Solar retains around 31% and Sunpower retains an interest of approximately 41%. Fortunately, most of the ownership that First Solar and Sunpower has retained is in subordinated units (lower on the totem pole for distributions). Even better yet for the common unit holders, the subordinated holders have agreed to forego any distributions until March 1, 2016. As with most MLP’s the subordination period will end when the company has paid out .8383 cents/unit (on a annualized basis) for 3 consecutive non over-lapping 4 quarter periods–meaning not sooner than 8/31/2018 OR after $1.2882/unit has been paid out in any 4 quarter non overlapping period on or after 8/31/2016.
During the time above because most of the ownership is in subordinated units it is a margin of safety for common unit holders as subordinated holders receive nothing until common units are paid–AND it give the subordinated holders real motivation to perform at plan or better so they can receive a distribution.
So why are the shares trading lower since the IPO if this is such a great investment? We are speculating that buyers figured out that the 432MW of solar farms included in the deal are not all operating yet. In fact only 202MW of farms were on line during the IPO period and on a pro forma basis this results in a sizeable quarterly loss. The good part is that the balance of the 230MW of projects should be on line by 10/2015. This obviously puts a higher degree of risk in an investment NOW, versus waiting until all the projects are up and running smoothly (and maybe this is presenting a ‘bargain’ for us).
CAFD has entered into a Right of First Offer (ROFO) agreement with First Solar and Sunpower for future dropdown projects. There is currently a porfolio of 1.143GW of power projects contracted by the sponsors which CAFD will be able purchase in the future, so for the next few years growth projects will be readily available.
Now for point of reference we direct you to newer company Terraform Power (ticker:TERP) which was formed by solar company SunEdison. The company was spun out in 7/2014 and has operated just fine since that point in time–although it has moved in a wide range. This YieldCo is currently paying a 3.50% dividend. Unfortunately they are now moving heavily into wind power and we are much less excited about wind then we are about solar.
Probably the most disturbing thing to us at this point in time is that 8point3 Energy Partners doesn’t have their website up yet and we have to dig for decent information. We have used the registration statement while researching the info on the page. The S-1 is here.
We are buying a starter position tomorrow (i.e. 200 shares). Please understand your risk tolerance before purchasing any shares for yourself as only you know your position in life and tolerance for risky assets.
NOTE—8.3 minutes is the length of time it takes light to reach earth from the sun.
NOTE—YieldCo. A company formed by a sponsor to purchase sponsors assets (to monitize assets) and to pay a reasonble and consistent yield to the owners.