8Point3 Energy Partners Earnings: Hypergrowth in 2015 BUT Oil Crash Could Pose Risk to Management's Payout Growth Plans

Source: 8Point3 Energy Partners

For those income investors seeking a safer way to profit from the coming solar energy revolution I can think of no better way than with solar yieldco 8Point3 Energy Partners (CAFD).

With full 2015 results now in, learn why this solar utility has such amazing growth potential over the coming decades, but also why management's impressive long-term growth forecast of 12%-15% per year might be threatened by the current crash in energy prices.

Fantastic Growth in 2015 and...

Source: earnings release

Note that 8Point3 Energy Partners was operating in 2014 but not yet a public yieldco, thus making annual payout comparisons impossible. In addition, above results for Q4 2015 don't include the month of December, which explains the low coverage ratio.

8Point3 Energy Partners is a pure solar yieldco -- essentially a solar electric utility -- sponsored, and managed by its general partners First Solar Inc. (FSLR -3.34%), and SunPower Corp. (SPWR).

It IPOed with 432 MW of utility scale solar projects however 131 MW of those projects weren't yet complete and were brought online in Q4. Management expects this solar portfolio to generate approximately $70 million in CAFD per year (with an average remaining contract term of 22 years), or $.99/share, providing a forward 2016 coverage ratio of 1.14 at the current quarterly distribution.

Further good news for investors came in the form of the recently announced $35 million Kern School district drop down, a 20 MW project that will be completed by the end of 2016 and is expected to generate an additional $2.7 million in annual CAFD.

At the end of 2015 8Point3 Energy Partners has $233 million in available liquidity to fund further drop downs to fuel management's targeted 12%-15% annual distribution growth for 2016. Assuming the same cost/MW as the Kern acquisition this is enough to purchase an additional 133 MW of solar project, which would represent a potential 29% increase in capacity.

...Management delivering strong payout profile...
The recent oil crash has shown that yield is not the first thing that dividend investors should focus on. Rather payout sustainability and long-term realistic growth prospects being just as, if not more important components of a distribution profile.

• Forward yield: 5.4%

• Projected 2016 DCR: 1.04

• Long-term projected payout growth: 12%-15% into 2018

Assuming management wishes to continue its 3.5% quarterly distribution increases (as it has over the first two quarters and is guiding for Q1 2016) then 8Point3 will wind up paying out $.944/share this year, compared to $.986/share in projected CAFD. This results in a sustainable and realistic and sustainable 1.04 coverage ratio, just based on its existing portfolio of solar assets.

However, for the yieldco to achieve its long-term growth target management is assuming it will be able to acquire all 1.1 GW of First Solar and SunPower's existing drop down pipeline.

This is where 8Point3 Energy Partners' biggest risk lies, because, should energy prices continue lower or stay low for several years, the yieldco may find this difficult to accomplish.

...BUT low share price could stifle massive growth potential

CAFD data by YCharts

Yieldcos such as 8Point3 Energy Partners, because they payout almost all CAFD to investors, require strong access to both cheap debt and equity markets to fund growth.

While the recent extension of the Solar Income Tax Credit (ITC) greatly helped 8Point3's share price, it is still trading substantially below its IPO price of $21. That is potentially bad news for long-term income investors because, should the ongoing oil crash or a bear market cause shares to fall much lower, management may not be able to profitably sell new shares to finance further asset acquisitions.

This is important because as of the end of Q4 2015 8Point3 Energy Partners has $297.2 million in debt and $200 million of its $233 million in liquidity is from its revolving credit facility. This facility includes debt covenants, including a maximum leverage ratio (debt/cash flow) of 5.5 through May 31, 2017 and 5.0 afterwards. Exceeding this ratio would force 8Point3 to suspend distributions so the yieldco is limited in how much it can borrow.

Thus investors can likely expect substantial equity issuances in 2016 as 8Point3 proceeds with its growth plans, assuming the share price is high enough to make such deals profitable.  

Bottom line
8Point3 Energy Partners' business model is one of the safest way for dividend lovers to potentially cash in on the coming solar energy growth megatrend. However, investors need to realize that, though its actual cash flows aren't directly impacted by gas and oil prices, until energy prices recover the yieldco may be forced to rely mostly on debt to fund drop down acquisitions from First Solar and SunPower.

That in turn could prolong how long it takes for 8Point3 to acquire new assets and, should oil prices remain low for many years. This in turn may force management to pare back its distribution growth guidance in the future, potentially causing Wall Street to punish the share price even more.