8Point3 Energy Partners' (CAFD) CEO Charles Boynton on Q2 2016 Results - Earnings Call Transcript

| About: 8point3 Energy (CAFD)

8Point3 Energy Partners LP (NASDAQ:CAFD)

Q2 2016 Results Earnings Conference Call

June 29, 2016, 4:30 pm ET

Executives

Bob Okunski - VP of Investor Relations

Charles Boynton - Chairman and Chief Executive Officer

Mark Widmar - Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

Pavel Molchanov - Raymond James

Colin Rusch - Oppenheimer & Co.

Vishal Shah - Deutsche Bank

Philip Shen - ROTH Capital Partners

Sophie Karp - Guggenheim Partners

Julien Dumoulin-Smith - UBS

Presentation

Operator

Good afternoon and welcome to 8point3 Energy Partners' second quarter 2016 results conference call. Today's call is being recorded. If you have any objections, please disconnect at this time.

I would like to turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at 8point3. Thank you. Sir, you may now begin.

Bob Okunski

Thank you, Laura. I would like to welcome everyone to our second quarter 2016 earnings conference call. On the call today Chuck Boynton, our CEO, will provide an operational review of our 2016's second quarter performance, followed by Mark Widmar, our CFO, who will discuss our second quarter financial results, as well as provide our guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website, 8point3energypartners.com.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's earnings press release, our report on Form 10-K. Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call on the Events and Presentations page of our Investor Relations website.

With that, I would like to turn the call over to Chuck Boynton, CEO of 8point3, who will begin on slide three. Chuck?

Charles Boynton

Thanks, Bob and thank you for joining us on our second quarter earnings call. I will provide some comments on our performance, update you on our ROFO portfolio and review our current strategic view. Overall, we are pleased with the progress we made in Q2 as our portfolio continues to perform enabling us to increase our distribution rate while managing our liquidity for additional project acquisitions.

Now let's discuss our progress in more detail. Our Q2 was solid as we exceeded our revenue, net income, adjusted EBITDA and CAFD goals for the quarter. Assets in operation at the end of the quarter were 522 megawatts, excluding three megawatts from Kern County that is yet to reach COD.

Performance was in line with our expectations. The balance of Kern County totaling 17 megawatts will be completed in two additional phases throughout the year. Please remember that we will pay the remaining purchase price in tranches as the phases achieve full construction milestones.

In relation to our ROFO assets, we have recently entered into an agreement to acquire the five megawatt Macy's Maryland projects from SunPower. We are paying $12 million for these seven stores, which represents approximately $1 million of annual CAFD. We anticipate closing this on Friday. In addition, we have the resources to acquire additional projects in the second half of 2016.

Our sponsor’s development activities remains solid and we are encouraged by the strength in both pipelines. We declared our most recent distribution of $0.2325 per share, which will be paid on July 15 to shareholders of record as of July 5. For Q3, we are guiding to a distribution of approximately $0.24 per share, or a sequential increase of 3.5%. Also, our Board with the concurrence of our Conflicts Committee has determined that we have met the minimum requirements in order to terminate the distribution forbearance period. As a result, starting in Q3 with payment in Q4 the shares held by our sponsors will be entitled to distributions. Finally, as I mentioned previously, we believe we have sufficient liquidity to fund some dropdowns in the second half of this year without raising equity.

I would now like to provide an update on our ROFO assets. Please turn to slide four. As we announced in today's earnings release, both 8point3 and our sponsors have agreed to make certain adjustments to the partnership's ROFO assets schedule. The overall impact of these changes can be seen in the charts on slide four where we compare the ROFO list from the IPO Q1 2016 and the current set of ROFO assets on a gross megawatt basis. These adjustments reduced our reliance on near-term equity markets, provides us with better flexibility and better matches potential dropdown timing with our long-term growth plans.

If you recall, the initial IPO ROFO schedule was heavily weighted in 2016 because of the planned ITC step down. Simply, the strategy was to acquire these assets, then manage our payout ratio in order to maintain our 12% to 15% growth rate. With the ITC extension, the partnership believes that these adjustments better align the ROFO schedule with its targeted growth plan while maintaining its stated targeted annual distribution growth.

I would now like provide a more detailed update of our ROFO list. Please turn to slide five. As we announced last quarter as well as today, both 8point3 and our sponsors have agreed to adjust the timing of certain assets in the ROFO to reduce reliance on equity markets and to better match dropdowns with our long-term growth plan. For example, in Q2, 8point3 agreed to a waiver under its ROFO agreement with First Solar, which permitted First Solar to reduce its interest in Stateline that is subject to OpCo's right of first offer from 49% to 34% in exchange for adding First Solar's 179 megawatt switch station project to our 2017 ROFO list.

We also acquired approximately 90 megawatts of operating assets during Q2, including our Kingbird and Hooper projects with performance of these assets reflected in our second quarter financials. Looking forward to the second half of the year, we expect to add additional assets to the operating portfolio based on our liquidity.

Also the partnership has approved the removal of First Solar's 250 megawatt Moapa project from its ROFO list. In its place, First Solar in the partnership, added the 280 megawatt California Flats project with COD expected in 2018. Again, as you saw on the previous chart, this better aligns the ROFO with our long-term growth plan. With the acquisition of Macy's Maryland and with other contemplated acquisitions in the second half of the year, we believe we are now able to extend our 12% to 15% growth rate into 2018.

Before handing the call over to Mark for the financial review, I would like to reiterate a few key tenets of our strategic approach with 8point3. Please turn to slide six. As you know, our sponsors are two of the leading global solar developers in the world with combined installs in excess of 10 gigawatts and pipelines that are more than double that. This gives us confidence that we are well positioned to acquire high quality assets as solar adoption continues across the world. Of course, in the near-term, our focus is on U.S. projects.

Second, given the volatility in the solar and YieldCo space, I would like to reiterate that we remain committed to acquiring projects only from our sponsors. As a result, we expect that we will only own high quality solar assets with strong off-takes and stable cash flows. In relation to the financing markets, which remain somewhat volatile, we continue to remain flexible with the goal of balancing dilution, distribution growth and our desire to own the assets the sponsors developed.

Additionally, we still expect to maintain a long-term low leverage approach compared to our peers. As a reminder, we have no project level debt in our asset portfolio. This approach helps minimize portfolio risk and increases returns for our shareholders. Finally, we feel our transparent corporate governance structure ensures that the partnership interests are aligned with our shareholders.

In summary, we are pleased with our performance in the second quarter with a diversified operating asset base and identified ROFO portfolio of more than 1.2 gigawatts and a favorable policy environment, we are well positioned to drive long-term value for our shareholders.

With that, I would like to turn the call over to Mark to discuss our financials and provide our guidance. Mark?

Mark Widmar

Thanks, Chuck, and I would like to welcome everyone to our call. I will start by reviewing some of the financial highlights for the quarter before going into detail on our liquidity position, operating portfolio and guidance.

Now please turn to slide eight. As Chuck mentioned, we are pleased with our Q2 performance as we exceeded our revenue, net income, EBITDA and CAFD guidance for the quarter. Revenue for the quarter was $13.5 million and reflects the partial performance of our recent Kingbird and Hooper acquisitions. Operating costs and expense totaled $9.6 million with $5.4 million in depreciation, $1.8 million for cost of operations, $1.6 million in SG&A cost and $0.8 million of project related acquisition cost. The increase in OpEx was primary related to higher depreciation costs and operating costs associated with the recent acquisitions. On an annual basis, excluding project related SG&A, we expect corporate SG&A to be in the $5 million range.

We posted a slight loss for the quarter. Net loss attributed to noncontrolling interests and redeemable noncontrolling interest was $10.2 million. Net income attributed to 8point3 unitholders was $10 million or $0.50 per share. Adjusted EBITDA for the quarter was $17.4 million, up approximately $10 million as compared to the prior quarter, which is reflective of expected seasonality and an increased operational asset base. CAFD was $10.3 million and exceeded our $7.5 million expectations due to portfolio outperformance as well as distribution timing related to certain projects.

Finally, the Board of Directors of our general partner declared a Q2 distribution of $0.2325 per share that will be paid on July 15 to shareholders of record as of July 5, 2016.

I would like to spend a few minutes discussing our liquidity position as of the end of first quarter. Please turn to slide nine. Cash on hand as of May 31 was $20 million, $45 million lower than Q1. The declining cash is primarily reflective of the use of cash to partially fund our acquisitions of Kingbird and Hooper. We have $101 million available under our $200 million revolver, with $59 million of our facility currently committed to letters of credit. Pricing under the revolver is at LIBOR plus 200 basis points.

Also as part of our credit facility, we have an accordion feature that creates potential additional finance capacity of up to $250 million. This gives us total potential liquidity of up to $371 million as of the end of the second quarter. As Chuck mentioned, we acquired the Kingbird and Hooper projects in the second quarter and we expect to purchase additional project assets in the second half of the year.

Now please turn to slide 10. We were also working diligently towards positioning 8point3 for an investment grade rating. We believe 8point3 exhibits many of the important characteristics to secure this rating. First, our conservative capital structure reflects the lowest leverage of any peer. Also as we have mentioned in the past, our solar only portfolio consists of long dated contracted assets, geographic diversity and predictable cash flows. Additionally, our off-take counterparties include strong credits with investment grade ratings.

Finally, our Conflicts Committee of independent directors with their advisors evaluate the terms and conditions of our potential drop-down transactions to ensure projects are properly valued and any conflicts of interest are eliminated. Also, our dual structure of non-dropping sponsor helps in performing due diligence on these assets.

I would like to now provide an update on our current portfolio. Please turn to slide 11. As of the end of the quarter, our portfolio consisted of interests in 525 megawatts of solar assets with an average weighted life of approximately 20 years. The portfolio is performing to plan and we expect to generate 2016 project level CAFD that is in line with our stated growth targets. This stable performance is the result of the quality of our projects as well as the high predictability with minimum variability of the sun as an energy resource.

I would also like to point out that we continue to maintain high credit standards for the portfolio of our assets. Excluding the residential portfolio, all have investment-grade ratings. In the case of the residential portfolio, our average credit score was 765 at the time of the initial contract. This portfolio gives us the confidence in the long-term stability of our cash flows and the strategy that we continue to follow.

Before turning to guidance, I would like to say a few words about the management and Board changes which will take effect July 5. In relation to the Board, due to the departure from First Solar, Joe Kishkill has been removed from his position on the general partner's Board and were replaced by Alex Bradley, who is currently the Interim CFO of First Solar. Alex played an instrumental role in the successful launch of 8point3 and has been Vice President of Operations for 8point3.

Additionally, this will be my last earnings call for the company as I will be stepping down as CFO of 8point3 as I focus on my new responsibilities as CEO of First Solar. However, I will remain on the board. First Solar remains committed to 8point3 and the partnership will have our full sport going forward. I want to thank our investors for the opportunity to service as CFO of 8point3 and look forward to continue to pursue our long-term strategy as member of the Board.

Finally, we have also made the decision to appoint Bryan Schumaker as CFO of 8point3. Bryan, who is currently First Solar's senior Vice President and Chief Accounting Officer, has been involved in. 8point3 since our pre-IPO date and is well qualified to step into the role with minimum transition time as he is already familiar with our structure, asset portfolio, as well as being a strong believer in our strategy. I have known Bryan for a number of years and he has my full confidence in his ability to perform in this role.

Now I would like to turn to our guidance. Please turn to slide 12. For Q3, based on P90 assumptions, we expect revenue of $23 million to $24 million, net income of $10 million to $11 million, adjusted EBITDA of $29 million to $30 million, CAFD of $20 million to $21 million and a distribution of approximately $0.24 per share, an increase of approximately 3.5% over our Q2 2016 distribution. For 2016, based on P90 assumptions, we expect revenue of $57.1 million to $59.1 million, net income of $1.8 million to $3.8 million, adjusted EBITDA of $68.8 million to $70.8 million and CAFD of $71 million to $73.5 million, which includes approximately $9 million of network upgrade reimbursements scheduled in Q4. We also remain committed to our 12% to 15% distribution growth forecast for the year as well as through 2017. As a reminder, revenue is lower than EBITDA and CAFD as the accounting for our 49% minority interest investment only impact EBITDA and CAFD.

In summary, we believe in the long-term growth of the solar sector and the strong value proposition we provide to investors. Our conservative capital structure and available liquidity provides us the flexibility to rapidly adjust to changing market conditions.

With that, we would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Brian Lee and please state your company name.

Brian Lee

Hi guys. Goldman Sachs. Thanks for taking the questions. A couple of maybe housekeeping ones, just to start off. Given the these adjustments on the ROFO, I was wondering if you could help us quantify, what's the run rate CAFD of the California Flats project versus what's coming out in terms of Moapa?

Mark Widmar

Hi Brian, this is Mark. So the CAFD profile is pretty similar. Actually the CA Flats would have a slightly higher CAFD, but they are relatively consistent. So a little bit larger project with CA Flats, it's 280 versus 250, but very similar CAFD profile.

Brian Lee

Okay. That's great. Thanks. And then just a couple of quick question around the balance sheet and leverage. Just if you could update us on the leverage ratio at the end of the quarter? And then how you are thinking about staying within the 5 to 5.5 times maximum level moving through the end of this year and early into next? And then just as a follow-up to that, given that Stateline looks like it's now with Moapa dropping out, the only real big dropdown is slated for later this year. Just wondering if the plan is to use your balance sheet and debt capacity solely to fund it? And then, where that would leave you in terms of leverage relative to what your covenants allow?

Charles Boynton

So Brian, this is Chuck. So there are a handful of projects still in the ROFO. There is a number of commercial projects, a SunPower project at Stanford University Henrietta and then the remainder of Stateline. We have capacity certainly to buy some of those and some we may do what we have done before, which is swap out ROFO projects. And of course, we will consider, we would like to own all of them. So it depends on how the markets are if we buy those or do additional swaps.

As far as our long-term leverage, we remain committed to the four times CAFD rate for long-term leverage. I don't know the run rate exactly we are today, but I think we are in the four to five range at the end of the quarter. I could do the calculation and follow-up later, but I’d say we remain with the long-term vision of industry best in terms of capital structure and most conservative capital structure with total leverage in the four times forecast.

Brian Lee

Okay. Thanks a lot. That's helpful. Will follow up offline. Thanks.

Charles Boynton

Thank you.

Operator

Thank you. Our next question comes from Pavel Molchanov and please state your company.

Pavel Molchanov

Raymond James. Thanks for taking the question. In your remarks, you obviously made it clear that you are trying to avoid issuing equity in the near future. A year ago, you went public at 4% yield. You are now trading at 6% yield. Is there a magic number for the trading yield of the stock where you would be more comfortable using equity to pay for new assets?

Mark Widmar

Yes. We get asked this question all the time and our response is the same, that we want to own the projects. We also want to manage dilution and distribution growth. And certainly I think the stock has been performing better lately. So I think the good news is that we have optionality. We would have flexibility. The math today, we could do accretive dropdowns and issue equity, but I would say, our primary focus has been managing that balance. And I think what the great news today is that we have amended the ROFO again to really push out more of the projects and give our investors more visibility in the long-term nature versus all being loaded in the back half of 2016. But I am not going to give you an exact number, but I would say we are optimistic on the future.

Pavel Molchanov

Okay. And then along those lines, is it fair to say that you are becoming more open to acquiring third-party assets than perhaps you would have been a year ago?

Mark Widmar

No. We remain absolutely committed to SunPower and First Solar projects only. We are not open to buying other projects or assets from other companies.

Pavel Molchanov

Okay. Clear enough. Thank you guys.

Charles Boynton

Thanks Pavel.

Operator

Thank you. Our next question comes from Colin Rusch.

Colin Rusch

Thanks guys. So as we think about actual CAFD growth into 2017, 2018, I am not clear that we are reflecting any amount of debt expense in terms of the total revenue number here. So should we be thinking about any kind of significant amount of debt expense within that growth and how should we think about topline growth relative to that CAFD growth as we think about the next two years?

Charles Boynton

So I think the debt right now is L plus 2 and we have purchased the recent assets with a combination of cash plus the delayed draw on the accordion last quarter and somewhat on the revolver. I think as we go forward and buy more projects, you will see a combination of or perhaps draws on the revolver, exercising the accordion, perhaps project level debt and also perhaps equity assurance. And I think it should be fairly simple to model the cost of debt given the terms we have in place are L plus 2.

Colin Rusch

Okay. That's helpful. And I can get into some of the mechanics offline. So again then the separate question is, if you are replacing some of the First Solar ROFO projects with SunPower projects, effectively we are swapping those out. Why would SunPower do that at this point? Obviously, having the flexibility in the market to have optionality here would make sense to me and SunPower. So why would SunPower get locked up here in that sort of trade? Just trying to understand the relationship within the organization?

Charles Boynton

So I think I guess maybe to make it clear is that, the asset that the waiver was provided for on the ROFO was First Solar asset and First Solar replaced the asset with another First Solar project. So there wasn't any cross sponsor changes. So the First Solar asset that replaced the First Solar asset.

Colin Rusch

Okay. But then the 179 megawatt project is a SunPower addition, correct?

Charles Boynton

No. That's First Solar as well. That 179 switch station was a change associated with the waiver for a partial reduction to the interest that would be dropped in for Stateline. We originally had identified a 49% interest. Now it will be a 34% interest. And again, I think it's really the quality of the model that we have with the organic development of each of our sponsors that we have the latitude to do that. And so as we made a decision to pull out Moapa and because it was near COD of 2016 and we didn't need the CAFD near-term and we replaced with a very high quality asset that has COD and a CAFD profile that falls into a horizon when CAFD will need additional growth in its CAFD profile. So we chose to do that and I think it's the right thing to do and each of the sponsors will stand behind our commitment to helping 8point3 be successful long-term.

Colin Rusch

Okay. Thanks. That's my mistake, I know on sponsor on that asset. Then one last quick one, as you look at the ROFO portfolio, are the returns accretive enough that you consider recycling some of the cash by selling a portion of existing assets? Is that something that you guys would consider down the road?

Mark Widmar

So I guess what I would do as a step back is we still believe the strategic value from the sponsor perspective is the long-term ownership interest in these assets and the optionality that accretes to these assets, whether it could repowering assets over time, integration of storage. So from a sponsor’s perspective, we still want to have a long-term interest in these assets to benefit from that optionality. If we sell down to a third-party or a partial interest to a third-party, we lose some of that inherent value and optionality. So our first priority and preference will be to drop down into 8point3, assuming again capacity capability and economic returns make sense.

Colin Rusch

Okay. Thanks guys.

Operator

Thank you. Our next question comes from Vishal Shah and please state your company name.

Vishal Shah

Deutsche Bank. Thank you. I apologize as I joined a little late. But I wanted to just understand the project leverage capacity that you would have. So do you expect planning to add some project level debt when you consider some of these dropdowns? And then how should we think about your ROFO and how much capacity do you have to grow your distributions into 2017 by the 12% to 15% range?

Charles Boynton

Thanks, Vishal. Thanks for joining. So as we have mentioned before, today we have the ability to grow the distribution through the end of 2017 just with the existing projects that we have acquired to-date. In the back half of the year, we hope to buy additional projects that would extend that date out into 2018. And we plan to do that, as we mentioned on the call, with existing cash in the balance sheet, cash that we generate, available borrowing under the revolver, the accordion facility and perhaps project debt and perhaps equity. And so I think we have a lot of options, as Mark mentioned and so we will use those tools available to buy the projects that are remaining in the ROFO for this year. And if we don't, then we would likely do a replacement for the projects that are in the ROFO today.

Vishal Shah

Thanks helpful. Thank you.

Operator

Thank you. Our next question comes from Philip Shen and please state your company name.

Philip Shen

ROTH Capital Partners. Thanks for taking my questions. Couple of quick housekeeping questions on the quarter. Can you share with us some unit metrics at all in the quarter? Perhaps the average number of sun hours? And then I think you ended with 521 megawatts of gross as at the end of the second quarter? What was the average through the quarter?

Charles Boynton

So Phil, in terms of giving the metrics around irradiance and those types of things, we don't provide those metrics. When you look at the 525 in terms of the average, we dropped in two project during the quarter between Hooper and Henrietta. You can see by the exposure that we made around the size of those project, the size of each of those, one achieved COD in March, the other was in April. So you can get a general indication of what those average megawatts would have been.

Philip Shen

That's fair. And as you guys think about your drop downs in the back half, you guys talked you named the projects that you could drop down. Can you give us a clear sense of what the funding requirements might be for each of them and perhaps what the Q3 drop down number might be?

Mark Widmar

We are not providing that level of detail on the sponsor projects. And the timing, I will comment on. So we lift the COD in the ROFO schedule. I think it's fair to assume that the drop downs would be somewhat coincident with COD. As a matter of strategy our plan is to acquire completed assets that are operational. So I think it's fair to assume the timing would be coincident with approximately COD a month before to a month after. But we can't comment on exact project economics. But as you know, I think we are very transparent and we do lift the purchase price, the CAFD numbers for those projects and try to sort of lead the pack in terms of transparency and disclosure around the projects that we acquire.

Philip Shen

Great. Chuck, Mark, thanks.

Operator

Thank you. Our next question comes from Sophie Karp and please state your company name.

Sophie Karp

Guggenheim Partners. Thank you for taking my question. Most of my questions have been entered, but I am curious about the decision-making process in terms of modifying the ROFO pipeline. I think that Henrietta, for example and Moapa had similar CAFD profile. So how did you arrive at a decision to bump down Moapa versus any other project?

Charles Boynton

So firs off, the CAFD profile between Moapa and Henrietta are not similar. Moapa is more than two times the size of Henrietta. So there is a difference in the CAFD profile from that perspective. And look, it was the timing of when the asset was going to be available to drop down. The structuring of the asset in terms of how we structure the tax equity and therefore what is the residual cash interest that was going to be drop down into 8point3 and when you look at the two projects, there was a much larger CAFD that would have to be dropped in from Moapa versus Henrietta. And First Solar was readily available to drop in another asset that is not only of equal size in terms of CAFD but it was also structured in a way to be very friendly to the YieldCo and how we look at the tax equity. So we made that decision. It was the right thing to do, was to pull Moapa out and then replace it with an asset that had a natural COD date that fell into the horizon of when 8point3 needed incremental CAFD.

Sophie Karp

Thank you.

Operator

Thank you. Our next question comes from Julien Dumoulin-Smith and please state your company name.

Julien Dumoulin-Smith

Good afternoon guys. UBS. Just wanted to follow-up real quickly on the accordion feature. How do you think about minimum liquidity ultimately as you look to drawdown on that first? And then the second question here, you talk about likely replacement of the ROFO today. Can you talk at when you will make that kind of a decision ultimately?

Charles Boynton

Sure Julien. I will take the second part first. We have a defined process for ROFO drop downs that is formulaic in terms of when the sponsors offer the assets to the Conflicts Committee and when we negotiate. We work very well, both as partners of First Solar and at times both ways to ensure we keep each other honest, so to speak, but there is a very defined process where if we want to sell an asset, we offer it and clearly though, in this process the sponsors really support 8point3 and so there has been a good working relationship of seeing that 8point3 would need growth in 2018 or 2019. And then the sponsors deciding to take the asset off of the ROFO list and replace it. And that's a process that's worked very well with First Solar and SunPower and the Conflicts Committee. In terms of our plans for this year, we would like to buy these additional projects. And as I mentioned, we have options and we will see about what kind of minimum liquidity and leverage we are targeting. As we mentioned before, long-term at four times. There was a question earlier on what was leverage ratio at the end of Q2? It was just below 5.5 and our second half estimate is roughly at five times. So we would expect delevering over the next two to three years.

With that, we will end the call. Thank you, Julien, for the call. Thank you all for calling in.

Julien Dumoulin-Smith

Minimum liquidity?

Charles Boynton

[Indiscernible] next quarter.

Operator

This concludes today's conference. Thank you for joining. And you may now disconnect.