yieldcos: short-term selection, - credit suisse
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YieldCos: Short-Term Selection,
Long-Term Accretion
Research Analysts
November 17, 2016
Andrew Hughes (415) 249-7928
(212) 325-8277 andrew.hughes@credit-suisse.com
Maheep Mandloi
(212) 325-2345
maheep.mandloi@credit-suisse.com
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE
STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
YieldCo landscape and coverage universe
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 2
TOP PICK
Company Name 8Point3 Energy Partners NEE Partners Pattern Energy NRG Yield Atlantica
Yield
Terraform
Global
Terraform
Power
Ticker CAFD NEP PEGI NYLD ABY GLBL TERP
Sponsor First Solar/SunPower NextEra Energy Pattern Development NRG Abengoa SA SunEdison SunEdison
Market cap ($m) $1,035.0 $3,921.5 $1,705.7 $2,780.3 $1,811.9 $685.5 $1,817.1
Current price $13.01 $25.10 $19.30 $15.20 $18.00 $3.80 $12.99
Rating UNDERPERFORM OUTPERFORM OUTPERFORM
Uncovered Uncovered Uncovered Uncovered
Target Price $12.00 $33.00 $22.00
CS Dividend CAGR
(2016-2020) 8.0% 16.3% 9.7%
Key points of
differentiation
High cost of capital and
compressing returns
threaten dividend and value
accretion beyond 2017
Unmatched and low-risk
growth visibility to drive
durable and long-term
dividend trajectory well
above peers
Locked-in near-term
dividend accretion and
improving longer-term
prospects with limited
exposure to more
uncertain US policy picture
Current yield 7.4% 5.4% 8.5% 6.6% 3.6% 28.9% 10.8%
Consensus 2016-19
dividend CAGR 11.2% 15.4% 8.2% 14.9% NM NM NM
Portfolio Solar Wind, Solar, Gas
Infrastructure Wind, Solar
Wind, Solar,
Conventional,
Thermal
Solar (CSP),
Wind,
Transmission,
Water,
Conventional
Wind, Solar Wind, Solar
Geography United States North America Americas and Japan United States Americas,
Spain, Africa International
Americas and
UK
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, FactSet Aggregates
YieldCo101 Heavily contracted dividend growth vehicles taxed as 1099 C-corps
− Long-term, low-risk cash flows generated by portfolios of contracted energy infrastructure assets
− Share attributes with, but are not structured as Master Limited Partnerships (MLPs)
Formed for investors seeking stable and growing dividend income from a diversified portfolio of cash
flowing assets to take advantage of trends in power generation through a lower cost of capital than that of traditional developers and Independent Power Producers
Dividend growth is paramount and financially engineered
− Dividend accretion through acquisition is the name of the game in the short-term
− Advantaged cost of capital drives longer term value creation
− Temporary tax protection through depreciation benefits (MACRs)
The right investors: long-term investment horizon, real asset/cash flow/yield oriented, looking for income and capital appreciation. Traditionally a lot of cross over with utilities, power, MLPs, REITs
Primary sector opportunities: large and growing TAM in a sector ripe for consolidation with a long
history of capital indiscipline, predictable cash flows, limited energy commodity price exposure, visible
growth opportunities, and limited political risk to tax benefits
Primary sector risks: limited organic growth, interest rates and capital availability, stock price
sensitivity to MLP valuation and energy commodity prices, financial health/viability of sponsor,
leverage, corporate governance, conflicts of interest, renewable energy policy and disclosure
Differentiating factors: corporate structure and incentive fees, asset types and geographies, sponsor
entities, disclosure, growth visibility, and dividend growth targets
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 3
Key themes Near term (0-12 months)
− US Energy Policy
− Rising interest rates
− Capital markets receptivity, particularly among new institutional and retail investors
− Parent company restructurings and strategy changes
− Energy commodity price correlation
Mid-term (1-3 years)
− Distribution growth and asset acquisition without overburdening capital markets
− Non-amortizing debt maturities
− Corporate renewable PPAs
− Return of third party M&A activity
− Consolidation of deregulated generation in the US, and rise of the international YieldCo
− Impact of low cost capital strategies on PPA prices and project returns
− Increased competition from non-YieldCo entities with less volatile cost of capital
− Short duration contracts will begin terming out for certain assets
Long-term (3+ years)
− Non-amortizing debt maturities
− Terminal or post-PPA and project site residual value
− Greenhouse gas and climate regulation
− Inclusion on alternative asset types like batteries or contracted baseload (nuclear, hydro, etc)
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 4
Seek quality and visibility, avoid return compression risk
NextEra Energy Partners (NEP) – TOP PICK
− Outperform, $33 Target Price
− Street high dividend CAGR, no longer a consensus long
− Largest and lowest risk growth visibility, least exposed to a more uncertain US energy policy
picture, and most likely to outperform in rising rate environment
8Point3 Energy Partners (CAFD)
− Underperform, $13 Target Price
− 80% of Street at Outperform
− Compressing development margins at sponsor as execution risk mounts means less dividend and
value accretion through acquisitions especially given high cost of capital
− Most exposed to negative turn in US renewables policy
Pattern Energy Group (PEGI)
− Outperform, $23 Target Price
− Consensus estimates do not reflect locked-in near-term growth, stock trading near net asset value
of current portfolio
− Longer-term growth less exposed to adverse US policies
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 5
Industry overview
1/19/2017 Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company reports 6
Large, fragmented, and underpenetrated TAM
YieldCo ownership represents 2% of deregulated
power plant assets and 11% of operating wind and
solar in North America
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
786 GW
Operating deregulated power assets across
North America
365GW
Operating renewable and gas fired power
plants
85 GW
11% owned by YieldCos or sponsors
<20 GW
~2% owned by YieldCos
7
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
NextEra Energy Resources
Southern
First Solar
SunEdison
TerraForm Power
Sustainable Power Group
8Point3
12 portfolios of 300-400MW*
25 portfolios of 100-200MW*
SOLAR Megawatts Commissioned Financed Permitted
Solar(top) and wind (bottom) ownership is
particularly fragmented
0 5,000 10,000 15,000
NextEra Energy Resources LLCAvangrid
MidAmericaEDP Renewables
InvenergyE.ON
IberdrolaEnel
TerraformNRG Yield
Pattern Energy Group (PEGI)NEE Partners
NRGPattern Energy Group (PEG LP)
6 portfolios over 1,000 MW19 portfolios of 500-1,000MW*
38 portfolios of 250-500MW*270+ portfolios under 250MW*
WIND Megawatts Commissioned Financed Permitted
YieldCo ownership underrepresented but companies have
an inside track on industry consolidation
Ownership of Operating Wind
Assets in North America
Ownership of Operating Solar
Assets in North America
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
YieldCos 11%
YieldCo sponsors 14%
Other 75%
YieldCos 15%
YieldCo sponsors 11%
Other 74%
8
Renewable Market is Global and Growing
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
0
20
40
60
80
100
120
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
Annual solar demand, GW
Others
Japan
India
Europe
China
US
0
10
20
30
40
50
60
70
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
Annual wind demand, GW
Others
India
Europe
China
US
9
YieldCos a sound structure to own these assets
Capital costs all upfront, which public markets should efficiently supply
Contracted, high credit, and long duration cash flows that market should efficiently value
Unlevered IRRs 6-8% through contract period
~10% of acquisition NPV derived from assumptions regarding post contract period
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
($200.0)
($150.0)
($100.0)
($50.0)
$0.0
$50.0
$100.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
$ m
illio
n
Contract year
EBITDA CAFD Total capex and debt paydown
$70M equity component on $200M asset (65% levered)
Non-recourse, fully amortizing debt termed ~2 years short of contract end date
EBITDA generated by long-term fixed price contract with high credit quality counterparty
CAFD = EBITDA less total debt service and maintenance capex
Final years of contract life (and post PPA value) can be highly cash flow accretive
10
Mutually beneficial and value-enhancing relationship
YieldCo’s benefit from sponsor
Recycled capital for increased development enhances YieldCo growth visibility
Cost of capital and
tax attributes
LP and GP distributions
Asset sale proceeds
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
Sponsor’s benefit from YieldCos
Dividend growth and visibility drives income and capital gains for shareholders
O&M, balance sheet,
downside protection
Dropdowns
Development pipeline
11
Accretion through acquisition means growth is financially
engineered, but sustainable in this market given size
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
6-May-13 22-Nov-13 10-Jun-14 27-Dec-14 15-Jul-15 31-Jan-16 18-Aug-16 6-Mar-17
Cas
h on
cas
h re
turn
Announcement date
Dropdowns 3rd Party M&A
12
Setup to issue equity, but volumes are not there yet and
there can be too much of a good thing
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 13
0%
5%
10%
15%
20%
25%
30%
35%
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Free float value Restricted float New issuance as % of float (RHS)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
17-Aug-2014 17-Jan-2015 17-Jun-2015 17-Nov-2015 17-Apr-2016 17-Sep-2016
Market Cap Weighted Sector Performance
Equity float only about half of market cap
¼ of existing float issued in new shares in 2Q15 was too much for market to handle
Ticker Free float Total outstanding Float %
CAFD.O CAFD 28.0 79.1 35.4%
NEP NEP 54.0 156.2 34.5%
NYLD.K NYLD 62.5 190.5 32.8%
PEGI.O PEGI 86.5 87.5 98.9%
ABY.O ABY 58.6 100.2 58.4%
GLBL.OQ GLBL 82.3 178.1 46.2%
TERP.O TERP 88.1 139.6 63.1%
Total Total 460.0 931.1 49.4%
Macro factors are turning more fundamental YieldCo correlations with 10 Year
Treasury yield (fundamental)
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
YieldCo correlation with Brent oil
price (technical)
14
(1.00)
(0.80)
(0.60)
(0.40)
(0.20)
0.00
0.20
0.40
0.60
0.80
1.00
17-Sep-2014 17-Feb-2015 17-Jul-2015 17-Dec-2015 17-May-2016
< le
ss c
orre
late
d/m
ore
corr
elat
ed >
T1M Brent correlation
(1.00)
(0.80)
(0.60)
(0.40)
(0.20)
0.00
0.20
0.40
0.60
0.80
1.00
17-Sep-2014 17-Feb-2015 17-Jul-2015 17-Dec-2015 17-May-2016
< le
ss c
orre
late
d/m
ore
corr
elat
ed >
T1M Rate correlation
(1.00)
(0.80)
(0.60)
(0.40)
(0.20)
0.00
0.20
0.40
0.60
0.80
1.00
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
< le
ss c
orre
late
d/m
ore
corr
elat
ed >
YC stock price correlation with US 10 Year Rate
(1.00)
(0.80)
(0.60)
(0.40)
(0.20)
0.00
0.20
0.40
0.60
0.80
1.00
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
< le
ss c
orre
late
d/m
ore
corr
elat
ed >
YC stock price correlation with Brent oil price
Interest rates remain below level at sector inception
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 15
0
2
4
6
8
10
12
14
16
18
10/15/1965 10/15/1969 10/15/1973 10/15/1977 10/15/1981 10/15/1985 10/15/1989 10/15/1993 10/15/1997 10/15/2001 10/15/2005 10/15/2009 10/15/2013
10 Y
ear
Tre
asur
y Y
ield
(%)
1
2
3
4
5
6
1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015 1/3/2016
10 Y
ear
Tre
asur
y Y
ield
(%)
US 10 Year Treasury 10 Year Rate at NYLD IPO
Prefer high dividend growers to high dividend yielders in a
rising rate environment
2009 rising rate cycle
Div yield at outset, performance through cycle
2003-2005 rising rate cycle
Div yield at outset, performance through cycle
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
99.6
99.7
99.8
99.9
100
100.1
100.2
100.3
100.4
1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009
AEE D PNM ETR NEE SRE
0.00
1.00
2.00
3.00
4.00
5.00
6.00
AEE PEG D FE PPL NEE SRE PNM EXC ETR
99.4
99.6
99.8
100
100.2
100.4
100.6
100.8
6/2/2003 9/2/2003 12/2/2003 3/2/2004 6/2/2004 9/2/2004 12/2/2004 3/2/2005
AEE D PEG ETR EXC PNM
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
AEE PNM D FE PEG PPL EIX EXC ETR NEE SRE
16
Thoughts on a more uncertain outlook for US renewables
Global climate commitments and national carbon goals face greatest headwinds
− US is likely to back out of Paris climate accord
− Clean Power Plan will most likely not advance
− EPA GHG endangerment finding remains a factor
Rollback of renewable tax credits seems unlikely, but there are pathways
− 2015 bipartisan extension includes statutory phase-out
− Easiest pathway to rollback is via budget reconciliation
− Lower corporate tax rate cold shrink pool of available tax equity supply
− Solar ITC may face bigger headwinds on Fair Market Value challenge
FERC commissioner changes
Major demand drivers largely independent of carbon rules
− State RPS, corporate sustainability goals, utility long-term procurement
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 17
Sector overview
1/19/2017 Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company reports 18
Magnitude AND quality of growth visibility both matter
MW, including development EBTIDA, excluding development
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
0
5,000
10,000
15,000
20,000
25,000
CAFD NEP NYLD PEGI
Meg
awat
ts
YieldCo ROFO operating Sponsor operating ROFO development Sponsor development$0
$500
$1,000
$1,500
$2,000
$2,500
CAFD NEP PEGI
$ m
illio
ns
19
Size and quality determine dividend yield
Consensus
Credit Suisse
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 20
CAFD
NEP
NYLD
PEGI
BEP
RNW
SAY
3%
4%
5%
6%
7%
8%
9%
10%
0.0% 5.0% 10.0% 15.0% 20.0%
Cur
rent
con
sens
us d
ivid
end
yiel
d
2016-19 consensus dividend CAGR
CAFD
NEP
PEGI
3%
4%
5%
6%
7%
8%
9%
10%
0.0% 5.0% 10.0% 15.0% 20.0%
Cur
rent
yie
ld im
plie
d by
Tar
get P
rice
2016-19 CS dividend CAGR
Dividend yield factors into cost of capital
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 21
DDM 8Point3 Energy Partners NEE Partners NRG Yield Pattern Energy
2016 consensus dividend estimate $0.93 $1.28 $0.95 $1.58
2017 $1.08 $1.58 $1.09 $1.75
2018 $1.19 $1.83 $1.26 $1.91
2019 $1.28 $1.97 $1.44 $2.00
2016-19 NPV10 $3.30 $5.20 $3.52 $5.27
Terminal growth rate 1.0% 1.0% 1.0% 1.0%
Terminal dividend $1.30 $1.99 $1.45 $2.02
Implied cost of equity 14.4% 11.0% 13.4% 15.4%
CAPM 8Point3 Energy Partners NEE Partners NRG Yield Pattern Energy
Market RF rate 2.24 2.24 2.24 2.24
Beta 0.74 0.68 2.05 0.89
Country risk premium 5.62 5.62 5.62 5.62
Dividend risk premium 0.54 (0.83) 0.30 0.95
Implied cost of equity 6.82% 5.52% 14.38% 8.11%
WACC 8Point3 Energy Partners NEE Partners NRG Yield Pattern Energy
Estimated cost of equity 12.76% 10.00% 13.56% 13.88%
Cost of debt 3.60% 5.60% 5.00% 4.25%
Weighted average cost of capital 10.4% 7.8% 8.1% 8.9%
Strategies differ
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
Solar 100%
CAFD
Wind 100%
PEGI
Solar 16%
Wind 84%
NEP
Solar 15%
Wind 42%
Conventional 41%
Thermal 2%
NYLD
22
Structures differ
Simple
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
Complicated
23
We Look Primarily at Dividend Yield
Coverage Universe 2-year
Forward Consensus Div Yield
Trade in-line with Dropdown
MLPs, varying spread to Treasury
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 24
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
01-Jan-2015 01-May-2015 01-Sep-2015 01-Jan-2016 01-May-2016 01-Sep-2016
CAFD NEP PEGI
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
01-Jan-2015 01-May-2015 01-Sep-2015 01-Jan-2016 01-May-2016 01-Sep-2016
YC Coverage US 10 Year Treasury Dropdown MLPs
We Also Consider EV/EBITDA and Net Asset Value (NAV)
EV/EBITDA
Wide range on consensus
− 8-13x 2018
Balance sheet nuances
− Off B/S debt
− Tax equity non-controlling interest
− Fully, partially and non-amortizing debt
More limited comp universe
− YieldCo group is small, and dropdown
MLPs do not trade on EBITDA
Net Asset Value
Discounted cash flow analysis of current portfolio at company WACC
− No post contract value
− No growth
− Full pay down of project financing
Fundamental assessment of floor value
Target prices imply a 1.1x – 1.9x range on NAV value assessment
− Reflects relative visibility and risks to
growth prospects
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 25
Credit Suisse versus the Street
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 26
Company 2016-2019
Outperform Neutral Underperform 2017 2018 2019 Dividend CAGR
8Point3 Energy Partners
Consensus 12 2 1 $1.08 $1.19 $1.28 11.2%
Credit Suisse Underperform $1.06 $1.17 $1.24 9.2%
NextEra Energy Partners
Consensus 10 6 $1.58 $1.83 $1.97 15.4%
Credit Suisse Outperform $1.52 $1.81 $2.13 16.7%
Pattern Energy Group
Consensus 14 1 $1.75 $1.91 $2.00 8.2%
Credit Suisse Outperform $1.76 $1.95 $2.16 11.0%
Rating Dividend per share
Comp sheets - YieldCos
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 27
As of 11/16/2016
Company Ticker Share price Indicated yield 2016-2018 2016-2019 2016-2020 NTM 2016 2017 2018 2019 2020
YieldCo Universe, consensus estimates
8Point3 Energy Partners CAFD $13.01 7.4% 13.1% 11.2% NM 8.0% 7.2% 8.3% 9.2% 9.9% NM
Atlantica Yield ABY $18.00 3.6% 40.7% NM NM 7.2% 4.9% 8.7% 9.7% NM NM
NEE Partners NEP $25.10 5.4% 19.3% 15.4% NM 5.8% 5.1% 6.3% 7.3% 7.8% NM
NRG Yield NYLD $15.20 6.6% 15.1% 14.9% 16.1% 6.7% 6.2% 7.2% 8.3% 9.5% 11.3%
Pattern PEGI $19.30 8.5% 9.8% 8.2% 8.3% 8.4% 8.2% 9.1% 9.9% 10.4% 11.3%
Terraform Power TERP $12.99 10.8% NM NM NM 11.2% 8.2% 9.7% NM NM NM
MEAN 7.0% 19.6% 12.4% 12.2% 7.9% 6.6% 8.2% 8.8% 9.4% 11.3%
Mean ex TERP/ABY 7.0% 14.3% 12.4% 12.2% 7.2% 6.7% 7.7% 8.6% 9.4% 11.3%
Consensus DPS CAGR Dividend yield (consensus estimates)
Company Ticker Target price Indicated yield2016-20 DPS CAGR
YieldCo Coverage Universe, Credit Suisse estimates NTM 2016 2017 2018 2019 2020
8Point3 Energy Partners CAFD $12.00 8.3% 8.0% 8.6% 7.3% 8.2% 9.0% 9.5% 9.9%
NEE Partners NEP $33.00 4.2% 16.3% 4.5% 4.1% 4.6% 5.5% 6.5% 7.4%
NRG Yield NYLD $16.00 6.3% 12.6% 6.5% 6.1% 7.0% 8.0% 9.2% 9.8%
Pattern Energy PEGI $22.00 7.4% 9.7% 7.8% 6.9% 7.6% 8.5% 9.4% 10.0%
MEAN 6.6% 11.7% 6.8% 6.1% 6.8% 7.7% 8.6% 9.3%
Dividend yields
Comp sheets – Dropdown MLPs
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 28
As of 11/16/2016
Company Ticker Share price Indicated yield 2016-2018 2016-2019 2016-2020 NTM 2016 2017 2018 2019 2020
Above average growth dropdown MLPs
Columbia Pipeline CPPL $17.10 4.6% 15.0% 20.8% 20.7% 5.2% 4.6% 5.2% 6.1% 8.1% 9.8%
Dominion Midstream DM $24.70 4.0% 22.0% 22.2% 22.1% 4.2% 3.9% 4.8% 5.8% 7.1% 8.7%
Phillips 66 PSXP $43.50 4.9% 22.0% 21.6% 17.3% 5.2% 4.7% 5.9% 7.1% 8.5% 9.0%
Valero Partners VLP $39.97 3.9% 23.9% 22.8% 21.4% 4.2% 3.7% 4.7% 5.7% 6.9% 8.1%
Shell Midstream SHLX $25.86 4.1% 22.8% 21.9% 19.8% 4.4% 3.9% 4.8% 5.9% 7.1% 8.0%
MEAN 4.3% 21.2% 21.9% 20.2% 4.7% 4.2% 5.1% 6.1% 7.5% 8.7%
Below average growth dropdown MLPs
EQT Midstream EQM $74.02 4.4% 18.3% 16.4% 15.1% 4.7% 4.3% 5.1% 6.0% 6.8% 7.5%
MPLX MPLX $31.95 6.4% 12.3% 12.3% 10.9% 6.7% 6.5% 7.3% 8.2% 9.2% 9.8%
Tallgrass Energy TEP $46.47 6.8% 17.5% 14.3% 10.9% 7.2% 6.5% 7.8% 9.0% 9.8% 9.9%
Tesoro Logistics TLLP $46.83 7.5% 11.6% 10.7% 9.8% 7.8% 7.3% 8.3% 9.1% 9.9% 10.6%
Western Refining Logistics WNRL $20.95 8.1% 13.6% 12.0% 10.0% 8.5% 8.0% 9.0% 10.3% 11.2% 11.7%
MEAN 6.6% 14.6% 13.2% 11.3% 7.0% 6.5% 7.5% 8.5% 9.4% 9.9%
Dropdown MLP mean 5.5% 17.9% 17.5% 15.8% 5.8% 5.4% 6.3% 7.3% 8.5% 9.3%
Consensus DPS CAGR Dividend yield (consensus estimates)
Stock picks/company tear sheets
1/19/2017 Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company reports 29
8Point3 Energy Partners (CAFD)
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 30
8Point3 Energy Partners (CAFD.OQ) YieldCo Key Financials Business Summary
Rating: UNDERPERFORM $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $12.0 (8% downside) Revenues NM $ 11 $ 62 $ 77 $ 101 72%
Analysts: Andrew Hughes Consensus 11 59 95 143 91%
Market Cap: $462m Shrs: 36m
EV $797m Gross Margin NM 74.3% 86.3% 80.7% 78.0%
Total Debt $365m Cash: $30m Operating Margin (64.5)% 36.7% 36.9% 31.4%
Price Performance EBITDA NM $ 18 $ 75 $ 136 $ 151
EBITDA Margin NM 156% 123% 176% 150%
Consensus -3 63 99 139
DPS NM $ 0.28 $ 0.96 $ 1.07 $ 1.18
y/y Growth NM NM 243% 12% 10%
Consensus $ 1.10 $ 0.89 $ 0.67 $ 0.99
CFO #ERR: NULL $ 7 $ 72 $ 125 $ 146
Capex NM $ 205 $ 0 $ - $ -
CAFD.OQ S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (10)% 0% Thesis
YTD (19)% 7% - Compressing development margins at sponsor will strain dividend accretion through acquisition capabilities
Price Nov 16: $ 13.01 $2,177 - Most exposed to risk of more uncertain US renewable policy
- Business strategies and execution of sponsors facing increased challenges
Valuation 2016E 2017E 2018E Current Issues
Current EV/EBITDA 10.6x 5.8x 5.3x - Sector high cost of capital faces additional pressure from rising interest rates
Target EV/EBITDA 10.1x 5.6x 5.0x - Business strategies and execution of sponsor companies facing increased challenges
Market EV/EBITDA 12.7x 8.1x 5.7x Catalysts
Current P/Sales 7.3x 5.8x 4.5x - SunPower guidance update call (Dec 7, 2016), Stateline acquisition close
Current div idend yield 7.4% 8.2% 9.0% - Dearth of additional near-term catalysts as future dropdowns may not accrete substantial value
Target div idend yield 8.0% 8.9% 9.8% - Management targets and investment grade debt rating
Market dividend yield 6.9% 5.1% 7.6% Valuation Methodology
Historical Divided Yield (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- Owner, operator and
acquirer of long-term
contracted solar assets
- Portfolio weighted-
average contract duration
remaining of 21 years
- Subsidiary of First Solar
and SunPower
Our $12 Target Price is based on a 9.5% yield applied to our 2018 dividend per share forecast of $1.17. Our target
yield represents a discount to peers in the both the YieldCo and dropdown MLP sectors given our lower than average
growth outlook for 8Point3. Our Underperform rating is a reflection of the company's uncertain longer-term growth
prospects. Recent acquisitions and the pending Desert Stateline dropdown are likely to enable dividend growth in-line
Interest rates, asset performance and limited access to capital markets to fund accretive acquisitions represent key
downside risks to our Target Price and Rating. Better than expected pricing on assets offered for acquisition from First
Solar and SunPower and growth in the contracted pipeline of both sponsors are key upside risks to our view.
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$18
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
8Point3 Energy Partners (CAFD.OQ)
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
NextEra Energy Partners (NEP) – TOP PICK
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 31
NEE Partners (NEP.N) YieldCo Key Financials Business Summary
Rating: OUTPERFORM $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $33.0 (31% upside) Revenues $ 356 $ 477 $ 710 $ 971 $ 1,151 25%
Analysts: Andrew Hughes Consensus 471 764 1,037 1,271 28%
Market Cap: $3,672m Shrs: 146m
EV $7,203m Gross Margin 78.4% 78.8% 74.2% 76.4% 76.9%
Total Debt $3,664m Cash: $133m Operating Margin 44.4% 44.1% 48.4% 50.0%
Price Performance EBITDA $ 273 $ 406 $ 640 $ 894 $ 1,030
EBITDA Margin 77% 85% 90% 92% 89%
Consensus 356 645 851 1,046
DPS $ 0.38 $ 1.02 $ 1.34 $ 1.52 $ 1.81
y/y Growth (64)% (39)% 32% 14% 19%
Consensus $ 0.46 $ 1.14 $ 1.52 $ 1.79
CFO $ 184 $ 240 $ 324 $ 447 $ 532
Capex $ 773 $ 2,007 $ 917 $ 1,739 $ 1,179
NEP.N S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (10)% 0% Thesis
YTD (16)% 7% - Largest and lowest risk growth visibility
Price Nov 16: $ 25.10 $2,177 - Least exposed to risk of more uncertain US renewable policy, posed to benefit from continued build-out in gas infrastructure
- Best positioned to outerperform peers in rising interest rate environment
Valuation 2016E 2017E 2018E Current Issues
Current EV/EBITDA 11.2x 8.1x 7.0x - Rising interest rates
Target EV/EBITDA 13.1x 9.4x 8.1x - Incentive Distribution Right (IDR) fees may weigh on cost of capital advantage over time
Market EV/EBITDA 11.2x 8.5x 6.9x Catalysts
Current P/Sales 5.2x 3.8x 3.2x - February 2017 updates on NET growth opportunity and continued wind repowering opportunity
Current div idend yield 5.3% 6.1% 7.2% - 1H2017 dropdown and capital markets activity
Target div idend yield 4.1% 4.6% 5.5% - Golden Hills energy storage project
Market dividend yield 4.5% 6.0% 7.1% Valuation Methodology
Historical Divided Yield (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- Owner, operator and
acquirer of long-term
contracted wind, solar,
and gas infrastructure
assets
- Portfolio weighted-
average contract duration
remaining of 18 years
- Best-in-class growth
visibility
- Subsidiary of NextEra
Energy
We reach our $33 target price for NEP by employing a dividend yield based methodology. In our view, NEE Partners'
growth prospects will be as attractive at the end of our 2020 forecast period as they are currently. Accordingly, we apply
the value that the market is willing to pay for the company's current growth prospects to our forecasted 2020 dividend
per share estimate, and discount the implied value back the present at our assessment of NEP's weighted average cost
The risks for NEP that may impede achievement of our $35 target price and Outperform rating are: (1) a significant
increase in interest rates (2) limited access to capital markets (3) energy commodity price volatility, (4) competition from
other Yield Cos for investment capital, and (5) a slower place of less accretive dropdowns.
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-16
NEE Partners (NEP.N) S&P 500 (indexed)
0.0%
2.0%
4.0%
6.0%
8.0%
13-Nov-14 13-May-15 13-Nov-15 13-May-16 13-Nov-16
Pattern Energy Group (PEGI)
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 32
0.0%
2.0%
4.0%
6.0%
8.0%
12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
Pattern Energy Group (PEGI.OQ) YieldCo Key Financials Business Summary
Rating: OUTPERFORM $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $22.0 (14% upside) Revenues $ 265 $ 330 $ 381 $ 570 $ 641 18%
Analysts: Andrew Hughes Consensus 330 382 506 604 16%
Market Cap: $1,574m Shrs: 82m
EV $2,925m Gross Margin 31.4% 21.8% 19.7% 32.4% 34.8%
Total Debt $1,428m Cash: $77m Operating Margin 10.4% 6.1% 17.9% 22.8%
Price Performance EBITDA $ 198 $ 251 $ 319 $ 427 $ 501
EBITDA Margin 75% 76% 84% 75% 78%
Consensus 251 293 372 433
DPS $ 1.30 $ 1.43 $ 1.58 $ 1.76 $ 1.95
y/y Growth 358% (355)% 10% 11% 11%
Consensus $ (0.46) $ (0.40) $ 0.20 $ 0.31
CFO $ 110 $ 118 $ 140 $ 189 $ 255
Capex $ 120 $ 380 $ 32 $ 893 $ 195
PEGI.OQ S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (14)% 0% Thesis
YTD (8)% 7% - Locked-in near-term dividend growth not accurately reflected in consensus
Price Nov 16: $ 19.30 $2,177 - Longer-term growth prospects less exposed to adverse US renewable policy developments
- Stock trading near estimated net asset value of current portfolio despite room for accretive growth
Valuation 2016E 2017E 2018E Current Issues
Current EV/EBITDA 9.2x 6.8x 5.8x - Poorly defined but much hyped integration plan with private parent company an overhang on the stock
Target EV/EBITDA 9.9x 7.4x 6.3x - High cost of capital relative to leading peers faces pressure in rising interest rate environment
Market EV/EBITDA 10.0x 7.9x 6.7x Catalysts
Current P/Sales 4.1x 2.8x 2.5x - Broadview acquisition to close in early 2017, Meikle dropdown likely to follow in 2H2017
Current div idend yield 8.2% 9.1% 10.1% - Update on integration plan and additional long-term capital for growth at Pattern Development
Target div idend yield 7.2% 8.0% 8.9% - Flexible near-term capital needs
Market dividend yield -2.1% 1.0% 1.6% Valuation Methodology
Historical Divided Yield (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- Owner, operator and
acquirer of long-term
contract wind and solar
assets
- Portfolio weighted-
average contract duration
remaining of 15 years
- Subsidiary of privately
held Pattern
Development
Our $22 Target Price is based primarily on an analysis of dividend yield. We ascribe an 9% target yield to our 2018
dividend per share estimate of $1.95 to arrive at our TP. Our target yield represents a discount to comparable dropdown
MLPs and higher growth YieldCos. Valuation is underpinned by an analysis of EBITDA and net asset value (NAV). Our
Outerperform rating is predicated on PEGI's strong near-term growth outlook, durable longer-term growth prospects,
Risks include a slower pace of less acctretive dropdowns, overhang from integration, energy commodity price exposure,
strengthening US dollar, rising interest rates, and asset performance
$10
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$30
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Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Pattern Energy Group (PEGI.OQ) S&P 500 (indexed)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
US Solar Update
Research Analysts
Andrew Hughes (415) 249-7928
(212) 325-8277 andrew.hughes@credit-suisse.com
Maheep Mandloi
(212) 325-2345
maheep.mandloi@credit-suisse.com
Solar coverage
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 34
Ticker Company Rating
Target
Price Price
Upside /
Downside
Market
Cap ($m) Industry Analysts
FSLR First Solar NEUTRAL $30.00 $32.82 -9% $3,410 Solar Andrew Hughes
SPWR SunPow er NEUTRAL $9.00 $7.16 26% $991 Solar Andrew Hughes
RUN Sunrun OUTPERFORM $14.00 $4.85 189% $504 Solar - DG Andrew Hughes
SCTY SolarCity RESTRICTED R $19.83 na $1,949 Solar - DG Andrew Hughes
VSLR Vivint Solar NEUTRAL $4.00 $2.80 43% $308 Solar - DG Andrew Hughes
Utility scale solar development
Demand drivers
− Increasingly competitive source of power thanks
to declining PPA prices
− 92GW of RPS-driven demand through 2040 outside purview of Federal Government
− 30% Investment Tax Credit (ITC) begins to stepdown in 2020 unless Trump gets to it first
− Mid-high single digit unlevered IRRs for contracted cash flows with no fuel risk
Current issues
− Clean Power Plan (CPP) an important driver of longer-term demand
− Low gas prices and increasing competition among factors pressuring PPA prices and
compressing development margins
− Oversupplied manufacturing industry further pressuring margins for integrated developers
− Rising interest rates
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
$0
$50
$100
$150
$200
$250
$300
Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13 Dec-14 May-16
Lev
eliz
ed P
PA
-$/
MW
h
Operating Planned
US solar PPAs have declined >70%
in last five years
0 1 2
3 4 4
6
3 5
8 10
0 0 0
1 1
2
3
3
4
5
6
0 1
1
1
1 1
1
2
2
2
3
-
2
4
6
8
10
12
14
16
18
20
2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E
US
so
lar
dem
and
in G
W
Utility demand Resi demand Commercial demand
35
First Solar
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 36
First Solar (FSLR) Solar Key Financials Business Summary
Rating: NEUTRAL $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $30.0 (9% downside) Revenues $ 3,392 $ 3,579 $ 2,870 $ 2,503 $ 2,831 (8)%
Analysts: Andrew Hughes Consensus 3,392 3,579 3,008 2,979 3,123 (4)%
Market Cap: $3,405m Shrs: 104m
EV $2,777m Gross Margin 24.4% 25.7% 25.6% 13.4% 15.8%
Total Debt $787m Cash: $1,414m Operating Margin 12.5% 14.4% 12.2% 1.8% 3.7%
Price Performance EBITDA $ 669 $ 774 $ 581 $ 307 $ 421 (18)%
EBITDA Margin 20% 22% 20% 12% 15%
Consensus 670 774 574 421 550 (11)%
EPS $ 3.94 $ 5.33 $ 4.66 $ 0.39 $ 1.06
y/y Growth (10)% 35% (13)% (92)% 174%
Consensus $ 3.91 $ 5.37 $ 4.48 $ 1.91 $ 2.65
CFO $ 681 $ (361) $ (124) $ 441 $ 656
Capex $ 258 $ 166 $ 251 $ 575 $ 450
FSLR S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (17)% 0% Thesis
YTD (50)% 7% - 2017 earnings cliff driven by shrinking systems business, and a higher mix of lower ASP module sales
Price Nov 16: $ 32.82 $2,177 - Module margins under pressure due to oversupply, system margins under pressure due to limited barriers to entry and low PPAs
- Revised technology roadmap carries significant execution risk
Valuation 2016E 2017E 2018E - Strongest balance sheet among solar peers, net cash of $12.6/s
Current EV/EBITDA 4.8x 9.0x 6.6x - 8Point3's high cost of capital may limit ability to drop future low margin projects at mutually accretive prices
Target EV/EBITDA 4.3x 8.1x 5.9x Catalysts / Current Issues
Market EV/EBITDA 4.8x 6.6x 5.0x - Shrinking backlog of legacy, high margin projects. System shipments in 2017 <30% vs >60% in 2016
Current P/Sales 1.2x 1.4x 1.2x - Additional efficiency improvements & cost reduction
Current P/E 7.0x 85.2x 31.1x - 2017 restructuring and revised technology roadmap carries significant execution risk
Target P/E 6.4x 77.9x 28.4x - More uncertain US renewable energy policy outlook
Market P/E 7.3x 17.2x 12.4x Valuation Methodology
Historical Forward P/E (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- Vertically integrated
player, manufactures
CdTe solar panels
- Focused on utility scale
project development
- Jointly owns YieldCo
(8point3 energy partners)
with SunPower
Our $30 target price for FSLR is derived from a sum of the parts valuation, which is also the basis for a Neutral
rating. We value the company’s core module and system sales business at $12/sh based on !14x 3018 EPS (ex
distributions from 8point3). FSLR’s share in the YieldCo has a market value of $2.8/sh, and the company’s net
Risks include lower government incentives, ability to lower costs, policy changes, toxicity concerns on Cadmium in
FSLR's panels, interest rates and capital availability, FX rates, and industry oversupply
$30
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$80
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6
Aug
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First Solar (FSLR) S&P 500 (indexed)
0x
5x
10x
15x
20x
25x
13-Nov-14 13-May-15 13-Nov-15 13-May-16 13-Nov-16
SunPower
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 37
SunPower (SPWR) Solar Key Financials Business Summary
Rating: NEUTRAL $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $9.0 (26% upside) Revenues $ 2,619 $ 2,613 $ 2,654 $ 2,375 $ 2,427 (2)%
Analysts: Andrew Hughes Consensus 2,619 2,613 2,797 2,802 2,965 4%
Market Cap: $1,015m Shrs: 142m
EV $2,708m Gross Margin 19.6% 23.9% 10.9% 13.0% 14.9%
Total Debt $2,104m Cash: $ 411 Operating Margin 7.4% 9.3% (4.3)% (2.1)% (1.5)%
Price Performance EBITDA $ 303 $ 380 $ 44 $ 114 $ 117 (33)%
EBITDA Margin 12% 15% 2% 5% 5%
Consensus 300 437 244 314 395 (3)%
EPS $ 1.30 $ 2.16 $ (0.25) $ 0.48 $ 0.69 (31)%
y/y Growth (18)% 66% (112)% (289)% 46%
Consensus $ 1.33 $ 2.17 $ 0.00 $ 0.22 $ 0.82 (28)%
CFO $ 8 $ (726) $ (830) $ 80 $ 94 (151)%
Capex $ 103 $ 230 $ 224 $ 100 $ 100
SPWR S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (20)% 0% Thesis
YTD (76)% 7% - Highest efficiency panel, but highest cost structure in the industry
Price Nov 16: $ 7.16 $2,177 - Value creation opportunity from solar rooftop leasing and cash sales faces slowdown of DG demand
- New utility scale projects face margin pressures due to execution challenges, increasing competition, and lower PPA pricing
Valuation 2016E 2017E 2018E - New p-type technology gives access to low cost expansion, but competitiveness vs Chinese panels not yet commercially proven
Current EV/EBITDA 61.3x 23.8x 23.2x - 8Point3's high cost of capital may limit ability to drop future low margin projects at mutually accretive prices
Target EV/EBITDA 67.2x 26.1x 25.5x Catalysts / Current Issues
Market EV/EBITDA 11.1x 8.6x 6.9x - Restructuring and 2017 update on December 7 will focus on cash flow generation (Total asking for a profitable solar business)
Current P/Sales 0.4x 0.4x 0.4x - SPWR has grown its US residential business rapidly through installer/developer network, but new CA rates pose challenges
Current P/E -28.5x 15.1x 10.3x - More uncertain US renewable energy policy outlook may have an outsized impact on solar and DG specifically (FMV issues)
Target P/E -35.8x 18.9x 13.0x
Market P/E 2386.7x 33.0x 8.8x Valuation Methodology
Historical Forward P/E (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
Our $9 Target Price & Neutral rating is based of a sum of the parts valuation. We value the core business (DevCo)
at ~$17/sh by using a ~14x 2016 EBITDA, and SunPower's ownership in the YieldCo at ~$3.0/sh based on its
current trading value. We do not include value from IDRs.
The key risks for our $9 price target and Neutral rating for Sunpower include (i) overall decline in solar panel
demand, (ii) regulatory and policy changes that adversely impact support for solar industry ,(iii) timely execution of
projects, (iv) technology risk, (iv) currency risk, and (v) intense competition for panel supply and project
- SunPower
manufactures high
efficiency PV panels
- The company sells (or
leases) panels to
distributed generation
(eg. residential) and utility-
scale projects
- Jointly owns YieldCo
(8point3 energy partners)
with First Solar
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SunPower (SPWR) S&P 500 (indexed)
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12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
Distributed Solar Generation (DG)
Demand drivers
− DG solar is cheaper than grid electricity in 41 states
− Major beneficiary of lower equipment costs
− 30% ITC an important driver of returns
Current issues
− Most exposed to Federal policy uncertainty given Republican scrutiny of Fair Market Value assessments
− Complicated state policy picture as utilities fight net metering with fee and electricity rate change proposals
− Valuation is complicated, and investors ascribe little or no value to post contract period
− High customer FICO scores notwithstanding, investors
see high counterparty credit risk
− High customer acquisition and soft costs
− Move to cash sales as investors focus on cashflow, and availability of tax equity and low cost project
financing has dwindled
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports
1.4 2.2 3.4 5.5
8.3 11.8
15.6 20.4
26.2
0.3% 0.5%0.7%
1.2%
1.7%
2.4%
3.2%
4.2%
5.4%
0%
1%
2%
3%
4%
5%
6%
0
5
10
15
20
25
30
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Pen
etra
tion
as %
GW
Inst
alle
d
Cumulative Residential Solar (GW)
Residential Penetration as % of Available Rooftops
US resi solar TAM of
41m rooftops
$ -
$ 1.00
$ 2.00
$ 3.00
$ 4.00
$ 5.00
$ 6.00
$ 7.00
1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16
Inst
alle
d C
ost (
$/W
)
Residential Non-Residential Utility
Declining installation costs
38
Sunrun
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 39
Sunrun (RUN) Solar Key Financials Business Summary
Rating: OUTPERFORM $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $14.0 (189% upside) Revenues $ 199 $ 305 $ 469 $ 625 $ 722 33%
Analysts: Andrew Hughes Consensus 305 461 618 810 39%
Market Cap: $510m Shrs: 105m
EV $1,276m Gross Margin 12.5% 7.9% 12.6% 32.2% 31.6%
Total Debt $985m Cash: $219m Operating Margin (72.0)% (43.2)% (9.6)% (6.9)%
Price Performance EBITDA $ (130) $ (216) $ (198) $ (60) $ (50) (39)%
EBITDA Margin (66)% (71)% (42)% (10)% (7)%
Consensus -147 -123 -92 -45 (33)%
EPS $ (0.74) $ (0.51) $ 0.27 $ (0.26) $ (0.31)
y/y Growth 1,666% (30)% (153)% (194)% 21%
Consensus $ (1.54) $ 0.37 $ 0.07 $ 0.40 (164)%
CFO $ (8) $ (105) $ (114) $ (10) $ 31
Capex $ 412 $ 595 $ 738 $ 757 $ 855
RUN S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (23)% 0% Thesis
YTD (59)% 7% - Unique platform model (direct and partner) enables broader and more efficient market penetration and cost advantages.
Price Nov 16: $ 4.85 $2,177 - Differentiated pricing structure and low cost financing maximizes project-level returns.
- Growing at 40%+ in 2016, above market growth rate of 34%, capturing market share with fastest cost reductions
Valuation 2016E 2017E 2018E
Current EV/EBITDA -6.4x -21.3x -25.6x
Target EV/EBITDA -11.3x -37.3x -44.9x Catalysts / Current Issues
Market EV/EBITDA -10.3x -13.9x -28.7x - Positive free cash flow generation
Current P/Sales 1.1x 0.8x 0.7x - Continued changes to rate design and net energy metering policy
Current P/E 17.8x -18.9x -15.5x - Demand slowdown due to new rate structure in California
Target P/E 51.4x -54.4x -44.8x - More uncertain US renewable energy policy outlook may have an outsized impact on solar and DG specifically (FMV issues)
Market P/E 13.0x 71.3x 12.1x Valuation Methodology
Historical Forward P/E (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- 2nd biggest residential
developer
- Fastest growing,
capturing market share
- Operates a sales
distribution business as
well
Our Outperform rating and $14 target price is based on a Discounted Cash Flow framework that assumes a 50%
discount to renewal value, a deployment growth rate of 41% in 2016, 19% in 2017, 16% in 2018, and then 10%, 5% in
2019, 2020. We assume a 15% development discount rate and a 6% project-level discount rate.
- Risks include increased competition, regulatory policy changes, interest rate increases, and availability of financing
$4 $5 $6 $7 $8 $9
$10
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Sunrun (RUN) S&P 500 (indexed)
(20)x
(10)x
0x
10x
12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
Vivint Solar
1/19/2017
Credit Suisse estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 40
Vivint Solar (VSLR) Solar Key Financials Business Summary
Rating: NEUTRAL $/millions 2014 2015 2016E 2017E 2018E CAGR (15-18)
Target Price: $4.0 (43% upside) Revenues $ 25 $ 64 $ 150 $ 237 $ 302 68%
Analysts: Andrew Hughes Consensus 64 135 234 355 77%
Market Cap: $317m Shrs: 113m
EV $887m Gross Margin (177.1)% (107.2)% (19.6)% (0.6)% 7.7%
Total Debt $683m Cash: $113m Operating Margin (360.1)% (128.9)% (62.5)% (46.7)%
Price Performance EBITDA $ (115) $ (163) $ (100) $ (65) $ (44) (35)%
EBITDA Margin (456)% (254)% (67)% (27)% (15)%
Consensus -193 -143 -33 -31 (46)%
EPS $ (0.35) $ 0.11 $ (0.03) $ 0.14 $ (0.44)
y/y Growth (562)% (133)% (130)% (525)% (408)%
Consensus $ (2.39) $ (2.13) $ (1.78) $ (1.71) (11)%
CFO $ (136) $ (189) $ (160) $ (71) $ (122)
Capex $ 387 $ 547 $ 423 $ 477 $ 466
VSLR S&P 500 Investment Thesis, Key Themes & Issues, Catalysts
QTD (11)% 0% Thesis
YTD (71)% 7% - 2016 growth was constrained by capital availability after a failed SunEdison takeover
Price Nov 16: $ 2.80 $2,177 - Direct sales model may yield limited growth and market share gains
- New strategy of driving cross sales across parent channels yet to deliver results
Valuation 2016E 2017E 2018E
Current EV/EBITDA -8.8x -13.6x -20.1x Catalysts / Current Issues
Target EV/EBITDA -10.2x -15.7x -23.2x - New rate structure in California and net metering discussions across states
Market EV/EBITDA -6.2x -27.2x -28.6x - Securing more tax equity financing, as current facility drives growth only till 2Q17
Current P/Sales 2.1x 1.3x 1.1x - Restarting bookings growth engine (peaked at 80 MWs in 4Q15)
Current P/E -82.6x 19.5x -6.3x - More uncertain US renewable energy policy outlook may have an outsized impact on solar and DG specifically (FMV issues)
Target P/E -118.0x 27.8x -9.0x
Market P/E -1.3x -1.6x -1.6x Valuation Methodology
Historical Forward P/E (NTM)
Valuation Risks
Source: Credit Suisse Estimates, I/B/E/S Estimate for all consensus numbers, FactSet Aggregates.
- Third largest residential
solar developers in US
- Most of the projects are
sold via leases to
customers
- growth historically
driven by a door-to-door
sales channel
We utilize a discounted cash flow framework to arrive at our Neutral rating and $4 Target Price. Our discounted cash
flow value assumes a 15% corporate discount rate, 50% discount to renewal value, a flat leasing deployment growth
rate till 2018, and then 1% in 2019/2020, and a 50% discount to fundamental value.
- Risks include increased competition, regulatory policy changes, interest rates increases, diversifying beyond door-to-
door sales channel, and availability of financing.
$2.0
$2.5
$3.0
$3.5
$4.0
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Vivint Solar (VSLR) S&P 500 (indexed)
(10)x
(5)x
0x
5x
12-Nov-14 12-May-15 12-Nov-15 12-May-16 12-Nov-16
YieldCo Appendix
1/19/2017 Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company reports 41
Material tax considerations
1099 C-corps
− YieldCos taxed as a corporation for US federal income tax purposes
− Distributions from current or accumulated earnings and profits taxable as ordinary dividend income
Return Of versus Return On Capital
− Distributions may exceed current and accumulate earnings and profits and therefore constitute a
non-taxable return of capital to the extent of a unitholders’ basis
− No guarantees, and may only be a portion of distributions
Modified Accelerated Cost Recovery (MACRs)
− Accelerated depreciation program that generates Net Operating Losses (NOLs) that are used to offset corporate income taxes
− Portfolios of assets can generate 10-15+ year tax shields via MACRS that roll forward as new acquisitions are made and MACRs restarts at higher basis
Optimized tax structure of an “Up-C”
− Not exclusive to YieldCos
Renewable energy tax credits
− Production Tax Credit (PTC, wind)
− Investment Tax Credit (ITC, solar)
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 42
Incentive distribution rights
Similar to traditional incentive distribution right (IDR) fees in MLP sector
− Computation and payment scheduled determined by Management Services Agreement
Entitles sponsor to receive and increasing share of distributions as thresholds for distributions from
the YieldCo are achieved
Unit Distribution Intervals/Thresholds (or “splits”) are set relative to a minimum quarterly distribution
(MQD) that is established at IPO
A subsequent thresholds cash distribution breakdown is achieved once distributions under the prior
threshold reach a maximum level
Example:
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 43
Thresholds
Quarterly Annually LP Unitholders GP Unitholders
Minimum quarterly distribution $0.2097 $0.8388 100% 0%
First Target Distribution level from MQD up to: $0.3146 $1.2582 100% 0%
Second Target Distribution level from top of 1st threshold to: $0.3670 $1.4679 85% 15%
Third Target Distribution level from top of 2nd threhold to: $0.4194 $1.6776 75% 25%
Thereafter above the level at the top end of 3rd threshold $0.4194 $1.6776 50% 50%
Distribtuion per unit target amount Share of cashflows
Corporate renewable PPA market
1/19/2017
Credit Suiss Estimates, I/B/E/S Estimate for all consensus numbers, Thomson, SNL, company
reports 44
Companies Mentioned (Price as of 16-Nov-2016)
8Point3 Energy Partners (CAFD.OQ, $13.01, UNDERPERFORM, TP $12.0) Atlantica Yield (ABY.OQ, $18.0) Columbia Pipeline Partners, LP (CPPL.N, $17.1) Dominion Mstream (DM.N, $24.7) EQT Midstream Partners, LP (EQM.N, $74.02) First Solar (FSLR.OQ, $32.82) MPLX LP (MPLX.N, $31.95) NRG Yield (NYLD.N, $15.2)
NextEra Energy Partners (NEP.N, $25.1, OUTPERFORM, TP $33.0) Pattern Energy (PEGI.OQ, $19.3, OUTPERFORM[V], TP $22.0) Phillips 66 Partners, LP (PSXP.N, $43.5) Shell Midstream (SHLX.N, $25.86) SolarCity (SCTY.OQ, $19.82) SunPower Corp. (SPWR.OQ, $7.16) Sunrun (RUN.OQ, $4.85) Tallgrass Energy Partners, L.P. (TEP.N, $46.47) Terraform Global (GLBL.OQ, $3.8) Terraform Power (TERP.OQ, $12.99) Tesoro Logistics, LP (TLLP.N, $46.83) Valero Energy Partners, LP (VLP.N, $39.97)
Vivint Solar, Inc. (VSLR.N, $2.8) Western Refining Logistics, LP (WNRL.N, $20.95)
Disclosure Appendix
Analyst Certification
I, Andrew Hughes, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for NRG Yield (NYLD.N)
NYLD.N Closing Price Target Price
Date (US$) (US$) Rating
09-Jan-15 28.84 O *
22-Jun-15 24.50 R
24-Jun-15 24.50 30.17 O
22-Jul-15 24.50 28.00
05-Nov-15 24.50 22.00
02-Mar-16 24.50 NR
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
N O T RA T ED
3-Year Price and Rating History for NextEra Energy Partners (NEP.N)
NEP.N Closing Price Target Price
Date (US$) (US$) Rating
09-Jan-15 37.92 46.00 O *
04-Aug-15 32.62 40.00
10-Sep-15 26.18 R
11-Sep-15 25.99 40.00 O
02-Mar-16 25.90 NR
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
N O T RA T ED
3-Year Price and Rating History for SolarCity (SCTY.OQ)
SCTY.OQ Closing Price Target Price
Date (US$) (US$) Rating
18-Mar-14 77.10 75.00 O
24-Jul-14 72.16 93.00
07-Aug-14 75.71 97.00
23-Sep-14 60.40 R
25-Sep-14 63.04 97.00 O
06-May-15 60.13 99.00
29-Jul-15 58.05 105.00
29-Oct-15 38.07 90.00
21-Dec-15 55.09 124.00
10-Feb-16 18.63 89.00
02-May-16 29.55 62.00
09-May-16 22.51 38.00
01-Jul-16 23.71 27.00 N
01-Aug-16 24.72 R
03-Nov-16 18.55 *
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
N EU T RA L
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Underperform/Sell* 15% (55% banking clients)
Restricted 3%
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Target Price and Rating Valuation Methodology and Risks: (12 months) for 8Point3 Energy Partners (CAFD.OQ)
Method: Our $12 Target Price is based on a 9.5% yield applied to our 2018 dividend per share forecast of $1.17. Our target yield represents a discount to peers in the both the YieldCo and dropdown MLP sectors given our lower than average growth outlook for 8Point3. Our Underperform rating is a reflection of the company's uncertain longer-term growth prospects. Recent acquisitions and the pending Desert Stateline dropdown are likely to enable dividend growth in-line with peers through the end of 2017. Longer-term, compressing margins and returns in the utility-scale solar sector, 8Point3's high relative cost of capital, and a high degree of exposure to an evolving US policy picture are likely to hamper the dividend trajectory.
Risk: Risks to our $12 Target Price and Underperform rating include interest rates, asset performance and limited access to capital markets to fund accretive acquisitions represent key downside risks to our Target Price and Rating. Better than expected pricing on assets offered for acquisition from First Solar and SunPower and growth in the contracted pipeline of both sponsors are key upside risks to our view.
Target Price and Rating Valuation Methodology and Risks: (12 months) for NextEra Energy Partners (NEP.N)
Method: We reach our $33 target price for NEP by employing a dividend yield based methodology. In our view, NEE Partners' growth prospects will be as attractive at the end of our 2020 forecast period as they are currently. Accordingly, we apply the value that the market is willing to pay for the company's current growth prospects to our forecasted 2020 dividend per share estimate, and discount the implied value back the present at our assessment of NEP's weighted average cost of capital. Specifically, we apply a 5.6% target yield to our 2020 dividend estiamte of $2.45, and discount the resulting value back to 2016 at at 7.7% WACC. Our Outperform rating on the stock is based on the total return profile and the growth outlook for the business, which are both higher than its peer group's average.
Risk: The risks for NEP that may impede achievement of our $33 target price and Outperform rating are: (1) a significant increase in interest rates (2) limited access to capital markets (3) energy commodity price volatility, (4) competition from other Yield Cos for investment capital, and (5) a slower place of less accretive dropdowns.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Pattern Energy (PEGI.OQ)
Method: Our $22 Target Price is based primarily on an analysis of dividend yield. We ascribe an 9% target yield to our 2018 dividend per share estimate of $1.95 to arrive at our TP. Our target yield represents a discount to comparable dropdown MLPs and higher growth YieldCos. Valuation is underpinned by an analysis of EBITDA and net asset value (NAV). Our Outperform rating is predicated on PEGI's strong near-term growth outlook, durable longer-term growth prospects, and share price close to our assessment of NAV.
Risk: Risks to our Outperform rating and $22 Target Price include a slower pace of less acctretive dropdowns, overhang from integration, energy commodity price exposure, strengthening US dollar, rising interest rates, and asset performance
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (PEGI.OQ, NEP.N, SCTY.OQ, NYLD.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (NEP.N, SCTY.OQ, NYLD.N) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (SCTY.OQ, NYLD.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (NEP.N, SCTY.OQ, NYLD.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PEGI.OQ, CAFD.OQ, NEP.N, SCTY.OQ, NYLD.N) within the next 3 months.
As of the date of this report, Credit Suisse makes a market in the following subject companies (SCTY.OQ).
Credit Suisse has a material conflict of interest with the subject company (SCTY.OQ) . Credit Suisse is acting as financial advisor to SolarCity Corporation (SQTY.OQ) on their sale to Tesla Motors Inc (TSLA.OQ).
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This research report is authored by:
Credit Suisse Securities (USA) LLC ................................................................................................................... Andrew Hughes ; Maheep Mandloi
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only
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