8point3 Energy Partners' (NASDAQ: CAFD) shares have been thrown for another loop this week, this time because sponsor First Solar (NASDAQ: FSLR) says it's looking into strategic alternatives for its stake in the yieldco, which is code for wanting to sell its shares. That sparked SunPower (NASDAQ: SPWR) into its own strategic review and could end up with a new co-sponsor, liquidation, or an outright sale of the company.
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First Solar's move comes as the company changes strategic directions, something I highlighted last week. The solar manufacturer wants to put less emphasis on its project development business and sell more components and services to developers rather than building systems itself. As it's made that strategic shift it makes less sense to own a stake in 8point3 Energy Partners, particularly if the yieldco won't be able to buy projects the company is selling long-term (which I'll cover below). And that's why First Solar may be jumping ship.
Image source: First Solar.
Wait, there was an earnings report?
The news of a strategic review may be grabbing the headlines today, but 8point3 Energy Partners also reported earnings for the first fiscal quarter of 2017. And once again it beat its own expectations.
Revenue was $9.9 million, net loss was $5.3 million, adjusted EBITDA hit $13.1 million, and cash available for distribution was $22.1 million in the quarter. Guidance had been for $9.3 million to $9.8 million in revenue, adjusted EBITDA of $11.8 million to $12.6 million, and CAFD of $19.8 million to $12.6 million. Given the long history of beating results it's safe to say that 2017 guidance for $91.5 million to $101.0 million in CAFD is an underestimate as well.
Image source: SunPower.
Management also revealed that its project level CAFD guidance of $122.0 million to $131.5 million for the year is based on a P90 statistical measure (a 90% confidence level). If we use the P50 measure, where 50% of estimates are above and 50% fall below, the project level CAFD is around $140 million. In other words, after paying for debt, operating expenses, and dividends it's likely there will be around $24.5 million in excess cash this year that can be used to pay down debt, buy projects, or just stay on the balance sheet.
Why First Solar wants out
As you can see with results, the announcement that First Solar wants out doesn't have a lot to do with operations, it has to do with where First Solar sees its future. When 8point3 Energy Partners was formed both First Solar and SunPower saw a huge future in project development and the yieldco was a great way to monetize those assets. But as the yieldco's yield has gone up it's become harder to buy projects from sponsors. Combine that with the strategic shift of both sponsors away from project development to more component sales and it may not make sense to have the yieldco anymore.
Official news that 8point3 Energy Partners likely won't be able to buy the 280 MW California Flats and 40 MW Cuyama projects from First Solar may have been the last straw. If project development isn't in the future and the yieldco can't buy the projects First Solar is developing, why own a stake in 8point3 at all?
What happens to 8point3 Energy Partners now?
I see three options for 8point3 Energy Partners after this week's announcement.
- First Solar's stake is sold to another co-sponsor. SunPower doesn't likely have the bandwidth to buy the stake outright, although it could take over 100% of the sponsor role if First Solar sold shares to the open market. A natural partner to step in would be Total (NYSE: TOT), the oil giant who owns two-thirds of SunPower. Total would be buying a steady stream of cash flows and this could be a great renewable energy arm for the company's slow shift away from fossil fuels to renewable energy.
- An outright sale. There are still solid assets and cash flows on 8point3 Energy Partners' balance sheet and there are buyers who may be interested. A utility could buy the company or even another yieldco with a lower dividend yield could buy the company and it would be immediately accretive.
- The final option, which may make the most financial sense, could be to sell off assets and liquidate the yieldco. On the conference call, management indicated that First Solar will likely be able to get a higher price for projects from third parties than from 8point3 Energy Partners. If the market overall has mis-priced 8point3's assets, why not just sell off pieces for a higher price than the market is currently pricing into the stock and distribute the money to shareholders?
For sponsors First Solar and SunPower, a sale of some sort could be great for their businesses. First Solar is focusing on upgrading manufacturing to its Series 6 product and while it doesn't need the cash it never hurts to have an even more solid balance sheet. If a full sale goes through, SunPower could use the ~$400 million in proceeds to shore up its balance sheet and invest in new products for the future. Management has been focused on cash preservation this year, so a sale may be a short-term boost. As strange as it seems, even at a low price a sale of the yieldco may be good for both sponsors.
An uncertain future
No matter what option is chosen, I don't think this is bad news short-term for 8point3 Energy Partners' stock. Management will likely be able to squeeze more value from the company than the market is pricing in and if a big sponsor like Total steps in the future for the company could be even brighter. This may force a strategic shift for the yieldco to buying assets from third party developers or adding project debt, two things the current management team has avoided. But it may take some time for this to play out and right now the uncertainty isn't pleasing investors in the market.
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