Axiom Capital Management's Gordon Johnson made a startling comparison this week, saying that yieldco 8point3 Energy Partners (NASDAQ: CAFD) looks a lot like the now bankrupt SunEdison and the recently bailed-out SolarCity. If he's right and the yieldco is built on unstable ground, it could justify the stock's drop over the last few months and be a warning for investors.
But Johnson may also be looking for a problem where there isn't one. I dug into 8point3 Energy Partners' recent filings to tease out where there's concern and where there isn't.
Where 8point3 Energy Partners isn't on solid footing
One of the claims Johnson made to a Benzinga reporter is that 8point3 Energy Partners isn't paying down debt like its yieldco peers. And that is true.
The yieldco has used a term loan ($575 million) and revolving credit facility ($200 million) and a $50 million seller's note with First Solar (NASDAQ:FSLR) to finance projects. All told, it had $763 million in debt outstanding at its last disclosure. And with only $14.3 million in cash on hand at the end of the fourth quarter and $10 million in cash used to buy the Stateline project, the cash level is likely down to about $4 million, which is low.
If you compare the debt level to the $109.8 million midpoint of guidance for EBITDA (earnings before interest, taxes, depreciation, and amortization), 8point3 Energy partners has a debt-to-EBITDA ratio of 6.9, which is toward the high end of where yieldco debt levels are at competitors. But with NextEra Energy at a debt-to-EBITDA ratio of 5.5 and TerraForm Power at 9.3 (and recently being bought out), the ratio isn't as crazy as it may seem on the surface.
One criticism of the debt level is that it's short-term debt and isn't amortizing, or reducing the principal over time. That's a fair criticism, but since the debt doesn't mature until June 20, 2020 or later, there's low risk that the rug will be pulled out in the meantime. Because this is corporate debt and not project debt, it doesn't necessarily have to be paid down for the company to remain viable. And if the company wanted to, it could get financing for its projects elsewhere.
Financing options available
8point3 Energy Management's strategy has been to use the short-term debt I outlined above for around three years, until it can get an investment-grade rating from a rating agency for traditional bond debt. So, the goal will be to wait until then to refinance debt at a corporate level.
So far, 8point3 Energy Partners has kept all of its debt on a corporate level, but it could layer on project debt, something many yieldcos have done. This would likely be amortizing debt, like a mortgage, and would free up cash to either pay down current debt or acquire more assets to grow cash flows.
The point here is that while 8point3 Energy Partners hasn't been paying down debt like its competitors, there's a strategic reason for that, and the debt level itself isn't something to worry about.
Why 8point3 Energy Partners is nothing like SunEdison or SolarCity
What's really key is that 8point3 Energy Partners is in no way structured like SunEdison or SolarCity; it buys projects and pays out cash flows as a dividend. The worst that could happen is that it stops buying projects, and maybe makes a dilutive stock offering or a reduction in the dividend at some point. But since these are cash flow projects and the yieldco has very little in operating expenses, there's little risk the company will go belly-up.
SunEdison and SolarCity, on the other hand, were developers, in constant need of funding to keep their development businesses afloat. They needed projects constantly flowing through the system, and those projects had to be financed regularly.
In SunEdison's case, it counted on TerraForm Power and TerraForm Global to drop down assets, and once those yieldcos had yields that no longer made dropdowns accretive, the model fell apart. Borrowing costs rose for the yieldcos and for SunEdison, which led to bankruptcy. But it was the underlying need to keep pushing projects through the system to cover operating costs that brought SunEdison down.
SolarCity was in a similar situation. It had around $1 billion in operating costs, with sales and marketing teams across the country churning out customers on a constant basis. But it needed those customers to keep flowing through the system to stay afloat. And when its borrowing costs began to rise and the market moved toward residential solar sales instead of the leases that made SolarCity what it was, the company was in trouble.
Even 8point3 Energy Partners' sponsors First Solar and SunPower don't need the yieldco to buy projects to stay alive (like SunEdison did). They're moving to more component sales, and when they have projects they can't sell to their yieldco, they can sell to another utility or yieldco without a second thought.
Worry where there is none
I don't know if 8point3 Energy Partners' stock will increase in the next few months, but the idea that it is in trouble, in the way that SunEdison and SolarCity were, is misguided. They're very different companies with very different business models. And while 8point3 Energy Partners may not be living up to expectations from a stock-price or growth perspective, it's still a great dividend stock for investors willing to hold it long-term. And that's a good option for renewable-energy investors today.