This week, 8point3 Energy Partners (CAFD) reported solid earnings, but the stock fell drastically after one of their parent companies, First Solar (FSLR 1.93%), announced they were exploring strategic alternatives to its ownership in the yieldco.
In this segment from Industry Focus: Energy, two Motley Fool analysts explain the most important context behind this decision -- how 8point3 was formed, and why First Solar is likely leaving now -- and take a look at why the market reacted so strongly, why First Solar is reportedly leaving, how 8point3 Energy Partner's story compares to other ill-fated yieldcos in recent memory, and more.
A full transcript follows the video.
This video was recorded on April 6, 2017.
Sean O'Reilly: So, I've talked about this company before, but we have to rap about this for a sec. Yesterday, 8point3 Energy Partners, which literally owns and buys solar installation projects, they have 20- to 25-year lives and then sell the electricity to utility companies, and that's it. I think they have five employees. I'm joking, but you see the point.
Taylor Muckerman: Yeah. Revenue per employee should be all right.
O'Reilly: They reported earnings after the close. They were pretty good; they projected their dividend for the year; they actually one month ago had increased their quarterly dividend by 3%. Things are OK over there operationally. [laughs]
Muckerman: Are they? Or so they say?
O'Reilly: The cause of the ruckus is an announcement by one of their two parent companies.
Muckerman: What happened? Overnight, the stock was down 8%-10%? More?
O'Reilly: It was rough. It's down 7% right now. It was down 15% after hours, it was crazy. Was like, woah, guys.
Muckerman: Some knee-jerk reactions and a little bit more rationalization. But still negative. What happened?
O'Reilly: There's three companies involved in this. You have 8point3, which trades under the symbol CAFD, and its two solar installer parent companies, First Solar, and SunPower. You could even throw in a fourth company, which is French oil giant Total SA. Where's Tyler Crowe when you need him?
Muckerman: Yeah, seriously, that's his bag, baby.
O'Reilly: They own 56% of SunPower. So they control it. They might as well not even have a board, L-O-L. So 8point3 reports earnings, they're decent, it's fine, cash flow's OK, distributable cash flow was $25 million, which is where it needs to be, all good. Then First Solar announced that they were exploring strategic alternatives for its ownership in 8point3 Energy Partners, basically saying they want out. And the stock tanks. One of the selling points two years ago, when 8point3 was created was, "We'll have two parent companies, as opposed to one," as was the case with TerraForm Power and Global; they were the yieldcos for SunEdison that's now in Chapter 11. Things were not great.
Muckerman: These yieldcos, NRG Energy had a yieldco; that's really done poorly.
O'Reilly: 8point3 was created when that was hot. That's the thing.
Muckerman: That's why they were created, because it was hot.
O'Reilly: I did some digging; it was weird, because on Dec. 1, 8point3 closed on an acquisition of a 34% interest in, you guessed it, First Solar, the company that wants out. Three hundred-megawatt Stateline solar project located in San Bernardino County, Calif. Project had 20-year contract life, expected to generate approximately $32 million in annual cash distributions. They're making deals, it's fine, they were fulfilling on why they were created. So First Solar said in the statement, their CEO said, it could allow them to allocate more capital to the production of its next generation Series 6 panels, which Chief Executive Mark Widmar said has the potential to be a transformational product. I don't quite buy this, because First Solar has a crap ton of cash on the balance sheet. I'm pretty sure it's over $1 billion. I don't know. I think it sounds --
Muckerman: Compared to their market cap ... $1 billion in cash, versus a market cap of $2.75 billion, so that's a pretty decent sum, OK.
O'Reilly: Yeah. And to be fair, solar panels are, for lack of a better word, a commodity. If you don't have a more efficient solar panel, somebody overseas will mess you up. So to be fair, they do have to dig in and do some things. But yeah, they have cash and cash equivalents -- as of end of 2016, $1.347 billion and $608 million in short-term investments, which I assume is T-bills or something. This is some serious cash. And I know they're thinking, we really have to focus on this, and that's fine. But it really smells to me like they created this thing when it was hot two years ago, and now it's just not --
Muckerman: It's falling out of favor.
O'Reilly: Yeah, it's falling out of favor.
Muckerman: The herd mentality has taken over.
O'Reilly: Fool.com, we have a contributing solar writer, he knows everybody --
Muckerman: Travis Hoium?
O'Reilly: Travis Hoium, yeah.
Muckerman: Yeah, he's the truth when you're looking at solar.
O'Reilly: I was chatting with him last night at 10 p.m., because this was just hilarious in every way. He said, and I appreciated this, "I think the whole move is because neither sponsor is betting on project development the way they were two years ago. So if you can cash out now, why not?" It could go either way. This could actually be good, and Total, the other 56% owner of SunPower -- there's a lot of "powers" and "suns" in here; I apologize -- you could see them buying the stake in this. They love renewables. You have an oil company worth hundreds of billions of dollars that's trying to pivot to solar. It would be incestuous, but it would be fine. This doesn't affect its cash flows right now. At the end of the day, it just seems like everybody doesn't like uncertainty on Wall Street, so they're just selling out.
Muckerman: Yes. That's where they tell you, you can capitalize, it is on uncertainty, but yeah. I think the whole NRG Energy yieldco story really, really soured people on these. So any hint of some negative news, people are jumping for the exits.
O'Reilly: People are still burned from the SunEdison stuff. TerraForm Global and Power, it was like, what are these things worth?
Muckerman: Right, and they're so confusing when you really dive down into it.
O'Reilly: Yeah, you look at a chart of the ownership structures of all the stuff they own ...
Muckerman: That's right, Enron-esque in terms of how confusing it can get.
O'Reilly: You own 34% of this project over here, and blah blah blah ...
Muckerman: Yeah, and somebody else below them owns another ... yeah, crazy.