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8point3 sees quiet start to asset dropdowns in 2017 as yieldco dynamics tighten

The next half-year is setting up to be a quiet one for 8point3 Energy Partners LP, as the yieldco digests recent dropdowns and prepares for a more aggressive posture in the back end of 2017.

Full-year earnings for 8point3, the joint yieldco formed between solar developers SunPower Corp. and First Solar Inc., landed largely in line with analyst expectations for 2016, with adjusted EBITDA coming in at $76.19 million, according to the company's after market close earnings release on Jan. 26.

Analyst consensus estimates for full-year EBITDA came in at $76.15 million for 2016, according to S&P Capital IQ. 8point3 management offered 2017 full-year adjusted EBITDA guidance in a range of $106.5 million and $113.1 million.

In the fourth quarter, the yieldco settled at $18.3 million in adjusted EBITDA, nudging by initial guidance.

Cash available for distribution settled at $73.1 million for 2016, in line with analyst expectations, with management targeting to increase that metric to between $91.5 million and $101 million in 2017.

"Assets in our portfolio at the end of the quarter included interests in 642 MW of projects on a gross basis with performance in line with our expectations," 8point3 CEO and Chairman Charles Boynton said in an earnings call. "We increased our distribution for the sixth quarter in a row and believe that with our recent acquisitions, we are well positioned in 2017."

The incrementally higher outlook entering 2017 is driven by a pair of recent solar dropdowns in which it is a minority partner with Southern Power Co., including a 49% interest in the 102-MW Henrietta Solar Project and a 34% interest in the Desert Stateline Solar Facility, for a combined $464 million.

Those stakes are expected to combine to drive additional annual cash distributions of about $43 million, 8point3 said, both owing to 20-year power purchase agreements with Pacific Gas and Electric Co. and Southern California Edison Co., respectively.

Challenging dynamics

While 8point3 acknowledged that it has a number of options for future dropdowns from its sponsors, it indicated that it is likely to hold off on utility-scale acquisitions in the immediate term, due to what it sees as tempered investor enthusiasm around yieldco portfolio growth, represented by a stock price it feels is undervalued.

The stock price closed at $14.75 on Jan. 26, down about 30% from where it debuted at $21 in June 2015.

"In simple terms, we are currently not getting rewarded for high growth at this point. As a result, we are currently reviewing a number of options to properly position ourselves for success in this environment," Boynton said.

"While we have seen some improvement in the market related to the yieldco industry in the last quarter, the overall dynamics remained somewhat challenging as investors evaluate the arising interest rates and the potential impact of the current administration," Boynton added.

Management adjusted its drop-down pipeline to include the 100-MW Boulder solar facility and a 42-MW commercial-scale solar portfolio, in lieu of the 54-MW Stanford project portfolio and 20 MW project in Japan.

8point3 also indicated that its sponsors SunPower and First Solar have made requests to potentially remove a pair of solar projects, the 100-MW El Pelicano plant in Chile and the 179-MW Switch Station project in Nevada, from its right of first offer, or ROFO, pipeline.

"Given that the partnership will most likely not to acquire these projects in 2017 and our sponsors desire to monetize these project asset in the near term, the Board of Directors and Conflicts Committee are currently reviewing these requests and any changes related to ROFO status of these projects is subject to their approval," Boynton said.

To this, analysts flagged initial concern around the joint structure of the 8point3 model.

"In our view, the ROFO revolving door is indicative of why conflict of interest issues somewhat inherent to the YieldCo model are exacerbated by a two-headed sponsor," Credit Suisse said in a Jan. 26 note. "The fact the removed projects were not replaced is even more concerning."

Alternative financing

But following through with identified ROFO projects will likely not materialize until the latter half of 2017.

"Currently, our liquidity, including revolver capacity, is more than $75 million, and we do not have plans to acquire any large-scale projects in the first half of 2017," 8point3 CFO Bryan Schumaker said.

In financing future drop downs, 8point3 aims to secure debt with an investment-grade credit rating, or alternatively look to refinance its existing holding company debt.

"We are considering alternatives, which could include refinancing a portion of our bullet debt with investment-grade amortizing project level debt to minimize refinancing and interest rate risks," Schumaker added.