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Wells Fargo downgrades 8point3 on sponsorship uncertainties

Wells Fargo Securities LLC on April 6 downgraded 8point3 Energy Partners LP shares to "market perform" from "outperform," and lowered its 12- to 18-month valuation range to $11 to $12 per share, from $16 to $17 per share.

The move was prompted by First Solar Inc.'s announcement the previous day that it has initiated a strategic review of its 28% interest in the joint yieldco, to result in a sale or a possible change in sponsorship of 8point3.

Wells Fargo also reduced its 12- to 18-month valuation range for First Solar to $29 to $30 per share from $35 to $36 per share, and maintained a "market perform" rating. The bank believes First Solar "will need to burn" some of its available cash as it converts production of solar panels to its new Series 6 models.

As a joint owner holding a 36.5% stake in 8point3, SunPower Corp. is also considering its strategic position and did not reject the possibility it could become the only sponsor after the review. "However, it appears [SunPower]'s preferred outcome is to find another partner and move forward with 8point3 as a financing vehicle. As such, much will depend on the partner search and [SunPower]'s ability to secure a new partner that excites investors enough to allow 8point3 to once again tap into the equity markets," Well Fargo analysts wrote.

First Solar also announced that the 179-MW Switch Station project is now up for a potential third-party sale and that it sent 8point3 a formal offer for the 280-MW California Flats and 40-MW Cuyama Valley solar projects in California, both projects included in the right of first offer portfolio. If 8point3 fails to acquire the power plants from First Solar, the projects will be sold to third-party buyers.

"We view this coupled with prior reductions to 8Point3's right of first offer (ROFO) list as indicative of 8Point3's current inability to raise equity capital on reasonable terms. Without the acquisition of the two large projects, and absent the ability to drop down additional projects, we believe it will be difficult for 8Point3 to grow cash available for distribution per share," Wells Fargo noted.

Wells Fargo's 2017 through 2020 EPS estimates for 8point3 are now at $1.31, $1.39, $1.37 and $1.36, respectively, compared to the previous EPS estimates of $1.30, 1.60, $1.70 and $1.75.