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Tech leap leads to yieldco soul searching at First Solar

First Solar Inc. faces a dilemma. The solar module manufacturer and project developer wants to quickly sell some of its power plants to help pay for a new product line, but the holding company it created to serve as a ready buyer and source of cheap capital cannot afford any big acquisitions.

On April 5, First Solar said it is considering selling its stake in 8point3 Energy Partners LP, the yieldco it took public in mid-2015 as a joint venture with competitor SunPower Corp. First Solar, like other manufacturers, has been hammered by a persistent glut of solar components that dragged down prices. In response, the company canceled production of its Series 5 module and is leapfrogging to the Series 6, a low-cost, high-efficiency product that is expected to deliver better gross margins.

However, the transition is estimated to cost $1 billion, and First Solar is looking to accelerate the return on capital in its power plant business by selling projects earlier in the construction phase, including the California Flats and Cuyama Valley solar projects in California. 8point3 has first rights to those projects, but the yieldco is short on cash and focused on repaying debt, so a deal is "highly unlikely," Charles Boynton, chairman and CEO of the yieldco's general partner, 8point3 General Partner LLC, said on an April 5 earnings call.

First Solar, which has said it could abandon the yieldco strategy if 8point3 fails to deliver its expected "strategic and financial benefits," on April 5 said it may sell its 28% stake in the the company to "refocus resources" and provide additional funding to support the transition to the Series 6 modules.

An exit would not be "entirely surprising," analysts at Oppenheimer & Co. Inc. said, given First Solar's desire to focus on equipment manufacturing and "opportunistic project development." First Solar CEO Mark Widmar, in a news release, said the company remains committed to building and selling utility-scale solar plants.

Following First Solar's announcement, SunPower said it, too, would evaluate its options for 8point3, including finding a new partner. "We have a very strong pipeline," said Boynton of 8point3, who also serves as CFO of SunPower. "[It's] no surprise the power plant market is really competitive right now. ... But I think we feel, from a SunPower standpoint, that we'll continue doing lots of transactions."

Shares in First Solar and SunPower, which are down 18% and 7%, respectively, since the start of the year, are up slightly since the reviews were announced. 8point3 shares, down 7% this year, have fallen nearly 10% since the announcements.

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Market turn

Except for an uptick in the middle of last year that was attributed to several large module supply contracts, First Solar's revenue has been declining since late 2015, with headwinds in the company's power plant business offsetting gains in third-party module sales. Executives said bookings were delayed after the extension of an industry tax credit late in 2015 relieved pressure on some customers to quickly build projects. Widmar, then First Solar's CFO, in April 2016 said the company's power plant business was also transitioning as construction wrapped up on old projects.

SunPower has gotten a lift from its distributed generation business, which serves the residential and commercial markets. Revenue increased by 73% during the third quarter of 2016 due, in part, to the sale of its noncontrolling stake in the utility-scale Henrietta project in California to 8point3.

However, both companies' earnings have been stung by the slide in solar equipment prices that started around mid-2016.

SunPower, which in December 2016 said it expected to book up to $275 million in restructuring charges as it shuttered a plant in the Philippines and cut about a quarter of its workforce, saw its losses widen by more than 426% during the fourth quarter, to $294.3 million. At First Solar, which in November 2016 said it expected $700 million in restructuring and asset impairment charges owing to the acceleration of Series 6 manufacturing, losses widened by more than 350% during the final three months of 2016, to $696.1 million.

Widmar, First Solar's CEO, has downplayed the risks associated with the company's technology jump, but UBS Securities LLC analyst Julien Dumoulin-Smith said investors seemed to miss warnings that its Series 4 technology was no longer competitive "and may now under appreciate the continued challenges to keep up with panel margins declining relative to the Series 6 panel."

Meanwhile, 8point3, which was set up during the the yieldco craze as a way to separate contracted assets from higher risk development activities, looks to be on shaky financial ground, according to Gordon Johnson, managing director of Axiom Capital Management. By removing development risk, such tax-efficient, dividend-paying holding companies were supposed to achieve better equity valuations for assets and create a virtuous cycle of low-cost capital for their sponsors. But with just $7 million in cash as of Feb. 28, the company has few options to acquire new projects.

"[Were] the equity markets to 'turn' on [8point3], we believe growth would stagnate, pushing up the required dividend yield, thus weighing on shares," Johnson said in a note to clients. 8point3, which reported $61.2 million in revenue last year, has racked up $710.7 million in debt, according to S&P Capital IQ.

First Solar, which received $5.3 million in distributions from 8point3 last year, said the carrying value of its yieldco investment totaled $214.6 million at the end of 2016.