Vertically integratedsolardeveloper superpowers and competitors First Solar and SunPower are partnering on a solar project YieldCo. This somewhat surprising announcement from the rival firms comes after several quarters of reluctance (or patience) about entering a YieldCo structure, either individually or jointly. The market has been waiting for both firms to form a YieldCo, but the joint nature of the deal is remarkable.
The companies are not commenting at this time, and it remains to be seen whether this Hollywood buddy movie will follow the plot of The Odd Couple or Alien vs. Predator. (Other movie analogy suggestions welcome in the comments section.)
Last quarter, it seemed as if every analyst on the earnings call asked the First Solar executive team about the company's YieldCo plans.
At the time, First Solar's CEO responded, "Turning to the often-asked question of YieldCos...[t]he company has determined that we are not prepared to file a registration statement and pursue a listed yield vehicle at this time. However, we have also determined that the ownership and operation of whole or partial interest in select solar generating assets does have a role as a component part of our overall business model. We will continue to develop generation assets in the U.S. and select other markets, and at times, we will retain either a whole or partial interest in such assets."
He added, "We do not feel that we are missing either gross margin opportunities or market share capture opportunities because we don’t have a YieldCo today. As we have consistently said, we’re self-developing projects, and those projects continue to be lucrative assets for us. We are keeping those projects on our balance sheet through the commercial operations date, and in certain circumstances, we are retaining an interest in those projects where we think it makes sense."
What made First Solar change its course?
In the last 18 months, YieldCos have been formed from the renewable portions of power portfolios at NRG, TransAlta, NextEra, Abengoa, and more recently, SunEdison's TerraForm Power, which was bolstered by its recent acquisition of First Wind.
As Louis Berger, a co-founder of Washington Square Capital Management, has written for Greentech Media, "A YieldCo is a corporate structure where the income component (generated by the underlying assets) is emphasized. YieldCos are similar in concept to a master limited partnership in the oil and gas sector or a real estate investment trust in the real estate sector. All three investments are designed to provide a dependable stream of cash flow to investors. YieldCos use completed renewable energy projects with long-term power-purchase agreements in place to deliver dividends to investors."
As Berger notes, "By spinning off their renewable power assets into a separate, high-yielding entity, power producers are attracting interest from two types of investors who may not have been interested otherwise: socially responsible investors and income investors."
Despite radically different core photovoltaic technologies, First Solar and SunPower compete head to head at the utility scale in the U.S. and across the globe, although mostly in the U.S. What benefit would the two companies receive by combining their solar project pipeline? Both have strong balance sheets and EPC chops. If the best-performing YieldCos need volume, then that's what can be achieved between these two gigawatt-scale solar players. It's a way of holding ownership on a portfolio of pre-2017 projects that will be eligible for the full federal Investment Tax Credit.
The analysts at Baird Equity Research write, "We believe a joint YieldCo would be positive for both companies and the overall solar industry," adding that it "would provide both companies a source of stable project demand and should allow the companies to gain more favorable project economics. Additionally, a joint YieldCo should provide greater project flexibility for both companies, as opposed to doing separate YieldCos. FSLR could also gain access to rooftop/DG projects through its ownership in the YieldCo, which would help to diversify the company’s project portfolio away from utility-scale projects (which has been a long-term bear argument)."
Baird said that the "combined intermediate-term pipeline of unsold projects is >2 GW and should provide sufficient projects for a YieldCo launch." The analysts added that the two companies' "industry-leading technologies are complementary and should reduce project risk. SPWR has industry-leading c-Si efficiency rates, while FSLR remains the leader in CdTe technology. We believe having projects consisting of both technologies lowers the overall risk of the YieldCo and should help the YieldCo achieve a lower risk premium."
A financier close to the deal notes, "I think what drives the deal is the need for cash available for distribution. [...] I suspect each of these companies feels like they are too light on CAFD on their current operating portfolio to do a standalone YieldCo. Also, when you look at the procedures required in a public deal for acquisitions, the arm's-length nature of future purchases means a sponsor company doesn't necessarily control what is bought by the YieldCo and at what price. Why not team up with a competitor and JV a public vehicle? You get it in the market quickly and have an avenue for disposition of your future projects."
She adds, "We are mesmerized currently by public yields. But some of these entities will again be taken private -- when recaps are necessary as public yield demand goes up or as part of a post-ITC recap."
SunPower had Q3 2014 GAAP revenue of $663 million. First Solar had Q3 revenue of $889 million, up $345 million from Q2 2014.
SunPower and First Solar stock prices are up 12.5 percent and 9.5 percent, respectively, in after-hours trading. Both companies have quarterly earnings calls tomorrow.