Image source: First Solar.
For months, investors have wondered if SunPower (SPWR +0.00%) would launch a yieldco following the success of offerings such as TerraForm Power (TERP +0.00%) and NRG Yield (NYLD 2.20%). The company has been stashing projects on its balance sheet as part of a holding company, or holdco, or a yieldco strategy, but has been mum about whether a yieldco was actually in its future.
In a surprise move, SunPower yesterday said it is in "advanced negotiations" with another major U.S. solar project builder, First Solar (FSLR 0.63%), to form a joint yieldco. These stocks are already popping today as a result. Let's take a look at the impact behind this announcement and what to expect going forward.
Workers building the California Valley Solar Ranch project. Image source: First Solar.
What the joint yieldco means
The press release from SunPower and First Solar was brief, but we can gather a few things. Most important, both are interested in keeping long-term ownership of their solar projects through the yieldco. A yield simply owns project assets long-term, paying a dividend from the cash flows projects generate each quarter. Unlike a solar panel manufacturer, the yieldco will only own projects that generate electricity and sell it to customers. In that respect, it's more like a REIT or MLP than a traditional solar stock.
Both companies should benefit from having a larger overall pipeline to pull from just from a scale and overhead standpoint. If each company had launched its own yieldco, each could have been forced to delay the project or go forward with a smaller business.
Along with their scale, the two companies are among the strongest financially in the solar industry, and both have differentiated technology. This should allow them to finance the venture at low cost, assisted by a diverse geographic base that will spread risk more fully across the new company.
Depending on what assets are included in the yieldco, this could be a way to further geographically diversify both businesses. For example, SunPower is investing heavily in China but does not intend to compete in India. First Solar is investing heavily in India and could benefit from SunPower's exposure to China and distributed generation assets, a market in which it doesn't currently compete.
Commercial solar could play a big role in the new yieldco. Image source: SunPower.
SunPower CEO Tom Werner said in the release he believes solar projects will increasingly be built with adjacent services such as energy storage. This could be an opportunity for both companies to leverage their strong research and development bases, providing further value to utility and commercial-scale projects. Racking, panel cleaning, and inverter technology would be natural ways to combine forces.
Another thing to consider is that SunPower and First Solar often compete for the same projects around the world. They did not say how they would resolve this conflict, but it's an interesting challenge when two of the world's largest project developers combine forces.
What to expect
The S-1 -- an SEC filing that lays out the company structure, finances, and other details -- is expected to be filed in the first quarter. We'll learn more details then about the yieldco's structure and what projects could be included.
I'd expect the yieldco to be launched later in the year, even as early as the third quarter. This company will continually buy projects from both SunPower and First Solar, so there will be a long-term impact.
Since it's a partnership, they'll also likely be able to report revenue and earnings when projects are pushed down to the yieldco. This will allow both to reap a short-term benefit while also getting long-term value from the yieldco.
I think this is a good move for both companies, and it will be good for both to benefit from owning their own projects over the long term instead of selling them as they're built, which was the standard before yieldcos became popular. Check back for more when the S-1 is filed and we know more about what will -- and won't -- be included in this yieldco.
