In what can only be called a surprise move, SunPower Corp. (NASDAQ: SPWR) and First Solar Inc. (NASDAQ: FSLR) announced Monday evening that they are joining forces to create a yieldco from assets currently included the separate portfolios of each company. As the two leading solar project developers in the United States, it is the sheer scale of the potential yieldco that is driving shares of the two companies higher Tuesday morning.
In its earnings release Tuesday morning, SunPower said it expects to install another 215 megawatts of generation in 2015 and that its project pipeline now totals more than 4,000 megawatts. First Solar, which reports earnings later Tuesday, became the first solar photovoltaic (PV) maker to install 10,000 megawatts of capacity last month. Its project pipeline exceeds 2,600 megawatts.
It is not unreasonable to assume that the SunPower/First Solar yieldco will at least match TerraForm Power Inc.’s (NASDAQ: TERP) 800 megawatts of assets. TerraForm is a publicly traded yieldco created last year by SunEdison Inc. (NYSE: SUNE) that currently holds nearly 800 megawatts of solar generation and recently added 521 megawatts of contracted wind and solar in its acquisition of First Wind Holdings.
According to TerraForm Power’s latest earnings release, its total drop-down inventory is 3,300 megawatts, triple its total since the company’s initial public offering (IPO) last July. The total represents TerraForm’s “call right list,” assets the company has an option to buy once the projects are completed.
If SunPower and First Solar each contribute about half their existing assets to the yieldco, the new company will at least be a solid match against TerraForm. As we have noted already, for companies like SunPower and First Solar, a yieldco offers liquidity to pay off debt from building solar plants or to use as financing for the next project in the pipeline. For investors, yieldcos offer a low-risk return from a predictable cash flow based on long-term contracted utility rates.
So far no China-based solar PV maker has split off a yieldco, although Barron’s has reported that JinkoSolar Holding Co. Ltd. (NYSE: JKS) may have a go at a yieldco IPO sometime this year. Chinese solar makers face financing issues, and that has stifled returns from projects built in China. Regardless of the difficulties and the fact that no Chinese solar maker has a yieldco yet, China’s solar PV stocks are got a boost Tuesday as well.
PowerShares WilderHill Clean Energy ETF (NYSEMKT: PBW) already includes TerraForm (2.5% of holdings) and Pattern Energy Group Inc. (NASDAQ: PEGI) (2.62%), another yieldco. Guggenheim Solar ETF (NYSEMKT: TAN) holds a 3.99% stake in Terraform. Both exchange traded funds traded higher on Tuesday morning.
First Solar traded more than 15% higher Tuesday morning to $57.12, in a 52-week range of $39.18 to $74.84.
SunPower traded up more than 16%, at $32.33 in a 52-week range of $22.75 to $42.07.