Updates On SunPower And First Solar’s Joint YieldCo

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8point3 Energy Partners, the joint yieldco formed by U.S. solar majors First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), has announced that it expects its initial public offering to be priced between $19 and $21 per share. The company intends to sell 20 million shares to the public, raising as much as $420 million. This could value the vehicle at about $1.49 billion, at the top end of the expected price range. ((8point3 Energy Partners expects IPO to be priced at $19-$21/share, Reuters, June 2015)) The markets appear to have approved of the valuation, with both First Solar and SunPower stocks ending higher in Wednesday’s trading. Overall, we see the move to create a yieldco as being promising for both companies, since it would allow them to expand their project businesses, while reducing funding costs (related: Understanding Solar Yieldcos).

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Why The YieldCo Is Beneficial To First Solar And SunPower 

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8point3 Energy Partners will have an initial portfolio totaling 432 MW (262 MW of utility-scale projects from First Solar and 170 MW of utility and distributed projects from SunPower) located in the United States and will also have a Right of First Offer (ROFO) for another 1,131 MW of projects. First Solar and SunPower will own 31.1% and 40.7% of total Class A and B shares, respectively, following the offering. Yieldcos reduce the cost of equity funding for renewable projects, since they allow investors to single out cash flows generated by power generation assets, without exposing them to other aspects of the parent company’s business. The yieldco structure could prove helpful for both companies, since it would allow them drop-down power plants into the yieldco and fund new projects at rates that are lower than the complex tax equity investments and bank debt that are currently common in the solar industry. This would lower the overall cost of capital and potentially improve the valuation of their respective project development businesses.

Initial Distribution, Targeted Growth Rates Seem Attractive

8Point3 Energy Partners will pay out an initial quarterly distribution of $0.2097 per Class A share, which translates into an annualized yield of about 4.2%. [1]  This seems reasonably attractive, since TerraForm Power, a yieldco which SunEdison created last year, offers a current dividend yield of about 3.6%, according to our estimates. Yieldco’s also typically deliver above-average dividend growth with below average risk, given their stable generation assets. For instance, 8Point3 is targeting an annual growth rate of distributions of 12% to 15% per Class A share over the three-year period following completion of its offering.

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Notes:
  1. 8point3 Energy Partners Form S-1 []