On Wednesday, SunPower Corp. (NASDAQ: SPWR) announced that it signed a deal to sell its Antelope Valley Solar Projects in California to MidAmerican Energy, a firm controlled by Warren Buffet’s Berkshire Hathaway. The co-located projects will have a total capacity of 579 MW, making them the largest photovoltaic development in the world.  The deal, which is valued between $2 billion and $2.5 billion and is almost as much as the firm’s 2011 revenues, comes at a time when the firm has been struggling with razor-thin margins and sluggish revenue growth. SunPower’s stock rose by about 9 percent on the news. We believe that the deal will allow SunPower to strengthen its position in the utility scale business and serves as a vote of confidence in the firm’s technological capabilities.
Details Of The Project
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SunPower has been developing the Antelope Valley Solar Projects over the last 4 years and is scheduled to commence construction sometime in Q1. The firm will deploy its Oasis Power Plant technology, which combines high efficiency panels mounted on solar tracking systems with balance of systems components and control equipment. Solar tracking systems vary the position of the panels to track the sun during the day, maximizing electricity output. SunPower will provide the engineering, procurement and construction services to build the power plants as well as operate and maintain the plants under a multi-year contract. Upon completion, the plants will supply electricity under two power purchase agreements to Southern California Edison (SCE).
How SunPower Benefits From The Deal
Economies Of Scale And Profitability: Utility scale projects are attractive to solar firms as they involve large, long-term contracts that allow for better economies of scale and lower exposure to panel price volatility. The large scale of the panels required by the project is also likely to help SunPower improve utilization levels at its cell and module manufacturing plants, and could help to bring down costs. Given that the projects will incorporate relatively sophisticated technologies such as tracking systems, it is likely that it will contribute to better profit margins.
Extends Brand Image In Utility Market: While SunPower’s utility segment has shown steady growth, with sales rising from around 110 MW in 2009 to nearly 400 MW in 2011, it still trails First Solar in terms of both scale and brand perception as a utility scale builder. As of December 2012, First Solar was developing 5 out of the 10 largest solar plants in the U.S. while SunPower was developing just one. Now, building the world’s largest solar project (displacing First Solar’s 550 MW Topaz power plant as the world’s largest) could help bolster SunPower’s image in the utility scale solar space.
Bolsters Confidence In The Firm’s Financials: Given the string of failures in the solar business, strong balance sheets are proving to be as much of a factor in bagging project orders as technological capabilities and development experience. While SunPower’s financial situation is not as bad as many Chinese firms, it has a relatively high debt load of around $800 million. Bagging a contract of this magnitude could be perceived as a vote of confidence in the firm’s future prospects.
We have a price estimate of around $5 for SunPower, which is 15% below the current market price.Notes: