Why SunPower is Increasingly Holding Solar Projects On Its Books

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SunPower’s (NASDAQ:SPWR) project development business – which involves the construction of large-scale solar power plants for electric utilities, generation companies and investment firms – has been the primary driver of the company’s performance over the last two years. The company has been working on projects such as the 579 megawatt (MW)  Solar Star – one of the worlds largest solar projects – and has also been scaling up its project pipeline overseas, with the help of its parent company Total S.A. Overall, the business is certainly maturing and the company has been looking at complementary business models to extract maximum residual value from projects that it builds, and also to reduce the cost of funding its project business. In this note, we take a look at  the company’s  “Holdco” and potential solar “Yieldco” strategies.

Trefis has a $35 price estimate for SunPower, which is slightly below the current market price.

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HoldCo Strategy Will Help Extract Maximum Residual Value From Projects

While SunPower has typically sold its solar projects while they are under development, the company has indicated that it would be holding on to certain projects on its balance sheet through their construction and possibly into the operational stages as well, in what is known as a Holdco structure. SunPower currently  has over 500 MW of projects under its Holdco asset pipeline, including the 135 MW Quinto Solar Project that it recently began building in California.  While this strategy could reduce the company’s  earnings and liquidity position in the near term, it should eventually allow for better margins and drive higher shareholder returns over the long run. For instance, if the company should choose to sell a solar project post-construction, rather than during construction as it most often does, it could realize better pricing since there is less risk involved for the buyer, who would be purchasing a fully functional power plant with proven energy production capabilities. Alternatively, if the company chooses to maintain the project on its books through the operation phase as well, it would be able to earn money through long-term power purchase agreements.

A YieldCo Could Help Bring Down Financing Costs

SunPower has also been mulling the creation of a Yieldco (or yield company) and is expected to make a final decision sometime in late 2015 or early 2016. [1] A Yieldco is a separate corporate subsidiary set up by energy companies to transfer a portfolio of operational energy projects. Yieldcos are usually listed through an IPO after they are spun off from their parent companies. Yieldco’s offer among the lowest costs of equity funding for renewable energy projects for several reasons. Firstly, these companies generate stable and predictable cash flows by selling electricity under power purchase agreements and distribute most of their cash through quarterly dividends. Secondly, the model allows investors to single out the cash flows generated by the power generation assets without giving investors exposure to other aspects of the parent company’s business. Additionally, Yieldco investments are quite liquid, since they trade in the open markets. The Yieldco structure could prove helpful for SunPower, since it would allow the company to sell projects into a Yieldco and potentially gain cheap funding to expand its projects business.

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Notes:
  1. SunPower edges towards yieldco, Recharge News, April 2014 []