Power Plant Business Drives SunPower’s Q4

SunPower (NASDAQ:SPWR) published its Q4 2014 results on February 24, beating market expectations on both revenues and earnings. The earnings were largely driven by the continued execution of the company’s North American solar projects, distributed generation (DG) demand from Japan and relatively stable ASPs.  The company’s quarterly revenues (GAAP) grew by about 82% year-over-year to $1.16 billion, while net income grew to about $135 million from about $22 million a year ago. However, guidance for Q1 2015 was lighter than expected, with the company projecting revenues (GAAP) of between $420 million to $470 million with an adjusted loss per share of between $0.05 and $0.15. Earlier this week, the company said that it was in advanced stages of negotiations with rival First Solar (NYSE:FSLR) to form a joint yieldco vehicle, which the two companies intend to take public. Here’s a brief overview of the company’s results and our thoughts on the yieldco venture with First Solar.

Trefis has a $33 price estimate for SunPower, which is about  in line with the current market price.

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Overview of Results

SunPower’s 579 MW Solar Star project, which it is constructing for MidAmerican Energy in California, continued to be the key driver of earnings. The company said that it had grid connected over 100 MW of capacity of the project during the quarter and noted that the project could reach substantial completion by the end of the next quarter. In the near-term, projects such as the 135 MW Quinto, which is expected to be complete by the end of this year, could drive earnings. SunPower has also been diversifying its power plants business internationally. The company noted that it had completed construction of its 70 MW Salvador merchant power plant in Chile during Q4 and also said that its 86 MW Prieska project in South Africa remains on track. The company is also continuing to ramp up its manufacturing and project joint ventures in China –  the world’s largest solar market – with plans to install more than 250 MW in the country this year. ^[1]

SunPower’s DG business also did reasonably well, on the back of strong panel shipments to Japan and demand from the U.S. residential and commercial markets. Japan accounted for about 27% of the company’s overall shipments for the quarter. While there have been concerns that the Japanese solar market is peaking off, as the government scales back on feed-in-tariffs, SunPower still expects Japan to remain a core distributed generation market for the company. In the United States, the residential business saw the number of lease customers rise from 25,000 to 27,000. The company also noted that its commercial project pipeline in the U.S. has grown to $1.4 billion. Installation growth in the United States could accelerate prior to the cuts in the solar investment tax credit (ITC) slated for the end of 2016. The ITC is expected to drop from 30% to 10% for commercial projects and to zero for directly owned residential projects.

Yieldco Plans Look Encouraging

SunPower said that it intended to jointly form a yieldco with First Solar, with the negotiations being in the advanced stages. Although the company didn’t provide specific details, we broadly believe that the move should create value for shareholders by reducing cost of capital and potentially providing an avenue to drive project sales. A Yieldco is a separate publicly listed corporate subsidiary set up by energy companies to transfer a portfolio of energy projects. Yieldcos generate stable and predictable cash flows by selling electricity under power purchase agreements and distribute most of their cash through quarterly dividends. 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, allowing for lower funding costs. Additionally, yieldco investments are also liquid, since they trade in the open markets. The yieldco structure could prove helpful for both companies, since it would allow them to transfer power plants into the yieldco and use the capital raised to fund new projects. Additionally, since the parent company typically retains a significant stake in the yieldco, it should help to bring in some recurring cash flows in the form of dividends.

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1. SunPower’s (SPWR) CEO Thomas Werner on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 2015 [↩]