Should First Solar Follow An Emerging Practice For Raising Project Development Funds Cheaply?

May 6 2014, 9:22pm CDT | by

As First Solar reported solid first-quarter revenue growth and earnings on Tuesday, some financial analysts wanted to know whether the solar power plant developer will follow its competitors and customers to create a public-traded subsidiary and sell shares of the projects it’s built and operating.

Called “yield co,” this fundraising vehicle gives developers access to cheaper capital and promises steady, long-term dividend payments to investors. The dividends come from long-term contracts to sell electricity to utilities. A developer would sell a stake from a portfolio of projects it owns and keep the rest of the shares.

There are potential drawbacks to using yield cos. Doing so could hurt the parent company’s credit profile by moving reliable sources of cash out to a subsidiary, and there could be double taxation of earnings in some circumstances, according to law firm Chadbourne & Parke.

Yield Cos are gaining popularity among renewable energy developers and owners. NextEra Energy, which owns wind and solar power plants, saw its shares rose last Wednesday when it announced a plan to create an yield co for those projects.

Other energy companies that have created yield cos include NRG Energy and SunEdison. NRG’s yield co includes fossil fuel and solar power generation. SunEdison’s executives said earlier this year that they plan to keep more of the projects they built and create yield cos with them rather than selling those projects. Its chief financial officer, Brian Weubbels, told analysts then that keeping certain projects could create 2.5 times more values than selling them.

First Solar CEO, Jim Hughes, told analysts during the earnings call Tuesday said the company is studying the yield co structure and the market reception to the ones already created. But he and other company executives don’t “feel compelled to make an imminent decision” on whether to pursue one.

“We have been pretty good at monetizing our assets efficiently,” Hughes said. “We haven’t left a lot of money or value on the table.”

Arizona-based First Solar prefers to sell the projects it’s developed and built, and it also goes after contracts to operate and maintain those solar power plants for their owners. The company most recently completed a 290-megawatt project, called Agua Caliente, in Arizona for NRG and Mid-American Solar.

Figuring out ways to lower the cost of securing funds to build projects has been a big challenge for solar companies. The rise of the solar energy market is a fairly recent phenomenon, so banks and other investors have assigned higher risks to solar power projects than they do to fossil fuel power or wind energy projects. That in turn makes borrowing money more expensive for solar project developers.

SolarCity has sought to raise money more cheaply by selling notes backed by the rooftop solar energy systems that it installs and leases to business and home owners. The leases are really long-term power sales contracts of 15-20 years, and the company is counting on low default rates among its customers. The California company was the first to securitize rooftop solar assets, which it completed last November.

First Solar reported $950.2 million in sales during the first quarter of this year, up 26% from $755.2 million from a year ago. It posted $112 million in net income, or $1.10 per share, for the first quarter, compared with $59.1 million, or $0.66 per share, from the first quarter of 2013.

First Solar executives said Tuesday they will no longer disclose their production cost, in cents per watt. I’m rather sorry to hear that. For many years, the company was way ahead of its competitors in producing solar panels far more cheaply. It excels at building big factories and running its production process efficiently to cut costs. Its quarterly reporting of its production cost provided a target for its competitors.

But that advantage began to erode a few years ago when its major rivals, mostly manufacturers from China, built massive factories to drive down costs. Those rivals have been found to price their panels at below fair market values, prompting the federal government to impose tariffs on them.

Solar panels from China are commonly made with silicon and can convert a greater percentage of sunlight into electricity. So First Solar had to play catch-up to boost the conversion efficiency of its solar panels, which use cadmium-telluride. A year ago, company executives declared their intent to focus heavily on improving their technology and halt plans to build factories.

 
 

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