When a sector’s reigning champs decide to join forces in a new venture, investors should take notice. In the world of solar stocks, that would be First Solar (FSLR) and SunPower (SPWR). The pair has already dominated utility-scale solar projects and panel production, but has decided to take it one step further. Both FSLR and SPWR have joined forces to form a YieldCo to take advantage of tax savings and cheap capital.
The venture — dubbed 8Point3 Energy (CAFD) — promises to be a doozy when it IPOs.
For investors, CAFD and the rest of the YieldCo’s are exactly the right way to profit from growing solar adoption in the utility space.
8Point3 Energy’s IPO
A few years ago, both FSLR and SPWR made the switch from being producers of just solar panels to those that also own/operate/sell grid-sized solar projects. The utility-scale solar projects businesses at both firms continue to be a major source of growth and profits. But, there is a way to juice more returns out of these solar farms — spin them off as a YieldCo.
Similar to master limited partnerships (MLPs) and real estate investment trusts (REITs), YieldCo’s are designed to be pass-through entities, pushing much of their cash flows back to investors via high distributions. Basically, a utility places various existing power plants into new subsidiary and then sells a stake in that firm to the public.
The two-fold kicker is that the power projects are tied to long-term power purchase agreements that utilize deprecation tax accounting to reduce taxable income on those power plants.
Utilities are able to raise much-needed cash, and since they still own a majority stake in the YieldCo, they continue receiving income from spun-off power plants. The YieldCo is able to use its excess stable revenue to buy additional plants from its parent company, and investors get a steadily increasing dividend stream.
It’s a win-win-win.
FSLR and SPWR’s 8Point3 Energy will operate under a similar plan, with both firms contributing projects to the new YieldCo. All in all, CAFD will initially hold 432 megawatts worth of solar farms, including several leases from SunPower’s growing residential portfolio and the project owned by the University of California. However, the bulk of the new firm’s holdings will be leased to major utilities under 20+ year agreements.
The unique thing about 8Point3 Energy is that the YieldCo will be 100% focused on solar energy. Several of the other publicly-traded YieldCo’s own a variety of renewable assets, and in the case of NRG Yield (NYLD), own some fossil fuel assets. 8Point3 Energy will also have first dibs on more than 1,400 MW worth of projects in planning/construction stages at both SPWR and FSLR.
Should You Snag 8Point3 Energy?
Given just how big and successful both FSLR and SPWR have been in the utility-sized solar space, their joint YieldCo could be one of the biggest and best around, especially when it comes to dividend growth, which is exactly why you’d buy a YieldCo in the first place.
CAFD’s initial assets will provide some decent cash flows. 8Point3 Energy expects to initially pay a minimum of 21 cents. However, the sheer breadth of future projects — 1,400 MW is quite a bit — that could potentially be dropped into the structure should continually boost that payout down the line.
Those payouts have already started to rise in other marquee YieldCo’s, and CAFD will be as marquee as they come.
Post a stock split, NYLD recently increased its dividend by 2.6%, while SunEdison’s (SUNE) TerraForm Power (TERP) latest payout of 32.5 cents is twice what it paid out in all of 2014. Given its asset drop-down potential and long-term agreements on existing solar farms, there’s no reason to believe that 8Point3 Energy won’t see similar dividend growth over its lifespan.
Since it hasn’t officially IPO’d yet, there’s no real way to gauge how expensive CAFD shares might be once they start trading. My guess is the IPO will do quite well. So, if you have access to the IPO, take it. If not, as long as 8Point3 Energy isn’t going for too much of a premium versus other YieldCo’s, it would make a great income play in your portfolio.
The Bottom Line
FSLR and SPWR’s joint YieldCo, 8Point3 Energy, has the potential to be a real money-maker for investors over the long term. Overall, it could be the best way to play the solar stock space.
As of this writing, Aaron Levitt is Long NYLD.
