Why First Solar and SunPower Had to Form 8point3

First Solar is contributing its 100% ownership of its 20-megawatt Maryland Solar project that has about 18 years remaining in a deal with First Energy Solutions. Three California plants that generate 242-megawatts and in which First Solar will own a 49% stake at the time of the IPO are also included. Existing sales agreements on the California plants range from 20.0 to 28.7 years.

Yieldcos like 8point3 are essentially master limited partnerships (MLPs) that own renewable energy generating assets and operations. They also own the revenue streams from power-purchase and other “offtake” agreements generated by those assets.

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SunPower is contributing 170-megawatts of generation capacity in which it currently owns 100% of all five projects. The company expects to enter into tax equity agreements on each of the projects prior to the IPO. Among SunPower’s contributed assets is a portfolio of residential generation totaling 39-megawatts and including approximately 5,900 homeowners. The length of the remaining sales agreements for these plants is 20 to 25 years and the weighted average length of time remaining on the household capacity is 17.5 years.

All the assets of 8point3 will be in the United States, and 87% are utility scale projects. The new company will have right of first offer (ROFO) on four First Solar projects and two SunPower projects currently under construction and comprising more than 750 megawatts. 8point3 also has first refusal rights on three SunPower projects still in development totaling 199 megawatts.

For SunPower and First Solar, 8point3 offers liquidity to pay off debt from building solar plants or to use as financing for the next project. Other benefits include lower cost of capital and the ability to pay a dividend to shareholders.

For investors, yieldcos offer a low-risk return from a predictable cash flow based on long-term contracted utility rates. Because shareholders are limited partners, the distributions are treated like cash distributions from pipeline MLPs and taxed at the shareholder level only, not at the corporate level.

Another U.S. solar maker, SunEdison Corp. (NYSE: SUNE) created its own yieldco, TerraForm Power Inc. (NASDAQ: TERP) in July of last year and raised about $500 million in the IPO.

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The day that First Solar and SunPower announced their advanced discussions, the stocks of both companies spiked about 18% and have held onto that gain for the most part. Since February 24, First Solar had gained more than 20% through Monday’s close and SunPower had gained nearly 16%. If the two had failed to agree on a yieldco IPO, chances are good that the stock price bump would have evaporated.

Neither the number of shares nor the price has been determined for the IPO. Joint bookrunners are Goldman Sachs and Citigroup. 8point3 will apply for a listing on the Nasdaq Global Market.

Still, investors are not thrilled with Tuesday’s announcement and pushed First Solar’s shares down about 2.0% and SunPower’s down by about 2.8% in morning trading.