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First Solar, Inc. (NASDAQ:FSLR)

Q2 2013 Earnings Conference Call

August 6, 2013 4:30 p.m. ET

Executives

David Brady - Vice President of Treasury and Investor Relations

James Hughes - Chief Executive Officer

Mark Widmar - Chief Financial Officer

Analysts

Brandon Heiken - Credit Suisse

Brian Lee – Goldman Sachs & Co.

Sanjay Shrestha – Lazard Capital Markets

Vishal Shah – Deutsche Bank Securities

Shahriar Pourreza - Citigroup

Stephen Chin - UBS

Andrew Hughes – Bank of America Merrill Lynch

Dan Ries – Maxim Group

Jagadish Iyer - Piper Jaffray

Paul Coster - JPMorgan

Colin Rusch – Northland Capital Markets

Operator

Good afternoon everyone and welcome to the First Solar’s second quarter 2013 earnings call. This call is being webcast live on the Investors' section of First Solar's website at firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded. I would now like to turn the call over to David Brady, Vice President of Treasury and Investor Relations for First Solar. Mr. Brady, you may begin.

David Brady

Good afternoon, everyone, and thank you for joining us. Today the company issued a press release announcing its financial results for the second quarter. A copy of the press release and the presentation are available on the Investors' section of First Solar's website at firstsolar.com.

With me today are Jim Hughes, Chief Executive Officer, and Mark Widmar, Chief Financial Officer. Jim will provide an update on significant business and technology development and then Mark will discuss the second quarter results and provide updated guidance for 2013. We will then open up the call for questions. Most of the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles, in the few cases where we report non-GAAP measures, we have provided the reconciliation to GAAP equivalent at the back of our presentation.

Please note that during the course of this call, the company will make projections and other comments that are forward-looking statements within the meaning of the federal securities laws. The forward-looking statements in this call are based on current information and expectations and are subject to uncertainties and changes in circumstances, and do not constitute guarantees of future performance. Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call or with respect to the announcements described herein.

It is now my pleasure to introduce Jim Hughes, Chief Executive Officer. Jim?

James Hughes

Thanks David. Good afternoon and thanks for joining us for our second quarter 2013 earnings call. Today, we announced the new technology and commercial collaboration agreement with General Electric, with the intent to advance cadmium-telluride thin-film solar cells and modules. Under the agreement, we acquire all of GE’s cadmium-telluride solar intellectual property and they receive 1.75 million shares of our Solar stock, making GE one of our top end shareholders. GE currently holds the efficiency record for a 10-cell research cell at 19.6%, which eclipsed the recent First Solar cell record at 18.7%. GE high efficiency cells employ technologies which are quite distinct from those being developed at First Solar and yet are consistent with our manufacturing platform. This is why we are excited to purchase their IP in this transaction.

GE has over 450 issued patents and pending applications on their 10-cell technology which effectively doubles our patent position. The combination of the company’s complementary technologies and First Solar’s existing manufacturing capabilities are expected to accelerate the development of test cells over module performance and create significant improvements in efficiency at full manufacturing scale. GE Global Research and First Solar research and development will also collaborate on future technology development to further advance cadmium-telluride solar technology.

This transaction builds upon our existing commercial relationship on solar inverter technology. GE will provide us with a new GE pro solar 4MW 1500 volt inverter optimized for large utility scale systems. In addition, First Solar will continue to purchase advanced inverters from GE Energy Management for use in First Solar’s global solar deployments. By combining complementary technologies, the collaboration is expected to lead to an improvement in solar grid integration, more competitive cost structures and create a roadmap for combined electrical equipment.

GE, which has 34GW of renewable energy installed globally, will also enhance its presence in Solar by buying GE branded modules from First Solar at agreed upon pricing for future global GE deployments, in addition to its investment in inverters, controls, balance of plan and ownership of utility scale systems. As a result, GE will discontinue the build-out of its Aurora, Colorado solar manufacturing facility.

In summary, having a company of GE’s stature invest and partner with us is a tremendous validation that cad-tell solar technology and First Solar’s manufacturing expertise and we are excited about the potential benefits this will mean for the future development of our technology and the prospects for our business.

Moving to Slide 5, Mark will walk you through the improvements in our efficiency and cost per watt later, but I wanted to mention some significant, tangible improvements we are already seeing in our own Cad-Tell technology. We are pleased to announce that our Series 3 Black Module is the first thin-film module in the world to pass two of the most difficult and strenuous independent tests with module durability and reliability, the Thresher test and the even more harsh long term sequential tests, both evaluated by TUV Rheinland.

The traditional IEC solar module standardized test using the accelerated life testing to evaluate a module’s ability to safely withstand the harshest of weather conditions over a period of time, while ensuring a basic acceptable level of performance. The Thresher and long-term sequential tests extend that period of time and the accelerated life test stress factors by two to four times the basic IEC test to identify those modules with truly differentiated long-term reliability and performance. First Solar's success in these test places us among an exclusive list of only four other module manufacturers to demonstrate this market leading capability. It also emphasizes that while we continue to make significant investments in the redesign of our modules to increase efficiency and reduce cost, we don't sacrifice quality and performance in order to do so. Instead, we are creating a unique market offering that maximizes value while minimizing risk.

A key contributor to our efficiency roadmap this year is the introduction of a new back-contact technology onto the module. This technology is remarkable in more ways than just increasing efficiency. Also, where panels gradually reduce their power over their operational life time of 25 years or more in the form of long-term degradation. Our testing shows that modules produced with our Back Contact technology demonstrated significantly reduced degradation profile. This means that the efficiency of the module degrades at a slower pace which increases the amount of energy produced by our modules over their life time, one of the primary drivers of solar project economics.

This reduces the [levelized] cost of electricity and increases demand for our projects in the market place. And while we are covering the subject of technology, a brief update on TetraSun. We are very pleased with the technology development to date with cell efficiencies and reliability assessments meeting our original expectations. The low cost profile of the product has been validated through our supply chain and is in line with our initial expectations. Given the progress to date, we have moved into the planning stage for our first cell manufacturing line and expect to have product and line qualification in the second half of 2014, with initial shipments commencing at that time.

Given our recent follow on equity offerings, we have ample capital available to invest in these exciting new products and we will detail the capital requirements on the next earnings call. We believe that the combination of the two technologies will allow us to cover the full spectrum of the solar photovoltaic market, both the utility scale and distributed generation segments.

Now turning to our book-to-bill performance. Slide six shows the total outstanding bookings in gigawatts and the change in those bookings that occurred year-to-date. This data represents our total business which includes a relatively small percentage of third party module sales in addition to our advanced systems project pipeline. Total outstanding bookings fell from 2.6 gigawatt to 2.2 gigawatt year-to-date. Although our shipments at the end of the second quarter were higher than our new bookings, we have several large long cycle project sales in process that we expect to get across the finish line by the end of the year and cumulatively we are pursuing 1.3 gigawatts of potential bookings in the next six months.

We still achieve at least a 1:1 book-to-bill ratio for 2013. Since our first quarter earnings call we have closed an additional 198 megawatts of bookings year-to-date, including the three PNM projects that we won recently. We announced an agreement with the public service company of New Mexico to provide our EPC services and modules to construct three solar power plants totaling 23 megawatts AC. These new projects are in addition to five plants completed in 2011 and an additional 22 megawatts of solar PV to be completed this year, all totaling 67 megawatts AC that first solar has contracted or is expected to construct with PNM by the end of 2014.

The balance of the bookings are primarily module only shipments to Europe and to GE as part of the transaction that we announced earlier. We also announced last quarter that construction of the Phase 1 demonstration plant in Ordos was planned to commence in the third quarter of this year, but that has been delayed till further notice pending receipt of regulatory approvals. On slide seven, outstanding bookings fell $400 million from the first quarter, but as said earlier, we still expect to achieve at least a 1:1 book-to-bill ratio for the year, based on shipment volumes and project sales currently in progress.

In addition, we have 8 gigawatts in near-term opportunities which is an increase until market activity of 2.5 gigawatts in just three months. This is discussed in detail on slide eight. The purpose of the metric on slide eight is to provide a useful indicator of the overall level of activity that we are seeing in the market place, which remains strong. Today we announced that we purchased a 1.5 gigawatt portfolio of U.S. and Mexico assets in various stages of development from Element Power. Strategic interconnection and land positions facilitate accelerated competitive positioning in several emerging U.S. markets such as Georgia and North Carolina, Texas, Colorado and Illinois. And optimized our pipeline in established markets such as California and Nevada.

The portfolio includes projects with secured site options and interconnect queue positions and are at various stages of environmental screening and permitting. The Mexico project pipeline also strategically positions First Solar for our entry into that market. We are excited by the opportunity to explore new relationships with commercial and industrial customers there and to establish a strong initial presence in the region. The purchase of Element is also an example of the use of proceeds for pipeline acquisitions which we indicated in connection with the recent equity offering.

We continue to see similar opportunities in sustainable markets around the world including Japan, Europe and India.

Including the Element transaction, our total number of potential bookings has increased to 8 gigawatts. You can see the breakdown on Slide 8 based on each perspective booking’s current stage of completion. This also includes approximately 1 gigawatt of module only sales. We have close to 1.5 gigawatts of mid and late stage deals with a moderate to high probability of success. The largest portion, about 6.6 gigawatts is early stage, which means that the majority of these projects will have a development cycle of 12 to 24 months and consists primarily of our own captive project assets. This reflects the fact that we have lower demand requirements in the short term and that we are focusing on replenishing our pipeline primarily in 2014 and beyond. We believe that the ratio of mid to late deals, early stage opportunities as a healthy proportional distribution.

Slide nine, shows the breakdown of demand by geography, with a large increasing portion of it continuing to come from North America, but a significant portion from the new sustainable market that we’re targeting. Our opportunity set outside of the U.S. is now 4.1 gigawatts and represents 51% of the total. The total also includes 853 megawatts of potential bookings in Southern Africa, a significant increase on the prior quarter. This is perhaps the best illustration to-date into progress that we're making in creating demand in sustainable markets and gives us confidence in our ability to replenish our pipeline going out to 2016 and beyond.

Now, I'll turn it over to Mark who will provide detail on our Q2 financial results and then update to our 2013 full year guidance.

Mark Widmar

Thanks Jim and good afternoon. Turning to slide 11, I would like to begin by highlighting second quarter operational performance. Production in the quarter was 389 megawatt DC, up 5% both on a sequential basis and on year-on-year comparison. But comparing production year-over-year, including the German manufacturing volume in the second quarter 2012, production in Q2 2013 was up 23%, based on improved module efficiency and utilization on the same number of production months. On a sequential basis, the increase in production volumes is reflective of the commencement of re-ramping production lines that have undergone planned equipment upgrades, which when completed is expected to enable the achievement of near term targets on our module cost and efficiency improvement roadmaps.

In the second quarter, we ran our factories at approximately 75% capacity utilization, flat to the prior quarter and up 12 percentage points compared to the second quarter of 2012. Our module manufacturing cost per watt for the second quarter fell to $0.67. On a comparable basis, cost per watt decrease $0.02 quarter-over-quarter or approximately 3% and is reflective of higher throughput, increased module efficiency and lower core manufacturing costs. Excluding the impact of un-utilization, our core manufacturing cost per watt fell to $0.63, a $0.01 improvement compared to the prior quarter.

During Q2, our best plant manufacturing cost at full utilization remained at $0.62 per watt. As reflective of the fact that this lead line (tail end) has yet to receive the line upgrades that are currently being rolled out. When the upgrades are completed though, we anticipate the lead line module cost to be approximately $0.57 per watt. This assumes our current module manufacturing costs that are (tail end) lead line with 14% efficiency.

Conversion efficiency for the quarter increased to 13% and is expected to make an increasing rate improvement over the next four quarters as the impact of our current line upgrades will allow through the entire production fleet. As mentioned on our first quarter earnings call, and during the Analyst Day, we're in the midst of rolling our two major efficiency improvement programs. The first was commenced in Q1 and is expected to be completed this month. And the second program commencing now, which Jim referenced drastically improves back-concept performance and resulting module efficiency, is expected to be completed by the first half of 2014. Effective in August, the impact of the first program has moved our current best line efficiency of 13.3% to the fleet average efficiency.

In Q3, we expect to complete the install and qualification of our first high volume tool on our lead line which will enable our new improved back-contact manufacturing process, which is expected to increase our lead line efficiency to approximately 14% by yearend.

Now moving to the P&L portion of the presentation on Slide 12. Second quarter net sales were $520 million compared to $755 million in the prior quarter. The sequential decrease in net sales is primarily attributed to lower systems business project revenue as well as lower module only volumes to third parties. As Q1 benefitted from the sale recognition of 128 megawatt AC of module volumes used in the construction of largest thin film PV power plant in Europe.

The sequentially lower project revenue is primarily attributed to lower revenue recognition at AVSR and Imperial Valley. Regarding the AVSR, activity at the project trended lower during the second quarter due to delayed approvals in the local county related to materials used for our tracker technology. The Imperial Valley project was sequentially lower as the project is nearing completion. Comparing the second quarter of 2012, the decrease in net sales was primarily attributed to lower systems business project revenue as initial revenue recognition for AVSR and the sale of Silver State North were both achieved in the second quarter of 2012, partially offset by higher sales volume to third party module only customers in the second quarter of 2013.

Also as stated in the earnings press release today, the sale of the ABW project is now expected to occur in the second half of the year. As a percent of total net sales, our solar power systems revenue which includes both our EPC revenue and solar modules used in systems projects, increased from 74% of total sales in the prior quarter to 84% of sales in the second quarter. The sequential mix shift in product sales was primarily driven by lower module only sales in Q2 as Q1 benefited from the large European projects previously mentioned.

Gross margin in the second quarter was 27%, up from 22.4% in the prior quarter. The sequential gross margin increase is primarily attributable to variable systems project mix, lower module only sales and lower manufacturing cost per watt. Second quarter operating expenses, including restructuring and start up, decreased $7 million quarter-over-quarter to $101 million, and is reflective of labor savings related to our previously announced restructuring activities, partially offset by higher R&D spending, primarily associated with TetraSun and legal and transaction related expenses.

As disclosed on our prior Q1 earnings call, during the second quarter we instituted a reduction in force, which is expected to result in annual labor savings of approximately $30 million, split evenly between cost of sales and selling, general and administrative expenses. These actions are consistent with our stated strategy to focus on lower, general and administrative expenses in order to prioritize and internally fund R&D in sales and marketing activities to facilitate market enabling growth. On a reported basis, second quarter operating income was $39 million compared to operating income of $61 million in the first quarter. The decrease is primarily reflective of lower revenue recognition for our systems business and lower module only sales to third-party customers, partially offset by higher gross margin and lower operating expenses.

Moving to restructuring. Second quarter operating income was $42 million compared to $64 million in the prior quarter. Second quarter GAAP net income was $34 million or $0.37 per fully diluted share, including $0.02 of restructuring charges compared to $0.66 per fully diluted share in the first quarter and $1.27 in the second quarter of 2012. The year-over-year decline is attributed to lower systems business project revenue, partially offset by higher sales volumes to third party module only customers in the second quarter of 2013. Excluding the restructuring charge of $0.02, our Q2 non-GAAP earnings per fully diluted share was $0.39.

Now turning to slide 13. I'll review the balance sheet and cash flow summary. Cash and marketable securities increased by approximately $273 million to $1.3 billion. The increase was driven primarily by net proceeds received from our recent equity offering in June and cash received from customers from the continued build out of our captive advanced stage systems projects and module sales, partially offset by a $306 million reduction in outstanding debt which we paid down during the quarter.

With these balance sheet strengthening actions, our industry leading net cash position increased by approximately $579 million to a total of just over $1 billion in net cash. As we stated at the analyst day, we continue to see projects fail or offered to us because developers have difficulty either finding investors or attracting financing due to the insolvency and execution risk associated with other EPC and module providers. Having the leading fortress balance sheet in the industry is a key and increasingly significant competitive advantage as it ensures customers and investors have a truly bankable long-term partner that stands as the industry's strongest, fully integrated PV solution provider.

Accounts receivable trade balance decreased by approximately $86 million quarter-over-quarter to $193 million and is due primarily to the collection from higher module sales in Q1 and continued collections related to several of our systems projects. Unbilled account receivable balance decreased by $20 million, primarily due to decreases in unbilled balances for AVSR, Topaz and Imperial Valley, partially offset by an increase in Agua Caliente retainage, which is expected to be collected over the next few quarters.

Inventories, including balance of system parts decreased $62 million sequentially due to greater insulation of modules in systems business. Project assets decreased $19 million, primarily due to the sale of Campo Verde project to Southern Company, which was partially offset by an increase related to project acquisitions, including the North Star project and due to the increase in construction activity on a portfolio of unsold systems project.

Deferred project cost increased by $391 million, principally due to the sale of commensurate construction activity over at the Campo Verde project and also due to the continued ramp up of construction of on Desert Sunlight. To date, we have not recognized any revenue for Desert Sunlight. However, as disclosed during our Analyst Day event, we currently expect revenue recognition criteria under GAAP to initially be met in 2013 and to begin recognizing revenue for Desert Sunlight project in the second half of 2013 through the 2014 time period.

Non-current retainage increased by $49 million versus the prior quarter of $238 million and was driven primarily by increases in the Desert Sunlight and Topaz projects. Such retainage amounts relate to construction work already performed.

Quarter-over-quarter total debt decreased to $256 million, a sequential decline of approximately $306 million. Operating cash flow for the second quarter was $222 million compared to $66 million in the first quarter. Free cash flow was a $168 million compared to $20 million at the prior quarter.

Capital expenditures totaled approximately $85 million for the quarter and were primarily related to production upgrades which are expected to increase module efficiency and throughput. Depreciation for the quarter was flat compared to the last quarter at $58 million.

Now I’ll provide an update on the full year 2013 guidance outlook. Turning to Slide 14, with the exception of a slight change in mix between shipping volume for module only versus system project volume, the fundamental underlying assumptions in our 2013 guidance remain intact. The production plan, including expected improvements in module efficiency and cost targets, the total shipments volume and Desert Sunlight revenue recognition assumption, all remained unchanged. Regarding the Desert Sunlight project, we anticipate achieving revenue recognition criteria on our GAAP in the second half of this year. The total amount expected to be recognized will be approximately one third of the total project volume.

Turning to the next slide, beyond the underlying assumptions just mentioned, we are updating and narrowing some of the key guidance ranges based on our latest assessment of the business. Beginning with net sales, we have decided to delay the project sales for both Solar Gen and Macho Spring projects, as we expect to be able to capture incremental project economic by holding these projects through construction and then sell them at or after construction is completed. Note, this decision to be patient in order to maximize projects economics, is consistent with previous communications, and is one of the reasons we stated for the use of proceeds in the June equity offering. As a result, we are adjusting full year of 2013 revenue guidance from the previous range of $3.8 billion to $4 billion to a new range of $3.6 billion to $3.8 billion.

Regarding gross margin on a percentage basis, the expected range increase due to improved expected mix remaining positive in the forecast, including expected improvement at the Imperial Valley, Campo Verde and ABW, partially offset steadiness as incremental costs and expect the construction delays associated with AVSR.

Next, we have increased our operating expense ratings by $10 million to account for higher expected R&D expenses, including amortization associated with the acquired IP related to the joint technology cooperation agreement with GE and higher project development expenses associated with our Element Project portfolio acquisition. Our new range is $390 million to $410 million versus the prior range of $380 million to $400 million.

The operating income range is being updated to a new range of $405 million to $435 million, down from the prior range of $430 million to $460 million. The change is reflective of the change in timing of the Macho Spring and Solar Gen projects, the incremental costs due to delays experienced at AVSR, higher operating expenses, all partially offset by expected improved project economics at Campo Verde, Imperial Valley and ABW.

The expected tax range is moving up to a range of 15% to 17% versus the previous range of 12% to 14%, and is due to a change in jurisdictional project economics with more taxable income coming from the U.S. and stems primarily from a higher portion of module shipments to Desert Sunlight from our U.S. manufacturing facility. The increase in expected tax rate is partially offset by year-to-date interest income which is expected to continue to positively impact net income as we do not expect to draw on our revolver and our marketable securities balance remains high throughout the year.

Based on these changes and excluding the impact to the equity offering and the shares issued to GE, our new earnings per share guidance is $3.75 to $4.25 per share versus the previous range $4 to $4.50 per share with the midpoint down $0.25 versus prior guidance. Expected operating cash flow, capital expenditures and working capital ranges all remain unchanged to prior guidance. Moving to the right, the next two columns in the slide show the per share impact of the recently completed equity offering and the shares issued to GE and the connection with the IP acquisition.

Please note as a result of the quarterly fiscal period having materially different amount of shares outstanding, the expected annual earnings per share range will not equal the sum of each standalone quarterly earnings per share amount. Going forward we will guide based on the new fully diluted share count estimates as reflected, post the impact of the June equity offering and the shares issuance to GE. The full year earnings per share guidance including the impact of the recently issued shares is $3.50 to $4 per share.

Now a comment on Q3. Specific to the third quarter, there are a number of items which could have a material impact on the quarter. These items include the initial revenue recognition on Desert Sunlight, the completion and revenue recognition of Campo Verde, and potential AVSR project delays pending the required county approvals to complete Phase 3 of the project. It is important to note though, these items are essentially all timing issues. However, if we do not achieve revenue recognition on Desert Sunlight and/or Campo Verde in Q3, and we experience further delays in the build out of AVSR, then sequentially we could see a material decline in Q3 earnings. If these delays were to occur, we could see a materially higher fourth quarter [of] the year. Net-net though, no impact on the full year.

Now, moving to slide 16. I would like to summarize the quarter. Q2 was a solid quarter and the sale of ABW is expected to occur in the second half of 2013 with improved economics. As Jim and I have highlighted, we continue to show progress on many fronts including a growing opportunity set, advancement of our technology competitiveness, and the execution of our operating plan. We continue to strengthen our balance sheet and resulting bankability with the intent of developing a well-balanced foundation that ensures our customers have a reliable long-term solar PV solution provider. We remain on track for the year, maintaining our focus on execution of our roadmap and strategic imperatives outlined during the April Analyst day event.

With this, we have concluded our prepared remarks and we'll open up the call for our questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Patrick Jobin with Credit Suisse.

Brandon Heiken - Credit Suisse

This is Brandon Heiken speaking on behalf of Patrick Jobin. Thanks for taking my question guys. I was wondering if you could quantify each of the different factors that are contributing to the changing guidance, specifically how much do you think of pricing benefit. Do you expect from holding some of these projects to completion and the other contributions as well, please?

Mark Widmar

So the impact on Macho and Solar Gen holding those assets through COD is now reflected obviously in the current year. It’s had an adverse impact on the current year because we pushed the revenue and the associated earnings out into 2014. But what I would say is that if you look at ABW, if you try and understand the impact of selling down a notice to proceed versus DOD, I mean ABW I think is a great example of where we have been able to achieve upsized economics by being patient in actually selling an asset that's up and operational.

When you look to the impact to the change in guidance on operating income, we came down about $25 million. $10 million of that is the associated impact of the two acquisitions. So we have incremental R&D expenses for Apollo, as well as incremental costs associated with the Element acquisition. So that's $10 million. The $15 million of it was the net impact of movement out of Solar Gen’s Macho, offsetting by improved economics on a handful of projects, but cost pressures that we’re experiencing on AVSR.

Operator

We'll move next to Brian Lee with Goldman Sachs.

Brian Lee – Goldman Sachs & Co.

So I guess on the two projects that you are holding to a completion, can you quantify the specific impact that it had to lowering the 2013 EPS outlook. And is it fair to assume these projects are now going to be fully recognized in 2014? And if so, what's the incremental EPS benefit for the delayed sale?

Mark Widmar

So they will all -- they both will be recognized in 2014. So it is just moving on, '13 into '14, so no issue from that standpoint. We are not qualifying the exact impact of movement of those projects out of the year. However as I indicated, the aggregate impact of a number of movement of projects, whether it's the impact of Solar Gen and Macho moving out, plus the incremental AVSR costs that we’re occurring because of delays in that project, offsetted by the improved economics on ABW, improved cost performance on Campo, improved performance on Imperial valley. All that nets the $15 million. So I’m not going to give you each of the pieces that add up to the $15 million, but net-net, you lost $200 million of revenue that fell out of the year, when you incorporate the whole mix of the portfolio items that I just referenced to you, changed our number by about $15 million.

Operator

And Sanjay Shrestha with Lazard Capital Markets has our next question.

Sanjay Shrestha – Lazard Capital Markets

Two part question, real quick, first on this module supply agreement with GE. Wondering if you guys can actually give any more color on that as to if there is any firm commitment of volume or timing and things along those lines. And two, on the Element Power, can you give us a sense of the stage of that 1.5 gigawatt pipeline that's you guys brought and how much of that is actually something that could contribute to P&L in 2014? Thank you.

James Hughes

With respect to the GE transaction, there is a specific commitment, purchase obligation and then there is a larger commitment that has agreed pricing and extends over extended period of years. I don't think we have detailed in the press release the exact numbers. If so we'll get back to you with them. I don't want to get into more detail than we’ve put out in the press release. But it does involves the specific commitment and we contemplate that we will see near term benefit from access to the GE sales force, particularly on high grid installations of both wind and thermal assets where they believe they have the ability to market photovoltaic asset alongside. And then, the second half of the question, Element. On the Element transaction, it's a mix of early, mid and late stage projects. But there are indeed some opportunities that are far enough along that we believe they would be a contributor in 2014.

Operator

We will hear now from Vishal Shah with Deutsche Bank.

Vishal Shah – Deutsche Bank Securities

On the Element transaction, given that you haven’t disclosed the amount, I’m assuming it’s not a big number. Curious to understand what the current rate of project sales would be in terms of the acquisition cost of new assets. Are we still looking in the $0.10, $0.15 range? That was the number that some of the other transactions were happening. And then on the GE transaction, I’m wondering what targets you have now that you’ve acquired this technology. Do you plan to update your long-term cost and efficiency targets? And the $35 million transaction, wondering what that would mean in terms of your R&D roadmap going forward. Thank you.

James Hughes

Let me start with the second question. In terms of cost and technology roadmap, we certainly expect over time to update that roadmap once we have an opportunity to fully determine how we best integrate their technology into our roadmap, determine the proper sequencing in terms of upgrading of equipment and what it means in terms of our profits as that will take time. I would guess that you could probably look towards next year's Analyst Day as the time at which we would be able to provide specifics around what we think the results of the acquisition will be. But based on the transaction and based on the value that we attributed to it upon a belief that there will be specific intangible improvements both in terms of timing and in terms of absolute outcome of the technology road map.

So, we in fact do believe that it is additive in that regard. On the Element transaction, the $0.10 to $0.15, that tends to be the kind of value you see paid for fully mature opportunities that include a PPA. Most of the Element transaction is strategic site positions and the interconnect positions and does not include a PPA. We see values in portfolio acquisitions all over the map depending upon exactly how strategic the positions are, and I think it's very difficult to generalize and we haven’t provided the specific number on this transaction.

Mark Widmar

The one other thing I would just comment, just about -- and we have referenced this before, when you think about the benefit of the efficiency gains that you can capture, and we have highlighted this before, about 100 basis points benefit across the module and across the BOS on an installed system base is somewhere around $0.08 to $0.10. So when you think about it's a capability that we now have with leveraging the knowledge in the IP that we've acquired. If we can capture even a small percentage of that 100 basis points, that's incremental. When you take that across $0.08 to $0.10 a watt and 2 to 3 gigawatts of production capability install, is major, it's very significant. So that's the way you need to think that and keep it in perspective around relative the acquisition price.

James Hughes

Yeah. We certainly believe that at our current production rate, any sort of meaningful increase in the overall efficiency acceleration of the timetable would have a very short payback period as a result of that leverage that Mark refers to.

Operator

And we will move on to Shahriar Pourreza with Citi.

Shahriar Pourreza - Citigroup

Just one question, obviously, with you potentially holding some of the assets, I'm sort of wondering whether the equity offering to some of the proceeds could be used to contract, build, develop and own the assets and potentially doing some sort of a YieldCo transaction. Is that something that you're seeing potentially with like Macho Springs and additional assets?

James Hughes

We've clearly indicated in discussing the equity offering and on prior conference calls that we are watching in the marketplace the outcome of the various efforts to create YieldCos with respect to renewable assets. We think it's going to be a meaningful capital structure for the industry going forward and we are actively evaluating how we should participate. Whether we should view them as customers that could pay higher value or whether we should have a captive vehicle. But as we retain assets in order to maximize the value of those assets upon monetization, clearly one of the alternatives that we will be evaluating as we move forward is a YieldCo.

No decision has been made, no specific effort. We're not specifically headed in that direction but we are looking hard at evaluating the results of the operations. The recent NRG transaction, there are other representative transactions in the market place. There are similar vehicles traded in the UK. All of that provides market data for us to look and compare that to what we think the financial results of monetizing our captive portfolio would be. It gives us a nice comparison. So, it's something we're actively considering but not something we're prepared to say we're definitively doing at this point.

Operator

We will go next to Stephen Chin with UBS.

Stephen Chin - UBS

Just a question on the cost per watt improvement. Jim, I was just wondering if you could talk about what kind of gains you are thinking can be achieved with the TetraSun technology and you can maybe elaborate on any other additional capabilities that you see could come from GE's cad-tell portfolio that could help drive this cost lower.

James Hughes

Well, the TetraSun portfolio, that is a basic high efficiency, low cost technology in and of itself. It primarily will deliver a benefit in the distributed or constrained space market. It will be at a higher cost per watt level than our cadmium-telluride technology, but will be at a much higher efficiency. So the benefit of that higher efficiency will be derived out of circumstances where you have a high balance of system costs, primarily constrained spaces such as rooftops or tight commercial and industrial locations.

We provided guidance as to some of the cost expectations at the Analyst Day. We have not updated that, but we have said here that our work to-date has validated those expectations. With respect to the Cad-Tell, we have an existing roadmap that's out there. GE has been working on the technology in parallel to us. We have been leapfrogging one another in terms of record sales, but we’ve been doing so with distinctly different approaches. When we chose to take a look at their technology, what we found much to our happiness was that the approaches they’re using are not inconsistent with ours. In other words, they can be additive to our roadmap and that's the reason for the acquisition. We have not committed to specific results in terms of how it affects the roadmap because that will require work in the laboratory. It will require integrating their technologies into our existing technology and we simply don’t have data yet. But we strongly believe that it will be additive, but we’re not prepared to quantify that at this time.

Operator

And we'll go next to Krish Shankar with Bank of America Merrill Lynch.

Andrew Hughes – Bank of America Merrill Lynch

This is Andrew Hughes for Krish. A quick question on the Element transaction, the portion of that pipeline that you’ve characterized as late stage, I’m wondering if that means those projects have PPAs. And then with the broader 8 gigawatt long term opportunity, just a little more color perhaps around what a moderate chance of conversion is on those mid-to-late stages and if all of the 1 gigawatts of module-only sales are included in that figure or spread between the mid and early? Thanks.

James Hughes

In terms of where the module-only sales fall between -- the spread between categories, I don't know that off the top of my head and I'm not sure that's the level of detail we'd be willing to provide. In terms of the rest of it, in terms of conversion rates, we've not provided a specific number in terms of conversion rate. But I would say that with respect to the mid and late-stage projects, we believe that those are all projects that have a significant -- a meaningful probability of coming into existence as they sail as opposed to merely a specifically identified opportunity.

Much of the early stage consists of specifically identified opportunity. They are a volume. They are a customer or captive opportunity. They have an identified market into which the electricity would be sold. But they may not have all of the elements that yet give rise to a meaningful probability. The things that we would characterize as mid to late stage are all projects that have sufficient elements in place, whether that's permitting, whether that's near-term off-take, whatever it may be that leads us to believe that there is a meaningful probability that those opportunities will be converted. So obviously it's a continuum. There is no one bright line. But that's how we would characterize those that fall under the early stage versus the mid to late stage.

Operator

Moving on to Daniel Ries with Maxim Group.

Dan Ries – Maxim Group

With your team out there discussing projects all over the world, do you have an estimate at this point for the size of the utility scale market in say 2016, perhaps both with and without China? And can you say what portion of that are you targeting? Are there areas where you are not targeting for one reason or another?

James Hughes

Sure. If you step out to 2016, when we look at all of the various estimates that are out there in terms of our own analysis of the market as well as research organizations and investment banks, you will see numbers that vary from probably mid-40s on the low end to 60 or 65 gigawatts from the high-end in terms of solar market. In the split of that market between utility scale and non-utility scale, you will see estimates that vary anywhere from something approaching 50:50 to something that looks more like 60:40 or 65:35. I'm not sure. I think directionally we feel like those are probably the midpoints and those are probably as good a proxy as we think.

One of the things I have said, that we continue to believe is the outcome in terms of total market size maybe heavily influenced by overall levels of economic activity. So, you could easily see a 10 or 15 gigawatts swing in the total market size based on different economic scenarios and the related commodity price impact of those scenarios. So, that those bands are less difference of opinion than probably the spectrum of outcomes that could happen.

In terms of how much of that is China, I don't know of the top of my head. I know that a lot of the recent additions to the domestic program that the Chinese have announced have not been factored into those estimates and I don't think we would have factored them fully into the estimates. So, there is probably upside to those numbers in terms of how much of it is China. I also think that one of the things we will see over time is, as utilities and markets, and people began to see the impact of capacity factor on grids, that people may revisit their estimation of distributed generation versus utility scale generation, given that you will have significantly higher capacity factors on the utility scale side. So for a given investment and for a given space within the dispatch order for solar to contribute to reducing the peak, you will get more total electricity out of facilities with a higher capacity factor and we think over time you may see that split revisited as that impact becomes clear to planners.

Operator

Next we will hear from Jagadish Iyer with Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Just a question on the GE situation. I just wanted to get an understanding of, would you foresee at some point of time using some kind of a GE process in your existing process, maybe two years out given that in your prepared remarks you did say that GE did certainly have a higher efficiency? And as a second part to that question, I was wondering whether, does GE have a back contact solution that you have described in your presentation, in today's earnings?

James Hughes

We won't be discussing any of the specifics of the technologies. But what we have intended by the statements that we made is, yes, we do anticipate sooner than two years that we will be incorporating some of the GE technologies into the product. Very specifically into the product and with that, that incorporating those technologies into the products will be additive to our current technology roadmap. So, that's specifically what we anticipate as a result of the acquisition.

Operator

And Paul Coster with JPMorgan has our next question.

Paul Coster - JPMorgan

It really is a combined question. First, the 8 gigawatt of opportunity you've now assembled, I think 1.5 came from the acquisition this quarter. But what was the rest by geography or by project type to the extent you can share that? And secondly, what is the net effect of this build in the both the pipeline and the timing shifts that you've described in terms of the shape of your revenue and earnings through 2015. Does it kind of smooth out there, anticipated in 2014 a bit?

James Hughes

I think it’s -- with respect to some of the larger acquisitions, it's probably still too early for us to be able to prognosticate what the timing looks like. We will take over the development and implementation of the assets or gain a greater sense of the timing once we do that. In terms of the shape and content, the information that we've provided in the presentation is the level of detail that we're willing to provide at this time. And historically we've not provided any further detail beyond that.

Operator

And our final question today will be from Colin Rusch with Northland Capital Markets.

Colin Rusch – Northland Capital Markets

You guys laid out an impressive R&D roadmap as you brought things into commercialization. Can you just give us an update on where you are at in context of what you had talked about at your Analyst Day in terms of implementing some of the newer technologies? In the presentation you’re identifying the peak line is flat quarter-over-quarter 14%. Just want to see where you’re at in terms of implementing some of the solutions?

Mark Widmar

We highlighted that a little bit in the release. So as Jim indicated we’re in the process of rolling out is the improved (back) content, the process across all of our lines. Once we implement that, it will drive our fleet efficiency up to 14%. So if you think about where we are right now on average, it's 13% as we exit Q2. When we sit at the four quarters from now, we'll have fleet average that at least will be at 14% potentially. It could be higher than that. So we are starting to see a step function improvement in terms of the efficiency benefit. Just as we began August, as we indicated as well in the script and some of the comments, we are now running a fleet average of 13.3%, which increased from 13% that that we ended as of June.

So we are at 13.3% now. We're on our way to 14%. So I would say we're progressing in line with all of our expectations and the commitments that we made in the Analyst Day around the roadmap. We feel confident with our capability to deliver against that. When you incorporate the learnings now that we'll capture from the IP from GE, we feel that we'll be able to accelerate that roadmap and potentially even take the destination above the 17% or so that we highlighted during the Analyst Day. So from a technology capability standpoint, I think very good about where we are and the opportunities that are in front of us.

Operator

And that is all the time we have for questions today. At this time that will conclude today's conference. And we thank you all for joining us.

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