Nov 9, 2016
Executives
Robert Okunski - SunPower Corp. Tom H.
Werner - SunPower Corp. Charles D.
Boynton - SunPower Corp. Howard Wenger - SunPower Corp.
Analysts
Tyler Charles Frank - Robert W. Baird & Co., Inc.
(Private Wealth Management) Brian Lee - Goldman Sachs & Co. Vishal Shah - Deutsche Bank Krish Sankar - Bank of America Merrill Lynch Colin Rusch - Oppenheimer & Co., Inc.
(Broker) Julien Dumoulin-Smith - UBS Securities LLC Pavel S. Molchanov - Raymond James & Associates, Inc.
Operator
Good afternoon and welcome to SunPower Corporation's Third Quarter 2016 Results Conference Call. Today's call is being recorded.
If you have any objections, please disconnect at this time. I would like to turn the call over to Mr.
Bob Okunski, Senior Director of Investor Relations, SunPower Corporation. Thank you, sir.
You may begin.
Robert Okunski - SunPower Corp.
Thank you, Yunez. I'd like to welcome everyone to our third quarter 2016 earnings conference call.
On the call today, we will start off with an operational review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our third quarter 2016 financial results. Tom will then discuss our updated outlook for Q4 and 2016.
As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's earnings press release, our 2015 10-K, and on our Quarterly Reports on Form 10-Q.
Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call on the Events & Presentations page of our Investor Relations website.
In the same location, we have also posted a supplemental datasheet detailing some of our historical metrics as well. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on slide 4.
Tom?
Tom H. Werner - SunPower Corp.
Thanks, Bob, and thank you for joining us today. I'll start by reviewing SunPower's solid third quarter results, provide an update on the market environment and lay out what we believe to be the key strategic drivers for the company.
Given difficult market conditions, earlier today, we announced the comprehensive cost reduction program designed to lower both our manufacturing and operational cost structures and deleverage our balance sheet, while maintaining ongoing investment in our industry-leading technology and product solutions. In my remarks today, I will outline these cost programs as well as update you on our partnership with Total, including details on a few current strategic initiatives.
First, let me cover our strong Q3 performance. In power plants, we achieved a number of significant development milestones and benefited from the sale of our minority interest in the Henrietta project 8point3.
On the product front, we launched our next-generation Oasis power plant solution that significantly lowers cost while improving overall system performance. Our DG businesses also performed well for the quarter, as a result of continued customer demand for our SunPower Equinox and Helix complete solutions.
We once more expanded our public sector footprint and added a number of new commercial customers. On the operations side, our team delivered excellent performance in our ITC fabs and our cost roadmaps remain on plan.
For P-Series, the volume ramp remains on track and costs are ahead of plan. We continue to see positive feedback from our customers regarding the competitiveness of this new product line.
I would now like to discuss current market conditions and highlight the key drivers for SunPower's long-term success. Please turn to slide 5.
As mentioned last quarter, we believe that long-term growth prospects remain very compelling with solar power widely expected to become the largest contributor to incremental electricity generation globally. For example, the International Energy Agency's recently updated 25-year forecast predicts solar power to be the number one new energy generation resource over this period.
We believe that our strategy is focused on developing differentiated technology and deployment across a diversified portfolio of markets, channels and applications will allow SunPower to profitably capitalize on this market opportunity. However, in the near-term the solar industry is experiencing a market dislocation that will impact our Q4 and 2017 financial performance.
Specifically, global panel ASPs have been depressed by the current mismatch between supply and demand with reported ASPs down approximately 25% in the third quarter as panel manufacturers liquidate excess inventory. We do not expect price reductions to continue at this pace, but we do believe that the panel price environment will remain very challenging into 2017.
In DG, residential demand remains solid particularly in the U.S where solar power is competitive with retail electricity rates in many states. However, as we entered the fourth quarter, we saw a moderation of demand growth in the U.S.
residential market versus historical rates, which will impact our Q4 residential performance. We anticipate continued steady future growth in the U.S.
residential market and expect to gain share with our high efficiency Equinox complete system solution. The commercial market remains fragmented and subject to policy implementing project dynamics that challenged our ability to deliver projects on time.
We have made adjustments in our commercial project, operating systems and have increased pipeline coverage so we expect better linearity next year. Over 70% of our forecasted 2017 volumes have already been awarded.
Finally, in power plants, we continue to see a challenging marketplace with PPA pricing under pressure, driven by aggressive competitive bidding and increasing prevalence of auction-based procurement mechanisms. We have decided to lower our 2017 forecast for this business and size our operating expenses commensurately.
Given the current industry disruption, we took a hard look at our business and have reaffirmed a set of key strategies that position the company for long-term profitable growth. Please turn to slide 6.
First, we remain committed to maintaining our upstream technology leadership and we'll continue to invest in next generation solar power solution. Second, we will size our investment in the power plant business to focus only on markets where we can add value through project development, primarily the Americas.
In other global power plant markets, we will sell our low cost P-Series panel and Oasis tracker products through our growing solar solution sales network. Third, we will reduce overall solar cell fab output to match profitable demand levels and continue to bias our product mix increasingly towards our industry leading X-Series product platform.
Fourth, we will expand our market cooperation with Total who remain deeply committed to SunPower as an increasingly core element of their business. Fifth, we'll focus the company on cash generation and profitable growth.
We believe that the strength of our balance sheet will be a key differentiator through this period of dislocation. Finally, we will continue to support the growth of 8point3 as both the buyer of our high quality projects, as well as the strategic investment asset.
Using these guidelines, we have decided to institute a number of cost reduction programs, the increased profitability and drive long-term market leadership. Please turn to slide 7 where I will discuss our initiatives in greater detail.
Following the current period of demand supply imbalance, we expect demand growth to return in 2017 or early 2018. As this happens, we would expect supply and demand to rebalance and panel prices to stabilize.
However, with the realignment of our power plant business, our plants increasingly leverage our P-Series products outside of core DG markets. We've made the decision to reduce our ITC capacity to match the level of profitable demand in our core markets.
We'll also size our operational expenses to a revenue plan that improves cash generation and profitability. Specifically, we plan to reduce our annual 2017 operating expenses to approximately $350 million, as well as improve our gross margin profile.
In addition to the balance sheet, we will implement a number of programs to reduce current inventory levels to improve working capital, increase of liquidity and delever our balance sheet. Given current market conditions, our focus over the next five quarters will be on maximizing cash flow.
We feel that cash flow and liquidity will be the best metric to evaluate our performance during the coming year and expect to generate positive cash flow from operations through the end of 2017 and exiting the year with approximately $300 million in cash. We will also accelerate our panel and BOS cost roadmaps over the next 18 months to lower system costs and improve profitability.
As I previously mentioned, Total remains very supportive, and we are expanding our strategic cooperation in a number of areas. Please turn to slide 8.
As announced today, we signed a four-year, up to 200-megawatt panel supply agreement with Total to solarize various facilities around the world. This agreement covers the supply of 150 megawatts of E-Series panels, with an option to purchase up to another 50 megawatts of P-Series panels, and includes prepayment in the amount of approximately $90 million.
Additionally, the companies are currently in discussions to expand their global power plant partnership to include potential Total project ownership opportunities in such markets as Japan, South Africa and France. We have also enhanced the joint R&D cooperation whereby Total will take an increased role in certain programs including residential smart energy.
In short, we are seeing increased traction with Total in the number of areas consistent with the recent formation of their new gas renewals and power division and their public commitment to better energy. Finally, I would like to provide a short update on the recent progress of our latest generation solar cell technology.
Please turn to slide 9. This chart shows the efficiency trend of solar cells manufactured in Fab 4, since April of this year, when we began high volume ramp of this facility.
During this period, our Fab 4 team has ramped production to full capacity, a run rate of approximately 375 megawatts per year, while simultaneously increasing peak and average cell performance. As you can see, the efficiency of our best production lines are now over 25%, with median cell efficiency at 24.7% and increasing steadily.
To put this into perspective, this is over 30% higher than the average industry cell efficiency. We believe that the ability of our R&D teams to continuously innovate and commercialize new industry-leading products is the foundation of our technology differentiation and the source of sustainable competitive advantage.
Please turn to slide 10. Before I conclude, I would like to announce, that Howard Wenger, our President of Business Units has decided to leave the company.
Howard has been a leader in the solar power industry for 30 years with the last ten years as a key member of our executive team. Howard will formally leave during the next six months.
And will continue to be an advisor to the company in the future. I and the company want to thank him for his tireless dedication and commitment for helping us change the way our world was powered.
In conclusion, we continue to see tremendous long-term opportunity for solar power and are proactively adjusting our near-term focus to position the company for success as we exit the current market dislocation. As a reminder, in an effort to enhance transparency related to this process, we plan to host a conference call on December 7, 2016, to update our investors on our progress, discuss details of our Board-approved restructuring plan and provide guidance for 2017.
With that, I would like to turn the call over to Chuck to review our financials. Chuck?
Charles D. Boynton - SunPower Corp.
Thanks, Tom, and good afternoon. I'll first review our third quarter results, then provide additional color on some of our key Q3 financial highlights before turning the call back to Tom for our updated 2016 guidance.
Please turn to slide 11. Q3 was a good quarter for the company, as we delivered solid results.
We generated approximately $148 million in EBITDA for the quarter with megawatts recognized up 67% sequentially. In addition, we continue to execute on our construction commitments, during the quarter, as we expect to deliver more than 350 megawatts of power plant projects in Q4.
Specifically on the P&L, our non-GAAP revenue was in line with our plan as the softness in residential was more than offset by strength in both our commercial and power plant segments. As you know, our power plant business is dependent on project timing and our Q3 performance benefited from the sale of our minority stake in the 102-megawatt Henrietta project 8point3.
In our commercial segment, non-GAAP revenue rose 30% due to strong execution as well as the early completion of certain projects. As Tom mentioned, we continue to see strong customer interest in our Helix product.
We expect our fourth quarter commercial segment to be impacted by timing of revenue recognition as certain booked projects are pushed into 2017. In the aggregate, 70% of our 2017 projected commercial projects have already been awarded.
Our global residential business performed well with Europe and Japan ahead of plan. Our non-GAAP gross margin for the quarter was 20% and ahead of plan.
Power plant margins improved significantly as we sold our Henrietta project. We expect power plant margins to decline in Q4 due to timing and the overall power plant market.
Commercial margins were in line with our forecasts, though down sequentially due to mix changes. Non-GAAP residential margin for the quarter was 20.6% with Europe and Japan above plan.
North American cash and loan sales were 68% of our shipments, while 32% release. We see a continuing trend of customers shifting from lease to cash or loans.
Cash or loan sales having better cash flow profile would generate less EBITDA due to NCI. Overall, we deployed 83 megawatts of residential products globally in line with our forecasts.
Lease bookings were 24 megawatts in Q3 with cumulative lease bookings of more than 325 megawatts in our HoldCo. Net contracted payments are approximately $1.2 billion excluding the residual value.
In addition, NCI for the quarter was $15 million. We remain confident that we will have sufficient tax equity capacity to meet our demand.
Third quarter non-GAAP OpEx was $98 million, down approximately 5% versus Q2. We expect OpEx to be approximately $95 million for the fourth quarter.
As Tom mentioned, we plan to reduce 2017 operating expenses to approximately $350 million. Our P-Series product is ramping on plan.
CapEx for the quarter was $56 million primarily for the completion of Fab 4, which produces our latest technology cell for X-Series. We expect a significant reduction in 2017 CapEx, as we complete Fab 4.
As expected, we exited the quarter with more than $380 million in cash, as we built projects for Q4 delivery. We expect cash to increase in Q4 as we complete construction and sell a number of power plant projects.
Inventory declined sequentially and we expect a further reduction in 2017. I'd now like to provide a color on some of the key financial highlights for the quarter.
Please turn to slide 12. First, we're pleased to announce the sale of our 102 megawatt Henrietta project to 8point3.
Second we took a goodwill charge, which impacted our GAAP results by a $147 million. The write-off of all of our goodwill was driven by the decline in our share price.
Third, we acquired the remaining 50% of our Malaysian joint venture during the quarter. Our closing balance sheet in Q3 reflects the transaction, where the investment in the JV, which was classified as a long-term asset is now reflected primarily in our property, plant and equipment.
Going forward, we expect to record lower equity and earnings, more than offset by lower overall product costs. This acquisition resolves a long-running dispute between the companies and give us full control over our best-performing fab.
Fourth, as noted in the past, we have long-term poly-silicon contracts that are above market and in quantities that exceed near-term consumption. These contracts negatively impact margins, inventory and cash flow.
We can utilize the full amount of the contracts over time. But as we've done in previously, we expect to sell near-term excess poly to improve our working capital.
If we do so, it will result in a P&L charge in both GAAP and non-GAAP. I'd now like to provide an update on the assets we have in relation to our HoldCo strategy, please turn to slide 13.
Total megawatts in our HoldCo was essentially unchanged, compared to last quarter at approximately 1.9 gigawatts. Residential operating megawatts rose sequentially and reflects our lease asset increase.
In power plant, the table reflects the sale of our Henrietta project to 8point3 offset by additional megawatts related to our portfolio of projects in Mexico. I'd now like to address some actions, we are taking as we transition to a near-term cash flow driven model.
Please turn to slide 14. As Tom mentioned, we are taking a number of proactive steps to successfully manage through this short-term industry dislocation.
We are very prudently running the company focused on cash flow and NPV economics. While this will likely have a short-term and intermediate-term impact reducing our EBITDA, it will create more shareholder value over the long-term.
Specifically some of these trade-offs are idling manufacturing lines to reduce inventory, shifting lease to loans or cash, shifting financial close on large commercial and utility projects from Q4 2016 to 2017. Additionally, we may sell projects at NTP versus at COD and not bid low PPA prices on projects, if they do not meet our cash flow or NPV requirements.
These actions can have the impact of shifting or reducing the EBITDA, but will improve cash flow to ensure we capture the value over the long-term. Finally, we remain focused on gross margin improvement by selling our complete solution, product suite, while reducing the cost of these solutions.
We see significant room for improvement given we have a great base of first-generation complete solutions. We believe these steps position the company appropriately to address near-term challenges, while maintaining the ability to execute on our long-term strategic plan.
With that, I will turn the call back to Tom for our guidance. Tom?
Tom H. Werner - SunPower Corp.
Thanks, Chuck. I would now like to discuss some of the highlights of our guidance for the fourth quarter, and update our fiscal year 2016 forecast.
Please turn to slide 15. As Chuck covered in his remarks, there are four primary factors that we expect will impact our financial performance in Q4.
First, we have reduced our solar cell and panel production to match demand by idling additional production lines. This will result in higher underutilization charges than previously contemplated.
Second, we are experiencing lower than anticipated growth in the U.S. residential market, which is our highest margin segment.
This will pressure our overall Q4 gross margin. Third, we have made the decision to shift lease sales to cash, and loan in some states where the lease economics do not meet our return threshold.
As Chuck mentioned, while the shift to cash and loan sales helps cash flow, we lose the benefit of incremental NCI, which lowers EBITDA. Finally, in commercial, we will be affected by nonlinearity of project completion and push outs of some projects into Q1 2017.
In total, we expect these factors to impact Q4 EBITDA by more than $80 million. On a GAAP basis, the company now expects 2016 revenue of $2.43 billion to $2.63 billion, gross margin of 8% to 10% and a net loss of $320 million to $295 million.
Fiscal year 2016 GAAP guidance includes the impact of the company's HoldCo asset strategy and revenue and timing deferrals due to real estate accounting. The company's updated 2016 non-GAAP financial guidance is as follows: revenue of $2.6 billion to $2.8 billion, gross margin of 9% to a 11%, EBITDA of $185 million to $210 million, capital expenditures of $220 million to $240 million, and gigawatts deployed in the range of 1.325 gigawatts to 1.355 gigawatts.
The company's fourth quarter fiscal 2016 GAAP guidance is as follows. Revenue of $900 million to $1.1 billion, gross margin of 0% to 2% and net loss of $125 million to $100 million.
Fourth quarter 2016 GAAP guidance includes the impact of the company's HoldCo asset strategy and revenue and timing deferrals due to real estate accounting. On a non-GAAP basis, the company expects revenue of $1 billion to $1.2 billion, gross margin of 1% to 3%, EBITDA of $0 million to $25 million, and megawatts deployed in the range of 235 megawatts to 265 megawatts.
With that, I would like to turn the call over for questions. In addition to Chuck, we also have Howard Wenger, President of Business Units; and Bob Okunski, our Vice President of Investor Relations.
Questions please?
Operator
Thank you. At this time, we are now ready to begin the question-and-answer session.
Our first question comes from Tyler Frank. And please say your company name.
Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)
Baird. Thanks for taking the question.
Can you provide some commentary on how this oversupply environment compares to the last environment a few years ago? Are you currently seeing people dumping panels in the market or what you believe to be lower than their costs to produce the panels?
And then, can you also provide additional color on the potential partnership with Total there? Is there a room for other expanding the model supply agreement above 200 megawatt potentially over time?
And how do you expect to move forward with potential projects in international markets? Thank you.
Tom H. Werner - SunPower Corp.
Thanks, Tyler. Tom Werner here.
First on panels. Yes, I have a 14-year perspective.
We're going on 14 years. And, actually with Howard, we've been through few of these downturns and what we found though is they don't last this long as one would think when you're in the middle of it.
So, we'll see. This downturn is faster though than what we previously experienced, as we said in our call – our prepared remarks, 25% price reduction within the quarter, we have not seen that previously.
Yes, we see our competitors selling price is below even what we believe to be cash costs and we spend a fair amount of time modeling cash costs for all of our competition. We're not doing that, and in fact, I have chosen on a go-forward basis to size our capacity to profitable demand, and change basically the breakeven point of the company.
So, we take into different, decisively different approach and I think an aggressive and proactive approach for 2017. In terms of partnering with Total, actions speaks louder than words and there is real action here.
The agreement for up to 200 megawatts panel with a $90 million upfront payment is clearly Total showing that not only they're supporting SunPower or working with SunPower, but also that they're committed to solar energy by using on their facilities. And in terms of is there a upside?
I would say that tentatively, I'd be cautious on that. I don't think in the near-term there will be a lot of gas stations and sites that will be converted to solar and we need to digest that together.
They do have a lot of land positions though that could be upside and certainly upside in terms of co-development or developing together. And then last part of your question of where might we develop or can we accelerate development?
The answer is decidedly yes, the CEO of Total, Patrick Pouyanné has talked about his ambitions and his footprint which is complementary to the SunPower footprint. And so, as we alluded to in my remarks, we are at the early stages of working together on at least France, Japan, and South Africa that I would use the word at least, I think there is more to come there, but we'll let time tell on that as well.
Thank you for the questions.
Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management)
Thanks, Tom.
Operator
Thank you. Our next question comes from Brian Lee.
Please state your company name.
Brian Lee - Goldman Sachs & Co.
Hey guys, thanks for taking the questions. I had a couple, maybe just start off on DG, a lot of original 2017 EBITDA guidance I think seems to rely on the growth and margins in that segment both commercial and residential.
So, curious if that's the biggest delta here and you guys stepping away from providing the guidance for 2017. And then, related to that, just how are you thinking about regulation change in Arizona for your residential solar business?
How much exposure do you have there? And then I have a follow-up.
Tom H. Werner - SunPower Corp.
Okay, I'll comment on EBITDA and then turn to Howard for any further comment on DG EBITDA, and Arizona. So, what we're choosing to do, Brian, is size to a reasonable or realistic revenue level that we can make money at in 2017.
So, we'll be less aggressive, and that's across the board, that would be DG and power plants. So, yes, that impacted the amount of EBITDA we expect.
Now, we haven't re-guided 2017. We'll talk about that on our call on December 7.
So, certainly expect more color on that but it is, as you know, the industry analysts forecast have 2017 as at best in-line year and probably less demand year. So, we're going into it realistically, and of course, as I mentioned in the previous call, sizing our breakeven point lower consistent with that.
Howard, do you want to add anything and then Arizona.
Howard Wenger - SunPower Corp.
Sure. I will say that when you look at the residential and commercial business in the U.S.
combined, we had a strong megawatt deployment quarter, 15% increase quarter-on-quarter for the company there. And the business remains solid, particularly U.S.
and we're expanding our volume in Europe as well, good quarters by the international team in DG. As for Arizona, it's not a material part of our DG business.
We don't do a lot of commercial there much at all and it's a small fraction of our residential business there. So I think what's more impactful there is just the precedent of policy there and the changes that are potentially being proposed there.
It's not 100% yet because there are new commissioners that are being elected even as we speak. So, for us, what we are seeing in our core states, our core DG states, the policy at the state level is very solid.
I'm talking about California, New Jersey, New York, Massachusetts. These are in really good shape.
So, we don't think Arizona is going to be material.
Brian Lee - Goldman Sachs & Co.
Okay. That's great color.
May be, if I could just squeeze in a follow-up. Can you guys comment a bit on the loan mix growing across the industry for residential solar.
I know you guys have been there a lot ahead of your peers. But a lot of them are getting aggressive here.
How do you think that changes the competitive landscape for you and may be, if you can also comment on how your offering is priced competitively versus some of the more key rates (30:54) that we are seeing out there (30:56) Thank you.
Tom H. Werner - SunPower Corp.
Okay, Brian. Thanks for the question, Tom again.
And then, Howard will talk on pricing. What we've done is allow customer choice, and we've always had a high cash loan to lease mix because people want to own SunPower systems, because they believe and they are getting the world's best solar that it will last longer and produce more energy per rated kilowatt or peak kilowatt.
So, when our sales team or our dealer sales team is selling to the customer, the customer, if they have – if they can qualify for a loan or cash, have a preference generally for SunPower system for ownership. And so that – you're right, that's been the history.
And what we found this year is there has been general market shift we think because of the idea of owning the solar system has become more mainstream and the risk that the people would attribute to owning the solar system has decreased over time. Howard, can you take the pricing?
Howard Wenger - SunPower Corp.
Yeah. So, our pricing has been steady in the U.S.
DG business both residential and commercial. In fact, it has gone up a little bit effectively on that revenue per watt basis because we are moving increasingly to complete solutions.
So, with our Equinox for residential, Helix for commercial, we're offering the full solution and therefore more value and more revenue and that's generating actually more revenue per watt. But in terms of pricing to the end consumer, it's steady for us.
We do see – and we plan for some reduction as we head into 2017, but it's in the low single-digit percentage, but it's holding.
Brian Lee - Goldman Sachs & Co.
Okay. Thanks, guys.
Operator
Thank you. Our next question comes from Vishal Shah.
Please state your company name.
Vishal Shah - Deutsche Bank
Deutsche Bank. Thank you.
Tom, can you comment on the three different product competitiveness in the current pricing environment. I mean, are you able to generate positive gross margins for your E-Series, X-Series and P-Series products at the current pricing environment?
And then can you also maybe talk about how you see the perceived risk to ITC given the recent elections in the U.S.?
Tom H. Werner - SunPower Corp.
Yes. So, thank you, Vishal for the question.
On P, E and X, let me give you color X, the answer is not equivocally yes. It's the world's highest efficiency we had a chart in our deck.
The capacity that we make seems about right, and since it's the world's best, it's the highest efficiency, it also has another number of other attributes in terms of lower degradation and longer life that that commands a premium and it can compete. P-Series uses mainstream front contact cells and we are benefiting from the reduction in the oversupply.
And so that product's value proposition is proving to be true, which is you get more efficiency for the same or roughly equivalent price. So the P-Series is working great, and it's also doing really well in manufacturing.
That leaves us with E-Series, and we've been asked as previously, can you have three product lines. And I think, what we we're concluding is yes, we can, but not at the scale that we have.
So, we'll be right sizing our E-Series capacity. It still is the second highest efficiency module on the market, so it's still an outstanding product but that would be in an area where we're likely to right size our capacity, and of course, we'll give the specifics on that on December 7.
In terms of the ITC, and the risk associated with that, let me a do a little homework with my team here and circle back to that later in the call. I would though comment generally about the election and say that still there is incredible customer poll for solar.
88% of Trump supporters according to the Pew Research support solar. The cost of solar has come down dramatically, it's dropped.
So, I think, we have a common goal here the growth in the economy in America, and so I think there's common ground that solar will do well and so that probably will influence ITC, but let me do a little homework during the call, and then, I'll comment on that later.
Vishal Shah - Deutsche Bank
Thank you.
Operator
Thank you. Our next question comes from Krish Sankar, and please state your company name.
Krish Sankar - Bank of America Merrill Lynch
Yeah. Hi.
It is Bank of America Merrill Lynch. I had a couple of them, first one Tom on the 2016 guidance cut roughly $100 million less in EBITDA and about 200 or so megawatts less, is it all primarily coming from the residential side?
Charles D. Boynton - SunPower Corp.
Krish, this is Chuck. The part of the megawatt reduction is actually a shift out into 2017.
And there is a reduction based on the overall market reduction for the DG side. But I will say the primary reduction is the shift out.
And in terms of our overall EBITDA, it's a combination of shifting from lease to cash sales and then some underutilization charges for the fabs as we reduce inventories to improve cash flow?
Krish Sankar - Bank of America Merrill Lynch
Got it. Got it.
And the lease to cash sales, that momentum has been going on for a while and I'm going kind of curious, because three months ago you guys were – dialed back the power plant business but still seemed very optimistic on resi. Today, three months later, like you're definitely down ticking on the resi too.
Kind of curious if anything changed in the last three months for your specific business or is the trend being going on for a while and then also the follow-up after that?
Tom H. Werner - SunPower Corp.
Yeah. I think if you do the math, as we hear other people announce, what we're seeing is a slowing in the growth of the U.S.
resi market. And you will actually see that our performance was pretty good in terms of our share and the growth that we had in Q3 or at least the performance that we had in Q3.
When we add our DG residential and commercial business, it would be fair to say commercial business outperformed and the residential business did fine, but as well as we planned and that's general market slowing of growth. Now you can get into a lot of specifics of what's driving that.
Broadly I'd say there has been some state activity that took Nevada offline, there has been a utility in California that's come offline in terms of their region. There has been a conversion from NEM 1.0 to NEM 2.0 that has caused the timing of the market.
But we believe that fundamentals are still there that U.S. residential market will still be quite strong and will be growing.
So, yes, you're right though, three months ago we thought we would do more megawatts than we did. I would also note that when you look at Q4, which you can easily conclude what it is from our annual guidance, Q4 returns to pretty substantial growth.
Krish Sankar - Bank of America Merrill Lynch
Got it. Got it.
That's helpful, Tom. And then another question I had on the P-Series modules.
When you look at it relatively to the Chinese incumbent modules, can you quantify how much the ASP for P-Series is above the incumbent Chinese today and how much would you say the cost is relative to the incumbent?
Tom H. Werner - SunPower Corp.
Okay. Of course it's a point in time because the pricing environment changed 25% in the quarter, we see that stabilizing.
And what I would say is as we do command premium with P-Series, so we get a little higher pricing and I would say that, call it, 10% plus or minus. And in terms of costs, we're ramping the product.
So, if we took the costs today, it's still a little bit higher, but we hit a meaningful production in the first half of 2017. And we think we crossed to at least cost equilibrium, and that's of course based on what we're forecasting.
Since I have – answering that question, I'm going to comment future on the ITC. I think you all know this, but if the ITC were to be modified, it would have to go through Congress, and there is – we can all sort of forecast likelihood of that.
We very involved and believe there's bipartisan support for solar, therefore, we would be optimistic or I'd say cautiously optimistic and as I mentioned earlier, because the customer pull the price is solar, if the way pricing has happened and the jobs we create, I think we have facts on our side, but we'll see how things play out.
Krish Sankar - Bank of America Merrill Lynch
Thanks, Tom, very helpful. Thank you.
Operator
Thank you. Our next question comes from Colin Rusch.
Please state your company name.
Colin Rusch - Oppenheimer & Co., Inc. (Broker)
Yeah. As you look at, what the potential risks are with FERC and new FERC appointees, have you guys taken a real hard assessment of what might happen with net metering?
As we go forward, it seems to me that given what we've seen in terms of potential appointees, there's potential real flight that's going to come up on that metering?
Howard Wenger - SunPower Corp.
This is Howard, I'll take that, Colin. Well, the FERC, their job, their jurisdiction is really on the transmission system and net metering plays out at the more local level, at the distribution level which is dictated at the state and even within the state level depending on if it's regulated utility or not.
So, we don't think for DG that, at least historically the purview of FERC has not reached that far down, but I think it's a valid question and we don't expect that to happen. And as Tom referenced I mean, solar is the way to energy independence which is something that that both sides of the isle have historically wanted and we're going to continue.
So, if anything, there is going to be a – potentially even tailwinds for that, push for that. We do want to mention that Pat Wood, who serves on our board, is a former Chairman of the FERC and he has been with the company as the board member for many years.
And so, we benefit from his experience and guidance in this area.
Colin Rusch - Oppenheimer & Co., Inc. (Broker)
Okay. And then just a follow-up on a couple of products.
Just looking at C7 and C12, the JVs in China, can you just give us a quick update there as well as what you are seeing in terms of demand for AC modules at this point?
Tom H. Werner - SunPower Corp.
So, yes. In China, we've also introduced our tracking systems, we have a mix of C7 and the tracking system.
And in the last year or so, that mix has favored towards the tracking system. As we look forward, our JV partners are working with us to reduce the cost of our concentrated product or the product that we've made together.
And as those costs come down, then their plan is to increase the mix of our C7 product, we'll have to see how that goes but that will be part of our joint venture in China.
Howard Wenger - SunPower Corp.
And on AC modules, this is Howard, real success story. We sell that through our Equinox complete solution for residential in the U.S.
and we went from 0% at the beginning of this year and we're now about 65% in our attach rate. So, it's going really well.
Thanks for the questions.
Colin Rusch - Oppenheimer & Co., Inc. (Broker)
Thanks guys.
Operator
Thank you. The next question is from the line of Julien Dumoulin-Smith.
Kindly state your company name.
Julien Dumoulin-Smith - UBS Securities LLC
Yeah, hi. Thank you.
UBS. So, first on the policy side.
Can you comment specifically with respect to the ITC around fair market value definitions of IRS? And secondly, any considerations around continuous construction?
And then on the business side, if you can comment quickly in terms of cash flow metrics relative to EBITDA. Why does a shift towards cash flow necessarily reduce EBITDA and how should we be thinking about the transition going into next year, I know that's getting ahead of 2017 a little bit.
But just can you give us at least a sense for what the new approach on the DG business, specifically resi means for EBITDA?
Tom H. Werner - SunPower Corp.
Okay. So, Chuck will take the question of the impact of lease percentage going down and cash going up, impact on EBITDA and then I'll take the second part – the first part.
Charles D. Boynton - SunPower Corp.
So, Julien, when we book a lease transaction, much of the cash flow comes over 20 years. The tax credit comes through the NCI line as the real benefit when we receive the cash on the ITC.
And so, if we consciously shift to lease or cash then effectively we have better cash flow, but lower EBITDA. And so, doing so is the conscious move on our part to improve cash flow.
And so that's a transition that you'll see happening this quarter and all through 2017.
Tom H. Werner - SunPower Corp.
I'll comment briefly on FMV. I don't have color on commenced constructions, so we'll take that as on work assignment and then on FMV, I'll just say a couple of things and maybe Chuck will want to say something.
We don't see anything changing in terms of the dynamic with Treasury. Although I will say that we're seeing some of it over the years, there've been lawsuits with Treasury and I think some of those, at least one of those is being dispositioned, and I think that affects the thinking here a little bit.
FMV has become, as PPA pricing goes down in America, FMV dynamic changes a little bit in terms of tax equity financing on – and so like that, we can leave at that and say that we're preferentially not doing business in the near-term that it doesn't make sense economically.
Charles D. Boynton - SunPower Corp.
Yeah. I'd just say, Julien, on the fair market value, we have a robust cash business as well.
So, we have a really good proxy for what fair market values are. And so, whether it's a lease, loan or a cash, we have really good data on our side.
And we believe that we've got a really strong track record here. And so, we see that as a real strength of our solution in our business model.
Julien Dumoulin-Smith - UBS Securities LLC
But Chuck just to ...
Tom H. Werner - SunPower Corp.
Yeah. Let's do a follow-up and one more question but go ahead with the follow-up, Julien.
Julien Dumoulin-Smith - UBS Securities LLC
Yeah. Chuck, just to quantify a little bit more about the NCI line item, et cetera.
Just the margin that you would see cash versus the lease approach?
Charles D. Boynton - SunPower Corp.
Sure. The margin profile is probably not radically different.
They're both in, I'd call, the mid 20% margins, the difference being though, you get a real benefit on the tax equity through NCI, whereas on the lease you get the margin paid over 20 years. And so, whereas if you sell a cash system, you don't get the tax benefits, the consumers gets those, but we get a really nice cash margin and it generates a really strong cash flow profile for us.
Julien Dumoulin-Smith - UBS Securities LLC
Thanks, guys.
Tom H. Werner - SunPower Corp.
Okay. Last question please.
Operator
Thank you. Next question is from the line of Pavel Molchanov.
Please state your company name.
Pavel S. Molchanov - Raymond James & Associates, Inc.
Raymond James. I hate to do another election one.
But one of the trends we've seen is that utilities have been deploying or contracting systems in anticipation of the clean power plant being implemented. Given that that's going to be off the table in the next administration, do you think that risks potential slowdown of utility scale solar bookings in the U.S.
market?
Tom H. Werner - SunPower Corp.
See. I think the answer, short answer is yes, and the question is how much, and what I would say is potentially not that much, because utilities and we interface with utilities a lot, are very impressed with A) the risk premiums of solar, which is no longer premium.
So the risk is very minimal. So they're very happy with the performance of the systems they deployed and of course, they are very aware of the cost.
And if you look at the cost of solar, it's hitting point where it's competitive with almost any other energy choice. And lastly, of course, you don't have fuel risk.
So, there is reasons that this will be a meaningful part of utilities. I think, it may change timing, Pavel, and it's a matter of degree, but it would be fair to say some that they will have some impact.
We believe that 2018 will still be a pivot year and there will still be a lot of American power plant, solar power plants being built and, of course, we're going to continue to position ourselves to do well. And what's your follow-up Pavel on...
Pavel S. Molchanov - Raymond James & Associates, Inc.
That's it.
Tom H. Werner - SunPower Corp.
Okay. Thank you very much.
Thank you all for your time calling in. We'll look forward to talking to all of you on December 7.
Thank you.
Operator
This conclude today's conference. Thank you for joining and you may now disconnect.