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FIRST SOLAR : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/22/2017 | 04:20pm CET
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto included in this Annual Report on
Form 10-K. Unless expressly stated or the context otherwise requires, the terms
"First Solar," "the Company," "we," "us," and "our" refer to First Solar, Inc.
and its consolidated subsidiaries. In addition to historical consolidated
financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions as
described under the "Note Regarding Forward-Looking Statements" that appears
earlier in this Annual Report on Form 10-K. Our actual results could differ
materially from those anticipated by these forward-looking statements as a
result of many factors, including those discussed under Item 1A. "Risk Factors,"
and elsewhere in this Annual Report on Form 10-K.

Executive Overview


We are a leading global provider of comprehensive PV solar energy solutions. We
design, manufacture, and sell PV solar modules with an advanced thin-film
semiconductor technology and also develop, design, construct, and sell PV solar
power systems that primarily use the modules we manufacture. Additionally, we
provide O&M services to system owners that use solar modules manufactured by us
or by third-party manufacturers. We have substantial, ongoing R&D efforts
focused on module and system-level innovations. We are the world's largest
thin-film PV solar module manufacturer and one of the world's largest PV solar
module manufacturers. Our mission is to create enduring value by enabling a
world powered by clean, affordable solar energy.

Certain highlights of our financial results and other key operational developments for the year ended December 31, 2016 include the following:

• Net sales for 2016 decreased by 18% to $3.0 billion compared to $3.6

billion in 2015. The decrease in net sales was primarily attributable to

the sale of majority interests in the North Star and Lost Hills projects

       in 2015, the completion of substantially all construction activities on
       the Imperial Solar Energy Center West and Decatur projects in 2015, the

completion of substantially all construction activities on the Silver

State South and McCoy projects in the first half of 2016, and lower

revenue from "module plus" transactions, which are transactions in which

we sell both our modules plus selected BoS parts. This decrease in revenue

       was partially offset by an increase in the volume of modules sold to third
       parties, higher revenue from the commencement of construction of the
       Taylor and Butler projects in late 2015, and the commencement of
       construction of the East Pecos project in early 2016.



•      Gross profit decreased 1.8 percentage points to 23.9% during 2016 from

25.7% during 2015, primarily due to the mix of lower gross profit projects

sold and under construction, higher inventory write-downs, and the

reduction in our module collection and recycling obligation in 2015

resulting from certain recycling technology advancements, partially offset

       by the higher gross margins on modules sales to third parties.



•      As of December 31, 2016, we had 28 installed production lines at our
       manufacturing facilities in Perrysburg, Ohio and Kulim, Malaysia. We
       produced 3.1 GW of solar modules during 2016, which represented a 24%
       increase from 2015. The increase in production was primarily driven by

increased throughput and higher module conversion efficiencies. We expect

       to produce approximately 2.2 GW of solar modules during 2017 as we ramp
       down production of our Series 4 modules and continue the transition to
       Series 6 module manufacturing.



•      During 2016, we ran our manufacturing facilities at approximately 97%

capacity utilization, which represented a 5.0 percentage point increase

       from 2015.



•      The average conversion efficiency of our modules produced in 2016 was

16.4%, which represented an improvement of 0.8 percentage points from our

       average conversion efficiency of 15.6% in 2015.




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Market Overview


The solar industry continues to be characterized by intense pricing competition,
both at the module and system levels. In particular, module average selling
prices in the United States and several other key markets have experienced an
accelerated decline in recent months, and module average selling prices are
expected to continue to decline to some degree in the short and medium terms
according to market forecasts. In the aggregate, we believe manufacturers of
solar modules and cells have significant installed production capacity, relative
to global demand, and the ability for additional capacity expansion. We believe
the solar industry may from time to time experience periods of structural
imbalance between supply and demand (i.e., where production capacity exceeds
global demand), and that such periods will put pressure on pricing. We believe
the solar industry is currently in such a period. Additionally, intense
competition at the system level may result in an environment in which pricing
falls rapidly, thereby further increasing demand for solar energy solutions but
constraining the ability for project developers; EPC companies; and
vertically-integrated solar companies such as First Solar to sustain meaningful
and consistent profitability. In light of such market realities, we are
executing our long term strategic plan, under which we are focusing on our
competitive strengths. Such strengths include our advanced module and system
technologies as well as our vertically-integrated business model that enables us
to provide utility-scale PV solar energy solutions to key markets with current
electricity needs.

Worldwide solar markets continue to develop, in part aided by demand elasticity
resulting from declining industry average selling prices, both at the module and
system level, which make solar power more affordable to new markets. We are
developing, constructing, or operating multiple solar projects around the world,
many of which are the largest or among the largest in their regions. We continue
to execute on our advanced-stage utility-scale project pipeline, which includes
the construction of some of the world's largest PV solar power systems. We
expect a substantial portion of our consolidated net sales, operating income,
and cash flows through the end of 2018 to be derived from these projects. We
continue to advance the development and selling efforts for the other projects
included in our advanced-stage utility-scale project pipeline, develop our
early-to-mid stage project pipeline, and evaluate acquisitions of projects to
expand our advanced-stage utility-scale project pipeline. See the tables under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Systems Project Pipeline" for additional information about these
and other projects within our systems business advanced-stage project pipeline.

Lower industry module and system pricing, while currently challenging for
certain solar manufacturers (particularly manufacturers with high cost
structures), is expected to continue to contribute to global market
diversification and volume elasticity. Over time, declining average selling
prices are consistent with the erosion of one of the primary historical
constraints to widespread solar market penetration, its affordability. In the
near term, however, declining average selling prices are expected to adversely
affect our results of operations relative to prior years. If competitors reduce
pricing to levels below their costs, bid aggressively low prices for module sale
agreements, EPC agreements, and PPAs, or are able to operate at minimal or
negative operating margins for sustained periods of time, our results of
operations could be further adversely affected. In certain markets in California
and elsewhere, an oversupply imbalance at the grid level may further contribute
to reduced short-to-medium term demand for new solar installations relative to
prior years, lower PPA pricing, and lower margins on module and systems sales to
such markets. We continue to mitigate these uncertainties in part by executing
on our module technology improvements, including our transition to Series 6
module manufacturing, continuing the development of key markets, and
implementing certain other cost reduction initiatives, including both
manufacturing and BoS costs.

We continue to face intense competition from manufacturers of crystalline
silicon solar modules and other types of solar modules and PV solar power
systems. Solar module manufacturers compete with one another on price and on
several module value attributes, including conversion efficiency, energy yield,
and reliability, and, with respect to PV solar power systems, net present value,
return on equity, and LCOE, meaning the net present value of total life cycle
costs of the system divided by the quantity of energy which is expected to be
produced over the system's life. As noted above, competition on the basis of
selling price per watt has intensified in recent months, resulting in sharp
declines in module average selling prices in several key markets. In addition,
we believe crystalline silicon cell and wafer manufacturers have begun
transitioning from lower efficiency Back Surface Field ("BSF") multi-crystalline
cells (the legacy technology against which we generally compete in our markets)
to higher efficiency PERC multi-crystalline and mono-crystalline cells at
potentially competitive cost structures.


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We believe we are among the lowest cost PV module manufacturers in the solar
industry on a module cost per watt basis, based on publicly available
information. This cost competitiveness is reflected in the price at which we
sell our modules and fully integrated PV solar power systems and enables our
systems to compete favorably. Our cost competitiveness is based in large part on
our module conversion efficiency, proprietary manufacturing technology (which
enables us to produce a CdTe module in less than 3.5 hours using a continuous
and highly automated industrial manufacturing process, as opposed to a batch
process), and our operational excellence. In addition, our CdTe modules use
approximately 1-2% of the amount of the semiconductor material that is used to
manufacture traditional crystalline silicon solar modules. The cost of
polysilicon is a significant driver of the manufacturing cost of crystalline
silicon solar modules, and the timing and rate of change in the cost of silicon
feedstock and polysilicon could lead to changes in solar module pricing levels.
Polysilicon costs have had periods of decline over the past several years, and
polysilicon consumption per cell has been reduced through the adoption of
diamond wafer saw technology, contributing to a decline in our relative
manufacturing cost competitiveness over traditional crystalline silicon module
manufacturers.

Given the smaller size (sometimes referred to as form factor) of our current
Series 4 CdTe modules compared to certain types of crystalline silicon modules,
we may incur higher labor and BoS costs associated with the construction of
systems using our modules. Thus, to compete effectively on an LCOE basis, our
Series 4 modules may need to maintain a certain cost advantage per watt compared
to crystalline silicon-based modules with larger form factors. We recently
introduced our next generation Series 6 module technology, which is expected to
enable the production of modules with a larger form factor along with better
product attributes and a lower manufacturing cost structure. Accordingly, the
larger form factor of our Series 6 modules is expected to reduce the number of
electrical connections and hardware required for system installation. The
resulting labor and material savings are expected to represent a significant
improvement compared to current technologies and a substantial reduction in
total installed costs resulting in improved project returns as BoS costs
represent a significant portion of the costs associated with the construction of
a typical utility-scale system. See Note 4 "Restructuring and Asset Impairments"
to our consolidated financial statements for the year ended December 31, 2016
included in this Annual Report on Form 10-K for additional information regarding
the transition to Series 6 module manufacturing.

In terms of energy yield, in many climates, our CdTe modules provide a
significant energy production advantage over most conventional crystalline
silicon solar modules (including BSF and PERC technologies) of equivalent
efficiency rating. For example, our CdTe solar modules provide a superior
temperature coefficient, which results in stronger system performance in typical
high insolation climates as the majority of a system's generation, on average,
occurs when module temperatures are well above 25°C (standard test conditions).
In addition, our CdTe modules provide a superior spectral response in humid
environments where atmospheric moisture alters the solar spectrum relative to
laboratory standards. Our CdTe solar modules also provide a better shading
response than conventional crystalline silicon solar modules, which may lose up
to three times as much power as CdTe solar modules when shading occurs. As a
result of these and other factors, our PV solar power systems typically produce
more annual energy in real world field conditions than competing systems with
the same nameplate capacity.

While our modules and PV solar power systems are generally competitive in cost,
reliability, and performance attributes, there can be no guarantee such
competitiveness will continue to exist in the future to the same extent or at
all. Any declines in the competitiveness of our products could result in
additional margin compression, further declines in the average selling prices of
our modules and systems, erosion in our market share for modules and systems,
decreases in the rate of net sales growth, and/or declines in overall net sales.
We continue to focus on enhancing the competitiveness of our solar modules and
PV solar power systems by accelerating progress along our module technology and
cost reduction roadmaps, continuing to make technological advances at the system
level, using innovative installation techniques and know-how, and leveraging
volume procurement around standardized hardware platforms. Such procurement
efforts include the use of high-quality, conventional BoS components as we have
phased out the use of our proprietary trackers and fixed mounting structures to
further reduce system costs and streamline our operations.

Certain Trends and Uncertainties


We believe that our operations may be favorably or unfavorably impacted by the
following trends and uncertainties that may affect our financial condition and
results of operations. See Item 1A. "Risk Factors" and elsewhere in this Annual
Report on Form 10-K for a discussion of other risks that may affect our
financial condition and results of operations.


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Long Term Strategic Plan


Our long term strategic plan is a long-term roadmap to achieve our technology,
growth, and cost leadership objectives. In executing our long term strategic
plan, we are focusing on providing utility-scale PV solar energy solutions using
our modules in key geographic markets that we believe have a compelling need for
mass-scale PV electricity, including markets throughout the Americas, the
Asia-Pacific region, and the Middle East. As part of our long term strategic
plan, we are focusing on opportunities in which our PV solar energy solutions
can compete directly with fossil fuel offerings on an LCOE or similar basis, or
complement such fossil fuel electricity offerings. Execution of the long term
strategic plan entails a prioritization of market opportunities worldwide
relative to our core strengths and a corresponding allocation of resources
around the globe. This prioritization involves a focus on our core module and
utility-scale offerings and exists within a current market environment that
includes rooftop and distributed generation solar, particularly in the United
States. While it is unclear how rooftop and distributed generation solar might
impact our core utility-scale offerings in the next several years, we believe
that utility-scale solar will continue to be a compelling solar offering for
companies with technology and cost leadership and will continue to represent an
increasing portion of the overall electricity generation mix.

We are closely evaluating and managing the appropriate level of resources
required as we pursue the most advantageous and cost effective projects and
partnerships in our target markets. We have dedicated, and intend to continue to
dedicate, significant capital and human resources to reduce the total installed
cost of PV solar energy, to optimize the design and logistics around our PV
solar energy solutions, and to ensure that our solutions integrate well into the
overall electricity ecosystem of each specific market. We expect that, over
time, an increasing portion of our consolidated net sales, operating income, and
cash flows may come from solar offerings in the key geographic markets described
above as we execute on our long term strategic plan. The timing, execution, and
financial impacts of our long term strategic plan are subject to risks and
uncertainties, as described in Item 1A. "Risk Factors," and elsewhere in this
Annual Report on Form 10-K. We are focusing our resources in those markets and
energy applications in which solar power can be a least-cost, best-fit energy
solution, particularly in regions with high solar resources, significant current
or projected electricity demand, and/or relatively high existing electricity
prices. As part of these efforts, we continue to optimize resources globally,
including business development, sales personnel, and other supporting
professional staff in target markets.

Joint ventures or other strategic arrangements with partners are a key part of
our long term strategic plan, and we generally use such arrangements to expedite
our penetration of various key markets and establish relationships with
potential customers. We also enter into joint ventures or strategic arrangements
with customers or other entities to maximize the value of particular projects.
Some of these arrangements involve and are expected in the future to involve
significant investments or other allocations of capital. We continue to develop
relationships with customers in these strategic markets with a view to creating
opportunities for utility-scale PV solar power systems. We sell such systems
directly to end customers, including utilities, independent power producers,
commercial and industrial companies, and other system owners. Depending on the
market opportunity, our sales offerings may range from module-only sales, to
module sales with a range of development, EPC services, and other solutions, to
full turn-key PV solar power system sales. We expect these offerings to continue
to evolve over time as we work with our customers to optimize how our PV solar
energy solutions can best meet our customers' energy and economic needs.

In order to create or maintain a market position in certain strategically
targeted markets, our offerings from time to time may need to be competitively
priced at levels associated with minimal gross profit margins, which may
adversely affect our results of operations. We expect the profitability
associated with our various sales offerings to vary from one another over time,
and possibly vary from our internal long-range profitability expectations and
targets, depending on the market opportunity and the relative competitiveness of
our offerings compared with other energy solutions, fossil fuel-based or
otherwise, that are available to potential customers. In addition, as we execute
on our long term strategic plan, we will continue to monitor and adapt to any
changing dynamics in the market set of potential buyers of solar project assets.
Market environments with few potential project buyers and a higher cost of
capital would generally exert downward pressure on the potential revenue from
the uncontracted solar project assets we are developing, whereas, conversely,
market environments with many potential project buyers and a lower cost of
capital would likely have a favorable impact on the potential revenue from such
uncontracted solar project assets.


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We expect to use our working capital, project financing arrangements, or
availability under our Revolving Credit Facility to finance the construction of
certain PV solar power systems for strategic purposes or to maximize the value
of such systems at the time of sale. From time to time, we may temporarily own
and operate certain PV solar power systems, often with the intention to sell at
a later date. We may also elect to construct and temporarily retain ownership
interests in systems for which there is no PPA with an off-taker, such as a
utility, but rather an intent to sell the electricity produced by the system on
an open contract basis until the system is sold. Additionally, our joint
ventures and other business arrangements with strategic partners have and may in
the future result in us temporarily retaining a noncontrolling ownership
interest in the underlying systems projects we develop, supply modules to, or
construct potentially for a period of up to several years. Such business
arrangements could become increasingly important to our competitive profile in
markets globally, including North America. In each of the above mentioned
examples, we may retain such ownership interests in a consolidated or
unconsolidated separate entity.

We continually evaluate forecasted global demand, competition, and our
addressable market, and seek to effectively balance manufacturing capacity with
market demand and the nature and extent of our competition. To the extent we
make investments to add or otherwise modify our manufacturing capacity in
response to market demand and competition, such investments would require
significant internal and possibly external sources of liquidity and would be
subject to certain risks and uncertainties described in Item 1A. Risk Factors,
including those entitled "Our future success depends on our ability to
effectively balance manufacturing production with market demand, convert
existing production facilities to support new product lines, such as our
transition to Series 6 module manufacturing, and, when necessary, continue to
build new manufacturing plants over time in response to such demand and add
production lines in a cost-effective manner, all of which are subject to risks
and uncertainties" and "If any future production lines are not built in line
with our committed schedules it may impair any future growth plans. If any
future production lines do not achieve operating metrics similar to our existing
production lines, our solar modules could perform below expectations and cause
us to lose customers."

8point3 Energy Partners LP


In June 2015, the Partnership completed the IPO. As part of the IPO, we
contributed interests in various projects to a subsidiary of the Partnership in
exchange for an ownership interest in the entity. Since the formation of the
Partnership, we and SunPower have, from time to time, continued to sell
interests in solar projects to the Partnership. The Partnership owns and
operates a portfolio of solar energy generation projects and is expected to
acquire additional interests in projects from the Sponsors. In addition, the
Partnership is expected to provide the Sponsors with optionality in the project
sales process. Given the broader economic factors currently impacting the
yieldco sector in general, including yieldco equity valuations generally, the
timing and execution of project sales to the Partnership are subject to market
conditions. For additional information, see Item 1A. "Risk Factors - We may not
be able to achieve the full strategic and financial benefits expected to result
from the formation of 8point3 Energy Partners LP, on a timely basis or at all"
and "Note 12 "Investments in Unconsolidated Affiliates and Joint Ventures -
8point3 Energy Partners LP" of our consolidated financial statements included in
this Annual Report on Form 10-K.

Construction of Some of the World's Largest PV Solar Power Systems


We continue to execute on our advanced-stage utility-scale project pipeline and
expect a substantial portion of our consolidated net sales, operating income,
and cash flows through the end of 2018 to be derived from several large projects
in this pipeline, including the following contracted projects which will be
among the world's largest PV solar power systems: the 280 MW California Flats
project, located in Monterey County, California; the 250 MW Moapa project,
located in Clark County, Nevada; the 150 MW Rosamond project located in Kern
County, California; and the 150 MW Sun Streams project, located in Maricopa
County, Arizona. Please see the tables under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Systems Project
Pipeline" for additional information about these and other projects within our
systems business advanced-stage project pipeline. The construction progress of
these projects is subject to risks and delays as described in Item 1A. "Risk
Factors," and elsewhere in this Annual Report on Form 10-K. Revenue recognition
for these and other system projects is in many cases not linear in nature due to
the timing of when all revenue recognition criteria are met, and consequently,
period-over-period comparisons of results of operations may not be meaningful.
Expected revenue from projects without a PPA, for which electricity will be sold
on an open contract basis, may be subject to greater variability and uncertainty
based on market factors compared to projects with a PPA.


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Systems Project Pipeline


The following tables summarize, as of February 22, 2017, our approximately 2.0
GW systems business advanced-stage project pipeline. As of December 31, 2016,
for the Projects Sold/Under Contract in our advanced-stage project pipeline of
275 MW, we have not recognized any significant amount of revenue. The remaining
revenue to be recognized subsequent to December 31, 2016 for the Projects
Sold/Under Contract is expected to be approximately $0.8 billion. The majority
of such revenue is expected to be recognized through the later of the
substantial completion or closing dates of the projects. The remaining revenue
to be recognized does not have a direct correlation to expected remaining module
shipments for such Projects Sold/Under Contract as expected module shipments do
not represent total systems revenues and do not consider the timing of when all
revenue recognition criteria are met, including the timing of module
installation. The actual volume of modules installed in our Projects Sold/Under
Contract will be greater than the project size in MW AC as module volumes
required for a project are based upon MW DC, which will be greater than the MW
AC size pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3. Such ratio
varies across different projects due to various system design factors. Projects
are removed from our advanced-stage project pipeline tables below once we have
substantially completed construction and after substantially all revenue has
been recognized. Projects, or portions of projects, may also be removed from the
tables below in the event an EPC-contracted or partner-developed project does
not obtain permitting or financing, an unsold or uncontracted project is not
sold or contracted due to the changing economics of the project or other
factors, or we decide to temporarily own and operate, or retain interests in,
such projects based on strategic opportunities or market factors.

In January 2017, we discontinued development of the 310 MW AC Tribal Solar
project. The development of solar energy projects, such as the Tribal Solar
project, involves numerous risks, and typically requires developers, such as
First Solar, to spend significant sums and devote substantial resources to a
project before a determination can be made whether the project is feasible,
economically attractive, or capable of being built. For more information about
the risks associated with project development, see Item 1A. "Risk Factors -
Project development or construction activities may not be successful; projects
under development may not receive required permits, real property rights, PPAs,
interconnection, and transmission arrangements; or financing or construction may
not commence or proceed as scheduled, which could increase our costs and impair
our ability to recover our investments." In light of significant uncertainties
and risks related to the land use rights and obtaining the required permits and
approvals, among other factors, and our experience developing over 6 GW of solar
energy projects, we made the determination that it would not be prudent to
continue development of the Tribal Solar project. We therefore notified SCE that
we were unwilling to pay the excess costs related to certain transmission
upgrades and new transmission facilities, and the PPA was terminated pursuant to
its terms. Accordingly, SCE has released to us the full amount of the
performance security, and we have ceased development activities related to the
Tribal Solar project. As of December 31, 2016, we estimated that the Tribal
Solar project was 2% completed and had a likely substantial completion date, if
any, in 2021.

We continually seek to make additions to our advanced-stage project pipeline. We
are actively developing our early to mid-stage project pipeline in order to
secure PPAs and are also pursuing opportunities to acquire advanced-stage
projects, which already have PPAs in place. New additions to our project
pipeline during the period from February 24, 2016 to February 22, 2017 included
a 126 MW AC solar power project in California, 60 MW AC of solar power projects
in India, a 49 MW AC solar power project in Australia, 41 MW AC of solar power
projects in Japan, a 40 MW AC solar power project in California, and a 25 MW AC
solar power project in Honduras.


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Projects Sold/Under Contract
(Includes uncompleted sold projects, projects under sales contracts subject to
conditions precedent, and EPC agreements including partner developed projects
that we will be or are constructing.)

                                                                          As of December 31,
                                                                                 2016
                                                              Expected
                                                                Year
                                                               Revenue
                                                  EPC        Recognition
                        Project     PPA     Contract/Partner   Will Be              Percentage
                        Size in  Contracted    Developed      Completed  Percentage of Revenue
Project/Location       MW AC (1)  Partner       Project          By       Complete  Recognized
Moapa, Nevada              250     LADWP          (2)           2017        99%         -%
Helios, Honduras            25    ENEE (3)    Grupo Terra       2017         7%         7%
Total                      275


Projects with Executed PPA Not Sold/Not Contracted

                                                             Expected or
                                                               Actual      Percentage
                        Project                              Substantial Complete as of
                        Size in    Fully    PPA Contracted   Completion   December 31,
Project/Location       MW AC (1) Permitted      Partner         Year          2016
California Flats,                           PG&E/Apple Inc.
California                 280      No            (4)           2018          45%
India (multiple
locations)                 250      No            (5)         2016/2017       69%
Rosamond, California       150      Yes           SCE           2018          11%
Sun Streams, Arizona       150      Yes           SCE           2019           4%
Luz del Norte, Chile       141      Yes           (6)           2016          100%
American Kings Solar,
California                 126      No            SCE           2020           5%
Willow Springs,
California                 100      Yes           SCE           2018          16%
Sunshine Valley,
Nevada                     100      Yes           SCE           2019           2%
Switch Station 1,                            Nevada Power
Nevada                     100      Yes         Company         2017          45%
                                             Nevada Power
                                           Company / Sierra
Switch Station 2,                            Pacific Power
Nevada                      79      Yes         Company         2017           6%
                                           Hokuriku Electric
Ishikawa, Japan             59      Yes      Power Company      2018          13%
Manildra, Australia         49      Yes     EnergyAustralia     2018           1%
Japan (multiple                             Tokyo Electric
locations)                  41      No       Power Company    2019/2020        7%
Little Bear,                                  Marin Clean
California                  40      No        Energy (7)        2020           4%
                                            Tohoku Electric
Miyagi, Japan               40      No       Power Company    2018/2019       10%
Cuyama, California          40      Yes          PG&E           2017          30%
Total                    1,745


(1) The volume of modules installed in MW DC will be higher than the MW AC size

pursuant to a DC-AC ratio typically ranging from 1.2 to 1.3; such ratio

varies across different projects due to various system design factors

(2) Contracted but not specified

(3) ENEE is defined as Empresa Nacional de Energía Eléctrica

(4) PG&E 150 MW AC and Apple Energy, LLC 130 MW AC

(5) Southern Power Distribution Company of Telangana State Ltd - 110 MW AC;

Andhra Pradesh Southern Power Distribution Company Ltd - 80 MW AC; Gulbarga

Electricity Supply Co. - 20 MW AC; Bengaluru Electricity Supply Co. - 20 MW

AC; and Chamundeshwari Electricity Supply Co. - 20 MW AC

(6) PPAs executed for approximately 70 MW AC of capacity; remaining electricity

to be sold on an open contract basis

(7) Expandable to 160 MW AC, subject to satisfaction of certain PPA contract

     conditions





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Results of Operations


The following table sets forth our consolidated statements of operations as a
percentage of net sales for the years ended December 31, 2016, 2015, and 2014:
                                                            Years Ended December 31,
                                                        2016          2015          2014
Net sales                                               100.0  %      100.0  %      100.0  %
Cost of sales                                            76.1  %       74.3  %       75.7  %
Gross profit                                             23.9  %       25.7  %       24.3  %
Research and development                                  4.2  %        3.6  %        4.2  %
Selling, general and administrative                       8.9  %        7.1  %        7.5  %
Production start-up                                         -  %        0.5  %        0.2  %
Restructuring and asset impairments                      27.7  %          -  %          -  %
Operating (loss) income                                 (17.0 )%       14.4  %       12.4  %
Foreign currency loss, net                               (0.5 )%       (0.2 )%          -  %
Interest income                                           0.9  %        0.6  %        0.5  %
Interest expense, net                                    (0.7 )%       (0.2 )%       (0.1 )%
Other income (expense), net                               1.4  %       (0.2 )%       (0.1 )%
Income tax (expense) benefit                             (2.0 )%        0.2  %       (0.9 )%
Equity in earnings of unconsolidated affiliates,          5.8  %        0.6  %       (0.1 )%
net of tax
Net (loss) income                                       (12.1 )%       15.3  %       11.7  %



Segment Overview
We operate our business in two segments. Our components segment involves the
design, manufacture, and sale of CdTe solar modules, which convert sunlight into
electricity, and our systems segment includes the development, construction,
operation, and maintenance of PV solar power systems, which primarily use our
solar modules.

See Note 23 "Segment and Geographical Information" to our consolidated financial
statements for the year ended December 31, 2016 included in this Annual Report
on Form 10-K for more information on our operating segments. See also Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Systems Project Pipeline" for a description of the system projects
in our advanced-stage project pipeline.

Product Revenue


The following table sets forth the total amounts of solar module and solar power
system net sales for the years ended December 31, 2016, 2015, and 2014. For the
purpose of the following table, (i) solar module revenue is composed of revenue
from the sale of solar modules to third parties, which does not include any
modules sold as part of our PV solar power systems, and (ii) solar power system
revenue is composed of revenue from the sale of PV solar power systems and
related products and services, including any modules installed in such systems
and any revenue generated by such systems (in thousands):
                                 2016           2015           2014
Solar module revenue         $   675,453    $   227,461    $   228,319
Solar power system revenue     2,275,875      3,351,534      3,162,868
Net sales                    $ 2,951,328    $ 3,578,995    $ 3,391,187



Solar module revenue to third parties increased by $448.0 million during 2016
compared to 2015 primarily as a result of a 211% increase in the volume of watts
sold, partially offset by a 5% decrease in the average selling price per watt.
Solar power system revenue decreased by $1,075.7 million during 2016 compared to
2015 primarily from the sale of majority interests in the North Star and Lost
Hills projects in 2015, the completion of substantially all construction
activities on the Imperial Solar Energy Center West and Decatur projects in
2015, the completion of substantially all construction activities on the Silver
State South and McCoy projects in the first half of 2016, and lower revenue from
module plus transactions. This decrease in revenue was partially offset by
higher revenue from the commencement of construction on the Taylor and Butler
projects in late 2015 and the commencement of construction on the East Pecos
project in early 2016.


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Solar module revenue to third parties decreased by $0.9 million during 2015
compared to 2014 primarily due to a 10% decrease in the average selling price
per watt, partially offset by an 11% increase in the volume of watts sold. Solar
power system revenue increased by $188.7 million during 2015 compared to 2014
primarily due to higher revenue from module plus transactions. Our net sales for
2015 also included the sale of majority interests in the partially constructed
Desert Stateline project and North Star project and higher revenue from the
Silver State South, McCoy, and Imperial Energy Center West projects, which
commenced construction in late 2014. These 2015 net sales were offset by lower
revenue from the completion, or substantial completion, of the Desert Sunlight,
Solar Gen 2, Topaz, and Campo Verde projects in 2014.

Net sales

Components Business


We generally price and sell our solar modules per watt of nameplate power.
During 2016, a significant portion of net sales for our components business
included modules installed in our PV solar power systems described below under
"Net Sales - Systems Business." Other than the modules included in our systems,
we sold the majority of our solar modules to integrators and operators of
systems in India, the United States, and the UAE.

From time to time, we enter into module sales agreements with customers
worldwide for specific projects or volumes of modules. Such agreements are
generally short-term in nature. During 2016, substantially all of our components
business net sales, excluding modules installed in our systems, were denominated
in U.S. dollars.

We transfer title and risk of loss to the customer and recognize revenue upon
shipment or delivery, depending on the terms of the underlying sales contracts.
Pricing is typically fixed or determinable at the time of shipment, and our
customers generally do not have extended payment terms or rights of return under
these contracts. The revenue recognition policies for our components business
are described further in Note 2 "Summary of Significant Accounting Policies" to
our consolidated financial statements for the year ended December 31, 2016
included in this Annual Report on Form 10-K.

During 2016, Southern Power Company and NextEra Energy, Inc. each accounted for
more than 10% of our components business' net sales, which includes the solar
modules used in our systems projects.

Systems Business


Through our fully integrated systems business, we provide complete turn-key PV
solar power systems, or solar solutions, which may include project development,
EPC services, and O&M services. Additionally, we may temporarily own and
operate, or retain interests in, certain of our PV solar power systems, which
are also included within our systems business. We typically use the
percentage-of-completion method using actual costs incurred over total estimated
costs to construct a project (including module costs) as our standard accounting
policy and apply this method after all revenue recognition criteria have been
met. There are also instances in which we recognize revenue after a project has
been completed, primarily due to a project not being sold prior to completion or
because all revenue recognition criteria have not been met. The revenue
recognition policies for our systems business are described in further detail in
Note 2 "Summary of Significant Accounting Policies" to our consolidated
financial statements for the year ended December 31, 2016 included in this
Annual Report on Form 10-K.

During 2016, the majority of our systems business net sales were generated in
North America, and the principal customers of our systems business were Southern
Power Company; NextEra Energy, Inc.; and Recurrent Energy, LLC, each of which
accounted for more than 10% of the segment's net sales.

The following table shows net sales by reportable segment for the years ended December 31, 2016, 2015, and 2014:

                                          Years Ended                                         Change
(Dollars in thousands)       2016            2015            2014            2016 over 2015            2015 over 2014
Components               $ 1,484,300     $ 1,389,579     $ 1,102,674     $   94,721         7  %   $ 286,905        26  %
Systems                    1,467,028       2,189,416       2,288,513       (722,388 )     (33 )%     (99,097 )      (4 )%
Net sales                $ 2,951,328     $ 3,578,995     $ 3,391,187     $ (627,667 )     (18 )%   $ 187,808         6  %




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Net sales from our components segment, which includes solar modules used in our
systems projects, increased by $94.7 million in 2016 primarily as a result of a
17% increase in the volume of watts sold, partially offset by a 9% decrease in
the average selling price per watt. Net sales from our systems segment, which
excludes solar modules used in our systems projects, decreased by $722.4 million
in 2016 primarily from the sale of majority interests in the North Star and Lost
Hills projects in 2015, the completion of substantially all construction
activities on the Imperial Solar Energy Center West and Decatur projects in
2015, and the completion of substantially all construction activities on the
Silver State South and McCoy projects in the first half of 2016. This decrease
in revenue was partially offset by higher revenue from the commencement of
construction on the Taylor and Butler projects in late 2015 and the commencement
of construction on the East Pecos project in early 2016.

Net sales from our components segment, which includes solar modules used in our
systems projects, increased by $286.9 million in 2015 primarily due to a 33%
increase in the volume of watts sold, partially offset by a 5% decrease in the
average selling price per watt. Net sales from our systems segment, which
excludes solar modules used in our systems projects, decreased by $99.1 million
in 2015 primarily as a result of lower revenue from the completion, or
substantial completion, of the Desert Sunlight, Solar Gen 2, Topaz, and Campo
Verde projects in 2014. These decreases were partially offset by the sale of
majority interests in the partially constructed Desert Stateline project and
North Star project, and higher revenue from the Silver State South, McCoy, and
Imperial Solar Energy Center West projects, which commenced construction in late
2014.

Cost of sales

Components Business

Our cost of sales includes the cost of raw materials and components for
manufacturing solar modules, such as glass, transparent conductive coatings,
CdTe and other thin-film semiconductors, laminate materials, connector
assemblies, edge seal materials, and other materials and components. In
addition, our cost of sales includes direct labor for the manufacturing of solar
modules and manufacturing overhead such as engineering, equipment maintenance,
environmental health and safety, quality and production control, information
technology, and procurement costs. Our cost of sales also includes depreciation
of manufacturing plant and equipment, facility-related expenses, and costs
associated with shipping, warranties, and our solar module collection and
recycling obligation (excluding accretion).

As further described in Note 23 "Segment and Geographical Information" to our
consolidated financial statements for the year ended December 31, 2016 included
in this Annual Report on Form 10-K, we include the sale of solar modules
manufactured by our components business and used by our systems business within
net sales of our components business. Therefore, the related cost of sales is
also included within our components business.

Systems Business


For our systems business, project-related costs include development costs
(legal, consulting, transmission upgrade, interconnection, permitting, and other
similar costs), standard EPC costs (consisting primarily of BoS costs for
inverters, electrical and mounting hardware, project management and engineering
costs, and construction labor costs), and site specific costs.

The following table shows cost of sales by reportable segment for the years ended December 31, 2016, 2015, and 2014:

                                          Years Ended                                          Change
(Dollars in thousands)       2016            2015            2014            2016 over 2015             2015 over 2014
Components               $ 1,105,414     $ 1,041,726     $ 1,009,164     $   63,688         6  %   $     32,562         3 %
Systems                    1,141,935       1,618,002       1,557,082       (476,067 )     (29 )%         60,920         4 %
Cost of sales            $ 2,247,349     $ 2,659,728     $ 2,566,246     $ (412,379 )     (16 )%   $     93,482         4 %
% of net sales                  76.1 %          74.3 %          75.7 %




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Our cost of sales decreased $412.4 million, or 16%, and increased 1.8 percentage
points as a percentage of net sales when comparing 2016 with 2015. The decrease
in cost of sales was primarily the result of a $476.1 million decrease in our
systems segment cost of sales primarily due to the volume of projects under
construction and the timing of when all revenue recognition criteria were met.
This net decrease was partially offset by a $63.7 million increase in our
components segment cost of sales primarily due to the following:

• Higher costs of $190.8 million associated with the increased volume of

modules sold directly to third parties and as part of our systems business

       projects;


•      A reduction in our module collection and recycling obligation of $69.6
       million during 2015 resulting from certain recycling technology

advancements, which significantly increased the throughput of modules able

       to be recycled at a point in time, along with other material and labor
       cost reductions; and


•      Higher inventory write-downs of $22.3 million primarily related to our
       remaining crystalline silicon module inventories; partially offset by


•      Continued reductions in the cost per watt of our solar modules, which
       decreased our components segment cost of sales by $246.5 million.



Our cost of sales increased $93.5 million, or 4%, and decreased 1.4 percentage
points as a percentage of net sales when comparing 2015 with 2014. The increase
in cost of sales was driven by a $60.9 million increase in our systems segment
cost of sales primarily due to a mix of lower gross profit system projects sold
or under construction during the period. Our components segment cost of sales
increased by $32.6 million primarily as a result of the following:

• Higher costs of $309.4 million associated with the increased volume of

modules sold as part of our systems business projects; partially offset by

• Continued manufacturing cost reductions of $135.1 million;


•      A reduction in our module collection and recycling obligation of $69.6
       million, as described above; and

• Lower underutilization penalties of $55.0 million due to the improved

capacity utilization of our manufacturing facilities. During 2015, we ran

our factories at approximately 92% capacity utilization, which represented

an 11.0 percentage point increase from 2014.

Gross profit


Gross profit is affected by numerous factors, including the selling prices of
our modules and systems, our manufacturing costs, BoS costs, project development
costs, the capacity utilization of our manufacturing facilities, and foreign
exchange rates. Gross profit is also affected by the mix of net sales generated
by our components and systems businesses.

The following table shows gross profit for the years ended December 31, 2016,
2015, and 2014:
                                       Years Ended                                      Change
(Dollars in thousands)      2016          2015          2014           2016 over 2015            2015 over 2014
Gross profit             $ 703,979     $ 919,267     $ 824,941     $ (215,288 )     (23 )%   $    94,326        11 %
% of net sales                23.9 %        25.7 %        24.3 %



Gross profit as a percentage of net sales decreased by 1.8 percentage points
during 2016 compared with 2015 primarily due to the mix of lower gross profit
projects sold and under construction, higher inventory write-downs, and the
reduction in our module collection and recycling obligation in 2015 as described
above, partially offset by the higher gross margins on modules sold to third
parties. Gross profit as a percentage of net sales increased by 1.4 percentage
points during 2015 compared with 2014 primarily due to a reduction in our module
collection and recycling obligation and improved utilization of our
manufacturing facilities.


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Research and development


Research and development expense consists primarily of salaries and
personnel-related costs, the cost of products, materials, and outside services
used in our process and product R&D activities, and depreciation and
amortization expense associated with R&D specific facilities and equipment. We
maintain a number of programs and activities to improve our technology and
processes in order to enhance the performance and reduce the costs of our solar
modules and PV solar power systems using our modules.

The following table shows research and development expense for the years ended December 31, 2016, 2015, and 2014:

                                  Years Ended                                      Change
(Dollars in
thousands)             2016          2015          2014           2016 over 2015            2015 over 2014
Research and
development         $ 124,762     $ 130,593     $ 143,969     $   (5,831 ) 
    (4 )%   $ (13,376 )      (9 )%
% of net sales            4.2 %         3.6 %         4.2 %



The decrease in our research and development expense during 2016 compared to
2015 was primarily due to reductions in our R&D headcount and employee
compensation expense resulting from the restructuring activities further
discussed in Note 4 "Restructuring and Asset Impairments" to our consolidated
financial statements for the year ended December 31, 2016 included in this
Annual Report on Form 10-K. During 2016, the average conversion efficiency of
our CdTe solar modules produced was 16.4% compared to 15.6% in 2015.

The decrease in our research and development expense during 2015 compared to
2014 was primarily due to reduced material and module testing costs associated
with the development of next-generation CdTe solar modules and lower costs for
outside services, partially offset by higher employee compensation expense.
During 2015, the average conversion efficiency of our CdTe solar modules was
15.6% compared to 14.0% in 2014.

Selling, general and administrative

Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other business development and selling expenses.

The following table shows selling, general and administrative expense for the years ended December 31, 2016, 2015, and 2014:

                                  Years Ended                                          Change
(Dollars in
thousands)             2016          2015          2014             2016 over 2015                2015 over 2014
Selling, general
and
administrative      $ 261,994     $ 255,192     $ 253,827     $     6,802             3 %   $     1,365             1 %
% of net sales            8.9 %         7.1 %         7.5 %



Our selling, general and administrative expense increased by $6.8 million, or
3%, and was 8.9% and 7.1% as a percentage of net sales, when comparing 2016 with
2015, respectively. The increase was primarily attributable to higher
development costs for early-stage projects and impairments of certain project
assets, partially offset by lower employee compensation expense due to the
various restructuring activities described in Note 4 "Restructuring and Asset
Impairments" to our consolidated financial statements for the year ended
December 31, 2016 included in this Annual Report on Form 10-K, and lower
professional fees associated with the formation and IPO of the Partnership.

Our selling, general and administrative expense increased by $1.4 million, or
1%, and was 7.1% and 7.5% as a percentage of net sales, when comparing 2015 with
2014, respectively. The increase was primarily due to higher employee
compensation expense and higher professional fees associated with the formation
and IPO of the Partnership, partially offset by lower project development
expense and lower accretion expense associated with the reduction in our module
collection and recycling obligation.



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Production start-up


Production start-up expense consists primarily of employee compensation and
other costs associated with operating a production line before it has been
qualified for full production, including the cost of raw materials for solar
modules run through the production line during the qualification phase and
applicable facility related costs. Costs related to equipment upgrades and
implementation of manufacturing process improvements are also included in
production start-up expense as well as costs related to the selection of a new
site, including related legal and regulatory costs, to the extent we cannot
capitalize these expenditures. In general, we expect production start-up expense
per production line to be higher when we build an entirely new manufacturing
facility compared with the addition of new production lines at an existing
manufacturing facility, primarily due to the additional infrastructure
investment required when building an entirely new facility.

The following table shows production start-up expense for the years ended December 31, 2016, 2015, and 2014:

                                    Years Ended                             

Change

(Dollars in thousands)     2016         2015        2014         2016 over 2015        2015 over 2014
Production start-up      $ 1,021     $ 16,818     $ 5,146     $ (15,797 )   (94 )%   $   11,672    227 %
% of net sales                 - %        0.5 %       0.2 %



During 2016, we incurred certain production start-up expense related to our next
generation CdTe module offerings. Production start-up expense for 2015 was
primarily related to our previous crystalline silicon manufacturing operations
at our facility in Kulim, Malaysia, which commenced during the third quarter of
2014.

Restructuring and asset impairments


Restructuring and asset impairments includes those expenses incurred related to
material restructuring initiatives and includes any associated asset
impairments, costs for employee termination benefits, costs for contract
terminations and penalties, and other restructuring related costs. Such
restructuring initiatives are intended to align the organization with current
business conditions and to reduce costs.

The following table shows restructuring and asset impairments for the years ended December 31, 2016, 2015, and 2014:

                                   Years Ended                                       Change
(Dollars in
thousands)             2016           2015           2014           2015 over 2014           2014 over 2013
Restructuring and
asset impairments   $ 818,792     $        -     $        -     $  818,792       100 %   $         -         - %
% of net sales           27.7 %            - %            - %



During 2016, our restructuring and asset impairments included $662.5 million of
charges primarily related to our November 2016 decision to accelerate our
transition to Series 6 module manufacturing and restructure our operations,
$87.5 million of charges associated with the end of our crystalline silicon
module manufacturing operations, and $68.8 million of goodwill impairment
charges. See Note 4 "Restructuring and Asset Impairments" to our consolidated
financial statements for the year ended December 31, 2016 included in this
Annual Report on Form 10-K for additional information. We expect to incur up to
$80 million of additional charges related to these actions as we complete the
transition to Series 6 modules manufacturing in 2017 and 2018. As a result of
these actions, we also expect to reduce our annual cost of sales and operating
expenses by approximately $80 million and $60 million, respectively.


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Foreign currency loss, net

Foreign currency loss, net consists of the net effect of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our subsidiaries' functional currencies.

The following table shows foreign currency loss, net for the years ended December 31, 2016, 2015, and 2014:

                                  Years Ended                                     Change
(Dollars in
thousands)             2016          2015          2014           2016 over 2015           2015 over 2014
Foreign currency
loss, net           $ (14,007 )   $  (6,868 )   $  (1,461 )   $   (7,139 )     104 %   $   (5,407 )     370 %



Foreign currency loss, net increased during 2016 compared with 2015 primarily as
a result of hedging activities related to our subsidiaries in India as well as
differences between our economic hedge positions and the underlying exposures
along with changes in foreign currency rates. Foreign currency loss, net
increased during 2015 compared with 2014 primarily due to differences between
our economic hedge positions and the underlying exposure along with changes in
foreign currency rates.

Interest income

Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest earned from notes receivable and late customer payments.

The following table shows interest income for the years ended December 31, 2016, 2015, and 2014:

                                       Years Ended                                        Change
(Dollars in thousands)      2016          2015          2014            2016 over 2015              2015 over 2014
Interest income          $  25,193     $  22,516     $  18,030     $    2,677           12 %   $    4,486           25 %



Interest income during 2016 increased compared to 2015 primarily as a result of
improved yields on our fixed income marketable securities. Interest income
during 2015 increased compared to 2014 primarily as a result of higher average
balances of notes receivable due from affiliates.

Interest expense, net


Interest expense is incurred on various debt financings. We capitalize interest
expense into our project assets or property, plant and equipment when such costs
qualify for interest capitalization, which reduces the amount of net interest
expense reported in any given period.

The following table shows interest expense, net for the years ended December 31,
2016, 2015, and 2014:
                                       Years Ended                                     Change

(Dollars in thousands) 2016 2015 2014 2016 over 2015

           2015 over 2014

Interest expense, net $ (20,538 ) $ (6,975 ) $ (1,982 ) $ (13,563 ) 194 % $ (4,993 ) 252 %




Interest expense, net of amounts capitalized, increased in 2016 compared to 2015
primarily due to lower interest costs capitalized to certain projects that were
substantially completed in 2016 and higher levels of project specific debt
financings outstanding during 2016. Interest expense, net of amounts
capitalized, increased in 2015 compared to 2014 primarily as a result of higher
levels of project specific debt financings.

Other income (expense), net


Other income (expense), net is primarily comprised of miscellaneous items, and
realized gains and losses on the sale of marketable securities and cost method
investments.

The following table shows other expense, net for the years ended December 31,
2016, 2015, and 2014:
                                  Years Ended                                     Change
(Dollars in
thousands)             2016          2015          2014           2016 over 2015           2015 over 2014
Other income
(expense), net      $  40,252     $  (5,502 )   $  (4,485 )   $  45,754    
 (832 )%   $   (1,017 )      23 %



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Other income (expense), net increased in 2016 compared to 2015 primarily due to
realized gains of $41.3 million on the sale of certain restricted investments
driven by an effort to align the currencies of the investments with those of the
corresponding collection and recycling liabilities, the resolution of an
outstanding matter with a former customer, and the reversal of the outstanding
contingent consideration associated with our TetraSun acquisition as the result
of our executive management's decision to end production of our crystalline
silicon modules, which adversely affected the likelihood of achieving certain
module shipment volume milestones, partially offset by the impairment of a cost
method investment. See Note 4 "Restructuring and Asset Impairments" to our
consolidated financial statements for further discussion relating to these
restructuring activities. Other income (expense), net in 2015 was consistent
with other income (expense), net in 2014.

Income tax (expense) benefit


Income tax expense or benefit, deferred tax assets and liabilities, and
liabilities for unrecognized tax benefits reflect our best estimate of current
and future taxes to be paid. We are subject to income taxes in both the United
States and numerous foreign jurisdictions in which we operate; principally
Australia, India, and Malaysia. Significant judgments and estimates are required
in determining our consolidated income tax expense. The statutory federal
corporate income tax rate in the United States is 35.0%, while the tax rates in
Australia, India, and Malaysia are 30.0%, 34.6%, and 24.0%, respectively. In
Malaysia, we have been granted a long-term tax holiday, scheduled to expire in
2027, pursuant to which substantially all of our income earned in Malaysia is
exempt from income tax.

The following table shows income tax (expense) benefit for the years ended December 31, 2016, 2015, and 2014:

                                   Years Ended                                       Change
(Dollars in
thousands)              2016           2015          2014           2016 over 2015            2015 over 2014
Income tax
(expense) benefit   $ (58,219 )    $   6,156      $ (31,188 )   $ (64,375 )   (1,046 )%   $  37,344      (120 )%
Effective tax
rate                    (12.3 )%        (1.2 )%         7.2 %



Our tax rate is affected by recurring items, such as tax rates in foreign
jurisdictions and the relative amounts of income we earn in those jurisdictions.
The rate is also affected by discrete items that may occur in any given year,
but are not consistent from year to year. Income tax expense increased by $64.4
million during 2016 compared to 2015 primarily due to certain U.S. taxes on a
cash distribution received from our foreign subsidiary, partially offset by tax
benefits from restructuring charges and a $35.4 million reversal of an uncertain
tax position related to the income of a foreign subsidiary. Income tax expense
decreased by $37.3 million during 2015 compared with 2014. The decrease in
income tax expense was primarily the result of a $41.7 million discrete tax
benefit associated with the receipt of a private letter ruling during 2015. See
Note 20 "Income Taxes" to our consolidated financial statements included in this
Annual Report on Form 10-K for additional information.

Equity in earnings of unconsolidated affiliates, net of tax


Equity in earnings of unconsolidated affiliates, net of tax represents our
proportionate share of the earnings or losses of unconsolidated affiliates with
whom we have made equity method investments as well as any gains or losses on
the sale or disposal of such investments.

The following table shows equity in earnings of unconsolidated affiliates, net of tax for the years ended December 31, 2016, 2015, and 2014:

                                  Years Ended                               

Change

(Dollars in
thousands)             2016          2015          2014           2016 over 2015           2015 over 2014
Equity in
earnings, net of
tax                 $ 171,945     $  20,430     $  (4,949 )   $  151,515    

742 % $ 25,379 (513 )%




Equity in earnings of unconsolidated affiliates, net of tax increased during
2016 compared to 2015 primarily due to the recognition of a gain of $125.1
million, net of tax, on the sale of our residual interest in the Desert
Stateline project to 8point3 Operating Company, LLC ("OpCo"), a subsidiary of
the Partnership; higher equity in earnings from our investments in OpCo; and
higher equity in earnings from our investment in the Desert Stateline project
prior to its sale. Equity in earnings of unconsolidated affiliates, net of tax
increased during 2015 compared to 2014 primarily as a result of our investment
in OpCo, along with the impairment of certain equity method investments during
2014.


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Liquidity and Capital Resources


As of December 31, 2016, we believe that our cash, cash equivalents, marketable
securities, cash flows from operating activities including the contracted
portion of our advanced-stage project pipeline, availability under our Revolving
Credit Facility considering minimum liquidity covenant requirements, and access
to the capital markets will be sufficient to meet our working capital, systems
project investment, and capital expenditure needs for at least the next
12 months. We monitor our working capital to ensure we have adequate liquidity,
both domestically and internationally.

We intend to maintain appropriate debt levels based upon cash flow expectations,
our overall cost of capital, and expected cash requirements for operations,
capital expenditures, and strategic discretionary spending. In the future, we
may also engage in additional debt or equity financings, including project
specific debt financings. We believe that when necessary, we will have adequate
access to the capital markets, although our ability to raise capital on terms
commercially acceptable to us could be constrained if there is insufficient
lender or investor interest due to industry-wide or company-specific
concerns. Such financings could result in increased debt service expenses or
dilution to our existing stockholders.

As of December 31, 2016, we had $2.0 billion in cash, cash equivalents, and
marketable securities compared to $1.8 billion as of December 31, 2015. Cash,
cash equivalents, and marketable securities as of December 31, 2016 increased
primarily as the result of proceeds from the sale of certain equity method
investments and cash generated from operating activities, partially offset by
expenditures for property, plant, and equipment. As of December 31, 2016, $1.2
billion of our cash, cash equivalents, and marketable securities were held by
foreign subsidiaries and were primarily based in U.S. dollar, Euro, and
Malaysian ringgit denominated holdings. As of December 31, 2015, $1.5 billion of
our cash, cash equivalents, and marketable securities were held by foreign
subsidiaries and were primarily based in U.S. dollar and Euro denominated
holdings.

We utilize a variety of tax planning and financing strategies in an effort to
ensure that our worldwide cash is available in the locations in which it is
needed. If these funds were needed for our operations in the U.S., we could be
required to accrue and pay U.S. taxes to repatriate such funds. In November
2016, we distributed $750.0 million of cash to the U.S. to fund capital
investments associated with our transition to Series 6 module manufacturing.
Other than this distribution, we intend to permanently reinvest our unremitted
earnings outside of the U.S., with the exception of Canada and Germany, and our
future plans do not demonstrate a need to repatriate additional amounts to fund
our domestic operations. Furthermore, changes to foreign government banking
regulations may restrict our ability to move funds among various jurisdictions
under certain circumstances, which could negatively impact our access to
capital, resulting in an adverse effect on our liquidity and capital resources.

Our systems business requires significant liquidity and is expected to continue
to have significant liquidity requirements in the future. The net amount of our
project assets, deferred project costs, billings in excess of costs and
estimated earnings, and payments and billings for deferred project costs, which
approximates our net capital investment in the development and construction of
systems projects was $1.1 billion as of December 31, 2016. Solar power project
development and construction cycles, which span the time between the
identification of a site location and the commercial operation of a system, vary
substantially and can take many years to mature. As a result of these long
project cycles and strategic decisions to finance the construction of certain
projects, we may need to make significant up-front investments of resources in
advance of the receipt of any cash from the sale of such projects. These
up-front investments may include using our working capital, project financing
arrangements, or availability under our Revolving Credit Facility to finance the
construction of such projects. For example, we may have to complete, or
substantially complete, the construction of a systems project before such
project is sold. Delays in construction progress or in completing the sale of
our systems projects that we are self-financing may also impact our liquidity.
We have historically financed these up-front systems project investments
primarily using working capital. In certain circumstances, we may need to
finance construction costs exclusively using working capital, if project
financing becomes unavailable due to market-wide, regional, or other concerns.

We are partnering with local developers on project development in markets around
the world where we may take an equity stake in a project for a number of years.
We are also self-developing projects in such markets where we may hold all or a
significant portion of the equity in the projects for several years. Given the
duration of these investments and the currency risk relative to the U.S. dollar
in some of these new markets, we continue to explore local financing
alternatives. Should these financing alternatives be unavailable or too cost
prohibitive, we could be exposed to significant currency risk and our liquidity
could be adversely impacted.


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Additionally, we may elect to retain an ownership interest in certain systems
projects after they become operational if we determine it would be of economic
and strategic benefit to do so. If, for example, we cannot sell a systems
project at economics that are attractive to us or potential customers are
unwilling to assume the risks and rewards typical of PV solar power system
ownership, we may instead elect to temporarily own and operate such systems
until we can sell the systems on economically attractive terms. As with
traditional electricity generation assets, the selling price of a PV solar power
system could be higher at or post-completion to reflect the elimination of
construction and performance risks and other uncertainties. The decision to
retain ownership of a system impacts liquidity depending upon the size and cost
of the project. As of December 31, 2016, we had $448.6 million of PV solar power
systems that have been placed in service, primarily in international markets. We
may elect to enter into temporary or long-term project financing to reduce the
impact on our liquidity and working capital with regards to such projects and
systems. We may also consider entering into tax equity or other arrangements
with respect to ownership interests in certain of our projects, including
selling interests in our projects to the Partnership described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Trends and Uncertainties - 8point3 Energy Partners LP,"
which could cause a portion of the economics of such projects to be recognized
over time.

The following additional considerations have impacted or may impact our liquidity in 2017 and beyond:

• The amount of accounts receivable, unbilled and retainage as of

December 31, 2016 was $205.5 million, which included $199.3 million of

unbilled amounts. These unbilled accounts receivable represent revenue

       that has been recognized in advance of billing the customer under the
       terms of the underlying construction contracts. Such construction costs
       have been funded with working capital, and the unbilled amounts are
       expected to be billed and collected from customers during the next 12

months. Once we meet the billing criteria under a construction contract,

we bill our customers accordingly and reclassify the accounts receivable,

       unbilled and retainage to accounts receivable trade, net. The amount of
       accounts receivable, unbilled and retainage as of December 31, 2016 also
       included $6.3 million of retainage, which represents the portion of a
       systems project contract price earned by us for work performed, but held

for payment by our customer as a form of security until we reach certain

construction milestones. Such retainage amounts relate to construction

       costs incurred and construction work already performed.


• The amount of solar module inventory and BoS parts as of December 31, 2016

was $365.1 million. As we continue with the construction of our

advanced-stage project pipeline, we must produce solar modules and procure

BoS parts in the required volumes to support our planned construction

schedules. As part of this construction cycle, we typically must

manufacture modules or acquire the necessary BoS parts for construction

       activities in advance of receiving payment for such materials, which may
       temporarily reduce our liquidity. Once solar modules and BoS parts are

installed in a project, such installed amounts are classified as either

project assets, deferred project costs, PV solar power systems, or cost of

       sales depending upon whether the project is subject to a definitive sales
       contract and whether all revenue recognition criteria have been met. As of

December 31, 2016, $104.9 million, or 35%, of our solar module inventory

       was either on-site or in-transit to our systems projects. All BoS parts
       are for our systems business projects.



•      We may commit working capital during 2017 and beyond to acquire solar

power projects in various stages of development, including advanced-stage

projects with PPAs, and to continue developing those projects as

necessary. Depending upon the size and stage of development, costs to

acquire such solar power projects could be significant. When evaluating

       project acquisition opportunities, we consider both the strategic and
       financial benefits of any such acquisitions.



•      Joint ventures or other strategic arrangements with partners are a key

part of our strategy. We have initiatives in several markets to expedite

our penetration of those markets and establish relationships with

potential customers. Some of these arrangements involve and are expected

to involve significant investments or other allocations of capital that

could reduce our liquidity or require us to pursue additional sources of

financing, assuming such sources are available to us. Additionally, we

have elected and may in the future elect or be required to temporarily

retain a noncontrolling ownership interest in certain underlying systems

projects we develop, supply modules to, or construct. Any such retained

       ownership interest is expected to impact our liquidity to the extent we do
       not obtain new sources of capital to fund such investments.


• We expect to make significant capital investments over the next two years

as we transition our production to Series 6 module technology and purchase

the related manufacturing equipment. We expect the aggregate capital

investment for this program to be approximately $1 billion. During 2017,

we expect to spend $525 million to $625 million for capital expenditures,

the majority of which is associated with the Series 6 transition. We

believe these capital expenditures will further increase our solar module

       conversion efficiencies, reduce manufacturing costs, and reduce the
       overall cost of systems employing our modules.




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Cash Flows

The following table summarizes the key cash flow metrics for the years ended December 31, 2016, 2015, and 2014 (in thousands):

                                                                   Years 

Ended

                                                        2016           2015 

2014

Net cash provided by (used in) operating
activities                                           $ 206,753     $ (325,209 )   $ 735,516
Net cash provided by (used in) investing
activities                                             144,520       (156,177 )    (387,818 )
Net cash (used in) provided by financing
activities                                            (136,393 )      101,207       (46,907 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash                         (6,306 )      (19,272 )     (19,487 )
Net increase (decrease) in cash, cash equivalents
and restricted cash                                  $ 208,574     $ (399,451 )   $ 281,304



Operating Activities

The increase in cash provided by operating activities during 2016 was primarily
driven by the lower volume of solar power projects under development and
construction, which generally require significant liquidity when such projects
are financed using working capital. Specifically, the reduction in the volume of
our system business affected our trade accounts receivable, project assets,
deferred project costs, and certain current liabilities. The increase in cash
provided by operating activities was also driven by the sale of certain other
solar power projects at or near substantial completion. The decrease in cash
provided by operating activities during 2015 was primarily driven by the
increase in project assets and deferred project costs resulting from our
financing the construction of certain projects with our working capital and
increases in our trade accounts receivable.

Investing Activities


The increase in cash provided by investing activities during 2016 was primarily
due to proceeds from sales of equity and cost method investments of $291.5
million, including the sale of our remaining interest in the Desert Stateline
project, and higher net proceeds from sales and maturities of marketable
securities and restricted investments of $102.9 million during 2016 compared to
$203.1 million of net purchases of marketable securities and restricted
investments in 2015. The effects of these items were partially offset by lower
distributions received from equity method investments in 2016. The decrease in
cash used in investing activities during 2015 was driven by the receipt of
$239.0 million from the IPO of the Partnership, and lower purchases of property,
plant and equipment. The effects of these items were partially offset by net
purchases of marketable securities of $203.1 million during 2015 compared to
$77.5 million during 2014.

Financing Activities

Cash used in financing activities during 2016 was mainly driven by payments of
long-term debt of $137.4 million. Cash provided by financing activities during
2015 primarily resulted from $146.0 million of proceeds from borrowings under
our project construction credit facilities in Chile, India, and Japan and $44.7
million of proceeds from the leaseback financing associated with the Maryland
Solar project, partially offset by $47.1 million of payments of long-term debt.


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Contractual Obligations


The following table presents our contractual obligations as of December 31, 2016
(in thousands), which consists of legal commitments requiring us to make fixed
or determinable cash payments. We purchase raw materials for inventory,
manufacturing equipment, construction materials, and various services from a
variety of vendors. During the normal course of business, in order to manage
manufacturing and construction lead times and help assure an adequate supply of
certain items, we enter into agreements with suppliers that either allow us to
procure goods and services when we choose or that establish purchase
requirements over the term of the agreement.
                                                             Payments Due by Year
                                               Less Than      1 - 3        3 - 5      More Than
                                  Total         1 Year        Years        Years       5 Years
Long-term debt obligations     $   196,691    $   27,958    $  10,574    $ 23,070    $  135,089
Interest payments (1)              102,173        22,469       21,718      19,600        38,386
Capital lease obligations              582           420          162           -             -

Operating lease obligations 192,536 16,847 26,605 14,249 134,835 Sale-leaseback payments (2) 14,334 5,219 9,115

    -             -
Purchase obligations (3)           524,962       464,271       33,611       8,725        18,355
Recycling obligations              166,277             -            -           -       166,277
Contingent consideration (4)        30,092        19,620       10,472           -             -
Other obligations (5)               38,952         7,763        9,675       8,632        12,882
Total                          $ 1,266,599    $  564,567    $ 121,932    $ 74,276    $  505,824



(1)    Includes estimated cash interest to be paid over the remaining terms of

the underlying debt. Interest payments are based on fixed and floating

       rates in effect at December 31, 2016.



(2)    Sale-leaseback payments represent the fixed rent payments associated with
       our leaseback of the Maryland Solar project from a subsidiary of the
       Partnership. See Note 12 "Investments in Unconsolidated Affiliates and
       Joint Ventures" to our consolidated financial statements for the year
       ended December 31, 2016 included in this Annual Report on Form 10-K for
       further information.


(3) Purchase obligations are agreements to purchase goods or services that are

noncancelable, enforceable, and legally binding and that specify all

significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum, or variable price provisions; and the approximate timing

       of the transactions.



(4)    In connection with business or project acquisitions, we may agree to pay

additional amounts to the sellers upon achievement of certain milestones.

See Note 16 "Commitments and Contingencies" to our consolidated financial

statements for the year ended December 31, 2016 included in this Annual

Report on Form 10-K for further information.

(5) Includes expected letter of credit fees and unused revolver fees.

In addition to the amounts shown in the table above, we have recorded $89.3 million of unrecognized tax benefits as liabilities in accordance with Accounting Standards Codification ("ASC") 740, Income Taxes, and we are uncertain as to if or when such amounts may be settled.

Off-Balance Sheet Arrangements


We have no off-balance sheet debt or similar obligations, other than financial
assurance related instruments and operating leases, which are not classified as
debt. We do not guarantee any third-party debt. See Note 16 "Commitments and
Contingencies" to our consolidated financial statements for the year ended
December 31, 2016 included in this Annual Report on Form 10-K for further
information about our financial assurance related instruments.

Recent Accounting Pronouncements

See Note 3 "Recent Accounting Pronouncements" to our consolidated financial statements for the year ended December 31, 2016 included in this Annual Report on Form 10-K for a summary of recent accounting pronouncements.

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Critical Accounting Estimates


In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates and
assumptions that affect the amounts of reported assets, liabilities, revenues,
and expenses, as well as the disclosure of contingent liabilities. Some of our
accounting policies require the application of significant judgment in the
selection of the appropriate assumptions for making these estimates. By their
nature, these judgments are subject to an inherent degree of uncertainty. We
base our judgments and estimates on our historical experience, our forecasts,
and other available information, as appropriate. The actual results experienced
by us may differ materially and adversely from our estimates. To the extent
there are material differences between our estimates and the actual results, our
future results of operations will be affected. Our significant accounting
policies are described in Note 2 "Summary of Significant Accounting Policies" to
our consolidated financial statements for the year ended December 31, 2016
included in this Annual Report on Form 10-K. Our critical accounting estimates,
which require the most significant management estimates and judgment in
determining the amounts reported in our consolidated financial statements
included in this Annual Report on Form 10-K, are as follows:

Revenue Recognition - Systems Business. We recognize revenue for arrangements
entered into by our systems business generally using two revenue recognition
models, following the guidance in either ASC 605-35, Construction-Type and
Production-Type Contracts, or ASC 360-20, Real Estate Sales, for arrangements
which include land or land rights.

Systems business sales arrangements in which we construct a PV solar power
system for a specific customer on land that is controlled by the customer, and
has not been previously controlled by First Solar, are accounted for under ASC
605-35. For such sales arrangements, we use the percentage-of-completion method,
as described further below, using actual costs incurred over total estimated
costs to develop and construct the system (including module costs) as our
standard accounting policy.

Systems business sales arrangements in which we convey control of land or land
rights as part of the transaction are accounted for under ASC 360-20.
Accordingly, we use one of the following revenue recognition methods, based upon
an evaluation of the substance and form of the terms and conditions of such real
estate sales:

(i) We apply the percentage-of-completion method, as further described below,

to certain real estate sales arrangements in which we convey control of

land or land rights when a sale has been consummated, we have transferred

the usual risks and rewards of ownership to the buyer, the initial and

continuing investment criteria have been met, we have the ability to

estimate our costs and progress toward completion, and all other revenue

recognition criteria have been met. When evaluating whether the usual

risks and rewards of ownership have transferred to the buyer, we consider

whether we have or may be contingently required to have any prohibited

forms of continuing involvement with the project pursuant to ASC 360-20.

The initial and continuing investment requirements, which demonstrate a

buyer's commitment to honor its obligations for the sales arrangement, can

typically be met through the receipt of cash or an irrevocable letter of

       credit from a highly creditworthy lending institution.


(ii) Depending on whether the initial and continuing investment requirements

have been met and whether collectability from the buyer is reasonably

       assured, we may align our revenue recognition and release of project
       assets or deferred project costs to cost of sales with the receipt of
       payment from the buyer if the sale has been consummated and we have
       transferred the usual risks and rewards of ownership to the buyer.



For any systems business sales arrangements containing multiple deliverables not
required to be accounted for under ASC 605-35 (long-term construction contracts)
or ASC 360-20 (real estate sales), we analyze each activity within the sales
arrangement to adhere to the separation guidelines of ASC 605-25 for
multiple-element arrangements. We allocate revenue for any transactions
involving multiple elements to each unit of accounting based on its relative
selling price and recognize revenue for each unit of accounting when all revenue
recognition criteria for a unit of accounting have been met.

Our system business sales arrangements within the scope of ASC 360-20 involve a
range of standard product warranties, which include limited solar module
warranties, limited BoS warranties, and system capacity and energy performance
testing. Each standard product warranty program represents a risk of the module
manufacturer or system EPC contractor, and is not an obligation or risk of a
system owner. These programs do not represent any guarantee of energy output and
relate to the underlying performance of the system assets. Consequently, our
product warranty programs do not represent any guarantees of cash flows related
to the systems, and we have not assumed any of the risks and rewards of
ownership with respect to such programs. Separately, our system customers may
also engage us to provide O&M services, which would typically include an
effective availability guarantee. Our availability guarantees are an incremental
offering within separate arrangements for O&M services. Availability guarantees
are guarantees of our own service performance and do not represent guarantees of
a system's output or cash flows. Accordingly, our product warranties and market
based service contracts are not forms of continuing involvement that would
indicate that substantially all of the risks and rewards of ownership have not
been transferred to the system owner.

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Revenue Recognition - Percentage-of-Completion. In applying the
percentage-of-completion method, we use the actual costs incurred relative to
the total estimated costs (including module costs) in order to determine the
progress towards completion and calculate the corresponding amount of revenue
and profit to recognize. Costs incurred include solar modules, direct materials,
labor, subcontractor costs, and those indirect costs related to contract
performance, such as indirect labor and supplies. We recognize solar module and
direct material costs as incurred when such items have been installed in a
system. When contracts specify that title to solar modules and direct materials
transfers to the customer before installation has been performed, we will not
recognize revenue or the associated costs until those materials are installed
and have met all other revenue recognition requirements. We consider solar
modules and direct materials to be installed when they are permanently placed or
affixed to a PV solar power system as required by engineering designs. Solar
modules manufactured and owned by us that will be used in our systems remain
within inventory until such modules are installed in a system.

The percentage-of-completion method of revenue recognition requires us to make
estimates of net contract revenues and costs to complete our projects. In making
such estimates, management judgments are required to evaluate significant
assumptions including the amount of net contract revenues, the cost of materials
and labor, expected labor productivity, the impact of potential variances in
schedule completion, and the impact of any penalties, claims, change orders, or
performance incentives.

If estimated total costs on any contract are greater than the net contract
revenues, we recognize the entire estimated loss in the period the loss becomes
known. The cumulative effect of the revisions to estimates related to net
contract revenues and costs to complete contracts, including penalties, claims,
change orders, performance incentives, anticipated losses, and others are
recorded in the period in which the revisions to estimates are identified and
the amounts can be reasonably estimated. The effect of the changes on future
periods are recognized as if the revised estimates had been used since revenue
was initially recognized under the contract. Such revisions could occur in any
reporting period, and the effects may be material depending on the size of the
contracts or the changes in estimates.

Accrued Solar Module Collection and Recycling Liability. We recognize expense at
the time of sale for the estimated cost of our future obligations for collecting
and recycling solar modules covered by our solar module collection and recycling
program. We estimate the cost of our collection and recycling obligations based
on the present value of the expected probability-weighted future cost of
collecting and recycling the solar modules, which includes estimates for the
cost of packaging materials, the cost of freight from the solar module
installation sites to a recycling center, the material, labor, capital costs,
and scale of recycling centers, and an estimated third-party profit margin and
return on risk for collection and recycling services. We base these estimates on
(i) our experience collecting and recycling our solar modules, (ii) the expected
timing of when our solar modules will be returned for recycling, and (iii)
expected economic conditions at the time the solar modules will be collected and
recycled. In the periods between the time of sale and the related settlement of
the collection and recycling obligation, we accrete the carrying amount of the
associated liability by applying the discount rate used for its initial
measurement. We periodically review our estimates of expected future recycling
costs and may adjust our liability accordingly.

At December 31, 2016, our estimated liability for collecting and recycling solar
modules covered by our collection and recycling program was $166.3 million. A 1%
increase in the annualized inflation rate used in our estimated future
collection and recycling cost per module would increase our liability by $37.5
million, and a 1% decrease in that rate would decrease our liability by $31.0
million.

Product Warranties. We provide a limited PV solar module warranty covering
defects in materials and workmanship under normal use and service conditions for
generally 10 years. We also typically warrant that modules installed in
accordance with agreed-upon specifications will produce at least 97% of their
labeled power output rating during the first year, with the warranty coverage
reducing by 0.7% every year thereafter throughout the 25-year performance
warranty period. In resolving claims under both the limited defect and power
output warranties, we typically have the option of either repairing or replacing
the covered modules or, under the limited power output warranty, providing
additional modules to remedy the power shortfall. We also have the option to
make a payment for the then-current market price of modules to resolve the
claims. Such limited module warranties are standard for module sales and may be
transferred from the original purchasers of the solar modules to subsequent
purchasers upon resale.


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As an alternative form of our standard limited module power output warranty, we
also offer an aggregated or system-level limited module performance
warranty. This system-level limited module performance warranty is designed for
utility-scale systems and provides 25-year system-level energy degradation
protection. In addition, this warranty represents a practical expedient to
address the challenge of identifying, from the potential millions of modules
installed in a utility-scale system, individual modules that may be performing
below warranty thresholds by focusing on the aggregate energy generated by the
system rather than the power output of individual modules. The system-level
module performance warranty typically is calculated as a percentage of a
system's expected energy production, adjusted for certain actual site
conditions, with the warranted level of performance declining each year in a
linear fashion, but never falling below 80% during the term of the warranty. In
resolving claims under the system-level limited module performance warranty to
restore the system to warranted performance levels, we first must validate that
the root cause of the issue is due to module performance; we then have the
option of either repairing or replacing the covered modules, providing
supplemental modules, or making a cash payment. Consistent with our limited
module power output warranty, when we elect to satisfy a warranty claim by
providing replacement or supplemental modules under the system-level module
performance warranty, we do not have any obligation to pay for the labor to
remove or install modules.

In addition to our limited solar module warranties described above, for PV solar
power systems built by us, we typically provide a limited product warranty on
BoS parts for defects in engineering design, installation, and workmanship for a
period of one to two years following the substantial completion of a system. In
resolving claims under such BoS warranties, we have the option of remedying the
defect through repair or replacement.

When we recognize revenue for module or systems sales, we accrue liabilities for
the estimated future costs of meeting our limited warranty obligations. We make
and revise these estimates based primarily on the number of our solar modules
under warranty installed at customer locations, our historical experience with
warranty claims, our monitoring of field installation sites, our internal
testing of and the expected future performance of our solar modules and BoS
components, and our estimated per-module replacement costs.

At December 31, 2016, our accrued liabilities for product warranties was $252.4
million. We estimate our limited product warranty liability for power output and
defects in materials and workmanship under normal use and service conditions
based on a warranty return rate of approximately 1% to 3% for modules covered
under warranty. As of December 31, 2016, 1% change in the estimated warranty
return rate would change our module warranty liability by $83.5 million, and a
1% change in the estimated warranty return rate for BoS components would not
have a material impact on the associated warranty liability.

Performance Testing. For systems sales arrangements, we also conduct performance
testing of a system prior to substantial completion to confirm the system meets
its operational and capacity expectations noted in the EPC agreement. In
addition, we may provide an energy performance test during the first or second
year of a system's operation to demonstrate that the actual energy generation
for the applicable year meets or exceeds the modeled energy expectation, after
certain adjustments. These tests are based on meteorological, energy, and
equipment performance data measured at the system's location as well as certain
projections of such data over the remaining measurement period. If there is an
underperformance event with regards to these tests, we may incur liquidated
damages as a percentage of the EPC contract price. If necessary, we accrue
estimates for liquidated damages at the end of each reporting period based on
our performance testing. In certain instances, a bonus payment may be received
at the end of the first year if the system performs above a specified level.

As part of our O&M service offerings, we typically offer an effective
availability guarantee, which stipulates that a system will be available to
generate a certain percentage of total possible energy during a specific period
after adjusting for factors outside of our control as the service provider, such
as weather, curtailment, outages, force majeure, and other conditions that may
affect system availability. Effective availability guarantees are only offered
as part of our O&M services and terminate at the end of an O&M arrangement.
These guarantees are based on meteorological, energy, and equipment performance
data measured at the system's location as well as certain projections of such
data over the remaining measurement period. If we fail to meet the contractual
threshold for these guarantees, we may incur liquidated damages for certain lost
energy under the PPA. If necessary, we accrue estimates for liquidated damages
at the end of each reporting period based on our effective availability
calculations. Conversely, many of our O&M agreements contain provisions whereby
we may receive a bonus payment if system availability exceeds a separate
threshold.


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Accounting for Income Taxes. We are subject to the income tax laws of the United
States, and its states and municipalities, and those of the foreign
jurisdictions in which we have significant business operations. These tax laws
are complex and subject to different interpretations by the taxpayer and the
relevant governmental taxing authorities. We must make judgments and
interpretations about the application of these inherently complex tax laws when
determining our provision for income taxes and must also make estimates about
when in the future certain items affect taxable income in the various tax
jurisdictions. Disputes over interpretations of the tax laws may be settled with
the taxing authority upon examination or audit. We regularly evaluate the
likelihood of assessments in each of the taxing jurisdictions resulting from
current and future examinations, and we record tax liabilities as appropriate.

We establish liabilities for potential additional taxes based on our assessment
of the outcome of our tax positions. Once established, we adjust the liabilities
when additional information becomes available or when an event occurs requiring
an adjustment. Significant judgment is required in making these estimates and
the actual cost of a tax assessment, fine, or penalty may ultimately be
materially different from our recorded liabilities, if any.

In preparing our consolidated financial statements, we calculate our income tax
expense based on our interpretation of the tax laws and regulations in the
various jurisdictions where we conduct business. This requires us to estimate
our current tax obligations, assess uncertain tax positions, and assess
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities. These temporary differences result in
deferred tax assets and liabilities.

We must also assess the likelihood that each of our deferred tax assets will be
realized. To the extent we believe that realization of any of our deferred tax
assets is not more likely than not, we establish a valuation allowance. When we
establish a valuation allowance or increase this allowance in a reporting
period, we generally record a corresponding tax expense in our consolidated
statement of operations. Conversely, to the extent circumstances indicate that a
valuation allowance is no longer necessary, that portion of the valuation
allowance is reversed, which generally reduces our overall income tax expense.

We also consider the unremitted earnings of our foreign subsidiaries and
determine whether such amounts are indefinitely reinvested. No additional U.S.
or non-U.S. taxes have been accrued that may be incurred if such amounts were
repatriated to the United States. We have concluded that, except for the
earnings of our Canadian and German subsidiaries and with respect to previously
taxed income, all such accumulated earnings are currently indefinitely
reinvested or that if upon repatriation no additional U.S. or non-U.S. tax would
be due. If our intention to indefinitely reinvest the earnings of our foreign
subsidiaries changes, additional U.S. and non-U.S. taxes may be required to be
accrued.

We continually explore initiatives to better align our tax and legal entity
structure with the footprint of our non-U.S. operations and recognize the tax
impact of these initiatives, including changes in the assessment of uncertain
tax positions, indefinite reinvestment exception assertions, and the
realizability of deferred tax assets, in the period when we believe all
necessary internal and external approvals associated with such initiatives have
been obtained, or when the initiatives are materially complete. It is possible
that the completion of one or more of these initiatives may occur within the
next 12 months.

Long-Lived Asset Impairment. We assess long-lived assets classified as "held and
used," including our property, plant and equipment, project assets, and PV solar
power systems, for impairment whenever events or changes in circumstances arise,
including consideration of technological obsolescence, that may indicate that
the carrying amount of such assets may not be recoverable, and these assessments
require significant judgment in determining whether such events or changes have
occurred. Relevant considerations may include a significant decrease in the
market price of a long-lived asset; a significant adverse change in the extent
or manner in which a long-lived asset is being used or in its physical
condition; a significant adverse change in the business climate that could
affect the value of a long-lived asset; an accumulation of costs significantly
in excess of the amount originally expected for the acquisition or construction
of a long-lived asset; a current-period operating or cash flow loss combined
with a history of such losses or a projection of future losses associated with
the use of a long-lived asset; or a current expectation that, more likely than
not, a long-lived asset will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life. For purposes of
recognition and measurement of an impairment loss, long-lived assets are grouped
with other assets and liabilities at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and
liabilities, and we must exercise judgment in assessing such groupings and
levels.


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When impairment indicators are present, we compare undiscounted future cash
flows, including the eventual disposition of the asset group at market value, to
the asset group's carrying value to determine if the asset group is recoverable.
If the carrying value of the asset group exceeds the undiscounted future cash
flows, we measure any impairment by comparing the fair value of the asset group
to its carrying value. Fair value is generally determined by considering (i)
internally developed discounted cash flows for the asset group, (ii) actual
third-party valuations, and/or (iii) information available regarding the current
market value for such assets. If the fair value of an asset group is determined
to be less than its the carrying value, an impairment in the amount of the
difference is recorded in the period that the impairment indicator occurs.
Estimating future cash flows requires significant judgment, and such projections
may vary from the cash flows eventually realized.

Goodwill. Goodwill represents the excess of the purchase price of acquired
businesses over the estimated fair value assigned to the individual assets
acquired and liabilities assumed. We do not amortize goodwill, but instead are
required to test goodwill for impairment at least annually. If necessary, we
would record any impairment in accordance with ASC 350, Intangibles - Goodwill
and Other. We perform impairment tests between scheduled annual tests in the
fourth quarter if facts and circumstances indicate that it is more likely than
not that the fair value of a reporting unit that has goodwill is less than its
carrying value.

We may first make a qualitative assessment of whether it is more likely than not
that a reporting unit's fair value is less than its carrying value to determine
whether it is necessary to perform the two-step goodwill impairment test. The
qualitative impairment test considers various factors including macroeconomic
conditions, industry and market considerations, cost factors, the overall
financial performance of a reporting unit, and any other relevant events
affecting the entity or its reporting units. If we determine through the
qualitative assessment that a reporting unit's fair value is more likely than
not greater than its carrying value, the two-step impairment test is not
required. If the qualitative assessment indicates it is more likely than not
that a reporting unit's fair value is less than its carrying value, we must
perform the two-step impairment test. We may also elect to proceed directly to
the two-step impairment test without considering such qualitative factors.

The first step in a two-step impairment test is the comparison of the fair value
of a reporting unit with its carrying amount, including goodwill. Our reporting
units consist of our CdTe module manufacturing business and our fully integrated
systems business. In accordance with the authoritative guidance over fair value
measurements, we define the fair value of a reporting unit as the price that
would be received to sell the unit as a whole in an orderly transaction between
market participants at the measurement date. We primarily use the income
approach methodology of valuation, which includes the discounted cash flow
method, to estimate the fair value of our reporting units.

Significant management judgment is required when estimating the fair value of
our reporting units including the forecasting of future operating results and
the selection of discount and expected future growth rates that we use in
determining the projected cash flows. If the estimated fair value of a reporting
unit exceeds its carrying value, goodwill is not impaired and no further
analysis is required.

If the carrying value of a reporting unit exceeds its estimated fair value in
the first step, then we are required to perform the second step of the
impairment test. In this step, we assign the fair value of the reporting unit
calculated in step one to all of the assets and liabilities of the reporting
unit, as if a market participant just acquired the reporting unit in a business
combination. The excess of the fair value of the reporting unit determined in
the first step of the impairment test over the total amount assigned to the
assets and liabilities in the second step of the impairment test represents the
implied fair value of goodwill. If the carrying value of a reporting unit's
goodwill exceeds the implied fair value of goodwill, we would record an
impairment loss equal to the difference. If there is no such excess, then all
goodwill for a reporting unit is considered impaired.

© Edgar Online, source Glimpses

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