When First Solar (FSLR 0.71%) announced it was considering selling its stake in yieldco 8point3 Energy Partners (CAFD), it sent a shock through the solar industry. Co-sponsor SunPower (SPWR -3.17%) initiated its own formal review of its options, and it appeared one of the better yieldcos in the industry was on the market.
The question investors have to answer now is what 8point3 Energy Partners' assets are worth, and what a sale of some (or all) of the company might go for. To answer this, I dug through the numbers (below) to try and get an idea of where we may expect bids for the company to end up.
Image source: SunPower.
The challenge valuing yieldcos
One of the tough things in valuing yieldcos is that there's no easy answer to what main assumptions to use. The discount rate used can swing valuations wildly and the assumptions used on terminal value (value of projects after a 20-year power purchase agreement is over) can make a big difference in valuation.
Below, I've created a table that shows the valuation of 8point3 Energy Partners' equity based on $140 million of annual cash available for distribution over the next 20 years of contracted revenue, with discount rates ranging from 7% to 9% and terminal values of $0.50 per watt to $1.00 per watt. I think the terminal value is conservative, because in 20 years the land, infrastructure, and solar panels will still be valuable and a project could just sell energy to the spot market. The $0.50 per watt number equates to cost per kWh of about $0.02, easily economically viable energy 20 years from now. Here are the numbers:
| Metric | 7% Discount Rate | 8% Discount Rate | 9% Discount Rate |
|---|---|---|---|
| $0.50 per watt | $862.3 million | $738.4 million | $629.3 million |
| $0.75 per watt | $907.2 million | $775.7 million | $660.3 million |
| $1.00 per watt | $952.1 million | $813.0 million | $691.3 million |
Calculations by author.
This equity value then needs to be equated to a stock price. And based on 28.1 million public shares outstanding and 51.0 million shares owned by First Solar, this is what the current contracted cash flows and terminal value of projects would be worth on the stock market given these assumptions.
| Metric | 7% Discount Rate | 8% Discount Rate | 9% Discount Rate |
|---|---|---|---|
| $0.50 per watt | $10.90 per share | $9.34 per share | $7.96 per share |
| $0.75 per watt | $11.47 per share | $9.81 per share | $8.35 per share |
| $1.00 per watt | $12.04 per share | $10.28 per share | $8.74 per share |
Calculations by author.
You can see that the assumptions made in the above analysis are crucial to the valuation number and could also lead to a sale of First Solar's shares at a discount to where shares trade right now.
I will also point out that 8point3 Energy Partners' CEO Chuck Boynton would argue that the terminal value assumptions I made above are probably low. Coal, natural gas, and hydro plants built 50-plus years ago are still in operation, not because they're still running the same technology they were built on, but because once the infrastructure is in place for a power plant, it'll be valuable to the grid for many decades. Maybe a plant will need to upgrade solar panels or add energy storage, but the terminal value may be higher than currently assumed. To his credit, it's something to think about.
What the know about 8point3 Energy Partners' valuation
We don't know all of the cash flows from 8point3 Energy Partners, so this analysis isn't going to be perfect compared to an analysis based on internal numbers. But based on what we know publicly, this gives investors an idea of where a sale price for the assets could be based on different discount rates and terminal values.
Depending on what assumptions a potential buyer might make, a sale price may not be all that attractive. First Solar and SunPower may just be better off recapitalizing the yieldco by adding slowly amortizing project-level debt, paying out a sizable one-time dividend, and just collecting regular dividends.
At the very least, this should give investors an idea of what kind of price might be reasonable if a sale does take place. And based on what we know today, anything over $12 per share might not be a bad deal for either company.
