Buffett Gets High Rates, U.S. Incentive in $2 Billion Solar Bet

By Christopher Martin – Dec 7, 2011 2:25 PM MT

 

Dec. 7 (Bloomberg) — Timothy Arcuri, an analyst at Citigroup Inc., talks about First Solar Inc.’s agreement to sell its $2 billion Topaz solar farm in Southern California to Warren Buffett’s Berkshire Hathaway Inc. He speaks with Emily Chang on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

Warren Buffett’s Berkshire Hathaway Inc., which agreed to buy a $2 billion solar farm in California may have picked the right time to invest in the industry.

The 550-megawatt Topaz project will qualify for a federal incentive because it began construction last month, and will sell power under a long-term contract that was completed before prices for solar panels fell 44 percent in the last year. Berkshire’s MidAmerican Energy Holdings utility unit and First Solar Inc. (FSLR), the project developer, announced the deal today.

Topaz, which will use First Solar panels, may be the last large solar farm to qualify for the U.S. Treasury Department incentive program, which is set to end this year. It will likely sell power at a higher price than projects that are seeking utility contracts now, said Paul Clegg, an analyst at Mizuho Securities USA in New York.

“The smart guys are getting into these early projects because they have very attractive power-purchase agreements,” Clegg said in an interview today. “Financing won’t be as easy at the rates being signed for the latest ones.”

First Solar projects that are currently being built will sell power for 14 cents to 16 cents a kilowatt-hour, said Alan Bernheimer, a spokesman for the Tempe, Arizona-based company. By 2014, he expects its solar farms to sell power at 10 cents to 12 cents a kilowatt-hour, he said.

The price of the Topaz deal wasn’t disclosed and Bernheimer wouldn’t give the rates at which it will sell electricity. PG&E Corp. (PCG)’s San Francisco-based utility agreed in August 2008 to buy Topaz’s power for 25 years.

‘Favorable Terms’

“The reason this project made sense is because the power purchase agreement was signed three years ago at very favorable terms,” Sanjay Shrestha, an analyst at Lazard Capital Markets in New York, said in an interview. He has a ‘buy’ rating on First Solar.

Prices for power sold under these long-term contracts are coming down, and the expected expiration of a federal incentive may further erode profit margins for large projects, Shrestha said. The Treasury Department 1603 program, which offers cash grants equal to about 30 percent of renewable energy projects’ development costs, is set to end Dec. 31.

First Solar received $3.1 billion in federal loan guarantees for three other solar projects that it later sold. Buffett is chairman and chief executive of Omaha, Nebraska-based Berkshire Hathaway.

Loan Guarantees

The Topaz plant was offered a conditional guarantee that the company couldn’t complete because it was unable to meet some of the requirements before the U.S. Energy Department loan guarantee program ended Sept. 30. MidAmerican Energy said the purchase shows that solar energy is viable without government backing. Solyndra LLC, a failed solar panel company, received a guarantee under the same program.

“Buffett’s investment shows that solar has come of age,” Shrestha said. The end of the grant program “takes away some of the incentive but there will still be viable large scale solar plants.”

The billionaire’s endorsement may also help First Solar sell other solar farms, even if they have power-purchase deals with lower rates, Clegg said. “I don’t doubt they will find buyers for more of their projects,” he said. “The returns probably won’t be as good as the ones that have already been sold.”

First Solar has sold and begun building projects using its panels to buyers including General Electric Co., NextEra Energy Inc., Exelon Corp. and NRG Energy Inc. Solar farms that First Solar is developing and still need buyers total 600 megawatts, according to a company presentation on Oct. 26.

Biggest Acquisition

MidAmerican may not be one of the buyers, said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.”

“I would guess this is specific to MidAmerican and this particular deal,” he said in an e-mail. Though Buffett has voiced support for renewable energy, “I wouldn’t think he’s going to run around and buy solar assets.”

Buying Topaz will provide a “nice set” of cash flow for MidAmerican, Jenny Chase head of solar analysis at Bloomberg New Energy Finance, said in an e-mail. “This is the biggest acquisition of a single photovoltaic project anywhere,” she said.

The Topaz project in San Luis Obispo County is expected to be complete in 2015. It’s the third-largest solar farm announced to date in the U.S., tied with First Solar’s Desert Sunlight plant also in California and trailing plants that NRG Energy and Cannon Power Corp. are developing, according to New Energy Finance.

First Solar rose 4.6 percent at 3:40 p.m. in New York. Berkshire Hathaway gained 0.5 percent to $118,000.

To contact the reporter on this story: Christopher Martin in New York atcmartin11@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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