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Buffett-backed MidAmerican buys First Solar's 550MW Topaz

First Solar's sale of its 550MW Topaz project to Warren Buffett-backed wind utility owner MidAmerican Holdings shows that there's still interest in big solar projects -- especially if the numbers are already locked in.

December 8, 2011 - First Solar has agreed to sell its 550MW Topaz Solar Farm project in California's San Luis Obispo County to MidAmerican Holdings, a Warren Buffett-owned utility holding company billing itself as the No.1 owner of US-utility wind power generation. Under terms of the deal, FSLR will construct, operate, and maintain the project, which began construction last month (Nov. 2011) and is expected to be finished by early 2015. The project has a 25-year PPA with PG&E. The sale is contingent on tying off "certain closing conditions" including permit and electrical interconnection arrangements -- but interestingly it is not contingent on MidAmerican obtaining debt financing. (The Topaz project, valued at over $2B, fell short of landing a $1.93B DoE loan guarantee earlier this fall.)

The two sides also tossed out the usual boilerplate info, with some caveats. 400 construction jobs will be created; though after that there'll be just a handful --15 -- of operations/maintenance jobs. FSLR cited a study from the Brattle Group and Cal Polytech estimating a $415M infusion into the local economy over the next 25 years; most of that, though, will be generated during the four-year construction phase. And the Topaz electricity generation will be enough to power 160,000 homes and displace roughly 377K metric tons of CO2/year, equal to about 73,000 cars.

Analysts' Take

Doing some back-of-the-napkin math, Citi's Tim Arcuri pegs the purchase price for Topaz Solar at ~$3.50/W -- taking into account MidAmerican's ~7% weighted average capital cost and an ~8% return. Assuming a $1.25/W cost structure for balance-of-system costs ($0.95/W core EPC and $0.30 in development), he thinks FSLR can still sell modules to Topaz for $2.00-$2.25/W -- "more than $1/W above what it would have to sell these modules into the merchant market," he points out. In the end that buffer will add more than $7 to FSLR's EPS (stretched over a few years, starting with 2012). The Topaz sale won't move Arcuri's needle for FSLR estimates, but he admits "this solidifies FSLR's earnings visibility given the sheer scale of the project."

From a broader perspective, though, the Topaz deal is a positive signal to other developers and the market overall. The Topaz project "demonstrates that solar energy is a commercially viable technology without the support of governmental loan guarantees," said MidAmerican CEO Greg Abel. Auriga's Hari Chandra Polavarapu expands: it means "high quality projects will get financing even in a dislocated macro environment that has hampered project financing, and will have a positive perception effect" on the likes of downstream players such as SunPower and MEMC Electronic Materials.

Another factor sealing the deal is the existing PPA with PG&E. "The smart guys are getting into these early projects because they have very attractive power-purchase agreements," which were signed while electricity rates were higher than today, notes Paul Clegg from Mizuho Securities, and projected to go even lower once the new crop of utility-scale projects come online. "Financing won?t be as easy at the rates being signed for the latest ones." Sanjay Shrestha from Lazard Capital Markets concurs: "The reason this project made sense is because the power purchase agreement was signed three years ago at very favorable terms." On top of that, the federal 1603 program is set to expire at year's end (unless recent lobbying can extend it by a year), which will further dent profits.

Jefferies' Gerard Reid adds that MidAmerican may also want to diversify within the renewables space: "Tax credits for wind in the US expire at the end of next year, while solar ones run till 2015."


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Volume 18, Issue 3


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