Warren Buffett Invests in Uncertain Solar Energy: FSLR, NRG
The company says it announced in May that it was looking for investors for help with its large-scale projects. The company has reported growing annual revenue and earnings since 2006, but little free cash flow. It was negative for the first two years, then fell from $395 million in 2009 to $117 in 2010. It has also been negative for the last three quarters. P/E, P/S and P/B ratios, however, have all fallen to historical lows. The stock price has declined 77% year to date.
NRG Energy is far more profitable, though its net margin has been on a downward slope for the past several years, and is negative for the trailing 12 months. Gross margins and operating margins declined annually for the last three years as well.
The third quarter of 2011 marked the biggest quarter ever for solar energy. PV (photovoltaics which convert sunlight directly to electricity) demand grew 140 percent year over year, and MWs of utility-scale installations increased 325 percent. But the figures mask some problems in the industry. While the utility market grew more than ever, the residential market grew incrementally and the non-residential market declined to its lowest point since 2010.
In addition, while costs in the industry are falling, legislative, financial, political and market risks abound. Most pressing is the unknown results of the year-end expiration of the 1603 Treasury Program. The legislation, enacted in 2009 as part of the American Recovery & Reinvestment Act (ARRA), reimbursed solar investors with a cash grant instead of the 30 percent solar investment tax credit. The program spurred 1,100 solar projects across 42 states. In December 2010, Congress extended the program.
If the program is not extended, the Solar Energy Industries Association (SEIA) predicts that there will be three main repercussions: 1) Shipments to the U.S. will jump in the fourth quarter 2011 as a result of developers hoping to qualify for the 5% safe harbor provision; 2) installations in the first and second quarters of 2012 will also be propped up as those safe-harbored projects reach completion; 3) the market will ultimately face a tax equity bottleneck in 2012 for new projects, and a slowdown in installations could be felt as early as the third quarter 2012 for commercial projects and into 2013 for utility projects.
Buffett’s investment in First Solar could also be an investment in the U.S. Of the 449 MW installed in the U.S. in the third quarter, 212 MW (or 47%) derived from the utility-scale segment, of which First Solar is the only U.S.-located manufacture among foreign suppliers. A pending petition with the U.S. International Trade Commission and the Department of Commerce on Oct. 19, 2011, was filed alleging that the Chinese manufacturers of crystalline silicon photovoltaic cells have had unfair advantage due to government subsidies. It also asks that they impose 100% or more duties on the wholesale cost of cells and modules made in China. The SEIA reports that “this would have the effect of making domestic suppliers more price-competitive, at least in the near term, and could result in a material increase in domestic market share for U.S.-manufacturer modules in 2012 and beyond.”
Buffett shared some of his views on energy in a CNBC interview that he saw oil as finite, and believed U.S. production had drastically reduced from 30 years ago, while the population had grown. He noted that Berkshire had a lot of wind farms in Iowa and would acquire more. “The world is going to attempt to do [find alternative forms of energy], but that is not a big answer to the kind of energy demand that is coming along. So I think, we’ve got to do everything we can in alternative areas, but I do not see that as a cure-all at all.”