First Solar Inc. Chairman Mike Ahearn has found the best way to make
money from photovoltaics is to sell whole power plants to Warren
Buffett and NextEra Energy Inc. instead of competing with China on panel
sales.
The biggest U.S. solar company is
forecast to report the only profit in the second quarter among the 17
companies in the BI Global Large Solar index, according to estimates
collected by Bloomberg. The rest, led by Suntech Power Holdings Co. of
China, are predicted to have losses.
Suntech and the other Chinese manufacturers that
dominate the industry have focused almost exclusively on panel sales,
exposing themselves to the brunt of a 47 percent plunge in prices in the
past year. Ahearn has insulated First Solar by cutting production and
expanding sales of the PV power plants, said Sanjay Shrestha, an analyst
at Lazard Capital Markets. Buffett and NextEra are among the company’s
best customers.
“Their strong project pipeline is helping them
weather the storm that everyone else is caught in,” Shrestha said in an
interview. “That’s buying them time while the rest of the industry
scrambles for the next panel sale.”
First Solar will report net income of 60.1 cents
a share in the second quarter, according to the average estimate of
nine analysts surveyed by Bloomberg. It’s due to report earnings after
trading finishes tomorrow in New York. Suntech and its rivals, mainly
Chinese companies listed in New York, are due to report later in August.
Yesterday, Suntech said it may delay its earnings due to a suspected
fraud.
Shares Underperform
Investors aren’t giving Ahearn credit for the
shift yet. First Solar’s shares have fallen 88 percent in the past year,
sharper than the 75 percent decline in the Large Solar index. Ted
Meyer, a First Solar spokesman, declined to comment, citing a quiet
period before its results.
“The big risk is that they won’t be able to
replace the pipeline as existing projects are completed,” said Rob
Stone, an analyst at Cowen & Co. in New York who has a neutral
rating on the stock. Many of First Solar’s projects relied on government
backing to make them profitable, and those programs have expired. “How
much longer can their profitability last?”
MidAmerican Energy Holdings Co., a unit of
Buffett’s Berkshire Hathaway Inc., agreed on Dec. 7 to buy the Topaz
Solar Farm in California developed by First Solar. The project’s
development budget is $2.5 billion and may generate 550 megawatts of
power starting in 2015, making it one of the world’s largest PV plants.
NextEra Deal
NextEra, the biggest U.S. generator of power
from solar and wind plants, joined a unit of General Electric Co. to buy
the 550-megawatt Desert Sunlight project in California and in March
completed the purchase of 40 megawatts of in Ontario.
First Solar typically sells its projects to an
energy company once it’s received permits, arranged financing and
completed a deal with a utility to buy the electricity. It receives an
upfront payment for the sale that’s usually confidential and is
typically a small fraction of the total development budget. Then it
continues to receive revenue during construction, for labor and for
supplying the panels.
Ahearn accelerated First Solar’s transition to
project development in October, when he replaced Rob Gillette after a
two-year break from leading the company. By the end of 2011, Ahearn had
delayed completion of a factory in Vietnam and shut a California R&D
unit.
Ahearn’s Strategy
In April, he announced measures to cut 30
percent of the workforce, idle four production lines in Indonesia and
shut a flagship plant in Frankfurt an der Oder, Germany.
The moves were part of First Solar’s “strategy
to pursue utility-scale solar opportunities in sustainable markets,”
Chief Financial Officer Mark Widmar said on a conference call to discuss
the restructuring on April 17.
The goal “is to align our business to a demand
profile that is highly reliable and predictable, which largely is our
captive pipeline” of solar farms the company is developing, he said.
“Our pipeline is a competitive advantage.”
About 53 percent of First Solar’s $497 million
in first quarter sales came from developing and selling solar farms.
That was up from 30 percent the prior quarter, and it was the first time
panel sales weren’t the top driver for results.
Competitors Suntech, JinkoSolar Holding Co. and
Yingli Green Energy Holding Co. get at least 90 percent of their revenue
from selling solar panels, either directly or through distributors. All
will probably lose money every quarter this year, according to
Bloomberg data based on analyst forecasts. They’re all listed in New
York and report later in August.
China’s Losses
Jinko is expected to lose $7.51 an American
depositary receipt this quarter, the worst performance within the Large
Solar index. Suntech, the world’s biggest panel maker, may lose as much
as 45 cents an ADR and isn’t expected to report a profit until 2014.
Analysts expect Yingli to lose 28 cents.
Solar panel prices fell by half last year, which
has “killed profitability in module manufacturing,” said Mark Bachman,
an analyst at Boston-based Avian Securities. “First Solar puts up more
profit over the next year than all the other companies combined.”
Ahearn’s plan to build up project development
dates to 2007, when First Solar bought the construction and engineering
company Turner Renewable Energy LLC for $34 million. That was followed
by 2009 purchase of the closely held developer OptiSolar Inc. for $400
million in stock, and the 2010 acquisition of NextLight Renewable Power
LLC for $285 million.
‘Logical Step’
“Adding these resources, along with their
development team, to First Solar, is our next logical step,” Ahearn said
when announcing the OptiSolar deal on March 2, 2009.
Those acquisitions came with several
utility-scale solar farms already under development. OptiSolar brought
the 550- megawatt Desert Sunlight project, which First Solar sold to
NextEra Energy Inc. in September and is scheduled to be complete in
2015. Also in the purchase was the 550-megawatt Topaz plant that
MidAmerican Energy Holdings bought in December, expected to be finished
in 2014.
First Solar had cash and cash equivalents of
$610 million at the end of the first quarter, up 72 percent from a year
earlier. Their current ratio, which measures the ability to repay
short-term debt, was 2.48, or 51 percent higher than the average for the
17 companies in the Bloomberg Industry Large Solar Energy index.
Contracts Ahead
First Solar had contracts to build 2.7 gigawatts
of power plants as of May 23, according to slides executives showed to
analysts along with the first-quarter earnings.
First Solar’s anticipated profit this quarter
will be followed by earnings of $1.34 a share for the current quarter
and $1.69 in the final three months of 2012, analysts predict. That
won’t be enough to counter a $5.20 loss in the first quarter, largely
due to a $413 million restructuring charge that came along with Ahearn’s
strategy shift. For the whole of 2012, analysts expect loss of $1.46,
according to the median of 24 forecasts collected by Bloomberg.
Even if First Solar arranges as much as 600
megawatts of new contracts annually, its factory utilization will drop
to about 70 percent by the end of 2014, Stone said. That may force
additional charges and closures that would cut profitability.
“They’ve got some nice projects and nice prices
right now, but any new projects they win will come at much lower
margins,” Stone said. He has a neutral rating on the stock.
First Solar’s production cost averaged 69 cents a
watt in the first quarter. Prices for standard, polysilicon based
panels were 76 cents a watt at the start of July, according to Bloomberg
New Energy Finance.
“For anyone following First Solar it’s always
been a game of ‘What’s the next negative to hit?’” said Lazard’s
Shrestha. “But they keep forgetting about the strong project pipeline.”
Copyright 2012 Bloomberg
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