Warren Buffett Should IPO MidAmerican Energy Now

Antoine Gara - The Street  JAN 03, 2013 2:20 PM

Warren Buffett should IPO MidAmerican Energy and prove green energy can work in America.

 


When the US government stepped in to rescue banks in the 2008 financial crisis, it was Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) that invested billions into the likes of Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE) in a cornerstone investment that gave investors the confidence to put money back into the banking system.

Quietly, in the wake of President Obama's $50 billion earmark to the renewable energy industry as part of the 2009 billion stimulus bill, Berkshire Hathaway is again playing the role of savior investor. This time in the crisis-stricken solar energy sector.

After a Wednesday deal with California-based solar giant SunPower (NASDAQ:SPWR) for ownership of the world's largest solar plant, Berkshire Hathaway's energy subsidiary MidAmerican Energy (NYSE:BRK.A) now has stakes in the three largest US solar power plants -- two plants are built by First Solar (NASDAQ:FSLR) -- as the industry undergoes transformation and tries to survive without government financial support.

When the three plants are completed by 2015, MidAmerican Energy will become a top utility in the US and the world when it comes to "green energy" generation.

For investors who want to put their dollars behind renewable energy investments, Berkshire Hathaway by way of its MidAmerican Energy unit is in an enviable position. However, Warren Buffett's sprawling investment conglomerate and MidAmerican are far from a pure-play bet on the renewable energy sector.

If Buffett wants to be the cornerstone investor to the renewable energy sector -- as he was to the banking industry in his crisis-time Goldman investment and a big holding in Main Street lenders like Wells Fargo (NYSE:WFC) -- it's time for the "Oracle of Omaha" to consider spinning off MidAmerican Energy to public markets.

As a publicly traded standalone, MidAmerican's renewable strategy might get the investor attention it deserves, as the likes of SunPower and First Solar attempt to transform their business models to meet a post-stimulus reordering of the green energy business in America.

A MidAmerican spinoff would also give investors a safer, Buffett-like investment in renewable energy after publicly traded solar and wind energy stocks in the US were battered by commodity price fluctuations, political wrangling, and pricing pressure from highly subsidized international players, particularly in China.

Putting MidAmerican on public markets would, however, have to appeal to Buffett's charitable instincts and a seemingly increasing role in public policy debates such as taxation and investment.

MidAmerican Energy is the classic Buffett business with high capital expenditure needs that make use of billions in cash that Berkshire generates every year, and it provides stable, predictable returns. Outside of Berkshire's insurance businesses and a recent $26 billion takeover of railroad Burlington Northern Santa Fe, MidAmerican Energy is the company's third largest business by revenue and profitability, as of 2011.

To understand why Buffett should consider a MidAmerican IPO, it's important to know how the company gained what is arguably the strongest green energy position in the US and possibly the world.

As solar giants like SunPower and First Solar transition from manufacturing and selling solar energy panels on wholesale markets to building large plants with multi-decade purchase agreements with utilities, MidAmerican Energy appears to be the biggest backer of such projects. In late 2011, when First Solar broke ground on its Topaz and Agua Caliente to take advantage of the final throes of a Department of Energy loan guarantee program, MidAmerican Energy stepped up to invest in the plants and the corresponding return that will be generated over the life of their power purchase contracts with utilities like Southern California Edison and NRG Energy. [Other large utilities like Exelon (NYSE:EXC) have also joined the mix.]

While the solar plant business of First Solar and SunPower is still uncertain in the absence of DoE loan guarantees, their Antelope Valley projects outside of Los Angeles and similar ones in California's Mojave Desert will be a test as to whether the US solar business survives.

In the new ordering of the solar world, First Solar or SunPower break ground on projects with a power purchase agreement in place, sell the plant to the likes of MidAmerican, and get contracted to maintain the plants over their lifespan.

The strategy is to move away from competing with highly subsidized Chinese panel manufacturers, who've pushed panel prices lower on wholesale markets.

The transition comes at a time when states like California will essentially force utilities to become a big investor in solar or other renewable energy generation, as the state tries to meet a mandate of a one-third renewable energy mix by 2020. With stakes in three of the nation's largest solar plants, MidAmerican appears to be in a leading position as the plants come online in 2014 and 2015.

MidAmerican's solar energy deals now include ownership of SunPower's 579-megawatt Antelope Valley Solar project worth a reported $2.5 billion, First Solar's $2 billion 550-megawatt Topaz plant ,and a 49% stake in another plant built by the company called Agua Caliente, which is projected to generate 290-megawatts of solar energy.

In total, MidAmerican says its plants will create hundreds, if not thousands, of green energy jobs, while pumping roughly a billion dollars total into local economies. The plants will also replace millions in carbon dioxide emissions annually, in aggregate.

Meanwhile, the company is also the largest wind power producer in the US and it's recently taken stakes in large General Electric-built wind farms. MidAmerican also has geothermal and hydroelectric businesses, and by way of its green energy portfolio, has power purchase agreements with some top utilities including Southern California Edison, NRG Energy (NYSE:NRG), and Hawaiian Electric (NYSE:HE).

All told, by 2015, MidAmerican will be a leading green energy player in the US. However, as US solar manufacturers complete controversial DoE backed financed plants in some political circles, their survival will depend on a next round of investment, this time likely without billions in government loans.

Berkshire's MidAmerican Energy and similar solar moves made by Exelon and others may be the investments that prove whether or not the green energy sector makes financial sense. Meanwhile, outside of California, most states are yet to map out renewable energy generation goals as climate change recedes from President Obama and Congress's agenda.

Out in public markets, MidAmerican Energy could be the sort of capitalist spokesperson for the renewable energy industry, which still suffers from the cloud of Solyndra and a politically charged stimulus program, in addition to the disappointing stock performance of First Solar and SunPower.

An analogy would be Elon Musk's Tesla Motors (NASDAQ:TSLA), which appears to be making an investor case for the mass electric car. Musk also recently IPO'ed a solar investment called SolarCity (NASDAQ:SCTY), which makes rooftop solar systems that can power small businesses and individual households. One day he may also be responsible for the first space shuttle stock.

Still, as with the banking industry in 2008, green energy needs a spokesperson -- and there appears to be no one more vocal or better positioned than Warren Buffett.

With the financial crisis largely resolved and a partisan debate on the taxation of the rich also in the rear-view mirror, Buffett may also be on the lookout for a new cause.

For more on Warren Buffett's investments, see why he may direct his elephant M&A guns at utilities. Also see four investors who could pick up the "Oracle of Omaha's" investing mantle.