[10Q Detective] Dark Future for Evergreen Solar

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David J. Phillips

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Mar 6, 2009, 12:36:26 PM3/6/09

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Lux Research predicted last month that solar cell and module capacity will overshoot demand by twofold in 2009. The 10Q Detective speculates that capital-starved Evergreen Solar (ESLR-$1.05) will not survive the impending industry shakeout.

At December 31, the solar panel maker had approximately $155 million in unrestricted cash on its balance sheet. However, the first phase of its Midland factory (in Michigan)—where it plans to manufacture the unique high temperature filament used in its wafer process—and debt service interest payments will require about $120 million in cash through the 1H:09, leaving just $35 million available to fund its operations, according to its recently filed 2008 annual report with the SEC.

Chairman and Chief Executive Richard Feld told analysts on the fourth-quarter 2008 earnings call that signed customer contracts totaled 79-megawatts in 2009, 116-megawatts in 2010, and 254-megawatts in 2011. However, operating losses are expected to continue until the Deven’s (Mass) facility reaches production capacity of about 160-megawatts, according to the 10-K filing. In addition, as the plant only shipped 8.5-megawatts in the fourth-quarter of 2008, reaching total capacity this year will not happen. Obtaining the funding for factory expansions is difficult in the current credit environment. As such, expect the company to secure the use of subcontractors to make solar cells and panels using its proprietary, thin-wafer "String Ribbon" technology.

Another obstacle to success—its German manufacturing joint venture with REC and Q-cells, called Sovello, is in financial distress, being in violation of certain of its bank loan covenants. If Sovello cannot obtain an amendment with its lenders, Evergreen would be required to provide gap funding of approximately $168 million to Sovello (in the form of a loan or an equity investment).

The company has $381.3 million in contractual obligations coming due in one to three years.

At December 31, Evergreen had an accumulated deficit of $221 million and had never delivered a quarterly profit. Albeit the company has sales contracts for approximately 80-megawatts of product to be manufactured at its Devens’ facility for delivery in 2009 at an average selling price of approximately $3.20 (assuming a U.S. dollar/Euro exchange rate of 1.25)—about 10 percent less than the average selling price of $3.55 in 2008—current manufacturing costs are approximately $3.50 per megawatt.

Given the existing liquidity risk and uncertainty in sales visibility and profitability, investors would be prudent to avoid this solar stock.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.