Last fall, after taking a financial sucker punch from Lehman Brothers, executives at Evergreen Solar in Marlborough said it had enough cash on hand to finish building its massive Devens manufacturing facility and portions of another in Michigan before mid-2009 “when we start generating cash from operations.”
Mid-2009 has come and gone, and Evergreen has not generated cash from operations. If watching Lehman go out of business while holding 31 million shares of company stock was a sucker punch, then the market since then has delivered a series of precise blows to Evergreen’s body: uninterested investors, falling prices, intense competition and a wary, cash-strapped market — all while the company has had its guard up.
Analysts say Evergreen will not fail. But they are also careful not to understate just how precarious the company’s situation has become.
Material Matters
One of the reasons for that precarious position is that demand for solar panels has waned as the cost of materials for making them has plummeted.
“They are a manufacturer of solar modules, and like all companies in the industry, they are facing an oversupply of modules,” said Pavel Molchanov, an analyst with investment bank Raymond James. “And they’re more challenged because they are a relatively high cost producer.”
Part of that cost is in Evergreen’s “string ribbon” technology, which uses less silicon to produce panels than some other manufacturers. In that regard, “Evergreen Solar has been worse hit,” Molchanov said. “String ribbon was very attractive in 2006, 2007 and 2008, but now the price of silicon is down 80 percent from the highs of 2008.”
String ribbon “is nowhere near as much of an advantage as it was when silicon was $400 per kilo,” he said. Silicon is currently selling for less than $100 per kilo.
To stave off those costs, Evergreen has been trying to establish manufacturing operations in Wuhan, China. At first, the company planned to build its own facility there. As of April, it is working with Jiawei Solar Co. in Wuhan, which will produce Evergreen panels. Evergreen will manufacture its string ribbon wafers at a leased facility on Jiawei’s campus and Jiawei, acting as a subcontractor, will process the wafers into Evergreen panels.
“They’re starting to work on shifting some manufacturing to China, and that’s going to take time,” Molchanov said. “Massachusetts, to say the least, is a relatively high-cost environment. They are a small producer with limited economies of scale. They have to increase scale, finish Devens, expand in the future, raise more capital and shift manufacturing overseas to low cost areas like China. Not all of it. They’re not going to abandon Devens, but future capacity expansions, they are overseas,” Molchanov said.
Less Money, More Problems
All of those efforts cost money. And while spending money to make money is just business as usual, some of what analysts see from Evergreen is cause for concern.
“What I’m always concerned about with start-up companies is what the cash burn is,” said Theodore O’Neill, an analyst with Kaufman Bros. LP in New York.
Evergreen reported $100.8 million in cash as of Dec. 31, 2008. As of April 4 of this year, that had dwindled to slightly less than $57 million. In May, the company raised $63 million in a stock offering, but apart from that, “investor interest in the company is about as close to zero as you can get,” O’Neill said. “Investors believe there is a glut of solar panels on the market and not enough solar farms to move them to.”
For some perspective, consider this: The 31 million shares of company stock Evergreen loaned to Lehman last year were then worth approximately $300 million and the share lending agreement was intended to finance the company’s expansion in the United States. To raise $63 million in May, the company issued 37 million shares and the proceeds went toward establishing manufacturing operations in China, a project that cost Evergreen $17 million, “assuming the Wuhan government provides or facilitates financing for approximately two-thirds of the initial expansion cost.”
In late July, the Wuhan government’s Hubei Science and Technology Investment Co. Ltd. came through with $33 million in financing for the plant and Evergreen inked a contract manufacturing deal with Jiawei.
At the same time, the Wuhan government also loaned Jiawei the same amount. Evergreen’s loan carries a 7.5 percent interest rate and must be paid off no later than July 2014. The initial capacity of the plant Evergreen and Jiawei will run will be 100 megawatts, the companies intend to expand that capacity to 500 megawatts by 2010.
Masked Men
If the capital markets had shown improvement by the first half of the year, perhaps Evergreen’s situation would be different. Perhaps the company would be building plants in the United States rather than leasing a plant in China, O’Neill said. But that hasn’t happened.
Michael El-Hillow, Evergeen’s CFO, said the intense price pressure combined with the inability to get financing in the United States drove Evergeen to China, where costs are lower and the government is enthusiastic about financing development.
“This is a cost game. You have to have the lowest manufactured cost-per-watt. That hasn’t changed,” El-Hillow said. “There’s an incredible pricing war right now. Cost is down 30 percent and the industry is growing. China is incredibly important to us. The lowest cost producers are in China and there’s almost no access to capital in the United States.”
El-Hillow warned that in the absence of a United States national energy policy that supports alternative sources, China has an opportunity to become dominant in the solar energy market.
“China has become front-and-center on this issue,” he said. “You don’t see the sun in China and people walk around with masks on their faces. That’s how critical alternative energy is.”
At least for now, federal government support for clean energy manufacturers here is all talk and banks see Evergeen as too great a risk.
“People have been told, ‘As soon as the stars line up, you’ll get this money,’ but it’s not there right now. It might be there in a year, but nobody knows,” El-Hillow said.
“We just opened a $400 million facility that employs 800 people and we can’t get a one penny financed against that,” El-Hillow said. “We’ve told everybody we want to grow in the United States, but you have to help us grow. We’re not looking for trade protectionism, but a level playing field. You want to sell in the United States, you manufacture in the United States. It hasn’t happened yet, and we couldn’t wait any longer.”
“I have spent countless hours talking with banks, and their position is if you’re not making money, we’re not interested in talking to you,” he added.
And Evergreen is not making money. The company reported a second quarter net loss of $20.3 million. A year earlier, the company lost $8.9 million in the second quarter. However, the quarter’s revenue nearly tripled to $63.8 million compared to a year ago as the company shipped 23.2 megawatts-worth of panels manufactured at $2.70 per watt compared to 17.3 megawatts at $3.13 per watt a year earlier.
Evergreen’s goal is to be able to produce panels for $1.50 per watt. Even then, Devens “is a break-even operation,” El-Hillow said.
He said the company plans to get production costs down to about $1 per watt in China. If it can also manufacture panels for $1.50 per watt at Devens, that works out to a “blended cost” of about $1.20 per watt. At that rate, the company would operate at a 20 percent margin.
Subject To Change
Patrick Hurley, vice president of sales and marketing at Channel Sun, a Westborough-based designer and installer of rooftop solar power systems, said his company uses Evergreen panels for many of its installations. But panel manufacturers in general are facing tough times.
He said a number of manufacturers “got into the game,” at about the same time, which in turn brought a large amount of product to market, “and the market isn’t there. Demand has dried up with the economy and credit.”
And the company’s future success isn’t just a matter of the economy improving or businesses regaining access to the credit that helps finance solar projects. The company has research and development hurdles on the horizon, too. Its competition is manufacturing panels that use less silicon or no silicon at all. Those companies can make their panels with cheaper raw materials and get the same power output, Hurley said.
Evergreen’s challenge is to get its panels to market profitably, Hurley said. If the company can’t get its cost structure down, by either spending less on raw materials, ramping up manufacturing in China or both, “it doesn’t bode well for next year, and they’re not alone in that.”
The playing field is being leveled, Hurley said.
Evergreen’s proprietary technology may produce some of the best solar panels available, but to customers “it isn’t a matter of whether it’s cutting edge or not and at the end of the day, they need to produce a kilowatt of power at a better price than their competitors,” Hurley said. “Evergreen’s prices have come down a bit, but not as aggressively as some of the manufacturers.”
“We’re very conscious of the fact that the customer is making a financial purchase rather than a technology purchase,” Hurley said. “We try to be open-minded or agnostic about technology. It doesn’t really matter to the customer when they’re trying to save money. Evergreen is an excellent, excellent product. Two-thirds of our projects are done with Evergreen, but that is subject to change.”
