Tuesday, August 16, 2011

Hanging By a String

Yesterday Evergreen Solar, Inc. (ESLR:  Nasdaq) filed for bankruptcy protection in a Delaware court, asking for relief from the collection proceedings of creditors.  The company has already come to terms with holders of more than 70% of its outstanding debentures, filing at the same time a restructuring agreement. 

The agreement stands out because of a provision for a “stalking horse,” a role being filled by a new entity named ES Purchaser, LLC.  The idea is prevent a hostile takeover by some low-ball bidder looking for a deal.  If there are no bids at acquire Evergreen’s assets at acceptable levels, the stalking horse will most likely end up the acquirer.

Evergreen wants breathing room to perfect its proprietary String Ribbon wafers for solar panels.  The Company owns a manufacturing process that pulls high temperature resistant wires through molten silicon to form a multi-crystalline ribbon of silicon crystals.  The idea is based on a simple concept of surface tension much like we observe when children dunk a little metal ring into a soapy solution and blow bubble.  Once pulled through the hot silicon, the “ribbon” is then cut into proper lengths for processing into solar cells. 

The Evergreen process offers considerable efficiency in manufacturing and raw materials costs.  Unfortunately, String Ribbon technology is not capable of achieving the same electrical performance as wafer technology. Conventional silicon wafers can convert 15% to 16% of the incoming light into electricity.  However, solar cells using String Ribbons are capable of converting only 13% to 14% of light into electricity.

That is not the only hurdle Evergreen has to jump.  Note the term “molten silicon.”  The crystal growth process requires considerable thermal energy.  So even though Evergreen’s solar cell design uses less silicon, it runs up a scary energy bill just to get the ribbons pulled and cut.  To make matters even worse, not all of the cuts can be used as they are not of consistent thicknesses.

Evergreen has yet to produce its solar cells in sufficient volume to breakeven.  It seems that solving the energy cost and batch issues should be higher priority than trying to scale production.

The company’s balance sheet tells the entire story.  The accumulated deficit is $1.1 billion  -  yes that is Billion with a B.  Evergreen has only $31.4 million of the total funds its raised over the years and has borrowed $394.8 million.  Creditors are now saying enough is enough, driving Evergreen to seek protection in bankruptcy court.

Evergreen is literally hanging by a string....in its market and in court.  The name is still included on our list of alternative energy companies called The Atomics Index.  There could be hope that Evergreen management is motivated by the bankruptcy process to make some hard choices on production.  Co-location with a low-cost energy producer, tweaks of the process to improve yields, sale to a more practical competitor....such moves could look more appealing from the court room.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  Evergreen Solar is included in Crystal Equity Research’s The Atomics Index in the Solar Group.

No comments: