Excess Manufacturing Capacity at First Solar

(MoneyWatch) 

• The Company: First Solar, a manufacturer of solar electric power modules using a proprietary thin-film semiconductor technology.
• The Filing: FORM 10-Q filed with the SEC on October 31, 2008.
• The Finding: First Solar announced in October that it anticipated ramping up annual capacity to 1.1-gigawatts by the end of 2009. The company may not need additional manufacturing lines, as a ThinkEquity analyst wrote in a research report that First Solar's thin-film panels might be piling up in European warehouses, according to GreenTech Media.

The Upshot: First Solar is currently constructing two additional plants at its Malaysian manufacturing center and is expanding its existing facility in Perrysburg, Ohio, which will be operational at various dates in 2009. Could the plants be shelved before becoming operational? Analyst Jonathan Hoopes of ThinkEquity Partners said in a note to clients on Friday that as many as six key First Solar customers, including EDF Energies and Conergy, are unable to install the solar panels quickly enough, given weakening economics, lower energy prices, higher interest rates, and tougher underwriting requirements. Hoopes estimated that the company was scheduled to deliver 353-megawatts worth of thin-film panels to the six customers in 2009.

Under its existing long-term solar module supply contracts with customers, First Solar only has the right to terminate contracts upon 12-months notice and payment of a termination fee. Cancellation can occur, however, if it was determined that certain material, adverse changes have incurred, such as persistent quality control issues, the inability to achieve stable conversion efficiencies at planned levels, or extraordinary events "beyond the control" of the company that substantially increase the cost of labor, materials, or utility expenses.

At September 27, First Solar sat on $126.5 million (mostly raw materials) in inventory, $750.5 million in property, plant, and equipment (of which $253.4 million constituted construction in progress), and an undisclosed amount in contractual guarantees to key customers.

The Question: In addition to falling average selling prices for its solar panels, could asset write-downs be on the horizon for First Solar and other solar module makers?