Energy Surprise

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Alternative energy company Energy Conversion Devices (Nasdaq: ENER) surprised Wall Street today by asking for a 15-day extension for filing its annual report. At issue is the purchase accounting for a joint-venture photovoltaic (PV) operation the company repurchased -- and the company's need for additional capital to sustain on-going operations.

In the press release, the company noted that it expects to report a 28% decrease in revenue for the year -- from $91.7 million to $66 million. It did not estimate the loss that will be reported other than to say that it would be "significantly higher" than the $20.9 million lost last year.

There has been controversy in the PV (solar) industry since BP PLC's (NYSE: BP) BP Solar unit exited the thin film PV business to focus on crystalline solar cells that were already growing at a 30% compounded annual growth rate. All of Energy Conversion Devices' solar cells are built using thin-film technology. The key BP Solar comment about thin film was, "However, while the technology continues to show promise, lack of material demand and present economics do not allow for continued investment."

The photovoltaic market is dominated by Japanese companies such as Kyocera (NYSE: KYO), Sharp (not traded in the United States), and Sanyo (Nasdaq: SANYY). Like BP, these companies are so large that their solar efforts do not get separate financial statement coverage. Energy Conversion Devices truly is a small company fighting in a business dominated by giants. To compete, it formed a joint venture to commercialize its technology.

At issue is Energy Conversion's PV operation, United Solar. In 2000, the company joined forces with N.V. Bekaert S.A. where Bekaert supplied $84 million and Energy Conversion provided its existing PV manufacturing operation and technology. The result of this collaboration was the construction and operation of a 30 MW state-of-the-art manufacturing plant. In May of 2003, Energy Conversion announced that it had repurchased the operation from Bekaert for $6 million in cash and assumed $25 in guarantees. At the time, the company's cash position and clean balance sheet were enough to offset any investor near-term concerns.

The stock was down as much as 24% in early trading today because the company announced it is attempting to obtain additional sources of cash required to sustain its operations. How that will be accomplished has not been finalized. Management believes that the independent auditors will issue a standard report on Energy Conversion's consolidated financial statements, which will include an explanatory paragraph concerning the company's ability to continue as a going concern for a reasonable period of time.

Energy Conversion has a clean balance sheet -- at least as far as we know until the company files. It also has PV assets and a number of other joint ventures in and beyond alternative energy (you can look back at them in our classic Rule Breaker columns on the company's ovonics, nickel metal hydride batteries and computer memory). The ability to raise funds for the near-term should not be difficult. Investors should be concerned about the PV operation's ability to generate a positive cash flow and the company's ability to become cash flow positive as well -- issues the company should address when the annual report finally comes out.

W.D. Crotty owns shares of Energy Conversion Devices. He welcomes your feedback at HawaiiFool@Hawaii.com.