MEMC Terminates Solar Wafer Customer

MEMC Electronic Materials Inc. (NYSE: WFR) has had no real good news heading its way in some time. Now we have news of a customer loss, or termination, as its subsidiary MEMC Singapore Pte. Ltd. has reached an agreement to terminate a long-term solar wafer supply pact with Conergy AG.

MEMC did not issue a warning with the news. Instead it stated, "MEMC is assessing the financial impact of the termination of the supply agreement and will provide further clarification on its third quarter financial results conference call in early November." MEMC called this a mutually beneficial outcome for both parties and it leaves the door open to working with Conergy again, but it is hard to not imagine that this will take one more bite out of forward guidance.

The original deal was signed in October 2007 for a preset pricing over a 10-year period, which was made on a take or pay basis. Conergy had advanced funds as a refundable capacity reservation deposit under the terms. MEMC said that starting back as far as early 2009 when market woes surfaced that obligations under the supply agreement created challenges to finding a mutually beneficial arrangement between the parties. This led to a lower supply agreement in January 2010.

In order to resolve these ongoing challenges, the companies have now agreed to terminate the supply agreement. MEMC will now receive payment of $21.2 million through the irrevocable letter of credit established by Conergy and MEMC will refund the refundable capacity reservation deposit currently held by MEMC in an approximately equal amount. Conergy will also make payments on outstanding payables in the amount of $5.5 million and it has agreed to transfer Conergy's portfolio of operations and maintenance contracts to MEMC covering solar power plants in Germany, Italy and Spain.

Where this may hurt is that it represents up to about 175 megawatts and is subject to MEMC's due diligence over the next 60-90 days. This termination agreement does states that there can be no assurance that the parties will conclude this transfer successfully.

We would definitely expect that this will result in a revenue dip for MEMC, but this is still subject to contractual due diligence. There may at least be some good news in that perhaps this will help margins.

MEMC shares closed down 5% at $2.82 on the day and shares are indicated up about 2% at $2.88 in the after-hours session after the news.


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