Hoku cuts operations and signs another major deal

The company signs a third multi-million-dollar contract and limits its solar work

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Hoku Scientific Inc., streamlining its operations to concentrate on supplying solar-cell makers, said yesterday that it has signed a third major supply deal and is dropping plans to enter the solar- panel manufacturing business itself.

It also said it may sell its Kapolei headquarters, although it plans to remain based on Oahu.

The $185 million contract with Solar-Fabrik AG increases the total amount of polysilicon supply contracts that Hoku has lined up to $1.2 billion.*

To deal with growing demand for polysilicon, a material used to make solar modules, Hoku said it will increase the capacity of the Pocatello, Idaho, polysilicon plant it is building by 50 percent, to 3,000 metric tons of polysilicon per year.

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Hoku Scientific Inc. signed another multimillion-dollar contract yesterday to supply polysilicon to solar-panel makers, while dropping plans to enter the solar-panel manufacturing business itself. It also said it is considering selling its Kapolei headquarters building, but plans to remain based on Oahu.

The six-year old alternative energy company, which began as a fuel-cell technology developer, said yesterday its involvement with solar now will be limited to purchasing modules from third-party suppliers and concentrating on the sale of turnkey, or ready to use, photovoltaic system installations and related services. Hoku said it intends to use modules from third-party suppliers because it believes it can buy modules for less than it costs to make them itself.

With its latest deal, a definitive seven-year, $185 million contract with a unit of Solar-Fabrik AG of Germany, Hoku Materials has lined up $1.2 billion* worth of contracts for the polysilicon plant it is building in Pocatello, Idaho.

It now plans to increase the size of that plant by up to 50 percent, or as much as 3,000 metric tons of polysilicon per year, from 2,000 metric tons. Polysilicon is material used to make solar modules.

Hoku said total construction costs for the plant will exceed the $260 million it had earmarked, but said the new estimated cost cannot be deter- mined at this time.

The company also said that, due to the recent downsizing of its fuel-cell business and the change in its solar strategy, it plans to consider selling the 14,000-square-foot headquarters building it completed in 2005 on 2.2 acres of land in Kapolei. Hoku said if it does sell the building, it would relocate to a smaller leased warehouse and office space on Oahu.

Analyst Jesse Pichel, who covers Hoku for Piper Jaffray & Co., called Hoku "a real player now" in the polysilicon industry. "They're not a top player, but this places them in the middle of the pack," he said of Hoku's latest deal.

The transaction with Solar-Fabrik's Global Expertise Wafer Division calls for the delivery of predetermined volumes of polysilicon each year at set prices beginning in the second half of 2009. The Pocatello plant is expected to be completed in the second half of 2008, with the additional capacity coming online six to 12 months later.

The Solar-Fabrik contract also provides for an initial direct deposit of $2 million to Hoku Materials upon signing and, subject to other production and quality milestones, requires Global Expertise to make additional prepayments prior to the first shipment of $51 million.

Hoku, which earlier signed a $678 million contract with China-based Suntech Power Holdings Co. Ltd. and a $370 million contract with Japan-based Sanyo Electric Co. Ltd., now has obtained conditional upfront payments of more than $211 million.

"It's just another indication that polysilicon is in severe shortage," Pichel said, "and it's an indication that the solar companies are getting desperate and are willing to sign with companies that have no track record in it, with enormous prepayments.

"To Hoku's credit, they have a plan that they're following and they're employing all the top companies to help them do it. Unlike the Chinese companies that want to do it themselves, we believe Hoku has a better chance of execution versus the Chinese silicon companies."

Still, Pichel said Hoku's ability to raise the necessary financing for the Pocatello plant is the next catalyst for the company and is "where the rubber meets the road."

Prior to yesterday's plant expansion announcement, Hoku had needed $150 million in debt financing for the plant. Hoku said it will seek to raise the remaining construction costs through advance payments from new customers, debt or the issuance of stock.

In exiting the solar module manufacturing business, Hoku said it is canceling its plans to install a production line in Hawaii, as well as its construction of a plant capable of producing 30 megawatts of solar modules per year in Pocatello.

Hoku intends to resell the 15-megawatt-per-year solar module production line that it agreed to purchase from Boston-based Spire Corp. for about $2 million, and also plans to resell the $2.8 million of solar cells that it purchased from Taiwan-based E-Ton Solar Tech Co. Ltd. in October 2006. Hoku said reselling the solar module production equipment and solar cells may result in a significant loss.

"Since we announced our plans to enter the solar module business in 2006, we have seen consistent reductions in module pricing, and have concluded that we cannot offer our installation customers with competitive module pricing at our lower production volumes relative to our competition," said Dustin Shindo, chairman, president and chief executive of Hoku. "We expect that exiting the module manufacturing business will allow (subsidiary) Hoku Solar to focus more on its installation business, while also freeing cash and potentially improving gross margins."