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Italian investment gives Suntech a $60 million headache

Chinese photovoltaic module giant Suntech has dropped something of a bombshell in its preliminary Q3 figures, out last Friday, with the revelation that its Italian troubles will force it to reissue its consolidated financial statements for 2010 and 2011.

Suntech will be force to reissue its full-year figures for 2010 and 2011 because of problems in Southern Italy.

Suntech

The Luxembourg-based Global Solar Fund (GSF), in which Suntech is an 80% shareholder and which has acted as Suntech’s investment arm in Italy, is at the center of a permitting trial in the southern Italian city of Brindisi, where a number of the solar plants it developed allegedly sidestepped permitting requirements.

In its preliminary July to September figures, Suntech admits that the legal row will entail a US$6 million hit on its operating expenses, but the statutory declaration also makes the revelation that Suntech was defrauded over a GSF Capital security, which it guaranteed with the result that its obligations under the investment will be $60 million to $80 million, rather than the $3 million previously stated.

As a result, the company will be forced to reissue its full-year figures for 2010 and 2011 once a full assessment of the situation – and an audit of GSF's accounts – is complete early next year.

The Brindisi public prosecutor alleges five solar projects developed by GSF, as five GSF subsidiaries, were artificially split into smaller sub 1 MW schemes in order to qualify for a less stringent 30-day permitting process. The prosecutor has also alleged that in some instances, solar schemes were declared complete in order to meet the deadlines to qualify for generous Italian subsidies – now removed under Italian premier Mario Monti's austerity program.

Suntech has been tight-lipped about the Italian prosecution, but admitted in May 2011 that a negative verdict in the case – which under Italian law would mean demolition of the five plants, totaling 2.83 MW, in question – would cost it around €9.6 million ($12.4 million).

A further 11 photovoltaic projects developed by GSF in the region – with the 16 plants totaling 20 MW of generation – are expected to be investigated, with an engineer appointed by the court estimating they would have cost €80 million to build.

Retrenchment

Away from its Italian imbroglio, Suntech's Q3 figures paint a story of retrenchment typical of the industry.

Shipments were down 10 percent on Q2, and revenues fell 18 percent to $387 million. Operating expenses were up, not just because of legal fees, but also due to the $8 million reorganization cost associated with reducing cell manufacture and a further $6 million hit to intangible assets.

Gross margin, at 5 percent, slipped as a result of an $18 million U.S. countervailing duty allowance although this was partially offset by $13 million of long-term purchase agreements and Suntech CEO, David King said demand was up in China, Japan and Thailand, although falling in Europe.

"With the soft demand environment expected to persist into early 2013, we have taken decisive steps to right-size production capacity and streamline operations, which will reduce production cost and operating expenses over time," said the CEO, adding, "We are also working with our banking partners and bondholders to ensure we have a capital structure that will enable Suntech to be successful in the current challenging industry environment.

"We are confident that these initiatives will strengthen our business and enable us to improve profitability as the market recovers."

Suntech is predicting a further quarter-on-quarter fall in shipments in the final three months of the year, although limited to a "low single digit" and expects gross margin to be "slightly" negative. As a result, the full-year shipping estimate has been revised down to between 1.7 and 1.8 GW, from 1.8 GW to 2 GW.