MEMC Electronic Materials, Inc. announced that its affiliate, MEMC Singapore Pte. Ltd., and Suntech Power Holdings Co., Ltd. have agreed to terminate their long-term solar wafer supply agreement.
Under the terms of the supply agreement, which was originally signed in July 2006, MEMC was to supply solar wafers to Suntech over a 10-year period, with pre-determined pricing, on a take or pay basis beginning in January 2007. As part of the original supply agreement, Suntech advanced funds to MEMC in the form of a loan/security deposit and MEMC received a warrant to purchase up to a 4.99% equity stake in Suntech.
Since the market downturn in early 2009, issues with respect to Suntech's price and volume purchase obligations under the supply agreement have created challenges to finding a mutually beneficial arrangement between the parties. After two formal contract amendments (in February 2009 and July 2009), in order to resolve these ongoing challenges, the companies have now agreed to terminate the supply agreement. In exchange for MEMC's agreement to terminate the supply agreement, Suntech has agreed to pay MEMC $120 million, through the retention by MEMC of $53 million of cash deposited previously by Suntech under the supply agreement and currently held by MEMC, and a $67 million irrevocable letter of credit established by Suntech for the benefit of MEMC, to be drawn upon in four equal installments on July 8, 2011, October 1, 2011, January 1, 2012 and April 1, 2012. The letter of credit has no drawing conditions other than the passage of time. MEMC has retained the Suntech warrant originally issued to MEMC in July 2006.
"We are pleased to have reached a mutually agreeable conclusion to our 2006 solar wafer supply contract with Suntech," commented Ken Hannah, President of MEMC Solar Materials. "In early 2009 we began to diversify our solar wafer customer base, such that wafer sales to Suntech have gone from over 50% of our Solar Materials business in 2009 to just over 2% in Q1 2011 and 0% in Q2 2011. By putting this behind us, we look forward to establishing a new and beneficial commercial relationship with Suntech. MEMC's overarching strategy in solar, which includes wafer production, a diversified wafer customer base and a strong downstream pipeline through SunEdison, remains unchanged."
MEMC is assessing the financial impact on its second quarter and full year 2011 earnings of the Suntech termination, related contract termination charges, and other restructuring actions being implemented by company management in response to the market downturn.