ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

ASSIGNMENT ONESTEP 3: PV CRYSTALOX SOLAR

INITIAL IMPRESSIONS

I was initially thrilled when I received PV Crystalox Solar (PVCS) as my firm on Friday evening. I yelled to my husband “I got a Solar Company!” while fist-pumping the air. I am an unusual kind of fish as I love the renewable energy sector and am genuinely interested in its dynamic nature. I have previously worked in a sales capacity for Urth Energy, a renewable energy retailer and generator start up, that unfortunately went into voluntary administration1 in 2017. I loved this work and enjoyed the challenge of finding greener energy options for my clients who were generally large manufacturing operations. I am very proud to have been instrumental in installing Australia’s largest roof-top solar system (3MW) for National Ceramics Industries Australia (NCIA).

There is a strange kind of rivalry in our household as my husband works as an operator at Origin Energy’s Eraring Power Station. We are two sides to the same coin and joke that combined we are carbon neutral. So, it was with a smile on my face that I clicked on the link to my company’s website. I posted a little about my initial findings on my blog2.

PV CRYSTALOX SOLAR

PV Crystalox Solar (PVCS) was established in the UK in 1982. According to the home page on its website3 PVCS is ‘a leading manufacturer of multicrystalline silicon ingots and wafers, the key component in solar power systems’, with production facilities in Germany and the UK PVCS serves cell producers in Japan, Taiwan, Canada and much of Europe. Ok, so contrary to my initial thoughts, PVCS manufactures components of PV (photo-voltaic) cells rather than the entire cells themselves. I found this interesting because I had assumed that the cells were manufactured by the one operation. So, what are multicrystalline silicon ingots and wafers? Having no idea, I turned to google. 1 https://reneweconomy.com.au/solar-focused-retailer-urth-energy-goes-into-administration-19753/ 2 https://wordpress.com/view/thedailyamy.home.blog 3 http://www.pvcrystalox.com/home/

Amy McClelland 1

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

After deep diving into some very heavy scientific websites I found that silicon ingots are large bricks of silicon formed by a smelting process and the wafers are a result of finely slicing these ingots. In very basic terms the wafers absorb the photons in sunlight and can convert this into electricity. I found this really interesting and was actually quite disappointed in myself that I hadn’t known this previously. It would have certainly been useful to know how the panels that I was selling were made. I now understood that the process to create these components was extremely complex, so it made sense that companies like PVCS exist to specialise in this.

Multicrystalline Ingot Multicrystalline wafer

Moving to the ‘About Us’ section of the website I felt the floor fall out from beneath my feet. I had felt like I was slipping into a groove and had a general grasp on my company until I read ‘The Group’s exit from PV manufacturing was finally completed with the termination of multicrystalline silicon wafer production in Germany during H1 2018 in accord with the announcement in the 2017 Annual Report.’ Wait, what?! Why wasn’t this mentioned on the home page? I obviously should have looked at the Annual Reports before spending so much energy looking into the specifics of silicon manufacturing.

Heading straight to the financial statements I saw the plant closures reflected in the Balance Sheets. In 2016 PVCS noted €1,780,000 in property, plant and equipment which was reduced to €651,000 at the end of 2017 and then reduced further to only €51,000 in 2018. The accounts receivable section also reflects a decrease in operations as it heads on a downwards trajectory over the 4 years.

A deeper look at the financial statements for 2018 and news articles illustrate just how dire the situation had become for PVCS. They had experienced a 76% fall in revenue from the 12 months to December 2018.

Obviously, this downward trend could not continue for PVCS. It was decided in 2017 to close the UK manufacturing operations but when this was deemed insufficient it further ceased all PV manufacturing operations in their German facilities in 2018. It was initially hoped that a buyer could be found to continue silicon wafering production, but this did not eventuate.

PVCS is currently restructuring to offer wire-sawing services to other industries (more on this below).

Amy McClelland 2

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

As I am quite a visual learner, I decided to graph some of the financial figures, so I could better understand the business realities of the firm. The results were quite sobering and can be found below.

2015 2016 2017 2018€ 0

€ 500,000

€ 1,000,000

€ 1,500,000

€ 2,000,000

€ 2,500,000

Property Plant & Equipment

Series 1

2015 2016 2017 2018€ -

€ 10,000,000 € 20,000,000 € 30,000,000 € 40,000,000 € 50,000,000 € 60,000,000 € 70,000,000

PVCS Revenue

Revenue

Amy McClelland 3

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

2015 2016 2017 20180

50

100

150

200

250

PVCS Wafer Shipments (MW)

Wafer Shipments (MW)

WHAT WENT WRONG?

The Chairman’s Introduction in the 2018 Annual Report4 explains that PVCS had been in ‘cash conservation mode’ since 2011 to protect shareholder value whilst preserving the Groups production capabilities. An improvement in market conditions was hoped for but this did not eventuate. The Operational Review points to ‘a Chinese manufacturing overcapacity’ as being instrumental in a collapse in value for the wider PV industry.

I was aware of China’s market dominance from my time working at Urth Energy. We sourced all of our Tier One panels from China as they were by far the cheapest but also came with the same production and quality guarantees as European made panels. I have no doubt that the oversupply from China was one of the challenges that PVCS faced but was curious about the other market forces in play.

I had previously wondered about the decision to base a large proportion of their manufacturing in Germany. Were operating costs lower or were their other factors that made it attractive? I once again turned to Google.

After a bit of a hunt around I found that Germany is committed to meet Europe’s green energy targets and leads the field in transitioning to renewable energy. In 2018 renewable energy made up over 40% of Germany’s energy mix. Here is an interesting video5 outlining how they are managing this transition.

With this in mind it is not surprising that Germany is second only to China in solar PV installations. Germany experienced a green revolution in 2011 that was propped up by government guaranteed feed in tariffs to customers. This led to a whopping 7000 kilowatts of new solar panels being installed in 2012 alone as customers were desperate to claim the €0.492 per kW hour feed in tariff. Many new players joined

4 http://www.pvcrystalox.com/investor_relations/reports_and_presentations/reports_archive/ 5 https://youtu.be/Iz14z0UYq3c

Amy McClelland 4

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

the field to meet the demand and a peak of 110,900 people were employed by the solar industry in Germany in 2011.

This boom however was short-lived. New (much lower) feed in tariffs were introduced in 2012 to control the supply of solar energy entering the grid. This was catastrophic for the bloated German solar industry which went into freefall. Multiple module and wafer manufacturers restructured or entered insolvency6 including market leaders such as Q-Cells and Schott.

Anti-dumping7 measures were introduced by the EU in 2013 as damage control and this acted as a parachute to the failing market but there was no recovery. The aim of these measures was to place a cap on the minimum amount solar systems could be sold for thus stemming the flood of Chinese panels entering the European market. Unfortunately, anti-dumping controls failed to bring consumers back as they now felt that prices were artificially inflated. By 2015 90% of jobs in the solar industry were lost in Germany and in 2017 only 600MW of new capacity was added, a drop of 90% from 2012.

I was initially quite baffled about the lack of reference to these factors in any of the Annual Reports, on PVCS’ website or in their press releases. It is irrefutable that PVCS was subject to the same market conditions that saw many of their competitors go bankrupt during this period so why have they not mentioned it? Is it because they wanted to convey an impression of optimism and solidity to their investors? By maintaining that Chinese overcapacity was their key challenge investors could possibly relax knowing that anti-dumping measures are now in place to counter this. By admitting to the catastrophic local market conditions, it would be difficult to persuade shareholders to stay the course. Is it this simple? It reminded me of Martin’s assertion that the firm’s annual report is a marketing document. By omitting certain facts and glazing over the truth PVCS had definitely put quite a bit of spin on their Annual Reports.

I couldn’t help but feel horrible for PVCS. The last 8 years must have been extraordinarily hard for them. After spending so much time looking into their operations, I felt a real empathy for them and for the Directors who tried so hard to weather the storm.

Conversely, I also feel that the Directors had tried in part to deceive their shareholders by not reflecting the extent of their challenges in their Annual Reports, on their website or in any of their press releases. The home page of the PVCS website still reads as if they are one of the largest solar component manufacturers in the world, which simply isn’t the case.

PVCS Annual Reports are certainly marketing oriented. The actual financial statements are set up similarly to others I have seen which is expected, as they all have to conform to International Accounting Standards, however the images and verbiage used are very optimistic.

6 https://www.pv-magazine.com/2019/11/18/solar-will-power-ahead-to-offer-20-more-output-for-25-lower-module-costs-within-15-months/ 7 https://www.pv-magazine.com/2018/05/25/around-250-signatories-call-for-an-end-to-eu-anti-dumping-measures/

Amy McClelland 5

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

GOING FORWARD

The restructure is still on shaky ground with a 94% fall in interim revenue8 to June 2019. This is to be expected as the remaining 20 staff of PVCS are focused on research and development and conducting cutting trials to establish new business. PVCS plans to offer silicon and non-silicon wafering (wire sawing) services to PV manufacturers and other industries such as optical and ceramics industries. The Group’s ability to continue in business hinges on the success of this venture.

PVCS received a significant cash inflow of €28.8m in 2018 after a settlement agreement in their favour relating to an unfulfilled wafer contract against one of the world’s leading PV companies. This coupled with €27m net cash from operating, resulted in a year end net cash amount of €54m which is €27.1m higher than the beginning of the year.

Rather than use this cash for business acquisition purposes it was decided that a Capital Return of £38.5m (€42.8m) should be distributed to shareholders. This meant a reduction of the firm’s capital reserves and a consolidation of the share price. I think that in light of the challenges that PVCS is facing that this was a very well thought out decision. A complete de-listing of the company and full share cancellation is also being considered for the future.

The Directors are of the opinion that operations can continue until March 2020. This is largely due to the decreased net cash demands since the restructure. Discussion of plans past this date are not evident but it is hoped that PVCS is able to form a solid customer base for their wire-sawing services. German companies are currently completing cutting trials to assess the cost benefit of using PVCS manufacturing facilities for their own operations.

My research into the solar industry has shown me that it is ever-changing, so I do have some concerns that PVCS might struggle to re-enter the silicon wafer manufacturing market now that it has left. Wafer size9 is changing and there is an increasing move away from multicrystalline panels to monocrystalline as these are more efficient. The existing manufacturing operations that PVCS owns will be ill-equipped to cope with these changes.

8 https://www.morningstar.co.uk/uk/news/AN_1569495955708685400/pv-crystalox-revenue-slumps-still-considering-share-cancellation.aspx 9 https://www.pv-magazine.com/2019/08/16/big-news-as-zhonghuan-semiconductor-unveils-12-inch-super-wafer/

Amy McClelland 6

ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

Multicrystalline wafer Monocrystalline wafer

I am quite impressed with the fortitude that PVCS has shown in the face of many challenges. In a time where even market leaders have folded, this company has continually adjusted to survive. On the basis of this I believe that there is every chance it will be able to regroup and rebuild as a general wafer manufacturer for industries other than solar.

During the course of preparing this assignment I have grown quite attached to PVCS. I was initially terrified when I realised that my company was undergoing a complete metamorphosis. How could I possibly understand something so amorphic? I felt short-changed when I read about many of my peer’s firms which seemed to be going from strength to strength and their growth seemed quite linear. As a novice of accounting I felt ill-equipped to understand the complexities of a restructure and how this would be represented in the firm’s financial statements.

To compensate for my lack of knowledge I have spent a LOT more time on this assignment than recommended. I found it really useful to learn about pressures in the wider industry in understanding the business realities of PVCS.

I took Danielle Bradley’s advice and used a lot of checklists to cover all of the required information. This was so helpful! I also spent hours explaining my key concepts to my children, so they are now apprentice accountants / solar manufacturers. I was hoping to jump on this week’s PASS again but have lost my voice (no doubt due to all of those explanations!!). Thank you, Danielle.

Now that I am (finally) finished my Step 1 I look forward to having the time to read my peer’s drafts and receiving their feedback. I expect to have to make many changes to this draft before it is submitted.

I also have to choose my favourite blogs and chat a bit about peer discussions.

But first, coffee!!

Amy McClelland 7