SunEdison: Where Did It All Go Wrong? Lessons and impacts from the collapse of the world’s largest clean energy company.

Posted by: aahassonjee

SunEdison: Where Did It All Go Wrong?
Lessons and impacts from the collapse of the world’s largest clean energy company.

Just six months in, 2016 has been quite an exciting year: countries have exited political unions, clean energy giants have proposed monumental mergers, and climate initiatives have reached massive political heights. One of the largest headlines, however, has been the collapse of the solar developer SunEdison- a company that was once the world’s largest renewables developer, but has now razed nearly $10-11 billion in market value over the course of its implosion. But where did it all go wrong?

2009: Acquisition
Silicon-wafer manufacturing giant, Monsanto Electronic Materials Company (MEMC) acquired rising solar-developer, SunEdison, for $200 million and changed its name to match the acquired company within 4 years. By the time of its acquisition, SunEdison had championed the power purchase agreement for solar installations, unlocking massive value in no-money-down solar. From 2010 onwards, the new and astonishingly larger SunEdison embarked on a debt-fueled journey of acquisitions and market plays to establish itself as a clean energy giant worldwide.

2014: The Rise
SunEdison launched its first YieldCo, Terraform Power. Yieldcos served as “complex financing vehicles” for investment in a variety of different regions, and allowed SunEdison to find and purchase projects from all types of developers. SunEdison also purchased wind energy producer, First Wind, for $2.4 billion.

Here is where many of the first fatal steps were taken. SunEdison immediately set about raising billions in loans to acquire projects and expand business in multiple different markets. Using up $2.4 billion on the First Wind acquisition was not the best call considering the level of debt the company was forced to raise to achieve this. The execution of the yieldco strategy would also prove to be SunEdison’s biggest thorn- Terraform Global and Terraform Power were designed to decentralize SunEdison’s project pipeline while simultaneously funneling back cash to the parent company as dividends to investors grew. This basically meant that SunEdison could raise loads of money, let its yieldcos handle the projects, and collect back cash periodically. But all that debt came at a price, and eventually it grew to be far too much for investors, media, and even the government to ignore. This wasn’t the best choice for a company looking to set itself apart as a utility scale solar developer that offered installations and energy services to a wide market of customers, across very different regional markets.

2015: The Peak
The second YieldCo, TerraForm Global was launched for investment focus in Africa and Asia. SunEdison also revealed its $2.2 billion plan to acquire Vivint Solar, a residential installer. The company’s stock price immediately plunged, marking the beginning of its collapse.

This was one of SunEdison’s first ill-fated moves into a totally different business direction- residential solar. The company’s woes, and many investor complaints, would be centered around stepping away from utility-scale solar, its main business, and proceeding into wind power and residential solar. Had it not adopted complex financial schemes and spent billions in money-raising and acquisitions, these directions might have made sense, given a more directed and patient strategy instead of large and fast project deals.

2016: The Fall
Amidst revisions taking place for the Vivint acquisition deal, David Tepper (Hedge-fund founder with 10% stake in TerraForm) sued SunEdison to block movement of Vivint assets to the YieldCos. Next, Steve Tesoriere (YieldCo strategy architect and board member), Francisco Perez Gundin (COO), and Paul Gaynor (former First Wind CEO) resigned from the company. SunEdison managed to secure a $725 million loan to improve on its dangerous liquidity position, and to try to find some saving grace amidst the collapse. In February, Vivint Solar approved a new $1.9 billion acquisition deal. Hawaiian Electric shut down $350 million worth of projects. SunEdison then sold its Japanese solar unit, Malaysian silicon wafer factory, and closed its Texas polysilicon factory. To top it off, UBS, and multiple other equity analysts, downgraded SunEdison’s stock price from $2.00 to $0.75. In March, SunEdison delayed it's 2015 and Q4 financial reports while the U.S. Department of Justice (DOJ) and Securities & Exchange Commission (SEC) investigations into “the accuracy of its financial disclosures” commenced. A $28.5 million settlement between SunEdison and TerraForm Power was then announced. Shortly afterwards, SunEdison’s Latin America Power acquisition was terminated.

At this point, SunEdison’s management made its greatest mistake- not coming clean. The company should have admitted to its massive debt numbers and cash flow problems from stalled terraform projects and halted acquisitions in its financial reports. The political costs of veiled information reports cost the company dearly in terms of investor confidence and ongoing project deals. It also fueled the internal fire that would lead to lawsuits being traded between the parent company and its yieldcos, further enhancing the media storm. Honesty to the public would have helped clear up much of the debt confusion, and should have been SunEdison’s first priority.

In May, Brian Wuebbels, previously CFO and now CEO of both yieldcos, submitted his resignation. Wuebbels’ promise to investors of “reliable dividends based off of long term contracts” fed through the yieldco system fell through as the company’s debt swallowed its stock price. Finally on April 22nd, SunEdison filed for Chapter 11 bankruptcy protection, showing assets of $20.7 billion and liabilities of $16.1 billion. It proceeded to secure a $300 million loan from first-lien and second-lien lenders for the restructuring process and debt reduction. The last shares of SunEdison stock were traded at $0.34, capping an absolute plunge from a $33.44 high in July of 2015. Greenlight Capital, one of SunEdison's largest shareholders, cut most of its stake at this time. After 7 years of leadership and subsequent losses, SunEdison Director and CEO Ahmad Chatila resigned in mid-June, with John Dubel (chief restructuring officer) taking his place. Chatila received $7.7 million in total compensation.

SunEdison is currently working through its restructuring process, and more details will be announced as its asset sales, investigation details, and management shuffles unfold.

Impacts
The collapse of SunEdison could have an immediately troubling effect on the solar economy, but the financial plausibility of the solar PV market is rapidly improving as a whole regardless. Bloomberg New Energy Finance Head-of-Solar, Jenny Chase, commented that “SunEdison’s bankruptcy says more about the company’s strategic decisions than about the solar industry as a whole.” Rod MacGregor, CEO of GlassPoint Solar, commented as well, stating that “the travails of one company will not stop the rise of solar power. We stand at a watershed moment where solar technologies are both proven and economical… This transformation is ushering in an era of energy convergence.” While larger companies combust and fall, the hope is that smaller developers will continue to pave the pathway forward for an all-encompassing solar industry, unhampered by financing problems and legislative red tape.

Solar installations are becoming cheap enough to purchase to the extent that the old PPA business models will become unnecessary in the near future. Larger corporate clients, such as Walmart and other retailers, will soon start to actually buy these installations, and work directly with solar companies on energy service management. For this reason, many investors are questioning SolarCity's position as possibly the next SunEdison while it scrambles to raise firefighting money and adapt its business model to address its remarkable lack of cash flow. People think it makes sense for them to use investment money and start dipping into manufacturing panels for sales as those products are now worthwhile for production. Even without this, companies like Sunpower and First Solar are still running strong with centralized project pipelines.

Based on the negative impacts in SunEdison’s case, Yieldco use will probably become more risky and far more cautionary for renewables companies. Solar developers will adapt financing schemes and have to pay better attention to regulations so they don't hit red tape blunders like the one SunEdison is fighting off right now from the SEC and DOJ. This will be especially important given that so many companies (i.e. SolarCity & SunEdison before its collapse) are starting to become utilities themselves, with their distributed energy networks and servicing models. If the traditional fossil fuel-focused utilities are to be beaten or changed by an actually competitive market, rising renewables companies will have to make sure they're ready for all sorts of regulatory and financial storms.

Lessons
Clear lessons exist here for clean energy companies to follow:
- Stick to your company’s main strengths.
- Avoid massive capital expenditure on acquisitions until your core business is stable.
- Be careful with financing schemes that distribute project ownership and pipelines AWAY from the core company.
- Don't rack up debt that will kill investor confidence, when you need it the most.


SunEdison’s collapse, though distressing, will serve as a powerful lesson for clean energy entrepreneurs to come, and its notorious rise signals a new era for mainstream clean energy across the globe.

Sources:
http://www.reuters.com/article/us-sunedison-inc-bankruptcy-idUSKCN0XI1TC
http://www.reuters.com/article/us-sunedison-inc-yieldco-idUSKCN0XM0A2
http://www.greentechmedia.com/articles/read/The-End-of-SunEdison-Developer-Now-Looking-Into-Liquidating-Its-Assets
http://www.greentechmedia.com/articles/read/SunEdison-The-Biggest-Corporate-Implosion-in-US-Solar-History
http://www.bizjournals.com/stlouis/news/2016/06/22/sunedison-ceo-resigns.html
http://www.reuters.com/article/us-sunedison-inc-yieldco-idUSKCN0XM0A2