UPDATED 4/21: SunEdison, the world’s leading renewable energy development company, has filed for Chapter 11 bankruptcy in a New York court today.
Multiple media outlets are reporting that SunEdison might be filing for bankruptcy — as soon as Sunday night.
Founded in 1959 as the Monsanto Electronic Materials Company (MEMC), SunEdison established itself as a pioneer of silicon wafer, or semiconductor-chip manufacturing. In 2006 the company bought into the solar market, selling solar wafers to solar-energy companies in Asia and shortly after, contracts with worldwide solar power plants followed.
Today, SunEdison is a company that develops, operates and installs distributed solar power systems. It also manufactures different solar technologies to help provide cost effective energy and other services to its customers. Over the years, SunEdison achieved and maintained its status as one of the leading solar-power companies in the world. They also created and own many subsidiaries including, TerraForm Power and TerraForm Global. With the selling of their subsidiary SunEdison Semiconductor in 2015, SunEdison successfully transformed from a semiconductor wafer manufacturer into a well-known renewable energy company.
SunEdison Prepares for Bankruptcy
By mid-March of 2016, it seemed that SunEdison had fallen short of its goal of becoming the world’s leading renewable energy company. On April 15, the New York Times announced that SunEdison is preparing for bankruptcy, hot on the heels of another renewable energy company, Abengoa. As of today, SunEdison’s stocks have since fallen about 99% since July of 2015.
So, what went wrong for this promising company?
While the news came as a bit of a shock for some, many are left shaking their heads at business practices that should have given SunEdison clear warning signs that they were headed for troubled waters.
There are several problems that led SunEdison to its current financial state. Most agree that the products, projects and services the company provided did not contribute to the company’s problems. The consensus is fairly universal regarding the company’s business practices, strategies and spending habits being the primary contributing factors to SunEdison’s plummeting stocks.
SunEdison delayed filing its 2015 report twice, which prevented the company from performing an internal investigation of alleged financial mismanagement. This action generated all kinds of rumors and questions from the public and investors about the financial state and transparency of the company.
Recently, SunEdison completed their internal investigation. Their conclusion, according to Forbes.com is that, “there were no identified material misstatements in the Company?s historical financial statements as well as no substantial evidence to support a finding of fraud or willful misconduct of management, other than with respect to the conduct of one former non-executive employee.?
While the results were positive, they didn’t do anything to help improve SunEdison’s other significant problems.
Many analysts feel that the major problem lies with the fact that SunEdison tried to grow too quickly. In order to expand its financing options, the company created two new subsidiaries. They also bought many other companies, picking up energy projects in many different renewable energy areas – one after the other. These areas included, energy, wind and residential solar. In addition to these purchases, SunEdison also attempted to expand its operations in locations like India, Brazil and China, to name a few.
All of these ventures required significant sums of money to organize and run. By the end of SunEdison’s third quarter of 2015, they had already reached approximately $11 billion in debt.
Last summer, SunEdison also decided to acquire Vivint Solar, a residential rooftop solar company. Investors moved to block the deal but the court ruled against them. The problem was, the ruling basically allowed SunEdison to force one of its subsidiaries to purchase $799 million in loans to assist the acquisition. Any investors who were against SunEdison’s purchase of Vivint Solar, but were also investors with the subsidiary, were then also forced to provide the funds by association.
Due to this ruling, SunEdison has recently acknowledged that the Securities and Exchange Commission and the Justice Department are investigating their financial activities connected to their subsidiaries, the attempted Vivint acquisition as well as a Uruguay project.
Many parties including Vivint, several investors, a subsidiary and creditors are also suing SunEdison due to the court ruling. In particular, David Tepper?s hedge fund Appaloosa Management is seeking an expiated trial. Appaloosa Management holds a 9.5% stake in the subsidiary company and did not want to be involved in the investment.
Unsustainable Business Model
The strategy many renewable energy companies have taken is to own the resources they build instead of coming up with or selling projects. The issue with this model is that it takes an incredible amount of financing to run successfully. Why? Well, these companies borrow money from shareholders. When those funds are used up, if there are any hiccups in the shareholders market, the company faces significant funding issues.
For example, On January 5th, SunEdison announced that it had $619 million in cash and was running 2.9 GW worth of projects. They need a significant amount of money to complete these projects and it was estimated that they likely spent most of their current balance in the early part of 2016.
The bottom line is, renewable energy companies who follow this model can?t dig themselves out of the problem they created. They literally cannot afford to build and maintain the systems they build in the long-term.
What Will Happen Now?
In order to make it just to the middle of 2016 the company will require $310 million, which could resolve itself in one of three different ways. Experts state that if the banks are given control, they could sell off SunEdison assets quickly and at discount prices in order to make up the debt faster. If other investors like hedge funds are given control, they might consider some of the assets to be undervalued and hold onto them for future benefits. The last option that might be given to SunEdison is to sell shares from their subsidiaries. This would give them the funds they need to continue to run their day to day business.
One significant factor to consider during this process is SunEdison’s current projects, or their global pipeline. They are developing 3.7 GW of projects globally that require about $272 million in investments. This in turn would generate $897 million in revenue.
As it currently stands, it is not clear what the end result will look like for the SunEdison and its subsidiaries. However, it is clear that this company is going to have to face some serious changes. In fact, it is quite likely that we will see these changes sooner rather than later if bankruptcy proceedings begin as is being reported in multiple media outlets.