How SunEdison went from Wall Street star to bankruptcy

Thousands of SunEdison Inc. employees and customers packed the House of Blues at Disneyland on a Wednesday night last September.

The big developer of renewable energy projects had set aside the last night of the largest solar trade show in North America to unveil a new brand campaign and colorful logo. Special T-shirts and lanyards were ordered up for the occasion.

But that night, the new logo went unmentioned. Also conspicuously absent: SunEdison’s top brass, including CEO Ahmad Chatila.

It quickly became clear that SunEdison executives had more important things to worry about.

A onetime Wall Street star and growth champion, SunEdison would soon lay off more than 1,000 workers. Contracts to buy several power projects and developers would be canceled. By March 22, when Debtwire broke the news that the company was in talks to restructure its debt, shares had plunged 95% from their 52-week high.

Today, SunEdison is in bankruptcy. The Securities and Exchange Commission and the Department of Justice are investigating its financial activities.

The company faces a slew of lawsuits, including one from its own subsidiary claiming that SunEdison misappropriated $231 million, using it to pay off a loan instead of solar developments, as it had said it would.

Interviews with the company’s founder and former CEO, and with former employees, give a sense of SunEdison’s mad scramble for growth, which required a nonstop supply of acquisitions and debt.

Early on, banks were more than happy to provide the necessary financial fuel.

But when the company pushed the limits of its new financial structure and tried to grow too large, too fast, investors turned on it and the money hose was shut off.

In the end, SunEdison had drifted far from the relatively simple idea that its founder, Jigar Shah, first envisioned in a paper he wrote as a University of Maryland MBA student.

“SunEdison at its core is a boring construction company, that earns the trust of its institutional investors by being boring and managing risks,” Shah, now 41, said in an interview. But the company’s senior executives “didn’t want to be boring, they wanted to be a technology company.”

Spokespeople for SunEdison and its subsidiaries declined to comment.

Life has been anything but boring for SunEdison and its investors.

For more than a decade, the company dominated the business of developing, financing, building and operating renewable energy projects for companies, institutions and utilities.

For instance, SunEdison owns the 82-megawatt Regulus solar facility in Kern County, which supplies Southern California Edison. And in January it agreed to supply 25 California elementary, middle and high schools with solar parking canopies.

Last year MIT Technology Review voted SunEdison the sixth smartest company in the U.S., on the basis of “aggressively expanding its renewable energy products and building a business to provide electricity to the developing world.”

Since 2012 the company has developed more than 4.3 gigawatts of renewable projects, enough energy to power more than 700,000 homes. The company said last year it had a further 2.9 gigawatts under construction and another 7.9 gigawatts in its development pipeline.

Shah’s original idea was that there was a gap in the nascent solar-energy market that could be filled by a company that sold the energy without shouldering the cost of building a solar farm.

The two parties would sign a contract called a power-purchase agreement. That would enable the customer to buy solar power generation at a fixed cost with no money down.

Construction would be paid for by investors, whose return would be guaranteed by the cash flow from the project.

Shah kept the idea in the back of his head until 2003, when he left a job at BP Solar to start his own firm.

His first customer was Whole Foods. SunEdison arranged the financing to build a solar system on the roof of an Edgewater, N.J., store. The supermarket chain agreed to buy the power on a long-term contract.

“We were off to the races,” Shah said.

The company suffered a setback when the financial crisis forced it to table a planned initial public stock offering. Disagreeing with the board over its plans to raise money and dilute his ownership, Shah left soon after. He now is president of Generate Capital, which invests in renewable energy.

SunEdison was bought by MEMC Electronic Materials Inc. of St. Peters, Mo., which sought to grow its production of silicon wafers — used both in semiconductors and solar panels — while generating revenue from solar developments. CEO Chatila moved his office and the company’s board meetings to Belmont, Calif., in the heart of Silicon Valley.

The company spent heavily on its materials business, including building factories in Italy and Malaysia. But when the price of silicon crashed in 2011 its revenues fell off. In 2013, MEMC changed its name to SunEdison and the company kept developing solar projects.

“We were the driving engine of the company,” recalled one person who had worked on the company’s project development side. He and other former SunEdison employees spoke on the condition of not being named, in some cases because they still work in the industry and fear repercussions.

The final transformation of SunEdison began the following year when it created the first of two publicly traded subsidiaries called yield companies, or “yieldcos.” Rather than sell operational projects to third parties, SunEdison would develop and sell them to its subsidiaries — TerraForm Power Inc. and TerraForm Global Inc..

In theory, the yieldcos would raise cash from public shareholders to buy operational power projects from SunEdison. The cash flows generated by the projects would pay a dividend to the subsidiary’s shareholders. SunEdison would be paid for the assets it sold to the yieldco.

A competitor, NRG Energy Inc., had already shown how lucrative the strategy could be, raising nearly $450 million from the IPO of its own yieldco.

But to keep the cash dividends high, the yieldcos had to keep acquiring projects.

SunEdison went on a spending spree, announcing the purchase of billions of dollars of renewable projects and companies in Europe, Asia, Africa, Latin and North America.

It also expanded beyond solar to wind, hydro and storage facilities.

TerraForm Power was the first of SunEdison’s yieldcos to go public, in July 2014. In a low-interest-rate environment, investors flocked to the offering. The company, which has bought up 2.75 gigawatts of power projects, saw its share price soar more than 21% over the next nine months.

But as growth exploded, so did debt. By September 2015, SunEdison owed $16.1 billion.

SunEdison’s bid for more assets helped drive up renewable valuations, according to market participants.

SunEdison and TerraForm Power announced in November 2014 they would buy First Wind Holdings, a wind and solar project developer, for $2.4 billion. It was the company’s largest acquisition and marked its expansion into wind power. SunEdison and TerraForm Power’s share prices immediately rose following the news.

However, First Wind’s owners are listed in SunEdison’s bankruptcy as some of its biggest creditors, claiming $231 million in disputed contractual payments.

“SunEdison went bonkers on the acquisition front,” said one former SunEdison employee. “There was no management around the table to say this does or doesn’t make sense financially.

“No one ever touched the brakes. God forbid you hit the brakes.”

But investors were backing away from energy, and solar wasn’t spared.

SunEdison’s shares began to slide in July, soon after the company announced it was acquiring the residential solar rooftop company Vivint Solar for $2.2 billion. That was more than a 40% premium to the company’s market capitalization.

Confirmation that shareholders were souring on yieldcos came two weeks after the Vivint deal was announced, when the second yieldco, TerraForm Global, went public. Its shares were priced below their original range, and kept falling. They now trade at about a fifth of their IPO price.

The Vivint deal hinged on TerraForm Power buying Vivint’s portfolio of rooftop solar systems from SunEdison for about $922 million. But the hedge fund Appaloosa, which held 9.5% of TerraForm Power’s shares, tried to block the deal with a court injunction.

SunEdison, scrambling to make the deal work as its share price crumbled, said it would cut the price paid for Vivint and reduce the asset sale to TerraForm Power.

But SunEdison’s share price continued to nosedive, and the company announced in its third-quarter earnings call in November 2015 that it would go back to selling assets to third parties, instead of its yieldcos.

Around the same time, SunEdison quietly approached potential buyers to offload a 400-megawatt portfolio of late-stage development projects, said several sources who asked to remain anonymous.

Several previously announced deals fell through as partners terminated agreements because, they said, SunEdison failed to deliver financing.

In November the company said it had access to approximately $1.4 billion in cash or cash equivalents.

But three senior executives at TerraForm Global who doubted the accuracy of SunEdison’s financial statements had already raised their concerns with the board, according to a lawsuit filed on April 4 by TerraForm Global against SunEdison.

The suit contained a more explosive allegation: that more than $231 million allocated for project development in India had been misappropriated and used instead to repay a loan. As a result, SunEdison abandoned construction of the projects, the lawsuit claims, even though TerraForm Global had paid for them.

Vivint terminated its acquisition agreement with SunEdison on March 8 and is suing SunEdison for breach of contract.

SunEdison contends that an internal investigation has cleared the company management of fraud or willful misconduct. It has secured a $300-million loan to continue operations and pay its employees, and it has appointed a chief restructuring officer.

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The yieldcos, which are not part of the bankruptcy, say they have plenty of liquidity.

Competitors, meanwhile, are watching closely to see what valuable renewable projects get sold off as SunEdison works its way through Bankruptcy Court. The company has already started to offload assets in the United Kingdom and Latin America.

Shah, the founder, says its gives him great pain to see a company that revolutionized the industry and had so much value squandered away.

“SunEdison overextended itself. It’s a pity,” he said. “But the company has a track record that nobody else has done before.”

Olivia Feld is a freelance writer who specializes in covering the energy industry.

@oliviafeld

[email protected]

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