Source: SunEdison.
In a quarter when its competitors wowed investors with better than expected profits, SunEdison (SUNEQ) is plunging after another massive quarterly loss.
The loss itself shouldn't surprise anyone who follows SunEdison, but it highlights how tough it's going to be to build a renewable energy powerhouse with nearly $11 billion in debt and negative cash flow from operations. The market is finally starting to realize that this high-profile renewable energy powerhouse may actually be building a house of cards.
Source: SunEdison.
Constructing a renewable energy giant
What SunEdison has sold to investors over the past few years is that it can build a massive renewable energy company that can play in nearly every end market in every geography around the world. The company has built an 8.1 GW pipeline of projects with 1.9 GW under construction on top of 404 MW finished in the second quarter. Those are impressive numbers no matter who is building them.
But building that scale has been costly for SunEdison. The company has a $10.7 billion debt load and continual losses quarter after quarter. Case in point was a loss of $263 million in the second quarter of 2015 on $455 million of revenue.
There are a few alarming numbers in last quarter's report besides the loss. First is that marketing and administration costs were $259 million, more than two and a half times the $103 million gross margin the company generated. On top of that, interest expense was $146 million, again more than gross margin.
With losses mounting and debt piling up, the only way for SunEdison to get out from under the pressure is to build more projects even faster with even more debt. It's the only path to potential profitability, but it's fraught with risk if interest rates rise or competitors with better technology begin winning projects. Given First Solar and SunPower's profitable results over the last two weeks, I think that second concern is bigger than SunEdison wants to admit.
Solar Grid Storage was SunEdison's move into energy storage. Source: SunEdison.
TerraForm Power paying money it doesn't have
You could say that SunEdison is just pushing projects down to its yeildco, TerraForm Power (TERP), which will monetize projects long term. That's true, and it has grown cash available for distribution (CAFD), but again, it's starting to look like a house of cards.
TerraForm Power's CAFD for Q2 was reported to be $65 million, and it paid a dividend of $0.335 per share. But cash provided by operations was just $45.9 million, and net income was just $29.1 million. On top of that, the company has $2.3 billion of debt to pay for with the cash flow.
At the very least, TerraForm Power is being aggressive about what it pays to shareholders and SunEdison, who owns all of its incentive distribution rights, and it is willing to leverage the balance sheet to do that.
Beware buying the biggest in renewable energy
SunEdison likes to tout itself as the biggest company in renewable energy, but it's far from the most profitable, despite having one of the biggest debt loads in the industry. That concerns me as an investor, and I don't see any sort of sustainable advantage for the company in renewable energy right now. SunEdison uses commodity solar panels, wind turbines manufactured by large conglomerates, and even battery storage that's a commodity.
I'm not sure that's a path to success in renewable energy, and nearly $11 billion in debt is enough to scare me far away from this stock.
