The market hasn't been kind to SunEdison Inc (SUNEQ) since the company reported earnings on August 6. Shares are down 38% since then and there seems to be a loss of confidence in the company's growth plans.
Looking through the company's conference call, here are the comments from management that stuck out to me.
SunEdison is focused on growth
"Our diversified pipeline grew once again, now at 8.1 gigawatts with gross pipeline additions of 1 gigawatt versus last quarter. This continued strong growth gives us confidence to set 2016 guidance of 4.22 gigawatts to 4.5 gigawatts, an increase by 50% over our prior outlook of 2.8 gigawatts to 3 gigawatts provided at our Capital Markets Day earlier this year."-Ahmad Chatila, CEO
Today, SunEdison is all about growth and this comment shows that. The company has been on an acquisition spree, buying up developers and assets that can be used to grow its yieldco and cash available for distribution from that yieldco.
The days of M&A may be coming to an end
"Our platform in totality, our multi-year transformation is largely complete. We expanded into wind with our acquisition of First Wind and the team has executed extremely well on integrating that business into our platform, and quickly capitalizing on synergies and expanding opportunities. We are now the number one global renewable utility scale developer with more than 50 gigawatts in development opportunities at SunEdison, and more than 10 gigawatts of operating projects and third-party call rights at the TerraForm yieldcos."-Ahmad Chatila, CEO
SunEdison's biggest acquisitions have been wind and residential solar businesses and now that it has those under its wing it can compete in almost any renewable energy space. That's been management's goal in expanding and now it has to show that the synergies it says exist actually do.
Here's where the market is a little uncertain. If you listen to management, there are lots of ways being the biggest renewable energy developer in the world makes SunEdison a stronger company. But continued losses tell a different story and investors don't know which one is true or if the acquisitions will pay off long-term.
Beyond the core business
"Not long ago, we announced the acquisition of Vivint Solar, which we expect to close during the fourth quarter. We also recently completed the IPO of TerraForm Global and with that SunEdison now has the ability to own and operate power plants globally, including attractive markets of China, India, and Brazil."-Ahmad Chatila, CEO
The move to acquire Vivint Solar was a questionable one on a lot of levels. First of all, the Vivint Solar culture of door to door sales and high pressure tactics that they're known for don't necessarily mix with SunEdison's usual utility customers.
Then there's the focus on expanding the business internationally with TerraForm Global, which may or may not have synergies with the other parts of the business. The market's tepid response to TerraForm Global -- which initially planned to sell shares at $19 to $21 per share and eventually IPOed for $15 and currently trades at $10.56 -- may show that investors aren't quite certain if SunEdison can deliver the returns it has promised with the global yieldco.
Finding new funding sources
"We expanded our capital formation with two warehouses, totaling a combined $2 billion, providing SunEdison with additional firepower for growth."-Ahmad Chatila, CEO
Here's where SunEdison becomes a dizzying array of complex financial instruments. The company introduced the "warehouse facility" to house newly acquired assets that it didn't have the funds to buy outright. In the facility there's an equity partner that's guaranteed a rate of return and also debt, which comes with a high rate of interest.
SunEdison raised $2 billion of these warehouse facilities and plans to use them to expand over the next few years. That could be a boon for shareholders if interest rates stay low but if they rise, as many predict, variable interest rates on debt could eat up most of SunEdison's upside from these facilities and it's unknown what the company would do with the assets then.
There's still a lot of cash for growth
"Of the $2 billion of cash at the end of the quarter, roughly $400 million was in TerraForm Power and $620 million related to TerraForm Global, leaving SunEdison, the development company with greater than $1 billion of cash and sufficient liquidity to support the future growth of the platform."-Brian Wuebbels, CFO
As I've noted above, SunEdison has a lot of projects under construction and those projects will need a lot of cash to be completed. But the company has prepared for that with $1 billion in cash on the balance sheet.
What investors should watch over the next year is how cash flows through the business and how interest rates trend. Recently announced rates, like the one for its warehouse facility, have been relatively high for a solar company, which could make SunEdison less competitive on projects long-term.
Is the sun rising or setting on SunEdison?
This is a high growth company but it's lost its place as a market darling in recent months, which should be concerning. What management didn't talk much about on the conference call was the company's continued losses, including $263 million last quarter alone. That's what has investors concerned because if you can't grow profitably what's the point of growing?
I have more questions than answers about SunEdison and until we see consistent profits and cash flows I see this as a high-risk solar investment. The last month has shown just how fast the market can sour on this solar stock so buyer beware.
