The rise and fall of SunEdison (NASDAQOTH:SUNEQ) is one of the stranger stories in renewable energy recently. Formerly known as MEMC Electronic Materials, SunEdison jettisoned its floundering semiconductor business after the solar industry collapsed in 2012 and made a big bet on building renewable energy projects.
Over the last few years, SunEdison has acquired wind companies and solar developers, and built its own organic growth business, growing until it became the world's biggest renewable energy developer. The company became a favorite of hedge fund billionaries, counting 10 such investors as of June 2015, according to Forbes.
But the stock has fallen 71.4% in the last three months, and investors have to be wondering what's going on -- and whether the company can recover.
Growth for the sake of growth
One of the reasons investors loved SunEdison so much is the company's incredible growth spree. In the past year, it bought First Wind, a $2 billion portfolio of wind projects from Invenergy, and residential solar company Vivint Solar (NYSE: VSLR), among other smaller deals.
The deals made SunEdison a growth machine, as you can see from the company's own projections below.
There's only one problem. SunEdison is losing money like crazy as it's built this growth engine. Legacy losses from the semiconductor business, operating expenses, acquisition costs, and debt costs are eating into the company's finances.
To make matters worse, SunEdison needs to fund these growth opportunities on top of paying for debt and operations costs. That money has to come from somewhere.
Where's the money?
If you're going to build 4.2 GW to 4.5 GW of wind and solar projects in a year you're going to have to have billions of dollars to fund those investments. Assuming a cost of $2.00 per watt, as much as $9.0 billion of funding might be necessary.
But at the end of the second quarter SunEdison had just $1.29 billion in cash not already committed to projects, and had another $10.7 billion of debt. Remember that was the company's financial position when it lost $263 million last quarter, so it isn't exactly swimming in cash flow to pay for debt.
To fund all of its growth plans, SunEdison thought it would turn to public markets again, creating two yieldco vehicles: TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL). In theory, these companies would be able to buy projects from SunEdison, taking debt and giving SunEdison a little profit in the process. Plus, dividends and inventive distribution rights paid to SunEdison would also improve the company's financial position.
That thesis is predicated on both stocks maintaining relatively high valuations and low dividend yields, which would also allow more share sales to buy projects from SunEdison. But tumbling stock prices have turned that thesis on its head.
In an act of desperation, SunEdison has created what it calls "warehouse vehicles", which will house projects until TerraForm Power or TerraForm Global can buy them. These vehicles are funded by debt and equity, but the cost is much higher than SunEdison would like. Warehouse 1.0 had an effective interest rate of 8.14% for its debt in Q2, and TerraForm Warehouse had an effective interest rate of 6.2% for its debt. Equity investors like First Reserve are also guaranteed returns on their investments, which could add up to $112 million in costs to Warehouse 1.0 alone.
SunEdison has also added another $1 billion warehouse vehicle, which can be expanded to $2 billion in the future, with a fund managed by Goldman Sachs, so these are becoming increasingly popular. But unless the company can lower TerraForm Power and TerraForm Global's costs of capital enough to justify buying projects from the warehouses, these are just ways to fund projects and provide a little upside to SunEdison. And that doesn't look likely in the current environment.
Rather than focusing on growth, I think it's time for SunEdison to prove to investors that it's going to be able to make money long-term. The company has bitten off more than it can chew, and with funding drying up it's unknown how the company is going to pay for all of these growth initiatives.
I've suggested that SunEdison call off its acquisition of Vivint Solar. A better focus of time and energy would be differentiating technology and capability on larger projects. Solar Grid Storage was the company's energy storage acquisition earlier this year -- adding those capabilities to projects could add value and increase margins. Finding a way to increase system efficiency and differentiate on that basis could also be a path for greater profitability going forward.
What's not working for SunEdison is its plan to buy up the entire renewable energy industry and use low cost capital to build projects. Low cost financing has dried up, and it's time for the industry's real leaders to prove they can make money building and owning projects long-term. I'm not sure SunEdison is one of the companies that can do that.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.