SunEdison strategy questioned as renewables developer cuts jobs

Greentech Media

In mid-September, SunEdison rented out the House of Blues in Disneyland and held a private party for hundreds of solar professionals at the industry’s biggest U.S. conference, Solar Power International.

It started off as a normal gathering. People mingled at multiple bars. A house band played on a small stage upstairs. Waiters handed out meat on sticks.

Suddenly, all the televisions throughout the bar displayed a mysterious countdown clock. When it hit zero, the party transformed. In a blur of multi-colored lights and electronic music, gogo dancers and men in yellow body suits carrying giant glow sticks filled a multi-level stage in the back of the building. Balloons rained down on the dancing crowd. People sported body paint, fake mustaches and oversized sunglasses.

It was a celebration that a company at the top of its game would throw. Except SunEdison was not at the top of its game.

At the time of the party, the company’s stock had tumbled from a 52-week high of $33.45 down to $11.50. And the stock price of its YieldCo, TerraForm Power, had fallen from $42.15 to $21.61 over the summer. In July, SunEdison had a market cap of more than $9 billion. Today, its market cap is $2.6 billion.

In retrospect, the countdown clock could be interpreted as an ominous sign.

Investor confidence had been wavering for some time. Many were having a hard time understanding SunEdison’s acquisition spree — specifically, the $2.2-billion purchase of the residential installation company Vivint Solar in July.

Executives called the Vivint acquisition a big step toward creating the first renewable energy supermajor. The street wasn’t fully convinced of the plan.

With its stock still under pressure, SunEdison is now culling its workforce. According to a company-wide memo from CEO Ahmad Chatilia released on September 30, SunEdison will be laying off around 10 percent of its 7,300 employees. Many employees received notices on Friday.

“Overall, the proposed changes result in an overall reduction of about 30%, 20% being from non-labor expenses and about 10% from headcount reduction. And this process will take some time to complete. Most of the changes will be announced during the fourth quarter with some final steps expected in the first quarter of 2016,” reads the memo.

The staff reduction will come through integrating acquired companies and “eliminating redundancy.” It will also come from simplifying management structures in different areas of the business, and focusing on a smaller range of geographic regions.

The cuts have reached all the way to the VP level, but not the executive level. Sources within the company expressed worry and surprise that the cuts didn’t impact the architects of the Vivint acquisition.

When asked for comment, SunEdison would not address the cuts specifically.

“We are proposing to take several actions around the world to optimize our business, align with current and expected market opportunities and position ourselves for long-term growth. In October we plan to provide investors with a more comprehensive view of our business structure and go-forward strategic growth plan in a conference call,” wrote spokesman Gordon Handelsman in an email.

The company is expected to inform investors of its new strategy sometime this week.

“Now it is time to take the next step in optimizing our business. Over the next six months, we are going to optimize our platform to take advantage of efficiencies, enhance cost savings, increase gross margins, and target investment areas with the greatest opportunity,” wrote Chatila in the memo.

Chris Cook, a founder of SunEdison who recently went back to the company after Solar Grid Storage was acquired, was told on Friday morning that he was no longer employed. “The only remaining Solar Grid Storage personnel that had joined SunEdison are in solar sales and are no longer in the SE Advanced Solutions storage group,” said Cook.

“As a founder of Solar Grid Storage, which SunEdison acquired in part in January, I believe storage has a very strong future — especially when mated with renewable technologies so the cuts in this area seem short sited,” he said. “I continue to believe the best value proposition for storage is to combine with solar to provide customer benefits like backup power, plus services to the grid. Now that the SunEdison team has seemingly lost interest in those types of projects, it might be a good time to start developing them again.”

Teams within SunEdison are already looking to sell off portfolios of projects, say other sources within the company.

What is behind SunEdison’s recent troubles and coming cutbacks?

The company has been hit by a confluence of factors. Recent acquisitions have nearly doubled SunEdison’s debt load and increased negative operating cash flow. The Vivint acquisition, which wasn’t an obvious fit with SunEdison’s culture and traditional business of building large solar power plants, added to investor skepticism.

Some investors have dumped the stock due to low oil prices and turmoil in commodity markets — a problem for other public solar companies. However, short sellers have targeted SunEdison more than its competitors. The stock has become a playground for hedge funds.

Most importantly, some worry that SunEdison has morphed from a project developer into a financial engineering firm that is too complicated for executives to manage.

In a long blog post this week, John Hempton of Bronte Capital provided his take on the company.

It took us a while to understand why they have fallen so hard. The argument comes down to complex accounts, lots of debt and a peculiar acquisition of door to door marketing company (Vivint). The Vivint acquisition — which looks strange — was poorly explained and was bundled with a few details that indicated that the margins on projects dropped down to the captive yeild-cos are declining caused a run on the stock. Moreover there were lots of hedge funds who had oversized positions in Sun Edison before the collapse. There clearly was a rush to the exits.

The equity and debt cost for Sun Edison has risen substantially and this seriously impedes the economics of the company. Its [sic] that strange thing about financials that lower prices for equity and debt reduce the future cash flows.

Just this week, analysts from CreditSights said they believe SunEdison now faces a margin call on a $410 million loan that it closed using stock from the TerraForm YieldCo.

Although Hempton was critical of SunEdison, he said he was long on the stock. “Given that the company is priced as if insolvency is likely this stock should produce a good return from here,” he wrote.

The company, he believes, is not on the verge of collapse as many have speculated. Rather, it needs to be more disciplined and risk averse. The round of job cuts will signal to investors that SunEdison is ready to make changes.

Stockholders and analysts have wondered why executives have been silent about recent turmoil.

During an earnings call just two months ago, Chatila talked about the company’s leadership and growth: “Our business continues to accelerate and you can see the confidence we have not only in the team’s ability to execute, but in our ongoing shift in the energy market, which shows the continued move towards solar and wind energies and their growing importance around the world.”

In a vote of confidence in the company, Chatila purchased 9,700 shares of stock in August and an additional 4,800 in September. He now owns 850,472 shares in the company. Chief Financial Officer Brian Wuebbels also purchased 50,000 shares in August.

Those running SunEdison talk passionately about their mission to become the most powerful renewable energy developer in the world. They want to transform the energy business through building large power plants, installing home solar systems, deploying battery storage and electrifying developing countries with microgrids. They want to do it in a way that’s equitable and supports women and minorities in the workforce. And they want to do it all with ferocious speed.

That is part of the problem. Critics think SunEdison’s expansion into too many areas is expensive and complicated.

Leadership now has to make some hard decisions. Laying off hundreds of people is just one. Some believe the company should abandon the Vivint Solar deal, sell off projects, or bring in new executives to monitor and limit the company’s complex financial deals with its YieldCo. Others think the company should be sold and taken private. It will certainly mean cutting back on development or project acquisition plans.

More details on SunEdison’s plans to “align with current and expected market opportunities” will be forthcoming this week.

A slowdown in project construction or constraints on capital would be a blow to SunEdison’s YieldCo, which was built on the promise that an unending volume of projects will bring ever-higher dividends to investors. Whatever the course of action, SunEdison’s plans to become a renewable energy supermajor are getting more complicated.

Hempton thinks Ahmad Chatila, the man behind SunEdison’s recent business strategy, should be replaced. He praised Chatila’s visionary approach to building the company (“He has created — from very little — a worthwhile, valid and large business”), but said SunEdison would be better suited with a “boring” executive.

“The ideal CEO would be someone from (say) the risk management department of Goldman Sachs. What you want is a dull suit occupied by someone whose job it is to pull wings off butterflies. Someone whose job it is to ensure — and be seen to ensure — that bad projects are not funded,” Hempton wrote.

In conversations with people inside SunEdison, no one called for Chatila’s resignation. One senior official described “tremendous respect” for leadership, but also said that they had a “rocket ship attitude” toward growth. That aggressive strategy commanded awe within the company — less so among investors.

“This company has got to become dull and predictable and it has to get there fast. Anything short of dull and predictable will end badly,” concluded Hempton.

In its most recent earnings declaration, SunEdison targeted 2,100 to 2,300 megawatts of completed renewable energy projects for all of 2015. The company has 1.9 gigawatts of projects under construction — a number that could change on the next earnings call.

This article was originally published on Greentech Media. Reproduced her with permission