SunEdison's Plan to Reduce Costs May Not Be Enough, Analyst Says

  • Biggest clean-energy developer will fire 15% of workforce
  • CEO Chatila to discuss SunEdison's strategic shift Wednesday

SunEdison Inc. Chief Executive Officer Ahmad Chatila has some explaining to do, after announcing a plan to fire 15 percent of his workforce. It’s his latest move to reverse an industry-worst 70 percent plunge in market value over three months.

Chatila will participate in a conference call Wednesday to discuss the restructuring. The world’s biggest renewable-energy developer is seeking to cut costs after an acquisition binge this year that exceeds $4 billion and is expected to help it double installations next year.

Investors soured on the deals after SunEdison reported a five-fold increase in its second-quarter loss, raising concerns about the company’s ability to finance future growth, said Ben Kallo, an analyst at Robert W. Baird & Co. in San Francisco.

“It’s a good first step,” Kallo said in an interview Tuesday. “The cost cutting and employee layoffs are really important to rein in costs after these acquisitions. I just don’t know if it’s enough.”

SunEdison paid $1.9 billion for First Wind Holdings Inc. in January, and in July announced a $2.02 billion deal to acquire Vivint Solar Inc., a U.S. installer of rooftop power systems. The deals are expected to help the Maryland Heights, Missouri-based company boost installations next year to 4,200 megawatts to 4,500 megawatts, from 2,100 megawatts to 2,200 megawatts this year.

Those are Chatila’s biggest acquisitions this year. He’s also acquired, either through SunEdison or two holding company units, an energy-storage company as well as developers, project portfolios and individual power plants all over the world.

Selling Stakes

In addition to the workforce reductions SunEdison announced Monday, Chatila raised capital by selling stakes in two power plants in Utah to Dominion Resources Inc. for $820 million in August and September. He also set up a $1 billion investment fund with Goldman Sachs Group Inc. that may double in size, and sold $650 million of preferred shares.

Chatila may need to make additional concessions to restore investor confidence, in SunEdison and in two publicly traded holding companies he formed to buy power plants as they’re completed, Kallo said. The companies, TerraForm Power Inc. and TerraForm Global Inc., are often described as yieldcos, once a popular model in the renewable energy industry. They’re designed to own and operate power plants, collecting revenue from selling electricity and paying dividends to investors.

TerraForm Global has dropped 55 percent since its initial public offering on July 30 at $15. TerraForm Power has lost 42 percent of its value over the same period, feeding into investor concerns that they won’t be able to raise the capital needed to buy more power plants from SunEdison, or at least not at the prices needed for SunEdison to make a significant profit, Kallo said. 

Lower Margins

With the holding companies’ shares trading at those levels, SunEdison “can’t drop plants down to the yieldcos,” Kallo said. “They need to sell some to third parties, which has lower margins.” He has the equivalent of hold ratings on both SunEdison and TerraForm Power, and doesn’t have a rating on TerraForm Global.

SunEdison’s restructuring will lead to charges of $30 million to $40 million, which will be recorded in the third and fourth quarters of this year and first quarter of 2016, according to a filing Monday with the Securities and Exchange Commission.

SunEdison said the cuts were “in response to current and expected market conditions and in order to remove duplicative activities created as a result of merger and acquisition activities and business growth.”

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