Renewable energy provider SunEdison (SUNE), in a move which surprised no one, has filed for Chapter 11 bankruptcy amid accusations of financial improprieties. The bankruptcy, filed Thursday morning in New York, follows a tumultuous April in which shares of SunEdison stock declined steadily. According to USA Today’s Bomey, the bankruptcy was expected after a board investigation revealed that poor accounting practices led to earnings reports that were overly optimistic at best.
There were several factors which led to SunEdison’s decision. For several years, the firm, once considered a rising star in the alternative energy field, fueled its ascent through acquisitions. In the last two years alone, SunEdison has purchased wind and solar assets on six continents. This resulted in a financial position that was highly leveraged and short on cash. In the last comprehensive report filed by the firm prior to the bankruptcy, SunEdison had total debt of some $11.7 billion as of September 30, 2015.
The debt, in and of itself, is not the reason for the demise and bankruptcy of SunEdison. Many, if not most, successful firms utilize leverage as part of a planned strategy of growth. In fact, investors once saw the prospects of subsidiaries such as TerraForm Power, Inc. and TerraForm Global, Inc. in a positive light. Prior to the accounting investigation that triggered the market’s fears of a SunEdison bankruptcy, the firm came under fire for its inability to complete its project obligations in a timely manner.
In February, Hawaiian Electric Industries canceled the purchase of 148 megawatts of solar plants that it had contracted with SunEdison to build. SunEdison had missed several progress and financial deadlines, and, in a move that revealed the form’s desperation, attempted to sell the projects to D.E. Shaw to avoid major losses and an inevitable bankruptcy filing. However, SunEdison was unable to secure financing for the sale, which played a large role in its decision to sell off assets such as a polysilicon facility in Texas and its Malaysian silicon water plant.
Bankruptcy was perhaps inevitable after the Hawaiian Electric disaster. The canceled solar projects served as a vote of no confidence from a client wishing to divest itself of exposure to SunEdison’s financial difficulties, and signaled the market that something was likely very wrong. The firm hired an independent auditor to find any weaknesses in its accounting structure, while the SEC and the Justice Department launched their own investigations. The audit committee found that not only did SunEdison have an overly optimistic culture that flowed from its top managers, but it also failed in implementing the controls and processes necessary for accurate cash forecasting.
The SEC agrees with the audit’s scathing conclusions, having decided to look into the firm’s November financial statements to determine whether SunEdison misrepresented to investors how much cash it had on hand. The Justice Department, meanwhile, is seeking to determine whether there was any criminal wrongdoing in its failed attempt to acquire Missouri bases Vivint Energy, the conduct of a SunEdison employee in the aborted negotiations, the nature of financial dealings between the parent firm and its TerraForm subsidiaries, and the manner in which SunEdison financed its projects in Uruguay.
Bankruptcy, then, seems to be only the beginning of SunEdison’s problems. While the bankruptcy filing may have protected whatever assets the firm retains, several lawsuits have been filed alleging the SunEdison exerted undue influence over its subsidiary yieldcos. Attempts by creditors to separate the finances of SunEdison from yieldcos such as TerraForm Global may take months, if not years, and millions in legal fees; TerraForm Global delayed the April release of its own 10-K due to accounting issues at its parent company.
Today’s filing by SunEdison represents the largest ever bankruptcy in the renewable energy industry.
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