Will SunEdison follow the historical path of technology pioneers — into bankruptcy?
Shares of the big solar company SunEdison seemed prepared to set records Thursday, rising a blistering 58%. As an energy investor, you might have found this thrilling. Unless, that is, you looked a little more closely: That huge percentage gain translated into 22 cents per share in real money. If you'd been a SunEdison holder since last July, you'd still be down by about 98%.
That pretty much defines the gap between the huge gains in solar energy production across the nation and the world in the last few years, and the disappointing results that trickle down for investors. SunEdison is only the most spectacular burnout in this once-brightly shining sector. The Spanish firm Abengoa has narrowly escaped bankruptcy for now, but like SunEdison it's saddled with heavy liabilities and dubious paths for paying them off.
The independent counsel...identified issues with the Companys overly optimistic culture and its tone at the top.
SunEdison board report on accounting irregularities
SunEdison's problems stem partially from unique conditions, partially from an industry-wide dalliance with a questionable and unnecessarily complex financing method, and partially from the habits of technological pioneers that can be found in emergent industries as far back as the late 1800s.
Many of SunEdison's problems certainly are self-inflicted. A committee of independent directors, assigned to investigate allegations by a former executive and former and current employees that the company was cooking the books, found corporate management innocent of "fraud or willful misconduct," but said its "independent counsel...identified issues with the company’s overly optimistic culture and its tone at the top." The man at the top is CEO Ahmad Chatila, who has masterminded the company's hectic growth over the last few years, fueling it with public braggadocio and financial engineering.
In November, when it signed a 20-year deal to provide solar-generated power to Los Angeles County, SunEdison described itself as devoted to "transforming the way energy is generated, distributed, and owned around the world." That same month, it boasted of a "pipeline" of potential solar and wind projects totaling 15.6 gigawatts, the equivalent of 15 major power plants, to add to its existing inventory of 4.5 gigawatts.
Questions soon arose about whether Chatila was too eager to gloss over the numerous risk factors standing in the way of the unalloyed growth he projected. SunEdison gained a reputation for "acquisitive hubris, operational failures, murky financials and shoddy corporate governance," as the Economist put it recently. More perilously, the Securities and Exchange Commission launched an investigation into whether the company overstated to investors how much cash it had on hand in November, as my colleague James F. Peltz reported last month. The SEC isn't likely to take at face value the SunEdison board's assurances that senior executives deserve a clean bill of health.
Some of SunEdison's growth was financed through a financially intricate system of "yieldcos"--ostensibly independent firms created by SunEdison to own and operate the power plants it built. The yieldcos, which were expected to attract outside investors, were to be a source of ready capital enabling SunEdison to build more plants.
At first, the concept seemed to have struck gold. SunEdison's first yieldco, TerraForm Power, went public in July 2014 at a price of $25 and rose to $42.15 in April 2015. Since then it's been all downhill; the shares closed Thursday at $9.71. A sister firm, TerraForm Global, never even experienced the euphoria of being a hot stock; it went public in August at $15, lost $1 on its first day, and closed Thursday at $2.56.
Part of the problem may be that investors have grown gun-shy of can't-miss stories in the energy sector, especially after having taken a bath in the last pitch for similar master limited partnerships in the oil and gas industry. As we reported last year, these were supposed to be immune from volatile crude oil prices because they derived their revenue from the transport of oil and gas, not the drilling of crude or sales at the retail end. That didn't turn out to be the whole story. In a similar vein, the magic of yieldcos has been vastly oversold.
Those familiar with business history may have noticed some intriguing parallels between these goings-on in the solar business and the patterns of other industries that came into being on the tides of new technologies, like the railroads in the late 19th century. Enthralled by the riches to be gained by throwing a web of tracks over the American landscape and binding the East and West coasts together with bonds of steel, investors clamored for railroad stocks, assured by promoters that profits were guaranteed because the U.S. government was interested in the industry's success.
Capital was cheap and almost as plentiful as the supply of connivers to pocket it. Executives of the Union Pacific formed their own company, Credit Mobilier, to front as the railroad's construction company while scooping up money and political influence; the financial connections between the construction company and its secret parent, which led to what may have been the first major financial scandal in American history, were as intricate as those between SunEdison and its yieldcos.
The trajectory of stock prices in the rail industry were equally volatile and raised suspicions of less-than-adequate disclosure, not to say of outright manipulation. (The Erie Railway was dubbed "the scarlet woman of Wall Street" because it had been bought and sold so often among its insiders.)
With money so easily available, railroads competed by building parallel tracks over each others' territory and cutting prices to the bone to secure market share. The inevitable result was a vicious shakeout. In the two decades after the golden spike connected marked the completion of America's first transcontinental railroad in 1869, three more transcontinental railroads were built; all landed in bankruptcy.
The crisis wasn't resolved until J.P. Morgan stepped in to impose order on the industry, by shutting unprofitable lines and consolidating the rest, and dictating territorial rights to keep competition at a minimum. At the moment, no Morgan appears on the horizon, and his 19th century methods would be viewed as flagrantly illegal today. But those methods did set the railroad industry on a solid footing that turned the technology of rail from a magnet for promoters into a boon for industry and agriculture. The shakeout among solar firms is certain to continue, but that may not stop the technology itself from working its transformative magic on the economy.