SunEdison malaise result of Vivint wrongdoing and "overly optimistic" culture, finds audit

The ongoing financial troubles bedeviling U.S. renewable energy firm SunEdison can be laid squarely at the feet of the company’s "overly optimistic" management, according to the findings of an investigation by an audit committee and independent directors published today in a public filing.

The investigation also found that a non-executive employee of SunEdison, since fired, was guilty of "wrongdoing" in regards the failed merger and acquisition of Vivint Solar, a deal that collapsed earlier this year after months of wrangling.

The independent directors’ findings were clear in their assertion that SunEdison has not succumbed to any nefarious financial practices such as fraud or willful misconduct of management. Rather, the company’s management team suffered from an "overly optimistic" culture when it came to properly assessing SunEdison’s reach, ambitions and – critically – its actual cash flow.

In the filing, four key areas of injurious behavior are identified, the first being "the company’s cash forecasting efforts" lacking sufficient controls and processes. Further, SunEdison’s Board was continuously fed overly optimistic cash assumptions and forecasts by the management team, while dialogue between the board and management lacked the necessary fulsomeness, particularly in light of the ambitious projects being signed off.

Thirdly, when forecasted targets went unmet, management did not respond appropriately, the independent directors have found, while the final point of contention centered on a lack of "sufficient control and processing" where SunEdison’s cash flow was concerned.

To rectify these shortcomings, the filing laid out a series of remedies that the audit committee believes could help steady what has fast become a sinking ship. These include the implementation of an improved cash forecasting system replete with better monitoring and control; more transparent dialogue between management and the board, and a more sober culture of assumptions and estimates where project-level decisions are concerned.

The recent hiring of a new CFO is viewed positively by the independent directors, while a review of "the board’s delegations of authority to management", that is, wresting back certain levels of decision-making from management, has also been recommended.

Deckchairs on the Titanic?

However, industry analysts and experts are generally of the opinion that these remedies are too little, too late to save SunEdison, with one anonymous source telling pv magazine that the findings will make scant difference to the firm’s plight, given that the company is still yet to file its 2015 annual and Q4 2015 financials, and has hefty term loan payments outstanding.

Raj Prabhu, CEO of Mercom Capital, told pv magazine that there were some crumbs of comfort in the filing, not least the audit committee’s confidence that there have been no ‘material misstatements’ or ‘willful misconduct of management’. That being said, Prabhu added, "the investigation does acknowledge a lack of sufficient controls" across sections of management.

"I think this will result in a positive short-term bump for SunEdison," Prabhu asserted. "However, this is all after the fact, and lax controls and an overly optimistic culture appear to have been the contributor for where they are today."

Where SunEdison are today, the majority in the industry believe, is firmly on a path towards bankruptcy. Saddled with debt of more than $11.7 billion, the firm faces defaulting on at least $1.4 billion in loans and credit facilities and is currently under investigation by the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC).

Earlier this year, as the Vivint Solar deal was on the verge of collapse, SunEdison also saw Hawaiian Electric pull out of a 148 MW PPA deal for solar plants in Hawaii – a decision that staff at the Hawaii Public Utilities Commission (HPUC) have this week concluded was taken too hastily and "without an in-depth analysis of any perceived bankruptcy concerns", according to an HPUC report.

The company’s tailspin has been further fueled by publicly declaring its intention to offload its sizable India solar projects, as well as a lawsuit filed by its own subsidiary, TerraForm Global, in which it is alleged SunEdison misappropriated $231 million in cash to avoid defaulting on a loan.