SunPower Files Chapter 11 While Sunrun Reports Strong Earnings
Update on SunPower’s Path to Bankruptcy
SunPower filed for Chapter 11 bankruptcy yesterday, causing its stock price to plummet to nearly 30 cents following the announcement. Key takeaways from the Chapter 11 filings include:
Financial Position:
Cash Balance: Significantly lower than expected at only $18 million, compared to total debt of $483 million.
Asset Sales: Blue Raven Solar and the new home business were sold for $45 million, with the potential for more if a new bidder emerges, though this is unlikely in the current market environment.
Potential Outcomes for Equity Shareholders:
Inventory: Valued at $260 million but likely to be sold at a 50% discount, resulting in $130 million.
Contract Assets: $100 million receivable from customer loans should be sellable at par.
Lease Portfolio: Currently valued at $320 million at a 6% discount rate. This portfolio is part of a joint venture with Hannon (51% owned by Sunnova and 49% owned by HASI). Hannon mentioned in its recent earnings call that they can change the servicer for its customers. Given Hannon’s strong balance sheet, they could absorb the assets or find a buyer. Applying a 30% haircut (a significant improvement from my initial analysis) translates to a $220 million value.
Remaining Cash: $18 million.
Blue Raven Solar + New Home Businesses: Sold for $45 million.
Summary of Asset Valuation:
Inventory: $130 million
Loan Receivables: $100 million
Lease Portfolio: $220 million
Cash: $18 million
Asset Sales: $45 million
The total estimated assets amount to $513 million ($130 million inventory, $100 million loan receivables, $220 million lease portfolio, $18 million cash, $45 million from asset sales) against $483 million in total debt. This indicates a residual value of $30 million for equity holders, which translates to approximately 12 cents per share (30 million equity / 255 million shares).
Sunrun’ strong quarterly earnings
On the other hand, Sunrun delivered a robust quarterly performance despite recent industry headwinds.
SunPower’s Bankruptcy Impact
SunPower’s bankruptcy undeniably casts some doubt on national residential solar players, especially considering SunPower's position as the #3 player nationally. This may lead customers to prefer local installers. However, operating successfully in the residential solar market requires significant scale, industry expertise, and the ability to navigate complex processes like securitization, tax equity funding, and ITC adders (which are particularly relevant for commercial players).
The intricate process of installing solar panels and batteries, obtaining permits, and securing financing creates a competitive moat for Sunrun. SunPower’s failure highlights the challenges of operating a PPA/lease business model, an area where Sunrun has a head start. During the earnings call, Sunrun mentioned it is onboarding some of SunPower’s previous partners and has hired two senior executives from SunPower’s new home business. This business segment has benefited from the 2020 California law mandating solar systems in all new homes. With approximately 100,000 new homes built annually in California, Sunrun is well-positioned to increase its market share in this segment to 30%-40% in the medium term, particularly following SunPower’s bankruptcy.
Unit Economics
Sunrun continues to improve its operating efficiency, notably reducing sales and marketing expenses. Total creation cost decreased to $1.6k per system, down to $37.2k per system, driven by:
A $1.1k reduction in installation costs due to the depletion of high-cost inventory and lower system costs.
A $300 reduction in sales and marketing expenses thanks to economies of scale and operational efficiency gains.
As a result, the net subscriber value increased by $500 to $12.4k (PV6).
Storage
Sunrun exceeded its guidance by installing 265 MWh of storage, with the attach rate rising by 4 points to 54%. Consequently, Sunrun raised its FY guidance to nearly 1.1 GWh of storage, representing over 90% year-over-year growth and solidifying its number one position in the battery/storage market. The attach rate is expected to rise to 60% by the end of the year.
Storage is crucial due to its potential future value from the VPP (virtual power plant) program. Across the country, more utilities are adopting VPPs as dispatchable energy resources to relieve grid pressure and meet rising electricity demand, driven by the rapid growth of data centers and AI.
Cash Generation
The increase in the ITC to 45% is expected to generate $350 million to $500 million in cash for 2025, thanks to the 10% domestic content ITC adder. The U.S. Treasury's May clarification on the IRA’s 10% domestic content ITC adders means that nearly all of Sunrun's future installations will qualify for the 10% adder, bringing the blended ITC level to 45%. For each 1% ITC increase, Sunrun expects an additional $60 million in cash generation. This strong cash generation supports the stock price, implying a cash yield of over 10% based on its current market cap of $4 billion.