Sunrun Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet amounts are as of March 31, 2018. Comparative Q1 2017 figures were restated following adoption of new revenue and lease accounting standards. Sunrun provides residential solar systems through long-term customer agreements and system and product sales.
Key financial results
- Revenue: $144.4 million, up 37% from $105.1 million. Customer agreements and incentives contributed $67.0 million; solar system and product sales contributed $77.4 million.
- Profit and margins: Operating loss was $56.7 million versus $48.7 million; consolidated net loss was $91.4 million versus $75.2 million. Net income available to common stockholders was $28.0 million, or $0.26 per diluted share, versus $9.9 million, or $0.09. The positive common-stockholder result reflects $119.5 million of losses allocated to noncontrolling and redeemable noncontrolling interests. Gross margin, calculated from reported revenue and cost of revenue, was approximately 17.5%, compared with 12.4%; operating margin was approximately negative 39.3%, compared with negative 46.4%.
- Cash flow: Operating cash outflow was $45.8 million; investing outflow was $164.7 million, including $163.2 million for solar systems; financing inflow was $212.0 million. Cash and restricted cash totaled $243.3 million at quarter-end, including $203.2 million of cash.
- Liquidity: Current assets were $459.8 million and current liabilities $300.3 million. Management said cash, fund commitments and available borrowings were expected to cover anticipated needs for at least 12 months, excluding repayment of the working capital facility, which it expected to refinance.
- Debt: Total debt carrying value was $1.384 billion, comprising $247.0 million of recourse debt and $1.137 billion of non-recourse debt. The $247.0 million working capital facility matured in April 2020; unused capacity under it was $0.4 million. Sunrun reported compliance with its debt covenants at quarter-end.
- Operating scale: Sunrun reported approximately 189,000 customers, 1,269 cumulative megawatts deployed, and $2.383 billion of Gross Earning Assets. Q1 deployments were 68 MW versus 73 MW in Q1 2017.
Material changes versus Q1 2017
- Revenue grew 37%; customer-agreement and incentive revenue rose 36%, and solar system and product sales rose 38%. Management attributed growth to more systems in service, increased SREC deliveries, and higher system sales through retail partners.
- Operating expenses increased 31% to $201.1 million. Sales and marketing rose 33%, while G&A rose 34%; management cited a $7.1 million combined litigation accrual and reserve against construction-in-progress relating to certain integrated partners, as well as higher compensation.
- Net interest expense increased 37% to $28.2 million, primarily due to additional borrowings entered into after Q1 2017. Operating cash use increased from $37.5 million to $45.8 million.
- Sunrun adopted Topic 606 and ASC 842 effective January 1, 2018, using retrospective presentation for comparative periods. The changes affected revenue timing, contract acquisition cost classification, and lease accounting. The filing cautions that Q1 results are not necessarily indicative of full-year results.
Outlook, risks and unusual items
- No specific numerical financial guidance for 2018 is provided in the filing. Sunrun expects to continue relying on outside financing, investment funds and debt to fund growth; it said additional capital would be needed and anticipated raising it from new and existing investors.
- Undrawn investment-fund commitments were approximately $231.2 million and were restricted to purchasing and installing solar systems. In April 2018, a subsidiary credit facility’s total commitments were increased to $595 million, according to the filing.
- Key risks include access to tax-equity and other financing, rising interest rates, changes to tax incentives and net-metering policies, solar-panel tariffs and supply costs, customer cancellations, competition, and geographic concentration (approximately half of customers were in California).
- Contingencies include a Treasury/Justice investigation concerning the Section 1603 grant program and investor audits relating to solar-system valuations; Sunrun said it could not estimate a possible loss. A TCPA class action had reached a settlement in principle after quarter-end. The IPO-related shareholder class action was certified; a separate securities class action was dismissed without prejudice and plaintiffs filed an amended complaint. The company said it intended to defend the shareholder claims.
- Interest-rate swaps generated a $16.2 million unrealized gain, net of tax, in other comprehensive income. This contributed to comprehensive income of $43.0 million, compared with $9.7 million a year earlier; it does not represent operating cash flow.
Important facts for investors to verify
- How much of the $28.0 million common-stockholder income reflects allocations to noncontrolling interests rather than consolidated operating profitability.
- Whether Sunrun can refinance its working-capital facility and secure continued fund-investor and lender commitments on acceptable terms.
- The financial and operational effects of the new accounting standards, including the restated comparative figures.
- Developments and potential exposure from the Treasury investigation, tax-credit valuation audits, and pending litigation.
- Whether deployment, customer growth and Gross Earning Assets support cash generation after substantial system investment and continuing operating cash outflows.