Sunrun Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the restated 2017 periods. Unless otherwise stated, amounts are USD millions.
Business context
Sunrun designs, installs, owns and maintains residential solar systems in the U.S., primarily under long-term customer agreements, and also sells systems and products. At quarter-end, it served approximately 218,000 customers in 22 states, the District of Columbia and Puerto Rico, with 1,460 MW cumulatively deployed. Its business depends substantially on external fund investors, tax incentives and debt financing.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $205.0 | $144.5 | $519.9 | $380.3 |
| Operating loss | $(23.5) | $(45.2) | $(115.2) | $(134.5) |
| Consolidated net loss | $(47.5) | $(82.8) | $(210.7) | $(231.6) |
| Net income (loss) available to common stockholders | $(2.9) | $28.0 | $32.5 | $56.2 |
| Basic earnings (loss) per share | $(0.03) | $0.26 | $0.30 | $0.54 |
- Revenue increased 42% in Q3 and 37% for the nine-month period. Customer agreements and incentives rose 86% and 62%, respectively; system and product sales rose 9% and 17%.
- Incentives revenue increased principally from investment tax credits (ITCs) recognized on systems placed in service for a financing-obligation fund opened in 2018. System sales growth reflected retail-partner demand; product sales declined year over year, partly following elevated wholesale sales ahead of anticipated tariffs in 2017.
- Operating expenses increased 20% in Q3 and 23% year to date. Sales and marketing expense rose 42% in Q3 and 39% year to date, primarily reflecting headcount and compensation. Operating loss narrowed, but higher net interest expense partly offset the improvement.
- Q3 customer-agreement and incentive costs were 55% of that revenue, compared with 77% in 2017; the nine-month ratio was 64%, compared with 80%. The filing attributes much of the decrease to higher ITC revenue. These ratios are affected by incentive mix.
- Operating cash used was $143.8 for the nine months, versus $64.0 in 2017. Investing cash used was $574.3, mainly for solar systems. Financing cash provided was $751.4, including net proceeds from fund investors and debt. Cash and restricted cash increased $33.3 to $275.1, comprising $242.9 cash and $32.2 restricted cash.
- At September 30, total assets were $4.53 billion and total liabilities $3.13 billion. Current assets of $446.0 million exceeded current liabilities of $383.9 million. Debt carrying value was $1.56 billion, including $247 million of recourse debt and $1.32 billion of non-recourse debt; pass-through financing obligations were a separate $362.0 million liability. Debt increased from $1.29 billion at year-end 2017.
- Solar systems, net, increased to $3.62 billion from $3.16 billion at year-end. Contracted but unrecognized revenue was approximately $5.1 billion; Sunrun expects to recognize about 6% over the next 12 months.
Changes, outlook and significant items
- Sunrun adopted revenue-recognition and lease accounting standards effective January 1, 2018 and restated comparative periods. ITC revenue is now recognized when systems receive permission to operate rather than over five years; customer-agreement revenue is generally recognized over the agreement term. These changes affect period comparability.
- Management said cash, investment-fund commitments and available borrowings should cover anticipated cash needs for at least 12 months. The company had $264.2 million of undrawn investment-fund commitments, restricted to purchasing and installing solar systems. It also stated that continued growth requires outside financing and warned that unavailable or costly capital could require spending reductions.
- No specific financial or deployment guidance is provided in the supplied filing text. Risks highlighted include reliance on fund investors and tax incentives, rising interest rates, tariff-related equipment costs, changing net-metering and other policies, customer cancellations, competition, and execution of growth plans. The federal ITC is scheduled to decline after 2019 under the laws described in the filing.
- Q3 other income included a $6.9 million gain from reclassifying accumulated hedge gains after refinancing made a forecast transaction unlikely to occur; this was partly offset by a debt-extinguishment loss. Higher borrowings contributed to interest expense increases of 49% in Q3 and 44% year to date.
- Legal matters include a proposed $32.0 million settlement of consolidated IPO-related state litigation, with $30.1 million expected from insurers and $1.9 million accrued; a proposed $5.5 million TCPA settlement, accrued; and a proposed $2.5 million federal securities-litigation settlement expected to be insurer-funded. Settlements remain subject to required approvals. A Treasury/Justice investigation into the Section 1603 grant program remains ongoing; Sunrun says it cannot estimate the outcome or potential loss. The company stated its ITC indemnification exposure was not probable and described insurance coverage, subject to limitations.
- Sunrun reported compliance with debt covenants at quarter-end and effective disclosure controls. It identified no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether fund-investor commitments and new financing remain available on acceptable terms, and how much capital is actually usable for growth and liquidity.
- How much revenue and margin depend on ITC and other incentive transactions, and the effect of accounting changes on comparisons and future reported results.
- Debt servicing capacity, interest-rate exposure, refinancing needs, covenant headroom and the distinction between recourse debt, non-recourse debt and pass-through obligations.
- Developments and potential financial exposure in the grant-program investigation, tax-credit indemnities and pending litigation and settlements.
- Whether customer deployment, cancellation trends, equipment tariffs, policy changes and operating-cost growth support the company’s expected economics.