Sunrun Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in millions except per-share data and operating metrics. Sunrun designs, installs, owns and maintains residential solar systems, generally financed through long-term customer agreements and third-party investment funds; it also sells systems and solar products.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $112.0 | $82.6 | $333.3 | $205.0 |
| Operating loss | $(51.0) | $(62.8) | $(166.3) | $(154.0) |
| Consolidated net loss | $(75.0) | $(72.2) | $(217.5) | $(174.6) |
| Net income (loss) available to common stockholders | $16.9 | $(27.7) | $62.7 | $(38.1) |
| Basic EPS available to common stockholders | $0.16 | $(0.41) | $0.61 | $(0.96) |
- Revenue rose 36% in Q3 and 63% year to date. Q3 operating-lease and incentive revenue was $43.2 million; systems and product sales were $68.9 million.
- Calculated gross profit after the two reported cost-of-revenue lines was $14.0 million in Q3 2016 (12.5% of revenue), versus $8.4 million (10.1%) in Q3 2015. For the nine-month periods, it was $39.5 million (11.8%) versus $21.4 million (10.4%). Operating-lease and incentive costs alone were 94% of that revenue in Q3 2016, up from 91%; nine-month costs were 95%, up from 87%.
- Common-stockholder income does not mean the consolidated company was profitable: consolidated losses were allocated substantially to noncontrolling and redeemable noncontrolling interests. Those allocations were $(91.8) million in Q3 and $(280.2) million year to date in 2016.
- Net cash used in operations was $127.2 million for nine months, compared with $71.9 million in 2015. Investing used $545.7 million, mainly for solar systems; financing provided $676.5 million. Cash increased by $3.6 million to $207.5 million. Cash flow from operations remained negative.
- At September 30, cash was $207.5 million, restricted cash $18.1 million, current assets $369.0 million and current liabilities $266.7 million. Total assets were $3.36 billion.
- Reported debt was $815.5 million, comprising $244.0 million recourse debt and $571.5 million non-recourse debt. In addition, the balance sheet reported $143.3 million of lease pass-through financing obligations and $26.7 million of capital lease obligations. Interest expense, net, increased 65% in Q3 to $14.0 million and 60% year to date to $38.5 million.
- Sunrun reported $148.7 million of undrawn investment-fund commitments, restricted to purchasing and installing systems, and said it expected cash, fund commitments and available borrowings to cover anticipated needs for at least 12 months. It also stated that continued growth depends on obtaining outside financing.
Changes, outlook and material risks
- Growth reflected more systems placed in service and increased system sales. Q3 system-sales revenue grew 179%; product-sales revenue was nearly flat. Nine-month system-sales revenue grew 312% and product-sales revenue 24%. Management attributed lower Q3 sales and marketing expense partly to generating more leads internally through Clean Energy Experts; year-to-date sales and marketing expense increased 22% with direct-to-consumer expansion.
- Q3 megawatts booked were 79, down from 95 a year earlier; megawatts deployed were 80, up from 56. Cumulative deployed capacity reached 801 MW, versus 528 MW. Estimated retained value was $1.91 billion, using a 6% discount rate; this is a management estimate dependent on customer, renewal, purchase and other assumptions, not a reported asset balance.
- Management provided no specific numerical financial guidance in this filing. It cautioned that results are subject to seasonality, cancellations and other uncertainties; historically, sales and installations can be affected by holiday timing and weather, while energy production and incentives revenue vary by period.
- Sunrun ceased Nevada operations in early 2016 following regulatory changes eliminating net metering. A September 2016 Nevada order grandfathered qualifying customers with systems installed or applications pending by December 31, 2015 under prior rates for 20 years. The company also disclosed litigation challenging the regulatory decision.
- Key risks include reliance on investment funds, tax credits and other incentives; regulatory changes to net metering and utility rate design; rising interest rates and substantial financing needs; increased customer cancellations in some markets; concentrated exposure to California; and the ability to scale operations while managing costs.
- The Treasury/Justice investigation into valuation of systems associated with the Section 1603 grant program remained unresolved; Sunrun said it could not estimate the outcome or potential loss. Four investment funds were under IRS audit, and the company disclosed possible investor indemnification if system valuations or related incentives are reduced.
- Multiple purported shareholder class actions concerning IPO disclosures were consolidated in September 2016; the company said it would defend them and could not estimate the outcome or potential loss. A related derivative action was dismissed without prejudice at plaintiffs’ request. The filing also describes an investor minimum-return guarantee whose maximum potential payment could not be determined.
- The company reported compliance with debt covenants at quarter-end and effective disclosure controls. A hypothetical 10% increase in variable interest rates would have increased nine-month interest expense by $0.5 million.
Most important facts for investors to verify
- How recurring customer cash flows, system deployment and cancellation rates are developing relative to bookings, and whether operating costs can scale with revenue.
- Availability, cost and conditions of future tax-equity funding, committed capital and debt; also the liquidity impact of negative operating cash flow and contractual obligations.
- Whether Nevada, net-metering, utility-rate and incentive developments affect customer economics or demand in Sunrun’s markets.
- Developments in the Treasury investigation, IRS audits, ITC/grant indemnities, shareholder litigation and investor-return guarantee.
- Assumptions behind estimated retained value, including its 6% discount rate and customer default, renewal and purchase assumptions; separately assess its distinction from GAAP financial results.
- Debt totals and restrictions, including the distinction between recourse debt, non-recourse project debt and lease pass-through financing; confirm the latest covenant and liquidity position.