Sunrun Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 8, 2017. Amounts below are in millions of dollars unless stated otherwise.
Business context
Sunrun designs, installs, sells, owns and maintains residential solar systems in the United States. It earns revenue from long-term customer leases and power purchase agreements, incentives, system sales and sales of solar products. As of September 30, it operated in 22 states and the District of Columbia; approximately half of cumulative deployments were in California. Its growth and customer pricing depend substantially on outside financing, tax incentives and utility policies.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Revenue | $141.3 | $112.0 | +26% |
| Operating loss | $(47.7) | $(51.0) | Loss narrowed |
| Consolidated net loss | $(80.2) | $(75.0) | Loss widened |
| Net income available to common stockholders | $27.8 | $16.9 | EPS: $0.26 basic, $0.25 diluted |
Revenue growth reflected higher lease revenue from more systems in service and higher product sales. For the nine months, revenue rose 15% to $383.3 million; consolidated net loss was $218.5 million versus $217.5 million, while net income available to common stockholders was $65.6 million versus $62.7 million (diluted EPS $0.61 versus $0.60). The positive common-stockholder result despite a consolidated net loss reflects the allocation of losses to noncontrolling interests and redeemable noncontrolling interests.
Gross profit, calculated as revenue less the two reported cost-of-revenue lines, was $22.5 million in Q3 (15.9% margin), versus $14.0 million (12.5%) a year earlier. For the first nine months, it was $63.0 million (16.4%) versus $39.5 million (11.8%). Lease-and-incentive costs were 84% of related revenue in Q3 and 82% year to date, compared with 94% and 95%, respectively; management attributed the improvement largely to a lower proportion of leased systems installed directly by Sunrun.
At September 30, cash was $216.1 million and restricted cash was $20.0 million. Current assets were $391.5 million against current liabilities of $544.1 million. Total debt was $1.116 billion, up from $898.0 million at December 31, 2016; $247.0 million was recourse debt under a working-capital line maturing in April 2018. Solar energy systems, net, increased to $3.147 billion from $2.629 billion.
For the nine months, operating cash use was $39.2 million, improved from $127.2 million; investing cash use was $589.1 million, mainly for solar systems; and financing provided $638.1 million, mainly from fund investors and debt. Cash increased by $9.8 million. Undrawn committed investment-fund capital was approximately $148.7 million.
Material changes and outlook
- Q3 operating-lease and incentive revenue increased 35%; system and product sales increased 20%. Year-to-date system sales fell 15%, while product sales increased 13%.
- Year-to-date sales and marketing expense declined 20%, while research and development rose 46% and general and administrative expense rose 14%. Interest expense increased 29% year to date, which management attributed to additional borrowings.
- Sunrun reported 93 MW booked and 90 MW deployed in Q3, compared with 83 MW and 80 MW, respectively, in Q3 2016. Cumulative deployed capacity was 1,117 MW, versus 801 MW a year earlier.
- Gross Earning Assets were reported at $2.068 billion, up from $1.669 billion a year earlier. This is a company-defined forward-looking estimate based on assumptions, including a 6% discount rate; it is not reported revenue or cash on hand.
- Management said available cash, fund commitments and borrowings were expected to cover anticipated cash needs for at least 12 months, excluding repayment of the working-capital facility expected to be refinanced. The company lacked cash to repay the $247.0 million facility at maturity and was negotiating refinancing; it said extension or refinancing was probable but not assured. Subsequent to quarter-end, subsidiaries entered into $303.0 million of non-recourse secured credit facilities, maturing in 2024.
- No specific financial guidance for future periods is provided in the filing. Management highlighted reliance on external financing and tax-equity investors, and risks from interest rates, customer cancellations, competition, equipment costs and availability, and changes to tax incentives, net metering and other regulations. A proposed U.S. solar import remedy could raise panel costs or constrain supply; the President had not yet determined what remedy, if any, would be imposed.
Risks, contingencies and unusual items
- The company disclosed a continuing government investigation concerning the Section 1603 grant program and claimed system fair values; it could not estimate the outcome or possible loss. It also described potential indemnification exposure if tax-credit or grant valuations are reduced, but said such exposure was not considered probable based on information available at filing.
- Pending matters include putative securities class actions concerning IPO disclosures and customer cancellations, a shareholder derivative action, and a TCPA class action. Sunrun disputed the claims; the filing did not quantify a likely loss.
- Sunrun entered an agreement with a Comcast affiliate for customer leads and sales. Comcast may earn warrants for up to 11,793,355 shares at $0.01 per share, subject to installation and marketing-spend milestones, creating potential dilution.
- Adoption of accounting guidance on intra-entity asset transfers resulted in reversal of a $378.5 million prepaid tax asset and recognition of $378.2 million in gross deferred tax assets at January 1, 2017, with a cumulative retained-earnings decrease of $0.3 million. Income tax expense is reported despite losses; the company cited partnership allocations and deferred tax effects and said it did not expect cash income-tax payments until net operating loss carryforwards were used.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. All disclosed debt covenants were reported as met at September 30.
Key facts for investors to verify
- Whether the April 2018 $247.0 million working-capital facility was extended or refinanced, and on what terms.
- Whether fund-investor commitments and future financing remain available on acceptable terms to support system deployment.
- How customer cancellations, net-metering and incentive changes, and any solar-import remedy affect bookings, deployments, costs and margins.
- Developments in the Section 1603 investigation, tax-credit valuation audits, and pending litigation, including any material change in estimated exposure.
- The assumptions underlying Gross Earning Assets and the vesting conditions and potential dilution from the Comcast warrant.