Sunrun Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Sunrun designs, installs, sells, owns and maintains residential solar systems in the United States. Its primary model is long-term customer agreements, typically 20 or 25 years, financed in part through investment funds, tax equity and debt. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019.
- At quarter-end, Sunrun reported 2,085 cumulative megawatts deployed, versus 1,661 a year earlier, and gross earning assets of $3.862 billion, versus $3.167 billion. Gross earning assets are a management estimate based on assumptions, including a 6% discount rate.
- Sunrun reported 34 active investment funds. Its assets include consolidated variable-interest-entity assets that are restricted to settling those entities’ obligations.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $210.7 million | $194.5 million |
| Operating loss | $63.0 million | $44.2 million |
| Net loss | $109.5 million | $86.9 million |
| Net loss attributable to common stockholders | $28.0 million; $0.23 per diluted share | $13.9 million; $0.12 per diluted share |
| Net interest expense | $49.9 million | $41.3 million |
| Cash from operating activities | $(116.9) million | $11.4 million |
| Cash used in investing activities | $(210.5) million | $(201.4) million |
| Cash from financing activities | $330.4 million | $195.5 million |
- Revenue increased 8% year over year. Calculated gross margin, using total revenue less the two reported cost-of-revenue lines, was approximately 19.4%, compared with 24.3% in Q1 2019.
- Cash was $286.4 million and restricted cash was $79.8 million at March 31, 2020. Current assets were $707.8 million and current liabilities were $474.8 million.
- Reported debt carrying value was $2.438 billion: $238.0 million of recourse debt and $2.200 billion of non-recourse debt. The $338.2 million pass-through financing obligation was reported separately. Debt carrying value increased from $2.255 billion at December 31, 2019.
- Management reported approximately $717.8 million of committed and available capital, restricted to purchasing and installing solar systems. It believed cash, fund commitments and available borrowings would cover anticipated needs for at least 12 months, while cautioning that future growth depends on outside financing.
Material changes versus the prior comparable period
- Customer-agreement revenue rose 20% to $94.3 million, but incentive revenue fell 77% to $4.9 million. Sunrun attributed the incentive decline primarily to the completion of PTO activity in a 2018 financing-obligation fund, with no comparable fund opened in 2019 or 2020. Customer agreements and incentives revenue overall was nearly flat.
- Solar-system and product sales revenue rose 18% to $111.6 million, including higher system sales through retail partners and higher wholesale product volume.
- Operating expenses increased 15% to $273.7 million. Sales and marketing rose 26%, mainly from headcount and customer-acquisition costs. Sunrun recorded $2.2 million of furlough-benefit and severance costs.
- Operating cash flow deteriorated from positive $11.4 million to negative $116.9 million. Management attributed the 2020 outflow to operating costs and $81.6 million of working-capital outflow; 2019 operating cash flow benefited from a large SREC-related deferred-revenue increase.
- Interest-rate swap liabilities rose to $162.7 million from $64.4 million at year-end. The quarter included $72.5 million of unrealized derivative loss, net of tax, in other comprehensive loss.
Outlook, commentary, risks and unusual items
- COVID-19 created significant uncertainty. Sunrun reported shifting sales consultations online, pausing some lead channels, continuing installations in most markets, and taking labor-related cost actions. It said digital channels were generating more leads at similar or more attractive acquisition costs, but the ultimate business impact remained unclear. The filing provides no specific financial guidance for the year.
- Key risks include restrictions or delays to sales and installation, supply-chain disruption, weaker customer demand or credit quality, and reduced access to capital or tax-equity funding. Sunrun’s business also depends on tax credits, rebates, net-metering policies, utility rates and continued financing availability.
- The company sought to preserve the 30% Commercial ITC for approximately 500 MW of projects through the IRS safe-harbor program; approximately $124.6 million of inventory was associated with the program. The filing describes ongoing IRS audits involving one investment fund and one investor and says potential tax liabilities could not be determined.
- Sunrun was in compliance with debt covenants at March 31, 2020. It reported a $250 million working-capital facility, with $238.0 million outstanding, and minimum liquidity and interest-coverage covenants.
- A putative class action alleges violations of the Telephone Consumer Protection Act and related California law. Sunrun said it believes the claims are without merit, intends to defend itself, and notes that vendors are contractually obligated to indemnify it for losses related to the alleged conduct.
Important facts for investors to verify
- Whether COVID-19 affected installations, customer acquisition, cancellations, collections and access to financing beyond the first quarter, and whether management’s 12-month liquidity assessment remained valid.
- How operating cash flow and working capital develop, and how much growth capital is available under fund commitments and borrowing facilities.
- Whether incentive reductions, higher customer-acquisition costs and operating expenses continue to pressure margins and losses.
- The outcomes of the IRS audits, the qualification of safe-harbor inventory, and any resulting tax, indemnification or investor obligations.
- The impact of derivative fair-value changes and interest costs, along with the terms and restrictions attached to reported debt and pass-through financing obligations.