Sunrun Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Sunrun designs, installs, owns and services residential solar systems, primarily under 20- or 25-year customer agreements, and also sells solar systems and products. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $215.5 million | $205.0 million | $614.6 million | $519.9 million |
| Operating loss | $60.3 million | $23.5 million | $167.3 million | $115.2 million |
| Net loss | $112.5 million | $47.5 million | $304.0 million | $210.7 million |
| Net income (loss) attributable to common stockholders | $29.0 million | $(2.9) million | $13.8 million | $32.5 million |
| Diluted earnings (loss) per share | $0.23 | $(0.02) | $0.11 | $0.28 |
Consolidated gross margin, calculated as revenue less the two reported cost-of-revenue lines, was approximately 26% in Q3 and 25% for the nine-month period. This is a simple calculation, not a company-reported non-GAAP measure. Common-stockholder results differ from consolidated net loss because losses are allocated to noncontrolling and redeemable noncontrolling interests.
- Revenue mix: Q3 customer agreements and incentives revenue declined 16% to $96.2 million, while solar system and product sales rose 32% to $119.3 million. For nine months, total revenue rose 18%; system and product sales increased 32% and customer agreements and incentives increased 6%.
- Costs and margins: Q3 operating expenses rose 21% to $275.9 million, faster than revenue. Sales and marketing rose 37% to $77.5 million, primarily from higher headcount and customer-acquisition costs. Customer agreements and incentives costs were 70% of that revenue, versus 55% a year earlier, partly because incentive revenue fell while incentive-related costs were minimal.
- Interest and other items: Net interest expense rose 27% in Q3 to $43.9 million and 35% for nine months to $127.6 million, reflecting added non-recourse and pass-through financing debt. Other expense included debt-extinguishment losses; the nine-month total was $9.3 million. A $4.4 million debt-extinguishment expense related to an early repayment of a pass-through financing obligation.
- Cash flow: For nine months, operating cash use was $106.1 million, investing cash use was $618.0 million, and financing cash provided was $793.2 million. Solar-system investment accounted for $594.1 million of investing outflows. Cash and restricted cash increased $69.0 million to $373.4 million; cash alone was $324.7 million at quarter-end.
- Liquidity and debt: Current assets were $567.2 million and current liabilities $429.0 million. Reported debt was $2.045 billion, up from $1.749 billion at December 31, 2018, comprising $239.0 million of recourse debt and $1.806 billion of non-recourse debt. Pass-through financing obligations were a separate $340.0 million liability. The company reported compliance with debt covenants at quarter-end.
- Scale and contracted revenue: Cumulative megawatts deployed reached 1,871, up from 1,460 a year earlier; the company served approximately 271,000 customers. Management reported $3.4 billion in Gross Earning Assets, a company-defined estimate using assumptions including a 6% discount rate. Contracted revenue not yet recognized was approximately $6.2 billion, with about 6% expected to be recognized over the next 12 months.
Material changes versus prior period
- Revenue growth was driven by higher customer-agreement revenue and stronger system and product sales, while incentive revenue fell substantially. Management attributed the incentive decline mainly to the completion of PTO activity for a financing-obligation fund opened in 2018; no comparable fund was opened in 2019.
- Operating losses widened as operating expenses grew faster than revenue. Sales and marketing, research and development, and general and administrative expenses all increased.
- Cash used in operations increased from $40.7 million to $106.1 million for the nine-month comparison. Working capital provided $34.5 million in net cash in 2019, versus a $11.0 million use in 2018; 2019 operating cash flow included a $95.5 million increase in deferred revenue from selling rights to future SRECs.
- Debt grew, and nine-month comprehensive results included a $69.1 million other comprehensive loss, principally reflecting unrealized derivative losses. Interest-rate swap liabilities were $91.1 million at September 30, 2019.
Outlook, risks and unusual items
- Management said cash, investment-fund commitments and available borrowings were expected to be sufficient for anticipated cash needs for at least the next 12 months. It also emphasized the business’s continuing dependence on outside capital and future fund formation; approximately $305.8 million of committed fund capital remained undrawn and restricted to system purchases and installations.
- The filing provides no specific quantitative operating or earnings guidance. Management cautioned that results are exposed to financing availability and cost, interest rates, solar incentives and the scheduled federal ITC step-down, utility rates and net-metering policy, regulation, customer cancellations, competition, supply-chain costs, weather and seasonality.
- Subsequent to quarter-end, a subsidiary issued $312.4 million of asset-backed notes on October 28, 2019. On November 12, the company extended its $250 million working-capital facility maturity to April 2022; the amendment increased the minimum interest-coverage ratio to 3.5:1 and quarter-end minimum unencumbered cash requirement to $35 million. The board also authorized up to $50 million of stock repurchases over three years.
- The company agreed in principle to settle shareholder derivative actions, subject to final documentation and court approval; the proposed settlement includes future corporate-governance measures, without admission of liability. An IRS audit of one investment fund and an investor audit concern system valuations used for ITCs; the company stated it could not reliably estimate potential indemnity exposure and noted insurance is subject to limits and exclusions.
- Sunrun acquired a customer pipeline and workforce from Omni Energy for approximately $23.5 million, including $20.8 million of contingent consideration tied to deployment milestones through 2022. The acquired business contributed no revenue through September 30.
Important facts for investors to verify
- Whether system and product sales growth, customer-acquisition spending and operating losses translate into improved unit economics and sustainable profitability.
- Availability and cost of tax-equity, project-fund and debt financing, and the company’s ability to meet the amended working-capital facility covenants.
- Assumptions underlying Gross Earning Assets and the $6.2 billion contracted-revenue estimate, including customer defaults, renewals, system performance and discount rates.
- Exposure to ITC valuation audits, potential investor indemnities, and the scope of insurance coverage; also confirm final court approval and implementation of the derivative-action settlement.
- Execution and financial effects of the subsequent $312.4 million note issuance and the $50 million repurchase authorization, including any effect on liquidity and leverage.