Sunrun Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods. Amounts are in millions unless otherwise noted. Sunrun designs, installs, owns and maintains residential solar systems, generally under long-term leases or power purchase agreements, and also sells systems and solar products.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $122.5 | $72.7 | $221.3 | $122.4 |
| Operating loss | $(48.4) | $(46.2) | $(115.2) | $(91.3) |
| Net loss | $(64.7) | $(49.9) | $(142.5) | $(102.4) |
| Net income (loss) attributable to common stockholders | $32.6 | $7.5 | $45.8 | $(10.5) |
- Q2 revenue rose 69%; operating leases and incentives increased 32% to $45.4 million, while solar-system and product sales more than doubled to $77.1 million. For the first half, revenue rose 81%.
- Q2 direct costs were $100.2 million, implying gross profit of approximately $22.3 million and a gross margin of 18.2%. First-half direct costs were $195.8 million, implying gross profit of $25.5 million and a margin of 11.5%. Operating expenses increased 44% in Q2 and 58% in the first half.
- Q2 net loss widened despite positive income attributable to common stockholders. The common-stockholder result reflects the allocation of losses to noncontrolling and redeemable noncontrolling interests; it is not consolidated net profit. Basic/diluted EPS was $0.32/$0.31 for Q2 and $0.45/$0.44 for the first half.
- At June 30, cash was $207.2 million; restricted cash totaled $16.2 million. Current assets were $374.4 million and current liabilities $256.4 million. Some consolidated cash and assets belong to VIEs and are restricted to settling VIE obligations.
- Debt carrying value was $754.7 million, comprising $242.4 million recourse debt and $512.3 million non-recourse debt. Debt rose from $534.8 million at year-end 2015. Separately, lease pass-through financing obligations totaled approximately $144.2 million, including current and long-term portions.
- For the first half, operating cash use was $98.4 million and investing cash use was $345.7 million, including $332.5 million for solar systems. Financing provided $447.4 million, and cash increased $3.4 million. Cash use from operations more than doubled from the prior-year period.
- Sunrun reported $341.6 million of undrawn investment-fund commitments, restricted to purchasing and installing solar systems. Management said cash, fund commitments and available borrowings were expected to meet anticipated cash needs for at least 12 months, while noting continued dependence on outside financing.
Material changes and operating developments
- Q2 system deployments were 65 MW versus 42 MW; bookings were 74 MW versus 61 MW. Cumulative deployed capacity reached 721 MW versus 473 MW a year earlier.
- Estimated retained value was $1.725 billion, up from $1.223 billion; estimated retained value per watt declined to $2.30 from $2.39. These are management estimates based on assumptions, not reported cash or GAAP revenue.
- Sales growth reflected increased system sales and product volumes, as well as a larger base of systems under customer agreements. Sales and marketing spending rose with direct-to-consumer expansion, new-market entry and hiring. Interest expense rose 55% in Q2 and 58% in the first half, principally due to additional borrowings.
- Sunrun ceased Nevada operations in early 2016 after regulatory changes eliminated net metering there. The first half included Nevada exit severance and cancellation costs, and write-offs of costs related to canceled deals. The company also reported increased customer cancellations in certain markets.
- The syndicated aggregation facility commitment increased to $310 million in May. The working-capital facility was increased to $250 million by July; a subsidiary also obtained a non-recourse facility of up to $33 million in July, with a 6.79% initial draw rate.
Outlook, risks and contingencies
- No specific financial guidance for future periods is provided in the filing. Management cautioned that interim results may not indicate full-year results and expects to seek additional capital as the business grows.
- Key business dependencies include continued access to investment-fund and debt financing, tax credits and other incentives, favorable net-metering and utility policies, competitive electricity pricing, installation execution, and the availability and cost of components. Floating-rate borrowings expose the company to higher interest expense; a hypothetical 10% rate increase would have added $0.6 million of quarterly interest expense in Q2 2016.
- Sunrun was in compliance with its debt covenants at June 30, 2016. The working-capital facility requires at least $25 million of unencumbered liquidity and a modified interest coverage ratio of at least 2.00. Contractual obligations totaled $996.7 million, including debt obligations and future interest of $889.9 million.
- The company disclosed a government investigation concerning the Section 1603 grant program and system valuations; it could not estimate the outcome or potential loss. It also faces multiple shareholder class actions related to IPO statements, including allegations concerning net metering and business practices, and a derivative action. Sunrun intends to defend the claims but could not estimate outcomes or losses.
- Other contingencies include investor indemnities tied to tax-credit or grant valuations and an investor minimum-return guarantee; maximum potential payments were not reliably estimable. Sunrun said payments beyond amounts recognized for the tax-credit/grant indemnity were not probable based on information available at filing.
- Management assessed disclosure controls as effective at quarter-end. The filing identifies prior internal-control weaknesses and notes the complexity of accounting for investment funds, noncontrolling interests and intercompany taxes.
Important facts for investors to verify
- Whether growth in recurring lease revenue and deployments can offset operating losses, rising operating costs and the cash required to build solar assets.
- Availability, cost and conditions of investment-fund commitments, debt facilities and other financing; distinguish recourse debt from non-recourse debt and restricted VIE assets from freely available liquidity.
- Trends in customer cancellations, deployment economics, retained value assumptions and the declining estimated retained value per watt.
- Developments in the Section 1603 investigation, IRS audits and valuation indemnities, as well as the IPO-related lawsuits and their potential financial or operational impact.
- Regulatory changes affecting net metering, customer savings and market access, including any further consequences of the Nevada exit.