Sunrun Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 8, 2017. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Sunrun provides residential solar systems through long-term leases and power purchase agreements, typically with 20-year terms, and also sells systems and solar products. It operates across 16 states and the District of Columbia. At year-end it reported approximately 134,000 customers and 879 MW cumulatively deployed; California represented about half of its customers. Growth depends substantially on tax-equity investors, debt financing, and government incentives.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $453.9 million | $304.6 million |
| Operating leases and incentives revenue | $168.4 million | $118.0 million |
| Solar systems and product sales revenue | $285.5 million | $186.6 million |
| Operating loss | $(214.9) million | $(219.2) million |
| Consolidated net loss | $(303.3) million | $(248.9) million |
| Net income (loss) attributable to common stockholders | $91.7 million | $(28.2) million |
| Net cash used in operating activities | $(150.6) million | $(105.3) million |
| Cash at year-end | $206.4 million | $203.9 million |
| Recourse debt | $244.0 million | $197.0 million |
| Non-recourse debt | $654.0 million | $337.8 million |
- Revenue grew 49%; lease and incentive revenue rose 43%, and systems and product sales rose 53%. Management attributed growth to more systems placed in service, increased direct and strategic-partner sales, and higher product volumes.
- Operating expenses increased 28% to $668.8 million. Direct costs of operating leases and incentives were $159.9 million and costs of systems and product sales were $239.4 million. Lease and incentive costs equaled 95% of the related revenue, as in 2015.
- Common-stockholder income does not represent consolidated profitability: the company recorded a consolidated net loss, while $395.0 million of net loss was allocated to noncontrolling and redeemable noncontrolling interests, largely under the HLBV accounting method for investment funds.
- Cash used in investing activities was $745.1 million, including $727.6 million for solar systems and components. Financing activities provided $898.2 million; cash increased by $2.5 million for the year.
- Year-end current assets were $369.3 million and current liabilities were $244.8 million. Debt obligations, including future interest, totaled $1.05 billion in the contractual-obligations schedule; this is distinct from the balance-sheet debt amounts above. Lease pass-through financing obligations were $143.8 million, and capital lease obligations were $23.0 million.
- Deployments were 282 MW in 2016 versus 203 MW in 2015; cumulative deployed capacity reached 879 MW versus 596 MW. Gross Earning Assets were $1.81 billion versus $1.27 billion, a management-defined estimate discounted at 6% and subject to assumptions.
Material changes, outlook, and risks
- Fourth-quarter revenue was $120.6 million versus $99.6 million in Q4 2015. Q4 consolidated net loss was $85.8 million versus $74.3 million; income attributable to common stockholders was $29.0 million versus a $15.0 million loss.
- In Q4, Sunrun revised its customer and megawatts-booked definitions to include systems that had reached notice to proceed, and replaced two prior operating metrics with Gross Earning Assets. It also extended the estimated useful life of solar systems from 20 to 35 years, concluding the estimate change had an immaterial impact for current and future periods.
- Management said cash, fund commitments, and available borrowings were expected to cover anticipated needs for at least 12 months. It reported $359.4 million of undrawn committed investment-fund capital, subject to use restrictions. No specific numerical earnings or revenue guidance is provided in the filing.
- In December 2016, National Grid agreed to invest $100 million in a partnership expected to own approximately 200 MW of Sunrun rooftop systems, alongside a grid-services pilot and joint marketing initiative.
- Key exposures include dependence on tax-equity and debt financing; federal tax-credit and other incentive changes; interest rates; net-metering, rate-design, and interconnection policy; increased customer cancellations in certain markets; and intense competition. Sunrun ceased new Nevada installations in early 2016 after regulatory changes, with later orders restoring some grandfathering and net metering.
- The Treasury/Department of Justice investigation into Section 1603 grant valuations remained unresolved; the company said it could not estimate the outcome or possible loss. IRS audits of five funds and two investors included reviews of system fair values, creating potential indemnity exposure. The filing also describes an Arizona leased-panel property-tax dispute.
- Related IPO shareholder class actions alleged misleading statements concerning net metering and business practices. The company reported that the federal court dismissed the consolidated actions with prejudice on February 9, 2017. Management also reported effective disclosure controls and internal control over financial reporting at year-end.
Important facts for investors to verify
- How much future growth can be funded on acceptable terms, and what conditions govern access to committed fund capital and credit facilities?
- What is the underlying cash-generating performance of the solar portfolio after maintenance, investor distributions, debt service, and customer defaults, compared with the company’s Gross Earning Assets estimate?
- How should investors interpret positive 2016 income attributable to common stockholders alongside the $303.3 million consolidated net loss and the HLBV allocations?
- What are the ultimate outcomes and potential financial effects of the federal grant investigation, IRS valuation audits, and Arizona tax dispute?
- How are cancellations, net-metering changes, incentive policy, and the evolving useful-life estimate affecting deployments, customer savings, and returns?