Sunrun Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Sunrun designs, installs, owns and maintains U.S. residential solar systems, primarily through 20- or 25-year customer agreements, and also sells systems and solar products. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $584.6 | $401.2 | $1,080.4 | $736.0 |
| Operating loss | $(155.3) | $(141.8) | $(336.8) | $(320.3) |
| Net loss | $(209.8) | $(213.4) | $(366.2) | $(417.7) |
| Net loss attributable to common stockholders | $(12.4) | $(41.2) | $(100.2) | $(65.0) |
| Net loss per diluted share | $(0.06) | $(0.20) | $(0.48) | $(0.32) |
- Revenue mix and growth: Q2 customer agreements and incentives revenue rose 18% to $259.9; solar system and product sales rose 79% to $324.7. Total revenue increased 46% year over year in Q2 and 47% in the first half. Management attributed system-sales growth to market demand, particularly through retail partners, and average system sale prices were up 19% in Q2 and 17% in the first half.
- Margins and expenses: Q2 cost of customer agreements and incentives was 78% of that revenue, compared with 81% a year earlier. Cost of system and product sales was 90% of related revenue, up from 83%. Overall gross profit, calculated as revenue less the two reported cost-of-revenue lines, was $89.5 (15.3% margin) in Q2, versus $72.2 (18.0%) a year earlier. Operating expenses rose 36% in Q2 to $739.9; sales and marketing increased 30%, while general and administrative expense declined 21%. The operating loss widened despite higher revenue.
- Interest and other items: Q2 net interest expense increased 37% to $103.0, primarily due to additional non-recourse debt. Other income was $51.9 in Q2, primarily reflecting derivative gains. For the first half, other income of $165.8 included a $47.3 gain on an equity investment and derivative gains. These items materially affected reported losses.
- Cash flow: First-half operating cash use was $454.3, versus $355.8 in 2021; investing cash use was $1,020.3 versus $757.1, mainly reflecting solar system investment. Financing provided $1,487.3, including net debt proceeds and fund-investor contributions. Cash and restricted cash totaled $863.1 at June 30, compared with $850.4 at year-end; unrestricted cash alone fell to $522.5 from $617.6.
- Liquidity and debt: Current assets were $1,710.4 and current liabilities $991.0. Total debt, net, was $7,602.9, up from $6,502.9 at December 31, 2021; this included $942.7 of recourse debt and $6,660.2 of non-recourse debt. The corporate bank line had $551.0 drawn against a $600.0 commitment, maturing January 2025. The $400.0 convertible notes mature in February 2026 and bear no regular interest. Sunrun reported compliance with debt covenants at June 30.
Material changes and operating metrics
- Networked Solar Energy Capacity increased to 5,136 MW from 4,238 MW a year earlier; cumulative customers rose to 724,177 from 599,743.
- Gross Earning Assets, a management estimate of projected cash flows and renewal value discounted at 5%, were $10.8 billion, versus $8.6 billion a year earlier. The company cautions that this forward-looking metric depends on assumptions, including customer defaults, discount rates and renewal or purchase behavior.
- Contracted but unrecognized revenue was approximately $16.9 billion; Sunrun expected to recognize about 5% over the next 12 months. This is not a measure of cash available or guaranteed future revenue.
- General and administrative expense declined in the first half, largely because of lower stock-based compensation, including the absence of certain Vivint Solar acquisition-related award expense recorded in 2021. Conversely, sales and marketing expense increased 34% in the first half.
Outlook, risks and contingencies
- Outlook and liquidity: No specific quantified financial guidance is provided in the supplied filing text. Management stated it expects cash, fund commitments and available borrowings to meet anticipated cash needs for at least 12 months, while acknowledging continued reliance on outside financing for growth.
- Capital and interest-rate exposure: The business requires substantial tax-equity, debt and other external funding. Rising rates may increase borrowing costs and reduce the value of customer-payment streams; a significant portion of debt is variable-rate, with interest-rate swaps used for hedging. LIBOR transition and SOFR volatility are also identified risks.
- Policy and market risks: Changes to net metering, utility rate design, incentives and tax credits could weaken customer economics and demand. California is a particularly important market, and the CPUC was reconsidering net-metering policy. The filing also cites supply constraints, tariffs and trade restrictions, labor availability, customer cancellations, and COVID-19-related disruption.
- Unusual costs and accounting judgments: Q2 included $4.2 million of costs to upgrade some systems from 3G to 4G; first-half costs were $10.6 million. The company reported no goodwill impairment for the first half but noted that its stock-price decline was a factor it would continue to monitor.
- Contingencies: An IRS audit of one investment fund is reviewing system fair-market-value determinations used for Commercial ITCs; the company could not determine whether it would produce an adverse final outcome. A customer class action concerning termination-fee provisions reached an agreement in principle to modify contract terms without cash payments to class members; attorneys’ fees and any incentive payment remained unresolved, and the company could not estimate a loss range.
Most important facts for investors to verify
- Whether operating cash outflows, heavy system investment and reliance on new debt and fund commitments remain manageable as the company grows.
- Whether system-sales growth can be sustained without further deterioration in related cost ratios and overall operating performance.
- How interest rates, debt balances and refinancing needs affect interest expense, financing availability and customer economics.
- Developments in California and other jurisdictions on net metering, utility rates, tax incentives and interconnection rules.
- Outcomes of the IRS audit and the pending customer settlement process, including any eventual financial exposure.
- The filing gives conflicting end dates for $475.8 million of supplier purchase commitments: the commitments note says by the end of 2023, while MD&A says by the end of 2022. Verify the applicable timing in the original filing or subsequent disclosures.