Sunrun Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Sunrun designs, installs, sells, owns and maintains residential solar systems in the U.S., primarily under long-term leases and power purchase agreements (PPAs), and also sells systems and products. Amounts below are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $98.7 | $49.7 |
| Operating loss | $(66.8) | $(45.1) |
| Consolidated net loss | $(77.8) | $(52.5) |
| Net income (loss) attributable to common stockholders | $13.1 | $(18.0) |
| Basic and diluted earnings (loss) per share | $0.13 | $(0.74) |
| Net cash used in operating activities | $(77.4) | $(2.3) |
| Net cash used in investing activities | $(169.7) | $(133.2) |
| Net cash provided by financing activities | $251.5 | $88.9 |
- Revenue grew 99%. Operating leases and incentives rose 55% to $34.5 million; solar system and product sales rose 135% to $64.2 million, reflecting higher retail and channel-partner volumes and the CEE acquisition.
- Direct costs of leases/incentives and system/product sales totaled $95.6 million against $98.7 million revenue, implying approximately $3.1 million of gross profit, or a 3.2% gross margin. This is before sales, marketing, research, general and administrative, and amortization expenses.
- Operating expenses increased 75% to $165.6 million. Sales and marketing rose 73% to $43.2 million, primarily with direct-channel expansion, market entry and lead-generation investment.
- Common-stockholder income does not represent consolidated profitability: the company reported a $77.8 million consolidated net loss, while $90.9 million of losses were attributed to noncontrolling and redeemable noncontrolling interests. The filing attributes the increased allocation partly to additional funds and the HLBV allocation method.
- Cash was $208.3 million at quarter-end, versus $203.9 million at December 31, 2015. Current assets were $382.9 million and current liabilities $256.1 million. Operating cash use increased substantially, including a $23.3 million inventory-related outflow; solar-system investment drove most investing outflow.
- Total debt carrying value was $632.8 million: $191.0 million recourse and $441.8 million non-recourse. Debt increased from $534.8 million at year-end. The company reported covenant compliance at March 31, 2016. Separately, $185.3 million of investment-fund commitments remained undrawn and restricted to solar-system purchases and installation.
- Solar-system assets were $2.14 billion. Consolidated assets include VIE assets that can only be used to settle VIE obligations; VIE creditors generally have no recourse to Sunrun’s other assets.
Changes, outlook and material items
- Q1 megawatts booked were 56.2 (excluding 12.8 MW associated with the Nevada exit), versus 38.4 a year earlier; megawatts deployed were 59.9 versus 36.6. Cumulative deployed capacity reached 656.2 MW, up from 430.1 MW.
- Sunrun ceased Nevada operations following final state regulatory rules eliminating net metering. The exit generated severance and cancellation costs, including $1.7 million in lease-related costs and $0.3 million in system/product costs, plus $1.6 million in sales and marketing write-offs and severance.
- Management said cash, fund commitments and available borrowings were expected to meet anticipated cash needs for at least 12 months, while emphasizing continued dependence on outside financing and the possibility that unavailable or unfavorable financing could require reduced spending. No quantitative earnings or revenue guidance is provided.
- In January, subsidiaries entered into up to $250 million of secured facilities; in March, a subsidiary obtained a $24.5 million secured non-recourse loan. In May 2016, facility amendments increased aggregate commitments to $340 million. This was a subsequent event, after quarter-end.
- Key risks include access to tax-equity investors and other capital, changes to tax credits and incentives, net-metering and utility-rate policies, interest-rate exposure, solar-market competition, and reliance on long-term customer contracts. The federal Commercial ITC was extended in 2015, with a scheduled reduction from 30% to 26% in 2020, 22% in 2021, and 10% thereafter.
- Five shareholder class actions filed in April 2016 allege misleading IPO disclosures concerning net metering and, in one complaint, business practices and dependence on complex financing. Sunrun intends to defend itself; it could not estimate potential loss. A Treasury/Justice investigation concerning Section 1603 grant valuations remains ongoing; no claim had been brought against Sunrun. Three investment funds were under IRS audit, and potential outcomes were not estimable.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fund commitments, new credit facilities and future investor capital will be available on acceptable terms, and whether the company can manage substantial operating and investment cash outflows.
- The sustainability and meaning of positive common-stockholder income given the much larger consolidated net loss and significant noncontrolling-interest allocations.
- How regulatory changes, particularly net-metering policies and the Nevada exit, affect bookings, customer economics and future growth in other markets.
- Potential financial exposure from the IPO shareholder lawsuits, Treasury grant investigation, IRS fund audits, ITC indemnities and investor-return guarantees; the filing does not provide a clear estimate of possible losses for several of these matters.
- The effect of debt growth, variable interest rates, covenant requirements and restricted VIE assets on liquidity available to Sunrun itself.