Sunrun Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Sunrun designs, installs, owns and maintains residential solar systems, generally under 20- or 25-year customer agreements, and also sells systems and products.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $590.2M | $584.6M | $1,180.0M | $1,080.4M |
| Operating loss | $(205.9)M | $(155.3)M | $(433.6)M | $(336.8)M |
| Net loss | $(340.7)M | $(209.8)M | $(676.5)M | $(366.2)M |
| Net income (loss) attributable to common stockholders | $55.5M | $(12.4)M | $(184.9)M | $(100.2)M |
| Basic EPS attributable to common stockholders | $0.26 | $(0.06) | $(0.86) | $(0.48) |
Q2 operating loss was about 35% of revenue; first-half operating loss was about 37% of revenue. Customer-agreement and incentive costs were 89% of that revenue in Q2 and 92% in the first half, versus 78% and 86% a year earlier. Solar-system and product sales costs were 94% of related revenue in both 2023 periods, versus 90% in Q2 2022 and 89% in the first half of 2022.
- Revenue mix: Q2 customer agreements and incentives rose 16% to $302.1M, while solar-system and product sales fell 11% to $288.0M. First-half revenue rose 9%; customer agreements and incentives increased 17% and system/product sales increased 3%.
- Cash flow: First-half operating cash use was $641.5M, investing cash use was $1,210.6M, and financing provided $1,820.1M. Cash and restricted cash together decreased $31.9M to $921.1M. Cash paid for interest was $198.8M.
- Balance sheet: June 30 cash was $669.1M and restricted cash was $252.0M. Current assets were $2.08B and current liabilities $1.42B. Total debt, net, was $9.60B, up from $8.40B at year-end 2022; this includes $945.9M of recourse debt and $8.66B of non-recourse debt. Debt fair value was $8.99B.
- Other scale and operating metrics: Solar energy systems, net, were $11.94B. Networked Solar Energy Capacity was 6,204 MW versus 5,136 MW a year earlier; customers numbered 869,464 versus 724,177. Gross Earning Assets were $12.56B versus $10.76B, but the prior-year measure used a 5% discount rate versus 6% in 2023; at 6%, the filing gives a 2022 value of approximately $9.59B.
Material changes and management commentary
- Q2 revenue was nearly flat year over year, as recurring customer-agreement revenue growth was largely offset by lower product and system sales. Management attributed lower product sales partly to easing supply constraints and lower average selling prices; system sales also reflected a greater customer preference for agreements over outright purchases, likely due to higher interest rates.
- Operating expenses rose 8% in Q2 and 14% in the first half. Management cited higher customer-agreement costs as more systems entered service and a greater mix of agreement customers, alongside increased sales and marketing and general and administrative costs.
- Net interest expense increased 53% in Q2 and 54% in the first half, primarily due to additional non-recourse debt. First-half other income fell substantially from 2022, reflecting derivative losses and the absence of a prior-year $47.3M equity-investment gain.
- The common-stockholder result differs sharply from consolidated net loss because the statements allocate substantial losses to noncontrolling and redeemable noncontrolling interests. Investors should not interpret the $55.5M Q2 common-stockholder income as consolidated profitability.
- California’s new Net Billing Tariff began applying to new customers in mid-April 2023. Management said California originations were below pre-transition levels and expects solar-plus-storage offerings to be increasingly important; it highlighted its Sunrun Shift product.
Outlook, risks and unusual items
- Management said cash, investment-fund commitments and available borrowings should be sufficient for anticipated cash needs for at least the next 12 months, while emphasizing dependence on external capital to fund growth. Approximately $424.6M of committed and available capital was restricted to purchasing and installing solar systems. No specific quantitative financial guidance is provided in the supplied filing text.
- The $600M corporate bank line had $551.9M drawn at June 30, 2023, bore a weighted-average rate of 8.70%, and matures in January 2025. The company reported compliance with debt covenants. Two non-recourse loan balances of $165.7M and $150.0M mature in April 2024; management believes extension or refinancing is probable, but gives no assurance.
- Key exposures include rising or volatile interest rates, continued access to tax-equity and debt financing, changes to tax credits and incentives, California rate policy, customer cancellations, competition, supplier concentration, and installation capacity. California accounted for over 45% of the customer base. The company also disclosed proposed California electrician licensing restrictions that could increase costs or delay storage installations.
- Sunrun performed a quantitative goodwill assessment at March 31, 2023 after a sustained market-capitalization decline and concluded reporting-unit fair value exceeded carrying value; a 100-basis-point higher discount rate alone would not have caused impairment. A June 30 qualitative assessment found no further evaluation necessary. Goodwill was $4.28B.
- The IRS was auditing an investor’s valuation of solar-system basis in a fund covered by the company’s 2018 insurance policy. An adverse final determination could trigger an indemnity obligation, with the company citing potentially limited out-of-pocket costs and higher future insurance premiums. The filing says ordinary-course legal matters are not currently expected to have a material adverse effect.
- Supplier purchase commitments totaled $254.0M for modules, inverters and batteries by year-end, but could be canceled without significant penalties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer-agreement growth can translate into better margins and operating cash flow, given the rising cost ratios and substantial upfront fulfillment costs.
- Whether Sunrun can maintain access to fund investors and refinance or extend the April 2024 non-recourse maturities on acceptable terms.
- How California’s Net Billing Tariff affects originations, cancellations, system economics and demand for batteries and solar-plus-storage products.
- The assumptions behind Gross Earning Assets, particularly discount rate, customer defaults and renewal or purchase rates; the company’s sensitivity table shows material variation under alternative assumptions.
- Potential exposure from the IRS fund audit, tax-credit eligibility and the availability and scope of insurance coverage.
- How much reported cash is available for corporate use: substantial VIE assets are restricted to settling VIE obligations, and restricted cash and committed project capital are not equivalent to unrestricted corporate liquidity.