Sunrun Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars except per-share data. Sunrun provides residential solar systems and related services, primarily through 20- or 25-year customer agreements, and finances system deployment through investment funds and debt.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $181.3 | $204.6 | $392.0 | $399.1 |
| Operating loss | $(83.5) | $(62.8) | $(146.5) | $(107.0) |
| Net loss | $(134.5) | $(104.6) | $(244.1) | $(191.5) |
| Net loss attributable to common stockholders | $(13.6) | $(1.3) | $(41.5) | $(15.2) |
| Net loss per diluted share | $(0.11) | $(0.01) | $(0.35) | $(0.13) |
- Q2 gross profit, calculated as revenue less the two reported cost-of-revenue lines, was approximately $34.1 million, or 18.8% of revenue, versus $47.7 million, or 23.3%, a year earlier. H1 gross profit was approximately $75.0 million, or 19.1%, versus $94.9 million, or 23.8%.
- Net interest expense rose 20% to $50.7 million in Q2 and to $100.6 million in H1, primarily reflecting additional non-recourse and pass-through financing debt. H1 other expense was lower than the prior year, which included debt-extinguishment losses.
- At June 30, cash was $269.6 million and restricted cash was $84.7 million. Current assets were $638.2 million and current liabilities were $517.3 million. Management said cash, fund commitments and available borrowings were expected to cover anticipated cash needs for at least 12 months.
- Total debt carrying value was $2.424 billion: $236.4 million recourse and $2.187 billion non-recourse. The balance sheet also showed $337.6 million of pass-through financing obligations. The $250 million working-capital facility had $236.4 million outstanding; Sunrun reported compliance with its covenants.
- H1 operating cash outflow was $152.3 million, versus $56.6 million in H1 2019. Investing cash outflow was $364.4 million, versus $402.4 million; financing provided $507.7 million, versus $508.5 million. Cash and restricted cash declined $9.0 million during H1.
Material changes and operating trends
- Q2 revenue fell 11% year over year. Customer agreement and incentive revenue increased 15% to $106.1 million, while solar system and product sales decreased 33% to $75.2 million.
- H1 revenue declined 2%. Customer agreement and incentive revenue rose 7% to $205.2 million, but solar system and product sales fell 10% to $186.8 million. Management attributed weaker system sales to lower retail-partner demand and weaker product sales to COVID-19 impacts and reduced purchases after customers acquired safe-harbor equipment in 2019.
- Operating expenses were $264.8 million in Q2, down 1%, and $538.5 million in H1, up 6%. Customer-agreement costs increased with the growing deployed fleet; the related cost ratio rose to 79% of that revenue in both Q2 and H1, from 76% and 73%, respectively.
- H1 sales and marketing expense rose 11% to $140.0 million, including $8.0 million of non-recurring and restructuring costs. General and administrative expense included a $6.7 million legal-settlement accrual and $3.4 million of non-recurring and restructuring costs.
- Cumulative deployed capacity reached 2,163 MW, up from 1,763 MW. Management’s estimated Gross Earning Assets were $3.892 billion, versus $3.312 billion a year earlier; this estimate uses assumptions including a 6% discount rate. Contracted revenue not yet recognized was approximately $7.1 billion, with about 6% expected to be recognized over the next 12 months.
Outlook, risks and unusual items
- Sunrun described COVID-19 effects as uncertain. It continued installations in most markets, shifted sales consultations to virtual channels, and cited improved digital lead generation. It also reported furloughs, layoffs, salary reductions and temporary facility closures; management cautioned that these actions might not be sufficient.
- No specific financial guidance for the remainder of 2020 is provided in the supplied filing text. Management’s stated liquidity expectation is subject to uncertainty, particularly given the company’s need for outside financing to fund growth.
- Key risks include access to tax-equity and other financing, interest-rate exposure, customer demand and cancellations, supply-chain disruption, COVID-19, changing solar incentives and net-metering rules, and potential reductions in the value of tax credits. More than 40% of customers were in California.
- An investor was under IRS audit concerning the fair market value of solar systems used for tax-credit claims. Sunrun said it could not determine potential liabilities; indemnity obligations and insurance coverage may be relevant.
- A proposed class-action settlement for $5.5 million was accrued and remained subject to court approval. The MD&A separately identifies a $6.7 million legal-settlement accrual; investors should reconcile these disclosures.
- Post-quarter events: Sunrun agreed to acquire Vivint Solar in an all-stock transaction, expected to close in Q4 2020 subject to approvals and other conditions. Vivint shareholders were expected to own about 36% of the combined company. The merger has termination fees of up to $107 million payable by Sunrun in specified circumstances. Sunrun also agreed to sell approximately $75 million of shares to SK E&S and co-invest in a $150 million home-electrification venture.
- H1 other comprehensive loss was $74.5 million, primarily unrealized derivative losses; interest-rate swap liabilities were $166.3 million at June 30, compared with $64.4 million at year-end 2019.
Important facts for investors to verify
- Whether cash, restricted cash and the $292.7 million of committed and available capital usable only for solar-system purchases and installation are sufficient amid operating cash outflows and financing needs.
- How gross margins and operating losses develop as recurring customer-agreement revenue grows and sales revenue, incentive revenue and costs change.
- The status, potential exposure and insurance coverage for the IRS audit, and the reconciliation of the $5.5 million settlement disclosure with the $6.7 million MD&A accrual.
- Whether the Vivint Solar merger receives required shareholder and regulatory approvals, closes on the expected terms and delivers anticipated benefits, and how the SK E&S transaction affects share count and liquidity.
- The sensitivity of Gross Earning Assets to customer defaults, discount rates, renewal or purchase assumptions, and the availability of tax incentives and fund investors.