Sunrun Inc. — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2017, with comparisons to Q1 2016. Sunrun designs, installs, owns and maintains residential solar systems in the United States, earning revenue from customer leases and power purchase agreements, incentives, system sales and product sales. It served 16 states and the District of Columbia; approximately half of cumulative deployed systems were in California.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $104.1 million | $98.7 million |
| Operating loss | $50.0 million | $66.8 million |
| Consolidated net loss | $73.1 million | $77.8 million |
| Net income available to common stockholders | $12.7 million; $0.12 per diluted share | $13.1 million; $0.13 per diluted share |
| Net cash used in operating activities | $29.1 million | $77.4 million |
| Net cash used in investing activities | $170.8 million | $169.7 million |
| Net cash provided by financing activities | $197.3 million | $251.5 million |
- Operating leases and incentives revenue increased 39% to $48.1 million; system and product sales revenue declined 13% to $56.0 million. Total revenue rose 5% year over year.
- Operating expenses fell 7% to $154.1 million, including a 27% reduction in sales and marketing expense. Operating loss narrowed, although net interest expense increased 33% to $15.3 million.
- Cost of operating leases and incentives was 92% of related revenue, compared with 110% in Q1 2016; the filing attributes the improvement partly to a higher share of incentive revenue and a lower proportion of directly installed systems.
- Cash was $203.8 million at quarter-end, down $2.6 million from year-end. Current assets were $341.1 million and current liabilities were $238.9 million. Some cash and other assets are held in consolidated variable-interest entities and are restricted to settling those entities’ obligations.
- Total debt at carrying value was $949.3 million: $247.4 million recourse and $701.9 million non-recourse. The $247.4 million working-capital line matures in April 2018; cash on hand was not sufficient to repay it in full. Sunrun said it was negotiating an extension or refinancing and believed refinancing probable, but gave no assurance.
- Capital investment remained substantial: $168.1 million was spent on solar systems in investing activities. The company reported approximately $391 million of undrawn investment-fund commitments, usable only to purchase and install solar systems.
Changes versus the prior comparable period
- Revenue mix shifted toward recurring lease and incentive revenue, while solar system sales weakened following softer retail-channel demand and reduced deployments linked to Q4 2016.
- Operating cash use improved by $48.3 million, largely reflecting a smaller net loss excluding noncash and non-operating items and a favorable inventory movement versus the prior-year cash outflow from inventory.
- Interest expense rose with additional borrowings. Cash interest paid increased to $9.3 million from $4.7 million.
- Megawatts booked increased to 74 from 62, and megawatts deployed rose to 73 from 60. Cumulative deployed capacity reached 951 MW, versus 656 MW a year earlier.
- Gross Earning Assets, a management estimate of discounted future contract cash flows and purchase or renewal value using specified assumptions, increased to $1.916 billion from $1.380 billion. It is a forward-looking operating metric, not recognized revenue or cash.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific financial or deployment guidance. Management said cash, investment-fund commitments and available borrowings were expected to meet anticipated cash needs for at least 12 months, excluding repayment of the working-capital facility expected to be refinanced. Growth remains dependent on outside financing and tax-equity investors.
- Subsequent financing: On May 9, 2017, a jointly owned Sunrun–National Grid subsidiary entered into $202 million of non-recourse secured facilities, including a $195 million delayed-draw term loan and a $7 million letter-of-credit facility, maturing in April 2024.
- Policy and market exposure: Key risks include changes to net-metering rules, utility rates, tax credits and other incentives; interest-rate increases; reduced availability or higher cost of tax-equity and debt financing; customer cancellations; competition; and dependence on suppliers, partners and concentrated markets. The filing notes increased cancellations in certain markets during 2016 and softer retail system-sales demand.
- Tax and accounting: Adoption of ASU 2016-16 changed the accounting for tax effects of intercompany asset transfers: the company reversed a $378.5 million net prepaid tax asset and recognized $378.2 million of gross deferred tax assets, with a $0.3 million cumulative reduction to retained earnings. Q1 income tax expense was $7.3 million, while management said net operating loss carryforwards meant it did not expect to pay income taxes until those carryforwards were used. The filing also reports adoption of stock-compensation guidance and a $3.3 million retained-earnings increase from that adoption.
- Investigations and litigation: Sunrun disclosed a continuing government investigation concerning the Section 1603 grant program and claimed system fair values; it could not estimate the outcome or potential loss. It also disclosed consolidated shareholder class actions related to its IPO, with the Greenberg action dismissed with prejudice in February 2017, and new Fink and Hall shareholder suits filed in May 2017 alleging statements about customer cancellations. The company said no claims had been brought against it in the Treasury investigation.
- Contingencies: The company has investor indemnification obligations relating to certain tax credits and grants, and a minimum-return guarantee to an investment-fund investor; maximum potential payments under these arrangements were not reliably estimable. Sunrun reported compliance with debt covenants at March 31, 2017.
Important facts for investors to verify
- Progress and terms of refinancing or extending the $247.4 million recourse credit line before its April 2018 maturity.
- Availability and conditions attached to the $391 million of undrawn fund commitments, and continued access to new tax-equity and debt financing.
- Whether lease growth, deployments and Gross Earning Assets translate into cash generation after system investment, operating costs and investor distributions.
- Customer cancellation trends, retail system-sales demand, and the effects of net-metering, utility-rate and incentive changes in key markets.
- Developments in the Treasury grant investigation, tax-credit valuation exposure, shareholder litigation and related potential indemnities.
- Effects of the new tax-accounting treatment and future accounting standards on reported taxes, earnings and balance-sheet comparability.