Sunrun Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Sunrun designs, installs, owns, and maintains U.S. residential solar systems, primarily under customer agreements typically lasting 20 or 25 years. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $563.2 million | $631.9 million | $1.743 billion | $1.712 billion |
| Operating loss | $1.347 billion | $136.2 million | $1.781 billion | $473.0 million |
| Net loss | $1.471 billion | $155.5 million | $2.147 billion | $521.7 million |
| Net income (loss) attributable to common stockholders | $(1.069) billion | $210.6 million | $(1.254) billion | $110.4 million |
| Basic EPS | $(4.92) | $0.99 | $(5.81) | $0.52 |
Revenue mix and cost trends: Q3 customer agreements and incentives revenue rose 17% to $316.5 million, while solar system and product sales fell 32% to $246.7 million. Total revenue declined 11%. For the first nine months, total revenue increased 2%; customer agreements and incentives rose 17%, while system and product sales fell 10%. Cost of customer agreements and incentives was 90% of that revenue in Q3, versus 77% a year earlier; cost of system and product sales was 95% of related revenue, versus 86%. For the nine-month period, those cost ratios were 91% versus 83%, and 94% versus 88%, respectively.
Cash flow, liquidity, and debt: For the first nine months, operating cash flow was $(704.7) million, investing cash flow was $(1.952) billion, and financing cash flow was $2.656 billion. Cash and restricted cash together ended the period at $951.9 million, including $643.8 million of cash and $308.2 million of restricted cash. Total debt, net, was $10.238 billion, up from $8.399 billion at December 31, 2022; reported balance-sheet non-recourse debt was $9.326 billion net. The corporate bank line had $517.2 million drawn of a $600 million commitment, with $31 million of unused capacity reported. Sunrun said it had $119.8 million of committed and available capital for solar system purchases and installations and believed cash, fund commitments, and available borrowings would cover anticipated needs for at least 12 months. It was in compliance with debt covenants at quarter-end.
Other operating metrics: Networked Solar Energy Capacity was 6,462 MW, up from 5,392 MW a year earlier; customers numbered 903,270, up from 759,937. Gross Earning Assets were reported at $13.3 billion, based on management assumptions including a 6% discount rate and assumed customer renewal or purchase rates.
Material changes and unusual items
- A non-cash goodwill impairment charge of $1.158 billion was recorded in Q3 after Sunrun’s market capitalization, including a control premium, fell below book value. Goodwill declined to $3.122 billion from $4.280 billion at year-end 2022. The charge did not affect cash flow, liquidity, or debt covenants. Management stated that a 50-basis-point increase in discount-rate assumptions, holding other assumptions constant, would have increased the impairment by approximately $0.5 billion.
- Quarterly revenue shifted toward long-term customer agreements and away from outright system sales. Management attributed the shift partly to higher customer financing rates. Higher interest expense reflected additional non-recourse debt: net interest expense rose 46% in Q3 and 51% for the nine-month period.
- Q3 other income declined year over year, partly because the prior-year quarter included a gain on debt extinguishment. Nine-month other income also fell substantially, primarily due to derivative losses and a prior-year equity-investment gain.
- Sunrun reported approximately $23.6 billion of contracted revenue not yet recognized, of which it expected to recognize approximately 5% over the following 12 months. This is a long-term contracted amount, not current-period revenue or cash.
Outlook, commentary, and risks
- No specific numerical forward guidance for future revenue, earnings, or deployments is stated in the supplied filing text. Management expects to seek additional capital and believes available resources are sufficient for at least the next 12 months, while cautioning that financing may not be available on acceptable terms.
- Management said California’s net billing tariff has reduced the attractiveness of solar-only offerings; originations there remained below pre-transition levels. Sunrun said most California sales were then solar-plus-storage offerings, which may face longer permitting, inspection, and installation cycles.
- Management identified rising and volatile interest rates as increasing its cost of capital and potentially reducing financing proceeds and the amount of capital available for new systems. The company relies on outside debt and investment-fund financing to support growth.
- Other material risks include changes to net-metering and other energy policies, incentives and tax credits; competition and customer cancellations; supplier, tariff, and trade disruptions; installation costs and delays; and concentrated exposure to California, which represented over 45% of the customer base.
- An IRS audit of an investor in one fund concerns the fair-market-value basis of solar systems and is covered by Sunrun’s 2018 insurance policy. An adverse final determination could trigger an indemnity obligation, limited out-of-pocket costs, and potentially higher insurance premiums. The filing says ordinary-course legal matters are not currently expected to have a material adverse effect, though outcomes cannot be assured.
- On September 15, 2023, Co-Executive Chair Ed Fenster adopted a Rule 10b5-1 trading plan that provides for specified option exercises, a donation, and potential sales of company shares through December 28, 2024, subject to price thresholds.
Important facts for investors to verify
- Whether customer-agreement growth can offset lower system-sale revenue while improving the reported cost ratios and cash generation.
- Whether Sunrun can maintain access to fund-investor capital and refinance or extend non-recourse facilities with near-term maturities; management noted refinancing is not assured.
- How sensitive goodwill and Gross Earning Assets are to discount rates, future cash-flow estimates, customer defaults, and renewal or purchase assumptions.
- Whether California’s net billing tariff, storage deployment complexity, and any future rate-design changes affect originations, cancellations, installation timing, and margins.
- The amount and availability of cash that is restricted or held in consolidated variable-interest entities; substantial VIE assets are limited to settling VIE obligations, and VIE creditors generally have no recourse to Sunrun.
- The outcome of the IRS investor audit, the extent of insurance coverage, and any potential indemnity exposure.