Sunrun Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Sunrun designs, installs, sells, owns and maintains U.S. residential solar systems and offers long-term customer agreements, typically 20 or 25 years. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $631.9M | $438.8M | $1,712.3M | $1,174.7M |
| Operating loss | ($136.2M) | ($137.9M) | ($473.0M) | ($458.2M) |
| Net loss, consolidated | ($155.5M) | ($241.3M) | ($521.7M) | ($659.1M) |
| Net income (loss) attributable to common stockholders | $210.6M | $24.1M | $110.4M | ($40.9M) |
| Net interest expense | $117.2M | $89.1M | $312.5M | $238.4M |
| Net cash used in operating activities | Not provided quarterly | Not provided quarterly | $544.1M | $535.8M |
- Revenue mix and growth: Q3 customer-agreement and incentive revenue was $271.2M, up 17%; solar-system and product sales were $360.7M, up 74%. Nine-month revenue grew 46%, with customer agreements and incentives up 18% and system and product sales up 77%.
- Margins: Cost of customer agreements and incentives was 77% of that revenue in Q3, versus 75% a year earlier, and 83% in both nine-month periods. Cost of system and product sales was 86% of related revenue in Q3 versus 83%, and 88% year to date versus 83%. Overall gross margin, calculated as revenue less these two cost-of-revenue lines, was approximately 17.5% in Q3 and 14.3% year to date, down from approximately 20.9% and 17.4%, respectively.
- Common-stockholder earnings require context: Despite consolidated net losses, common stockholders were allocated income because the filing attributed larger losses to noncontrolling and redeemable noncontrolling interests: $366.1M in Q3 and $632.1M year to date. Common-stockholder income should not be read as consolidated operating profitability.
- Cash flow: Nine-month investing cash use was $1,567.4M, mainly for solar systems, and included a $75.0M investment in the SK E&S home-electrification venture. Financing provided $2,217.1M, primarily from debt and fund investors. Cash and restricted cash increased by $105.6M to $956.1M.
- Liquidity and debt at September 30: Cash was $672.1M; restricted cash was $284.0M. Current assets were $1,880.0M and current liabilities $1,082.5M. Net recourse and non-recourse debt in the debt note totaled $7,985.2M, versus $6,502.9M at December 31, 2021; this excludes the separately reported $307.9M pass-through financing obligation. The corporate credit line had $506.0M drawn and $45.0M unused capacity. Management reported compliance with debt covenants.
- Operating scale: Networked Solar Energy Capacity was 5,392 MW, versus 4,457 MW a year earlier; customers numbered 759,937, versus 630,441. Management’s estimated Gross Earning Assets were $11.5B, versus $9.2B. This is a forward-looking, assumption-dependent metric, not a GAAP balance-sheet value.
Material changes versus prior comparable periods
- Q3 revenue increased $193.1M, while operating expenses rose 33% to $768.2M. The operating loss improved modestly from $137.9M to $136.2M. For the first nine months, revenue growth exceeded expense growth, but the operating loss widened to $473.0M from $458.2M.
- Management attributed sales growth to greater market demand, particularly through retail partners; average system-sale prices rose 12% in Q3 and 15% year to date. Customer-agreement revenue benefited from additional systems placed in service.
- Net interest expense increased 32% in Q3 and 31% year to date, principally due to additional non-recourse debt. Total debt increased by approximately $1.5B from year-end 2021.
- Other income included substantial derivative gains: $97.953M in Q3 and $263.784M year to date. The nine-month amount also included a $47.3M gain on an equity investment; Q3 included a $26.0M gain on debt extinguishment. These items materially affected reported net loss.
- Sales and marketing expense increased 13% in Q3 and 26% year to date, driven by headcount and customer-acquisition costs. Year-to-date G&A declined 30%, primarily reflecting lower stock-based compensation and integration-related costs compared with 2021.
Outlook, risks and contingencies
- Liquidity outlook: Management said cash, investment-fund commitments and available borrowings were expected to meet anticipated cash needs for at least 12 months. It cited approximately $288.4M of committed, available capital restricted to purchasing and installing solar systems. The business nevertheless depends on continued external financing, and management anticipated raising additional capital.
- No specific forecast: This filing does not provide a numerical earnings or revenue guidance target. Management cautions that results may vary and highlights seasonality, installation backlog and customer cancellations.
- Interest rates and funding: Rising rates increase financing costs and can reduce the value or proceeds of fund monetization. The company uses interest-rate swaps; derivative gains were unusually large in the period. The filing also identifies benchmark-rate transition and refinancing risks.
- Policy and supply chain: Changes to net metering and utility rate design—particularly in California—could reduce customer savings and demand. Solar tariffs, import restrictions, forced-labor-related enforcement, supplier concentration and component shortages could raise costs or delay installations. The Inflation Reduction Act extended and modified tax incentives, but the company noted that implementation and eligibility guidance remained important uncertainties.
- Other risks and contingencies: The company depends on tax-equity and other fund investors, long-term customer payments, partners and suppliers; it also faces labor, weather, customer-credit, regulatory and execution risks. One fund was under IRS audit concerning system fair market value and related tax credits; the outcome was uncertain, and the company said the matter was covered by insurance. A Vivint Solar customer class action settlement would amend certain contract termination-fee provisions, without cash payments to class members; final approval was scheduled for February 2023. Management did not then expect a material financial-statement impact.
- Goodwill and controls: Goodwill was $4.28B. The company concluded fair value exceeded carrying value as of its October 1, 2022 annual assessment, while noting it would continue monitoring factors including its share-price decline. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether revenue growth can translate into improved operating and gross margins, particularly as system and product sales expand.
- Separate recurring operating performance from derivative gains, debt-extinguishment gains, equity-investment gains and the large allocation of losses to noncontrolling interests.
- Review debt maturity, interest-rate exposure, covenant headroom, refinancing needs and the availability and restrictions of fund commitments; distinguish unrestricted cash from restricted cash and project-level, non-recourse financing.
- Monitor installation backlog, cancellations, customer acquisition costs, system costs and the impact of California net-metering and rate-design decisions.
- Verify the amount and timing of supplier commitments: Note 15 says $433.5M of equipment purchases are due by the end of 2023, while MD&A says by the end of 2022. The filing text does not reconcile this difference.
- Track the IRS fund audit, insurance coverage and exclusions, the class-action settlement approval, and the assumptions underlying Gross Earning Assets.