Sunrun Inc. — 2019 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 7, 2019. Sunrun designs, installs, sells, owns and maintains residential solar systems in the United States. Its business includes long-term customer agreements, system and product sales, and financing through investment funds and debt.
Business context and operating scale
- At quarter-end, Sunrun served approximately 255,000 customers in 22 states, the District of Columbia and Puerto Rico; cumulative deployed capacity was 1,763 MW, compared with 1,360 MW a year earlier.
- Management-reported Gross Earning Assets were approximately $3.31 billion, up from $2.58 billion. This estimate depends on assumptions including a 6% discount rate and projected renewals or system purchases.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $204.6 million | $170.5 million | $399.1 million | $314.9 million |
| Operating loss | $(62.8) million | $(35.0) million | $(107.0) million | $(91.7) million |
| Consolidated net loss | $(104.6) million | $(71.7) million | $(191.5) million | $(163.1) million |
| Net income (loss) attributable to common stockholders | $(1.3) million | $7.4 million | $(15.2) million | $35.4 million |
| Basic EPS attributable to common stockholders | $(0.01) | $0.07 | $(0.13) | $0.33 |
- Q2 revenue increased 20%. Customer agreements and incentives contributed $92.4 million, nearly flat year over year; solar system and product sales rose 42% to $112.2 million. System sales growth reflected greater demand through retail partners.
- Calculated gross profit was $47.7 million, or approximately 23.3% of revenue, versus $48.5 million, or 28.4%, in Q2 2018. Operating expenses rose 30% to $267.4 million, including a 42% increase in sales and marketing expense. The operating loss widened to 30.7% of revenue from 20.5%.
- Q2 net interest expense increased 33% to $42.3 million, primarily due to additional non-recourse and pass-through financing debt. Six-month interest expense was $83.6 million, up 39%.
- The common-stockholder result differs substantially from consolidated net loss because losses are allocated to noncontrolling and redeemable noncontrolling interests.
Cash flow, debt and liquidity
- For the six months, operating cash use was $56.6 million, investing cash use was $402.4 million, and financing cash provided was $508.5 million. Cash and restricted cash increased $49.5 million to $353.9 million; unrestricted cash was $299.5 million.
- Investing outflows primarily funded solar systems. Financing inflows included $330.3 million of contributions from noncontrolling interests and redeemable noncontrolling interests, alongside substantial debt issuance and repayment activity.
- Total reported debt was $1.96 billion at June 30, including $239.0 million of recourse bank-line borrowings and $1.72 billion of non-recourse debt. The balance sheet also reported $340.6 million of pass-through financing obligations, separately from debt.
- The $250 million working-capital facility matures in April 2020; $239.0 million was drawn, leaving no unused capacity shown. Sunrun reported compliance with debt covenants and said it believed refinancing or extending the facility before maturity was probable, though not assured. It stated cash, fund commitments and available borrowings should cover anticipated needs for at least 12 months.
- Current liabilities exceeded current assets by approximately $107.8 million. The filing cites approximately $338.9 million of undrawn committed investment-fund capital, restricted to solar-system purchases and installation.
Material changes, outlook and risks
- Revenue growth was led by system sales and customer-agreement revenue. Incentive revenue was lower in Q2 because a 2018 financing fund’s ITC-related PTO activity was largely complete and no comparable fund had opened in 2019.
- Operating cash flow included a $95.5 million increase in deferred revenue from selling rights to future SRECs over 10–15 years; Sunrun said it repaid debt previously drawn against those rights. This transaction boosted deferred revenue and should be distinguished from recurring customer cash generation.
- Six-month other expense was $6.1 million, primarily debt-extinguishment losses, including a $4.4 million charge from early repayment of a pass-through financing obligation. Derivative fair-value changes produced a $44.1 million six-month other comprehensive loss; interest-rate-swap liabilities were $56.6 million at quarter-end.
- The filing provides no specific new quarterly or annual financial guidance. Management emphasized dependence on external financing and investment funds to finance growth and said future capital availability and terms are uncertain.
- Key risks include the federal ITC step-down beginning in 2020; changes to incentives, net-metering rules and utility rates; interest-rate exposure; solar equipment tariffs, supply constraints and costs; customer cancellations; and reliance on partners and tax-equity investors. More than 40% of customers were in California, increasing geographic concentration risk.
- Sunrun disclosed an IRS audit involving one investment fund and an investor, both reviewing system fair values used for tax benefits. Potential indemnification exposure cannot be reliably estimated; insurance applies to certain funds but has exclusions and limits.
- A TCPA class-action settlement for $5.5 million received final court approval in July 2019; Sunrun had accrued the amount previously and denied liability. Proposed settlements in two derivative actions remained subject to documentation and court approval. A July 2019 acquisition of a channel partner’s multifamily solar assets followed the reporting date.
Important facts for investors to verify
- Whether Sunrun can refinance or extend the $239 million working-capital facility before its April 2020 maturity and maintain covenant compliance.
- How much of operating cash flow depends on nonrecurring financing transactions, including SREC sales, versus ongoing customer receipts.
- Whether revenue growth can outpace customer-acquisition, installation and financing costs, given declining calculated gross margin and a larger operating loss.
- How the ITC step-down, regulatory changes, tariffs and equipment availability affect customer economics, deployment and access to tax-equity financing.
- Potential outcomes of IRS fair-value audits, investor indemnities, litigation matters and redeemable noncontrolling-interest obligations.