Sunrun Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparative figures are for FY2017 unless stated otherwise. This is an annual filing, not a standalone fourth-quarter report. Sunrun provides residential solar systems and services, primarily through 20- or 25-year leases and power purchase agreements, financed with tax-equity funds and debt. At year-end, it served approximately 233,000 customers in 22 states, the District of Columbia and Puerto Rico, with 1,575 MW deployed.
Financial and operating performance
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Total revenue | $760.0 million | $532.5 million | Up 43% |
| Customer agreements and incentives revenue | $404.5 million | $234.3 million | Up 73%; included $131.8 million of incentives, mostly reflecting ITC revenue from a pass-through financing fund |
| Solar systems and product sales | $355.5 million | $298.3 million | Up 19%; system sales rose, while product sales declined |
| Operating expenses | $881.9 million | $713.7 million | Up 24% |
| Loss from operations | $(121.9) million | $(181.1) million | Improved; operating margin was approximately (16.0)% versus (34.0)% |
| Net loss | $(260.2) million | $(287.6) million | Improved, but remained substantial |
| Net income attributable to common stockholders | $26.7 million; $0.24 basic EPS | $125.5 million; $1.19 basic EPS | Down materially; differs from consolidated net loss because of allocations to noncontrolling interests |
| Net cash used in operating activities | $(62.5) million | $(96.1) million | Operating cash burn narrowed |
| Cash used in investing activities | $(811.3) million | $(777.3) million | Primarily solar system deployment |
| Cash provided by financing activities | $936.4 million | $890.8 million | Fund contributions and debt proceeds funded growth |
Gross profit, calculated from the reported revenue and cost-of-revenue lines, was approximately $225.1 million, or 29.6% of revenue. This aggregate margin was affected by the mix of solar service, system and product sales and incentive revenue; Sunrun does not present it as a single reported margin metric in the supplied filing text. Sales and marketing expense increased 42% to $207.2 million, while net interest expense increased 43% to $131.8 million, reflecting additional financing.
At December 31, 2018, Sunrun reported $226.6 million of cash and $77.8 million of restricted cash. Current assets were $461.4 million and current liabilities $372.2 million. Total debt carrying value was $1.749 billion: $247.0 million recourse debt and $1.502 billion non-recourse debt. The $250 million corporate bank line had $247 million outstanding and matures in April 2020. Total equity was $1.283 billion. Gross Earning Assets, a company-defined estimate using a 6% discount rate, were $3.062 billion, up from $2.213 billion.
Material changes versus FY2017
- Revenue increased $227.4 million. Customer-agreement revenue rose with a larger fleet and a full year of revenue from systems placed in service during 2017. Incentives revenue rose $108.3 million, primarily due to ITCs from a new pass-through financing fund.
- Solar system sales revenue increased $72.6 million, attributed mainly to increased retail-partner demand; product sales declined $15.3 million.
- Operating expenses grew more slowly than revenue, and operating loss narrowed by $59.3 million. However, sales and marketing costs rose substantially, and interest expense increased $39.5 million.
- Cumulative deployed capacity increased from 1,202 MW to 1,575 MW. Gross Earning Assets increased from $2.213 billion to $3.062 billion.
- Operating cash use fell by $33.6 million, while investing cash use increased. Financing remained central to the model, with $483.8 million of net proceeds from fund investors and $438.1 million of net debt proceeds in 2018.
- Sunrun adopted new revenue and lease accounting standards in 2018 and recast comparative periods. The new revenue standard recognizes certain ITC revenue in full when systems receive permission to operate; reported historical comparisons therefore reflect revised accounting.
Outlook, risks, contingencies and unusual items
- Management said cash, investment-fund commitments and available borrowings should meet anticipated cash needs for at least 12 months, while acknowledging dependence on new and existing outside capital. Undrawn committed fund capital was approximately $205.8 million at year-end; management gave no quantitative operating guidance in the supplied filing text.
- Key risks include access to tax equity and debt, rising interest rates, federal ITC step-downs, changes to net-metering and other state policies, utility competition, equipment tariffs and supplier concentration, cancellations, and customer/system performance obligations. More than 40% of customers were in California, creating geographic concentration risk.
- The company reported $5.3 billion of contracted but unrecognized revenue, with approximately 6% expected to be recognized over the next 12 months. This is contracted revenue, not a forecast of cash receipts or profit.
- One investment fund and three investors were under IRS audit involving system fair-market-value determinations used for ITCs. Sunrun stated it could not reliably estimate maximum potential indemnity payments; insurance obtained in 2018 has exclusions and coverage limits.
- Legal matters included a TCPA class-action settlement proposed at $5.5 million, accrued in 2018 and preliminarily approved in January 2019; a $32.0 million IPO-related state-court settlement, of which insurers were to fund $30.1 million and Sunrun accrued $1.9 million; and a separate $2.5 million federal securities settlement expected to be funded by insurers, subject to final approval. A proposed derivative-action settlement included future corporate-governance measures.
- The filing reported a one-time $6.9 million reclassification from accumulated other comprehensive income to earnings following a refinancing that made the hedged forecast transaction probable not to occur. Tariffs imposed in 2018 did not have a material negative effect on the business that year, but management said they tempered equipment-cost decreases.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Common-stock dilution and control are relevant: insiders, directors and 5%-or-greater holders collectively beneficially owned approximately 52% of outstanding shares at year-end.
Most important facts for investors to verify
- How much of 2018 revenue growth and margin improvement came from recurring customer agreements versus one-time or timing-sensitive ITC and other incentive recognition.
- Whether operating cash flow can improve without continued large fund contributions and substantial new borrowing; review debt maturities, covenants and refinancing needs, especially the corporate bank line maturing in April 2020.
- Assumptions behind Gross Earning Assets, including the 6% discount rate, customer defaults, renewal or purchase values, and future operating costs.
- Exposure and insurance coverage related to IRS fair-market-value audits and the status and ultimate cost of the disclosed legal settlements.
- Effects of ITC reductions, net-metering or rate-design changes, tariffs and supplier availability on customer savings, demand and system economics.