Sunrun Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparative periods are the corresponding 2014 periods. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context
Sunrun designs, installs, owns and maintains residential solar systems in the United States. It earns revenue from customer leases and power purchase agreements, incentives, system sales and solar-product distribution. Most customer agreements typically run 20 years. As of September 30, Sunrun served 15 states and the District of Columbia, with most cumulative deployments in California. It completed its IPO in August 2015.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $82.6m | $56.1m | $205.0m | $138.4m |
| Operating loss | $(62.8)m | $(37.0)m | $(154.0)m | $(90.2)m |
| Net loss | $(72.2)m | $(45.1)m | $(174.6)m | $(102.5)m |
| Net loss available to common stockholders, including deemed dividend | $(27.7)m | $(15.2)m | $(38.1)m | $(44.2)m |
| Basic and diluted loss per share available to common stockholders | $(0.41) | $(0.64) | $(0.96) | $(1.98) |
Q3 gross profit, calculated as revenue less the two reported direct cost lines, was $7.4m (about 9.0% of revenue), versus $6.7m (about 12.0%) a year earlier. For the nine months, gross profit was $31.9m (about 15.6%), versus $21.0m (about 15.2%). Sales and marketing expense rose to $45.4m in Q3 from $23.4m, contributing to the larger operating loss.
- Revenue growth: Q3 revenue increased 47%; nine-month revenue increased 48%. Q3 operating leases and incentives rose 46%, while solar system and product sales rose 48%. Product sales growth included the April 2015 acquisition of Clean Energy Experts (CEE).
- Cash flow, nine months: Operating activities used $71.9m, versus $4.0m provided in 2014; investing used $431.9m, versus $339.4m; financing provided $614.6m, versus $391.4m. Cash and cash equivalents increased $110.9m to $263.0m.
- Balance sheet at September 30: Current assets were $398.9m and current liabilities $231.4m (working capital of $167.5m). Total debt carrying value was $468.8m, including $133.3m drawn on the recourse line of credit and $335.5m of non-recourse debt. Lease pass-through financing obligations were $127.0m; capital lease obligations were $17.8m.
- Funding: The IPO generated approximately $221m net proceeds after offering expenses as described in the notes; the cash flow statement reports $223.5m of net IPO proceeds. Sunrun reported $121m of undrawn investment-fund commitments at quarter-end, restricted to solar system purchases and installation, and $43.1m of unused borrowing capacity in its debt table. The company was in compliance with stated debt covenants.
Material changes and operating indicators
- Q3 megawatts booked rose to 94.5 from 44.0; deployed megawatts rose to 55.7 from 33.5. Cumulative deployed capacity reached 528.2 MW, compared with 356.2 MW.
- Estimated retained value was $1.368bn, up from $897m; estimated retained value per watt declined to $2.30 from $2.40. These are company-defined estimates, not recognized revenue or cash balances.
- Sales and marketing expense rose 94% in Q3 and 96% year to date, reflecting direct-to-consumer expansion, hiring, market entry and advertising. Total operating expenses grew 56% in Q3 and 57% year to date, faster than revenue.
- In August, all outstanding preferred stock converted to common stock in connection with the IPO. Sunrun also issued inducement shares and warrants to former Series D and E holders; the transaction generated a $24.9m non-cash deemed dividend that increased loss available to common stockholders.
- CEE was acquired in April for $25m in cash and common stock, with additional contingent consideration possible. CEE contributed $7.0m of Q3 and $11.1m of nine-month revenue from the acquisition date.
Outlook, risks and unusual items
- Management expected Q4 solar system sales to accelerate from Q3 and product sales to be flat to lower due to seasonality; in aggregate, it expected solar system and product sales to increase by up to 20% from Q3. Management stated that cash, investment-fund commitments and available borrowings were expected to cover anticipated cash needs for at least 12 months, while emphasizing dependence on outside financing.
- Sunrun’s model relies on tax-equity investors, tax credits, incentives and customer financing. The filing notes that, under then-current law, the federal Commercial ITC was scheduled to decline from approximately 30% to 10% for systems placed in service after December 31, 2016. Changes to incentives, net-metering rules, utility rates or access to capital could impair demand, customer savings or financing.
- Cash use and substantial investment in solar assets remain significant: solar-system investment payments were $408.9m in the first nine months. Sunrun warned that unavailable or more costly financing could require spending reductions and harm growth.
- Disclosure controls were deemed ineffective as of September 30 because of a previously reported material weakness involving deferred tax liabilities, prepaid tax assets and related tax accounting for intercompany transactions. The filing says prior financial statements were restated; remediation was ongoing.
- The Department of Treasury/Department of Justice investigation into Section 1603 grant valuations remained unresolved. Sunrun said no claims had been brought against it and it could not estimate the outcome or possible loss. Two investment funds were under IRS audit. Potential ITC indemnification exposure was not reliably quantifiable. The filing also identifies ongoing consumer-rights and wage-and-hour class actions.
- Other unusual items included a $0.4m early debt-extinguishment loss in the first nine months, a $2.7m fair-value liability on interest-rate swaps, and $2.1m of swap losses expected to be reclassified into interest expense over the next 12 months.
Most important facts for investors to verify
- Whether revenue growth can translate into improving operating performance as sales and marketing costs and total operating expenses rise faster than revenue.
- How much of reported cash and financing capacity is available for corporate purposes, given restricted cash, VIE assets and use-restricted fund commitments.
- Whether new tax-equity funding and debt remain available on acceptable terms, including the impact of the scheduled ITC reduction and changes in state utility policies.
- The status and potential financial exposure of the government investigation, IRS audits, tax-credit indemnities and disclosed litigation.
- Progress in remediating the material weakness and the reliability of tax and fund-accounting estimates; also reconcile the different IPO net-proceeds figures reported in the filing.