SUNRUN INC.
The discussion in this Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the Private Securities Litigation
Reform Act of 1995, which statements involve substantial risks and
uncertainties. Forward-looking statements generally relate to future events or
our future financial or operating performance. In some cases, you can identify
forward-looking statements because they contain words such as "may," "will,"
"should," "expects," "plans," "anticipates," "could," "intends," "target,"
"projects," "contemplates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these words or other similar terms or expressions
that concern our expectations, strategy, plans or intentions. Forward-looking
statements contained in this Quarterly Report on Form 10-Q include, but are not
limited to, statements about:
•the potential effects of the COVID-19 pandemic on our business and operations,
results of operations and financial position;
•failure to satisfy the required conditions and otherwise complete our planned
acquisition of Vivint Solar, or Vivint Solar on a timely basis or at all;
•the expected benefits and potential value created by the proposed merger with
Vivint Solar for our stockholders, including the ownership percentage of our
stockholders in the combined organization immediately following the consummation
of the proposed merger;
•the inherent risks, costs and uncertainties associated with integrating the
businesses in the proposed merger with Vivint Solar successfully and risks of
not achieving all or any of the anticipated benefits of the proposed merger with
Vivint Solar, or the risk that the anticipated benefits of the proposed
acquisition may not be fully realized or take longer to realize than expected;
•the amount of any costs, fees, expenses, impairments and charges related to the
relating to the proposed merger with Vivint Solar;
•the availability of rebates, tax credits and other financial incentives, and
decreases to federal solar tax credits;
•determinations by the Internal Revenue Service of the fair market value of our
solar energy systems;
•the retail price of utility-generated electricity or electricity from other
energy sources;
•regulatory and policy development and changes;
•our ability to manage our supply chains and distribution channels and the
impact of natural disasters and other events beyond our control, such as the
COVID-19 pandemic;
•our industry's, and specifically our, continued ability to manage costs
(including, but not limited to, equipment costs) associated with solar service
offerings;
•our strategic partnerships and expected benefits of such partnerships;
•our ability to realize the anticipated benefits of past or future investments,
strategic transactions, or acquisitions, and risk that the integration of these
acquisitions may disrupt our business and management;
•the sufficiency of our cash, investment fund commitments and available
borrowings to meet our anticipated cash needs;
•the expected size and time frame of our stock repurchase program;
•our need and ability to raise capital, refinance existing debt, and finance our
operations and solar energy systems from new and existing investors;
•the potential impact of interest rates on our interest expense;
•our business plan and our ability to effectively manage our growth, including
our rate of revenue growth;
•our ability to further penetrate existing markets, expand into new markets and
our expectations regarding market growth (including, but not limited to,
expected cancellation rates);
•our expectations concerning relationships with third parties, including the
attraction, retention and continued existence of qualified solar partners;
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•the impact of seasonality on our business;
•our investment in research and development and new product offerings;
•our ability to protect our intellectual property and customer data, as well as
to maintain our brand;
•technical and capacity limitations imposed by power grid operators;
•the willingness of and ability of our solar partners to fulfill their
respective warranty and other contractual obligations;
•our ability to renew or replace expiring, cancelled or terminated Customer
Agreements at favorable rates or on a long-term basis;
•the ability of our solar energy systems to operate or deliver energy for any
reason, including if interconnection or transmission facilities on which we rely
become unavailable;
•our expectations regarding certain performance objectives and the renewal rates
and purchase value of our solar energy systems after expiration of our Customer
Agreements; and
•the calculation of certain of our key financial and operating metrics and
accounting policies.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions, including those described in the section titled "Risk Factors"
and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a
very competitive and rapidly changing environment, and new risks emerge from
time to time. It is not possible for our management to predict all risks, nor
can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements we may make.
These risks and uncertainties may be amplified by the ongoing COVID-19 pandemic,
which has caused significant economic uncertainty and negative impacts on
capital and credit markets. The extent to which the COVID-19 pandemic impacts
our business, operations, and financial results, including the duration and
magnitude of such effects, will depend on numerous factors, many of which are
unpredictable, including, but not limited to, the duration and spread of the
pandemic, its severity, the actions to contain the pandemic or treat its impact,
and how quickly and to what extent normal economic and operating conditions can
resume. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this Quarterly Report on
Form 10-Q may not occur and actual results could differ materially and adversely
from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future
events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future
results, levels of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. We undertake no obligation to update publicly
any forward-looking statements for any reason after the date of this Quarterly
Report on Form 10-Q to conform these statements to actual results or to changes
in our expectations, except as required by law.
You should read this Quarterly Report on Form 10-Q and the documents that we
reference in this Quarterly Report on Form 10-Q and have filed with the
Securities and Exchange Commission (the "SEC") as exhibits to this Quarterly
Report on Form 10-Q with the understanding that our actual future results,
levels of activity, performance, and events and circumstances may be materially
different from what we expect.
Overview
Sunrun's mission is to provide our customers with clean, affordable solar energy and storage, and a best-in-class customer experience. In 2007, we pioneered the residential solar service model, creating a low-cost solution for customers seeking to lower their energy bills. By removing the high initial cost and complexity of cash system sales that used to define the residential solar industry, we have fostered the industry's rapid growth and exposed an enormous market opportunity. Our relentless drive to increase the accessibility of solar energy is fueled by our enduring vision: to create a planet run by the sun. 35 -------------------------------------------------------------------------------- We provide clean, solar energy typically at savings compared to traditional utility energy. Our primary customers are residential homeowners. We also offer battery storage along with solar energy systems to our customers in select markets and sell our services to certain commercial developers through our multi-family and new homes offerings. After inventing the residential solar service model and recognizing its enormous market potential, we have built the infrastructure and capabilities necessary to rapidly acquire and serve customers in a low-cost and scalable manner. Today, our scalable operating platform provides us with a number of unique advantages. First, we are able to drive distribution by marketing our solar service offerings through multiple channels, including our diverse partner network and direct-to-consumer operations. This multi-channel model supports broad sales and installation capabilities, which together allow us to achieve capital-efficient growth. Second, we are able to provide differentiated solutions to our customers that, combined with a great customer experience, we believe will drive meaningful margin advantages for us over the long term as we strive to create the industry's most valuable and satisfied customer base. Our core solar service offerings are provided through our lease and power purchase agreements, which we refer to as our "Customer Agreements" and which provide customers with simple, predictable pricing for solar energy that is insulated from rising retail electricity prices. While customers have the option to purchase a solar energy system outright from us, most of our customers choose to buy solar as a service from us through our Customer Agreements without the significant upfront investment of purchasing a solar energy system. With our solar service offerings, we install solar energy systems on our customers' homes and provide them the solar power produced by those systems for typically a 20-year initial term. In certain markets, we offer a 25-year initial term service offering. In addition, we monitor, maintain and insure the system during the term of the contract. In exchange, we receive predictable cash flows from high credit quality customers and qualify for tax and other benefits. We finance portions of these tax benefits and cash flows through tax equity, non-recourse debt and project equity structures in order to fund our upfront costs, overhead and growth investments. We develop valuable customer relationships that can extend beyond this initial contract term and provide us an opportunity to offer additional services in the future, such as our home battery storage service. Since our founding, we have continued to invest in a platform of services and tools to enable large scale operations for us and our partner network, and these partners include solar integrators, sales partners, installation partners and other strategic partners. The platform includes processes and software, as well as fulfillment and acquisition of marketing leads. We believe our platform empowers new market entrants and smaller industry participants to profitably serve our large and underpenetrated market without making the significant investments in technology and infrastructure required to compete effectively against established industry players. Our platform provides the support for our multi-channel model, which drives broad customer reach and capital-efficient growth. Delivering a differentiated customer experience is core to our strategy. We emphasize a customized solution, including a design specific to each customer's home and pricing configurations that typically drive both customer savings and value to us. We believe that our passion for engaging our customers, developing a trusted brand, and providing a customized solar service offering resonates with our customers who are accustomed to a traditional residential power market that is often overpriced and lacking in customer choice. We have experienced substantial growth in our business and operations since our inception in 2007. As ofJune 30, 2020 , we operated the second largest fleet of residential solar energy systems inthe United States . We have an aggregate of 2,163 Megawatts Deployed as ofJune 30, 2020 , and our Gross Earning Assets as ofJune 30, 2020 were approximately$3.9 billion . Please see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Operating Metrics" for more details on how we calculate Megawatts Deployed and Gross Earning Assets. We also have a long track record of attracting low-cost capital from diverse sources, including tax equity and debt investors. Since inception we have raised tax equity investment funds to finance the installation of solar energy systems. Recent Impacts of COVID-19 on Our Business The COVID-19 pandemic and the resulting impact on theU.S. economy have accelerated many of our operational initiatives to deliver best-in-class customer value and to reduce costs. We have invested in technology to streamline our installation processes, including online permitting and interconnection in many locations, as well as employing extensive use of drone technology to complete rooftop surveys. While we continue to install solar systems in most markets, we are monitoring this fluid situation and will follow official regulations to protect our employees and customers. 36 -------------------------------------------------------------------------------- Following the first shelter-in-place orders inCalifornia , we enabled our entire salesforce to complete sales consultations in a virtual setting. Despite the fact that we have paused sourcing leads through certain channels, we have seen more leads through our digital channels at similar or more attractive customer acquisition costs. We believe this transition towards a digital model will position us well to realize sustaining reductions in customer acquisition costs. We have taken actions to mitigate the negative impacts of COVID-19, including, but not limited to, cost reduction initiatives such as decreasing a portion of our workforce through furloughs and layoffs, salary reductions, and temporarily closing warehouses and sales offices. However, these efforts may not prove to be sufficient given the present uncertainties about the duration and severity of the COVID-19 pandemic. A significant portion of our business model is directly variable with deployments currently sold and built by our channel partners. In the remainder of our business, we have already taken actions to significantly lower our expenses, primarily from various labor-related cost actions, which we believe strike an appropriate balance that considers the welfare of our employees, protecting the business against possible downside scenarios, and preserving our ability to grow quickly as the situation stabilizes. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and we do not yet know the full extent of potential delays or impacts on our business, operations or the global economy as a whole. We will continue to monitor developments affecting our workforce, our customers, and our business operations generally and will take additional actions that we determine are necessary in order to mitigate these impacts. Proposed Acquisition of Vivint Solar, Inc. Agreement and Plan of Merger OnJuly 6, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Vivint Solar andViking Merger Sub, Inc. , aDelaware corporation and our direct wholly owned subsidiary. Pursuant to the Merger Agreement, we will acquire Vivint Solar in an all-stock transaction. Each share of Vivint Solar common stock issued and outstanding immediately prior to the effective time of the merger will be converted automatically into the right to receive 0.55 shares of our common stock, representing a combined enterprise value of$9.2 billion based on the closing price of our shares of common stock onJuly 6, 2020 . Vivint Solar stockholders are expected to own approximately 36% and our stockholders are expected to own approximately 64% of the fully diluted shares of the combined company. The exchange ratio implies a 10% premium for Vivint Solar shares based on closing prices onJuly 6, 2020 , and a 15% premium to the exchange ratio implied by the three-month volume weighted average price of Vivint Solar and our shares. The acquisition of Vivint Solar is expected to be completed during the fourth quarter of 2020, subject to approval by Vivint Solar andSunrun stockholders, regulatory approvals and other customary closing conditions. Support Agreements Simultaneously with the execution of the Merger Agreement,Sunrun and313 Acquisition LLC , an affiliate ofThe Blackstone Group Inc. ("313 Acquisition"), have entered into a support agreement (the "Vivint Solar Support Agreement"), pursuant to which 313 Acquisition agreed, among other things, to vote its shares of Vivint Solar Common Stock in favor of the adoption of the Merger Agreement and against any alternative proposal. 313 Acquisition also agreed not to transfer any shares of Vivint Solar Common Stock, subject to certain exceptions including for certain permitted transfers from and after the date of Vivint Solar's stockholder meeting, or any adjournment or postponement thereof, in each case, at which a vote in favor of the merger is obtained. Also simultaneously with the execution of the Merger Agreement,Tiger Global Investments, L.P. andTiger Global Long Opportunities Master Fund, L.P. (collectively, "Tiger Global") and Vivint Solar have entered into a support agreement (the "Sunrun Support Agreement"), pursuant to which Tiger Global agreed, among other things, to vote its shares of Sunrun Common Stock in favor of the approval of the issuance of shares of Sunrun Common Stock pursuant to the Merger Agreement and against any alternative proposal. Tiger Global also agreed not to transfer any shares of Sunrun Common Stock currently held by it until the conclusion ofSunrun's duly convened stockholder meeting, or at any adjournment or postponement thereof, in each case, at which a vote on the issuance ofSunrun Common Stock in connection with the merger is taken. 37 -------------------------------------------------------------------------------- Registration Rights Agreement Simultaneously with the execution of the Merger Agreement and to be effective as of the Effective Time,Sunrun , 313 Acquisition,Blackstone VNT Co-Invest L.P. ,Blackstone Capital Partners VI L.P. ,Blackstone Family Investment Partnership VI-ESC L.P. ,Blackstone Family Investment Partnership VI L.P. ,Summit Partners Growth Equity Fund VIII-A, L.P. ,Summit Partners Growth Equity Fund VIII-B, L.P. ,Summit Investors I, LLC ,Summit Investors I (UK), L.P. andTodd R. Pedersen (collectively, the "Holders" and each, a "Holder") have entered into a registration rights agreement (the "Registration Rights Agreement"), pursuant to which the Holders agreed, among other things, that ifSunrun registers its securities for public sale or sale pursuant to the exercise of any demand rights,Sunrun will, at the request of a Holder, include such shares ofSunrun Common Stock held by such Holder in the registration. The Holders have also agreed to lock up 50% of the shares of Sunrun Common Stock obtained as a result of the Merger for 60 days following Closing and the remaining 50% for 120 days following Closing, subject to certain exceptions.
Private Placement
OnJuly 29, 2020 ,Sunrun entered into a Subscription Agreement (the "Subscription Agreement") withSK E&S Co., Ltd. , a corporation organized under the laws of theRepublic of Korea ("SK"), an aggregate of 2,074,688 shares of its common stock, par value$0.0001 per share (the "Shares"), at a price per share of$36.15 , for a purchase price of approximately$75.0 million .Sunrun's sale and issuance of the shares to SK will occur on a date to be determined during the week ofAugust 10, 2020 . The private placement is made concurrently with an agreement betweenSunrun andSK E&S and other affiliated companies to co-invest in a new venture focusing on home electrification. The electrification venture will have a contribution of$150.0 million , withSK E&S and other affiliated companies investing$75.0million in cash andSunrun investing$65.0 million in cash and contributing advisory services valued at$10.0 million . Each entity will have equal ownership of the venture. Investment Funds Our Customer Agreements provide for recurring customer payments, typically over 20 or 25 years, and the related solar energy systems are generally eligible for Commercial ITCs, accelerated tax depreciation and other government or utility incentives. Our financing strategy is to monetize these benefits at a low weighted average cost of capital. This low cost of capital enables us to offer attractive pricing to our customers for the energy generated by the solar energy system on their homes. Historically, we have monetized a portion of the value created by our Customer Agreements and the related solar energy systems through investment funds. These assets are attractive to fund investors due to the long-term, recurring nature of the cash flows generated by our Customer Agreements, the high credit scores of our customers, the fact that energy is a non-discretionary good and our low loss rates. In addition, fund investors can receive attractive after-tax returns from our investment funds due to their ability to utilize Commercial ITCs, accelerated depreciation and certain government or utility incentives associated with the funds' ownership of solar energy systems. As ofJune 30, 2020 , we had 34 active investment funds, which are described below. We have established different types of investment funds to implement our asset monetization strategy. Depending on the nature of the investment fund, cash may be contributed to the investment fund by the investor upfront or in stages based on milestones associated with the design, construction or interconnection status of the solar energy systems. The cash contributed by the fund investor is used by the investment fund to purchase solar energy systems. The investment funds either own or enter into a master lease with aSunrun subsidiary for the solar energy systems, Customer Agreements and associated incentives. We receive on-going cash distributions from the investment funds representing a portion of the monthly customer payments received. We use the upfront cash, as well as on-going distributions, to cover our costs associated with designing, purchasing and installing the solar energy systems. In addition, we also use debt, equity and other financing strategies to fund our operations. The allocation of the economic benefits between us and the fund investor and the corresponding accounting treatment varies depending on the structure of the investment fund. 38 -------------------------------------------------------------------------------- We currently utilize three legal structures in our investment funds, which we refer to as: (i) pass-through financing obligations, (ii) partnership flips and (iii) joint venture ("JV") inverted leases. We reflect pass-through financing obligations on our consolidated balance sheet as a pass-through financing obligation. We record the investor's interest in partnership flips or JV inverted leases (which we define collectively as "consolidated joint ventures") as noncontrolling interests or redeemable noncontrolling interests. These consolidated joint ventures are usually redeemable at our option and, in certain cases, at the investor's option. If redemption is at our option or the consolidated joint ventures are not redeemable, we record the investor's interest as a noncontrolling interest and account for the interest using the hypothetical liquidation at book value ("HLBV") method. If the investor has the option to put their interest to us, we record the investor's interest as a redeemable noncontrolling interest at the greater of the HLBV and the redemption value. The table below provides an overview of our current investment funds (dollars in millions): Consolidated Joint Ventures Pass-Through Financing Obligations Partnership Flip JV Inverted Lease Consolidation Owner entity Single entity, Owner and tenant consolidated, tenant consolidated entities entity not consolidated consolidated Balance sheet classification Pass-through financing Redeemable Redeemable obligation noncontrolling noncontrolling interests and interests and noncontrolling noncontrolling interests interests Revenue from Commercial ITCs Recognized on the None None permission to operate ("PTO") date Method of calculating investor interest Effective interest rate Greater of HLBV or Greater of HLBV or method redemption value redemption value; or pro rata Liability balance as of June 30, 2020 $ 337.6 N/A N/A Noncontrolling interest balance (redeemable N/A $ 768.7 $ 35.3
or otherwise) as of
For further information regarding our investment funds, including the associated
risks, see Part II, Item 1A. Risk Factors- "Our ability to provide our solar
service offerings to customers on an economically viable basis depends in part
on our ability to finance these systems with fund investors who seek particular
tax and other benefits", as well as Note 10, Pass-through Financing Obligations,
Note 11, VIE Arrangements and Note 12, Redeemable Noncontrolling Interests and
Equity to our consolidated financial statements appearing elsewhere in this
Quarterly Report on Form 10-Q.
Key Operating Metrics
We regularly review a number of metrics, including the following key operating
metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic
decisions. Some of our key operating metrics are estimates that are based on our
management's beliefs and assumptions and on information currently available to
management. Although we believe that we have a reasonable basis for each of
these estimates, we caution you that these estimates are based on a combination
of assumptions that may prove to be inaccurate over time. Any inaccuracies could
be material to our actual results when compared to our calculations. Please see
the section titled "Risk Factors" in this Quarterly Report on Form 10-Q for more
information. Furthermore, other companies may calculate these metrics
differently than we do now or in the future, which would reduce their usefulness
as a comparative measure.
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•Megawatts Deployed represents the aggregate megawatt production capacity of our
solar energy systems, whether sold directly to customers or subject to executed
Customer Agreements (i) for which we have confirmation that the systems are
installed on the roof, subject to final inspection; (ii) in the case of certain
system installations by our partners, for which we have accrued at least 80% of
the expected project cost, or (iii) for multi-family and any other systems that
have reached NTP, measured on the percentage of the project that has been
completed based on expected project cost.
•Gross Earning Assets represents the net cash flows (discounted at 6%) we expect
to receive during the initial term of our Customer Agreements (typically 20 or
25 years) for systems that have been deployed as of the measurement date, plus a
discounted estimate of the value of the Customer Agreement renewal term or solar
energy system purchase at the end of the initial term. Consistent with industry
standards, we use a discount rate of 6%. We consider a discount rate of 6% to be
appropriate and consistent with recent market transactions that demonstrate that
a portfolio of residential solar customer contracts is an asset class that can
be securitized successfully on a long-term basis, with a coupon of less than 5%.
We calculate the Gross Earning Assets value of the purchase or renewal amount at
the expiration of the initial contract term assuming either a system purchase or
a five year renewal (for our 25-year Customer Agreements) or a 10-year renewal
(for our 20-year Customer Agreements), in each case forecasting only a 30-year
customer relationship (although the customer may renew for additional years, or
thereafter purchase the system), at a contract rate equal to 90% of the
customer's contractual rate in effect at the end of the initial contract term.
After the initial (generally 20 or 25 year) contract term, our Customer
Agreements typically automatically renew on an annual basis and the rate is
initially set at up to a 10% discount to then-prevailing power prices.
Gross Earning Assets is calculated net of estimated cash distributions to
investors in consolidated joint ventures and estimated operating, maintenance
and administrative expenses for systems deployed as of the measurement date. In
calculating Gross Earning Assets, we deduct estimated cash distributions to our
project equity financing providers. In calculating Gross Earning Assets, we do
not deduct customer payments we are obligated to pass through to investors in
pass-through financing obligations as these amounts are reflected on our balance
sheet as long-term and short-term pass-through financing obligations, similar to
the way that debt obligations are presented. In determining our finance
strategy, we use pass-through financing obligations and long-term debt in an
equivalent fashion as the schedule of payments of distributions to pass-through
financing obligation investors is more similar to the payment of interest to
lenders than the internal rates of return (IRRs) paid to investors in other tax
equity structures.
•Gross Earning Assets Under Energy Contract represents the net cash flows during
the initial term of our Customer Agreements (less substantially all value from
SRECs prior to July 1, 2015 ), for systems deployed as of the measurement date.
•Gross Earning Assets Value of Purchase or Renewal is the forecasted net present
value we would receive upon or following the expiration of the initial Customer
Agreement term (either in the form of cash payments during any applicable
renewal period or a system purchase at the end of the initial term), for systems
deployed as of the measurement date.
Gross Earning Assets is forecasted as of a specific date. It is forward-looking,
and we use judgment in developing the assumptions used to calculate it. Factors
that could impact Gross Earning Assets include, but are not limited to, customer
payment defaults, or declines in utility rates or early termination of a
contract in certain circumstances, including prior to installation.
As of June 30,
2020 2019
Cumulative Megawatts Deployed (end of period) 2,163 1,763
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As of June 30,
2020 2019
(in thousands)
Gross Earning Assets Under Energy Contract $ 2,667,498 $ 2,252,118
Gross Earning Assets Value of Purchase or Renewal 1,224,664 1,060,236 Gross Earning Assets
$ 3,892,162 $ 3,312,354
The tables below provide a range of Gross Earning Asset amounts if different default, discount and purchase and renewal assumptions were used. Gross Earning Assets Under Energy Contract:
As of June 30, 2020
Discount rate
Default rate 4% 5% 6% 7% 8%
(in thousands)
5% $ 3,056,653 $ 2,810,374 $ 2,594,277 $ 2,403,958 $ 2,235,731
0% $ 3,147,759 $ 2,891,899 $ 2,667,499 $ 2,469,956 $ 2,295,425 Gross Earning Assets Value of Purchase or Renewal:
As of June 30, 2020
Discount rate
Purchase or Renewal rate 4% 5% 6% 7% 8%
(in thousands)
80% $ 1,595,964 $ 1,302,796 $ 1,067,241 $ 877,307 $ 723,627
90% $ 1,831,336 $ 1,494,950 $ 1,224,664 $ 1,006,720 $ 830,372
100% $ 2,066,707 $ 1,687,105 $ 1,382,086 $ 1,136,132 $ 937,116
Total Gross Earning Assets:
As of June 30, 2020
Discount rate
Purchase or Renewal rate 4% 5% 6% 7% 8%
(in thousands)
80% $ 4,743,723 $ 4,194,695 $ 3,734,739 $ 3,347,263 $ 3,019,052
90% $ 4,979,094 $ 4,386,850 $ 3,892,162 $ 3,476,676 $ 3,125,797
100% $ 5,214,466 $ 4,579,004 $ 4,049,585 $ 3,606,088 $ 3,232,541 Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
("GAAP"). GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses and related
disclosures. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. In many
instances, we could have reasonably used different accounting estimates, and in
other instances, changes in the accounting estimates are reasonably likely to
occur from period-to-period. Actual results could differ significantly from our
estimates. Our future financial statements will be affected to the extent that
our actual results materially differ from these estimates. For further
information on all of our significant accounting policies, see Note 2, Summary
of Significant Accounting Policies, to our consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.
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We believe that policies associated with our principles of consolidation,
revenue recognition, impairment of long-lived assets, provision for income taxes
and calculation of noncontrolling interests and redeemable noncontrolling
interests have the greatest impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and
estimates.
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Results of Operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Quarterly Report on Form 10-Q.
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(in thousands, except per share data)
Revenue:
Customer agreements and incentives $ 106,095 $ 92,439 $ 205,219 $ 192,289
Solar energy systems and product
sales 75,199 112,156 186,806 206,810
Total revenue 181,294 204,595 392,025 399,099
Operating expenses:
Cost of customer agreements and
incentives 83,422 70,594 161,699 140,087
Cost of solar energy systems and
product sales 63,746 86,348 155,344 164,147
Sales and marketing 69,701 70,038 139,971 125,991
Research and development 4,971 6,555 9,017 12,029
General and administrative 41,756 33,044 69,830 62,107
Amortization of intangible assets 1,167 814 2,650 1,707
Total operating expenses 264,763 267,393 538,511 506,068
Loss from operations (83,469) (62,798) (146,486) (106,969)
Interest expense, net 50,721 42,309 100,645 83,649
Other expenses, net 148 1,388 98 6,144
Loss before income taxes (134,338) (106,495) (247,229) (196,762)
Income tax expense (benefit) 211 (1,910) (3,131) (5,271)
Net loss (134,549) (104,585) (244,098) (191,491)
Net loss attributable to
noncontrolling interests and
redeemable noncontrolling interests (120,987) (103,292) (202,577) (176,336)
Net loss attributable to common
stockholders $ (13,562) $ (1,293) $ (41,521) $ (15,155)
Net loss per share attributable to
common stockholders
Basic $ (0.11) $ (0.01) $ (0.35) $ (0.13)
Diluted $ (0.11) $ (0.01) $ (0.35) $ (0.13)
Weighted average shares used to
compute loss per share attributable
to common stockholders
Basic 120,279 115,765 120,201 114,843
Diluted 120,279 115,765 120,201 114,843
43-------------------------------------------------------------------------------- Comparison of the Three Months EndedJune 30, 2020 and 2019 Revenue Three Months Ended June 30, Change 2020 2019 $ % (in thousands) Customer agreements$ 98,525 $ 85,277 $ 13,248 16 % Incentives 7,570 7,162 408 6 % Customer agreements and incentives 106,095 92,439 13,656 15 % Solar energy systems 44,579 66,569 (21,990) (33) % Products 30,620 45,587 (14,967) (33) % Solar energy systems and product sales 75,199 112,156 (36,957) (33) % Total revenue$ 181,294 $ 204,595 $ (23,301) (11) % Customer Agreements and Incentives. The$13.2 million increase in revenue from Customer Agreements was primarily due to both an increase in solar energy systems under Customer Agreements being placed in service in the period fromJuly 1, 2019 throughJune 30, 2020 , plus a full quarter of revenue recognized in the second quarter of 2020 for systems placed in service in the second quarter of 2019 versus only a partial quarter of such revenue related to the period in which the assets were in service in 2019. Revenue from incentives primarily consists of sales of SRECs, which increased by$0.4 million during the three months endedJune 30, 2020 , compared to the prior year as a result of an increase in SREC deliveries from the prior year. Solar Energy Systems and Product Sales. Revenue from solar energy systems sales decreased by$22.0 million compared to the prior year due to decreased demand through retail partners. Product sales decreased by$15.0 million , primarily due to a decrease in the volume of wholesale products sold, which has been impacted by COVID-19 and customers' reduced purchases in 2020 after purchasing safe harbor materials in 2019 for use in 2020. Operating Expenses Three Months Ended June 30, Change 2020 2019 $ % (in thousands) Cost of customer agreements and incentives$ 83,422 $ 70,594 $ 12,828 18 % Cost of solar energy systems and product sales 63,746 86,348 (22,602) (26) % Sales and marketing 69,701 70,038 (337) - % Research and development 4,971 6,555 (1,584) (24) % General and administrative 41,756 33,044 8,712 26 % Amortization of intangible assets 1,167 814 353 43 % Total operating expenses$ 264,763 $ 267,393 $ (2,630) (1) % Cost of Customer Agreements and Incentives. The$12.8 million increase in Cost of customer agreements and incentives was primarily due to the increase in solar energy systems placed in service in the period fromJuly 1, 2019 throughJune 30, 2020 , plus a full quarter of costs recognized in the second quarter of 2020 for systems placed in service in the second quarter of 2019 versus only a partial quarter of such expenses related to the period in which the assets were in service in 2019. The Cost of customer agreements and incentives increased to 79% of revenue from customer agreements and incentives during the three months endedJune 30, 2020 , from 76% during the three months endedJune 30, 2019 . 44 -------------------------------------------------------------------------------- Cost of Solar Energy Systems and Product Sales. The$22.6 million decrease in Cost of solar energy systems and product sales was due to the corresponding net decrease in the solar energy systems and product sales discussed above. Sales and Marketing Expense. The$0.3 million decrease in Sales and marketing expense was a result of a decrease in headcount driving lower employee compensation. This decrease was partially offset by$7.0 million in non-recurring and restructuring costs incurred in the three months endedJune 30, 2020 . Included in sales and marketing expense is$3.5 million and$2.9 million of amortization of costs to obtain Customer Agreements for the three months endedJune 30, 2020 and 2019, respectively. Research and Development Expense. The$1.6 million decrease in Research and development expense was primarily attributable to a lower consulting fees, as well as a slight decrease in headcount resulting in lower employee compensation. General and Administrative Expense. The$8.7 million increase in General and administrative expenses was primarily attributable to a$6.7 million legal settlement accrual and other non-recurring and restructuring costs of$3.2 million , partially offset by a decrease in consulting costs. Non-Operating Expenses Three Months Ended June 30, Change 2020 2019 $ % (in thousands) Interest expense, net$ 50,721 $ 42,309 $ 8,412 20 % Other expenses, net $ 148$ 1,388 $ (1,240) (89) % Interest Expense, net. The increase in Interest expense, net of$8.4 million was related to additional non-recourse and pass-through financing obligation debt entered into subsequent toJune 30, 2019 . Included in net interest expense is$6.2 million and$7.4 million of non-cash interest recognized under Customer Agreements that have a significant financing component for the three months endedJune 30, 2020 and 2019, respectively. Other Expenses, net. The decrease in Other expenses, net of$1.2 million relates primarily to a loss from the early extinguishment of certain non-recourse debt in 2019, with no such comparable activity in the three months endedJune 30, 2020 . Income Tax Expense (Benefit) Three Months Ended June 30, Change 2020 2019 $ % (in thousands) Income tax expense (benefit)$ 211 $ (1,910) $ 2,121 (111) % The tax benefit at the statutory rate of 21.0% for 2020 was reduced by the allocation of losses to noncontrolling interests and redeemable noncontrolling interests of 18.8%, and increase in valuation allowance of 3.5% and increased by other benefits of 1.1%. The tax benefit at the statutory rate of 21.0% for 2019 was reduced by the allocation of the losses to noncontrolling interests and redeemable noncontrolling interests of 20.4%, and increase in valuation allowance of 4.3% and offset by tax deductions from other miscellaneous items of 5.5%. 45 -------------------------------------------------------------------------------- Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests Three Months Ended June 30, Change 2020 2019 $ % (in thousands) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (120,987) $ (103,292) $ (17,695) 17 % The increase in net loss attributable to noncontrolling interests and redeemable noncontrolling interests of$17.7 million was primarily a result of the addition of four investment funds sinceJune 30, 2019 , as well as the HLBV method used in determining the amount of net loss attributable to noncontrolling interests and redeemable noncontrolling interests, which generally allocates more loss to the noncontrolling interest in the first several years after fund formation. Comparison of the Six Months EndedJune 30, 2020 and 2019 Revenue Six Months Ended June 30, Change 2020 2019 $ % (in thousands) Customer agreements$ 192,778 $ 163,805 $ 28,973 18 % Incentives 12,441 28,484 (16,043) (56) % Customer agreements and incentives 205,219 192,289 12,930 7 % Solar energy systems 115,856 125,005 (9,149) (7) % Products 70,950 81,805 (10,855) (13) % Solar energy systems and product sales 186,806 206,810 (20,004) (10) % Total revenue$ 392,025 $ 399,099 $ (7,074) (2) % Customer Agreements and Incentives. The$29.0 million increase in revenue from Customer Agreements was primarily due to both an increase in solar energy systems under Customer Agreements being placed in service in the period fromJuly 1, 2019 throughJune 30, 2020 , plus a full half year of revenue recognized in 2020 for systems placed in service in the first half of 2019 versus only a partial first half of such revenue related to the period in which the assets were in service in 2019. Revenue from incentives consists of sales of Commercial ITCs and SRECs, which decreased by$16.0 million during the six months endedJune 30, 2020 , compared to the prior year. The decrease was due to the sale of Commercial ITCs under a financing obligation fund opened in 2018, with PTO activity in that fund primarily concluding during the second quarter of 2019. There has been no such comparable fund opened in 2019 or 2020. Solar Energy Systems and Product Sales. Revenue from solar energy systems sales decreased by$9.1 million compared to the prior year due to decreased demand through retail partners. Product sales decreased by$10.9 million , primarily due to a decrease in the volume of wholesale products sold, which has been impacted by COVID-19 and customers' reduced purchases in 2020 after purchasing safe harbor materials in 2019 for use in 2020. 46 --------------------------------------------------------------------------------
Operating Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(in thousands)
Cost of customer agreements and incentives $ 161,699 $ 140,087 $ 21,612 15 %
Cost of solar energy systems and product
sales 155,344 164,147 (8,803) (5) %
Sales and marketing 139,971 125,991 13,980 11 %
Research and development 9,017 12,029 (3,012) (25) %
General and administrative 69,830 62,107 7,723 12 %
Amortization of intangible assets 2,650 1,707 943 55 %
Total operating expenses $ 538,511 $ 506,068 $ 32,443 6 %
Cost of Customer Agreements and Incentives. The $21.6 million increase in Cost
of customer agreements and incentives was primarily due to the increase in solar
energy systems placed in service in the period from July 1, 2019 through
June 30, 2020 , plus a full half year of costs recognized in 2020 for systems
placed in service in the first half of 2019 versus only a partial first half of
such expenses related to the period in which the assets were in service in 2019.
The cost of Customer Agreements and incentives increased to 79% of revenue from
customer agreements and incentives during the six months ended June 30, 2020 ,
from 73% during the six months ended June 30, 2019 due to the $16.0 million
decrease in revenue from incentives, as discussed above. The cost of sales
related to incentives was minimal.
Cost of Solar Energy Systems and Product Sales. The $8.8 million decrease in
Cost of solar energy systems and product sales was due to the corresponding net
decrease in the solar energy systems and product sales discussed above.
Sales and Marketing Expense. The $14.0 million increase in Sales and marketing
expense was primarily attributable to $8.0 million in non-recurring and
restructuring costs incurred during the six months ended June 30, 2020 , as well
as an increase in costs to acquire customers through our retail channels and
sales lead generating partners, partially offset by a decrease in headcount
driving lower compensation. Included in sales and marketing expense is $6.9
million and $5.5 million of amortization of costs to obtain Customer Agreements
for the six months ended June 30, 2020 and 2019, respectively.
Research and Development Expense. The $3.0 million decrease in Research and
development expense was primarily attributable to a decrease in consulting fees,
as well as a decrease in headcount resulting in lower employee compensation.
General and Administrative Expense. The $7.7 million increase in General and
administrative expenses was primarily attributable to a $6.7 million legal
settlement accrual, as well as $3.4 million in non-recurring and restructuring
costs incurred during the six months ended June 30, 2020 , partially offset by a
decrease in consulting costs.
Non-Operating Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(in thousands)
Interest expense, net $ 100,645 $ 83,649 $ 16,996 20 %
Other expenses, net $ 98 $ 6,144 $ (6,046) (98) %
47-------------------------------------------------------------------------------- Interest Expense, net. The increase in Interest expense, net of$17.0 million was related to additional non-recourse and pass-through financing obligation debt entered into subsequent toJune 30, 2019 . Included in net interest expense is$12.3 million and$13.4 million of non-cash interest recognized under Customer Agreements that have a significant financing component for the six months endedJune 30, 2020 and 2019, respectively. Other Expenses, net. The decrease in Other expenses, net of$6.0 million relates primarily to losses on extinguishment of debt related to an early repayment of pass-through financing obligation in 2019, with no such comparable activity in the six months endedJune 30, 2020 . Income Tax Expense Six Months Ended June 30, Change 2020 2019 $ % (in thousands) Income tax benefit$ (3,131) $ (5,271) $ 2,140 (41) % The tax benefit at the statutory rate of 21.0% for 2020 was reduced by the allocation of losses to noncontrolling interests and redeemable noncontrolling interests of 17.1%, and increase in valuation allowance of 4.8% and increased by other benefits of 2.2%. The tax benefit at the statutory rate of 21.0% for 2019 was reduced by the allocation of the losses to noncontrolling interests and redeemable noncontrolling interests of 18.8%, and increase in valuation allowance of 5.1% and offset by tax deductions from other miscellaneous items of 5.6%. Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests Six Months Ended June 30, Change 2020 2019 $ % (in thousands) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (202,577) $ (176,336) $ (26,241) 15 % The increase in net loss attributable to noncontrolling interests and redeemable noncontrolling interests of$26.2 million was primarily a result of the addition of four investment funds sinceJune 30, 2019 , as well as the HLBV method used in determining the amount of net loss attributable to noncontrolling interests and redeemable noncontrolling interests, which generally allocates more loss to the noncontrolling interest in the first several years after fund formation.
Liquidity and Capital Resources
As of June 30, 2020 , we had cash of $269.6 million , which consisted of cash
held in checking and savings accounts with financial institutions. We finance
our operations mainly through a variety of financing fund arrangements that we
have formed with fund investors, borrowings, cash generated from our sources of
revenue, and proceeds from secured credit facilities arrangements with a
syndicate of banks for up to $265.3 million and from secured, long-term
non-recourse loan arrangements for up to $199.0 million . Our principal uses of
cash are funding our business, including the costs of acquisition and
installation of solar energy systems, satisfaction of our obligations under our
debt instruments and other working capital requirements.
48
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Our business model requires substantial outside financing arrangements to
grow the business and facilitate the deployment of additional solar energy
systems. The solar energy systems that are operational are expected to generate
a positive return rate over the term of the Customer Agreement, typically 20 or
25 years. However, in order to grow, we will continue to be dependent on
financing from outside parties. If financing is not available to us on
acceptable terms if and when needed, we may be required to reduce planned
spending, which could have a material adverse effect on our operations. While
there can be no assurances, we anticipate raising additional required capital
from new and existing investors. In connection with our cost reduction measures
discussed above implemented in response to COVID-19, we believe our cash,
investment fund commitments and available borrowings as further described below
will be sufficient to meet our anticipated cash needs for at least the next 12
months. The following table summarizes our cash flows for the periods indicated:
Six Months Ended June 30,
2020 2019
(in thousands)
Consolidated cash flow data:
Net cash used in operating activities $ (152,253) $ (56,615)
Net cash used in investing activities (364,417) (402,380)
Net cash provided by financing activities 507,673
508,463
Net change in cash and restricted cash
Operating Activities During the six months endedJune 30, 2020 , we used$152.3 million in net cash from operating activities. The driver of our operating cash outflow consists of the cost of our revenue, as well as sales, marketing and general and administrative costs. During the six months endedJune 30, 2020 , our operating cash outflows were$102.1 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$50.2 million . During the six months endedJune 30, 2019 , we used$56.6 million in net cash from operating activities. The driver of our operating cash outflow consists of the cost of our revenue, as well as sales, marketing and general and administrative costs. During the six months endedJune 30, 2019 , deferred revenue increased by$95.5 million arising from a sale of the right to SRECs to be generated over the next 10 to 15 years by a group of solar energy systems. In connection with the sale, we repaid debt previously drawn against the rights to these SRECs, which is reflected in our financing activities below. During the six months endedJune 30, 2019 , our operating cash outflows were$95.8 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash inflow of$39.2 million . Investing Activities During the six months endedJune 30, 2020 , we used$364.4 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. During the six months endedJune 30, 2019 , we used$402.4 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. Financing Activities During the six months endedJune 30, 2020 , we generated$507.7 million from financing activities. This was primarily driven by$338.7 million in net proceeds from fund investors and$156.9 million in net proceeds from debt, offset by$5.5 million in repayments under finance lease obligations. During the six months endedJune 30, 2019 , we generated$508.5 million from financing activities. This was primarily driven by$287.8 million in net proceeds from fund investors and$212.3 million in net proceeds from debt, net of debt issuance costs and repayments, offset by$6.4 million in payments for finance lease obligations. 49 -------------------------------------------------------------------------------- Debt and Investing Fund Commitments As ofJune 30, 2020 , we had committed and available capital of approximately$292.7 million that may only be used to purchase and install solar energy systems. We intend to establish new investment funds in the future, and we may also use debt, equity or other financing strategies to finance our business. For a discussion of the terms and conditions of debt instruments and changes thereof in the period, refer to Note 8, Indebtedness, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Contractual Obligations and Other Commitments The following table summarizes our contractual obligations as ofJune 30, 2020 (in thousands): Payments Due by Period Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total (in thousands) Contractual Obligations: Debt obligations (including future interest)$ 227,299 $ 871,107 $ 762,118 $ 1,362,623 $ 3,223,147 Purchase commitments 30,639 77,850 - - 108,489 Distributions payable to noncontrolling interests and redeemable noncontrolling interests (1) 17,751 - - -
17,751
Financing lease obligations (including accrued interest) 8,574 8,695 150 -
17,419
Operating lease obligations, net of sublease income 11,935 19,667 10,065 6,640
48,307
Total contractual obligations$ 296,198 $ 977,319 $ 772,333 $ 1,369,263 $ 3,415,113
(1) The foregoing table does not include the amounts we could be required to expend under our redemption obligations discussed above.
Off-Balance Sheet Arrangements We include in our consolidated financial statements all assets and liabilities and results of operations of investment fund arrangements that we have entered into. We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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