The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this Annual Report on Form 10-K. We provide clean, solar energy to customers at a significant savings compared to traditional utility energy. We have been selling solar energy to residential customers through a variety of offerings since we were founded in 2007. We, either directly or through one of our solar partners, install a solar energy system on a customer's home and either sell the system to the customer or, as is more often the case, sell the energy generated by the system to the customer pursuant to a lease or power purchase agreement ("PPA") with no or low upfront costs. We refer to these leases and PPAs as "Customer Agreements." Following installation, a system is interconnected to the local utility grid. The home's energy usage is provided by the solar energy system, with any additional energy needs provided by the local utility. Any excess solar energy, including amounts in excess of battery storage, that is not immediately used by the customers is exported to the utility grid using a bi-directional utility net meter, and the customer generally receives a credit for the excess energy from their utility to offset future usage of utility-generated energy. We offer our solar service offerings both directly to the customer and through our solar partners, which include sales and installation partners, and strategic partners, which include retail partners. In addition, we sell solar energy systems directly to customers for cash. We also sell solar energy panels and other products (such as racking) to resellers. As ofDecember 31, 2019 , we provided our solar services to customers and sold solar energy panels and other products to resellers throughoutthe United States . More than 40% of our cumulative systems deployed are inCalifornia . We compete mainly with traditional utilities. In the markets we serve, our strategy is to price the energy we sell below prevailing local retail electricity rates. As a result, the price our customers pay under our solar service offerings varies depending on the state where the customer lives, the local traditional utility that otherwise provides electricity to the customer, as well as the prices other solar energy companies charge in that region. Even within the same neighborhood, site-specific characteristics drive meaningful variability in the revenue and cost profiles of each home. Using our proprietary technology, we target homes with advantageous revenue and cost characteristics, which means we are often able to offer pricing that allows customers to save more on their energy bill while maintaining our ability to meet our targeted returns. For example, with the insights provided by our technology, we can offer competitive pricing to customers with homes that have favorable characteristics, such as roofs that allow for easy installation, high electricity consumption, or low shading, effectively passing through the cost savings we are able to achieve on these installations to the customer. Our ability to offer Customer Agreements depends in part on our ability to finance the purchase and installation of the solar energy systems by monetizing the resulting customer cash flows and related commercial investment tax credits ("Commercial ITCs"), accelerated tax depreciation and other incentives from governments and local utilities. We monetize these incentives under tax equity investment funds, which are generally structured as non-recourse project financings. From inception toFebruary 24, 2020 , we have established 43 investment funds, which represent financing for an estimated$9.7 billion in value of solar energy systems on a cumulative basis. From time to time, we may repurchase investors' interests in our tax equity investment funds after the recapture period of the relevant tax incentives. We intend to establish additional investment funds and may also use debt, equity and other financing strategies to fund our growth. In addition, completing the sale and installation of a solar energy system requires many different steps including a site audit, completion of designs, permitting, installation, electrical sign-off and interconnection. Customers may cancel their Customer Agreements with us, subject to certain conditions, during this process until commencement of installation. Customer cancellation rates can change over time and vary between markets. 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 46 -------------------------------------------------------------------------------- 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 ofDecember 31, 2019 , we had 36 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. 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 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):
Pass-Through Financing Obligations Partnership Flip JV Inverted Lease Consolidation Owner entity Single entity, Owner and tenant consolidated, consolidated entities consolidated tenant entity not consolidated
Balance sheet classification Pass-through Redeemable
Redeemable financing noncontrolling noncontrolling obligation interests and interests and noncontrolling noncontrolling interests interests Revenue from Commercial ITCs Recognized on the None
None
PTO date
Method of calculating investor Effective interest Greater of HLBV or
Greater of HLBV or interest rate method redemption value redemption value; or pro rata Liability balance as of December $ 339.0 N/A N/A 31, 2019 Noncontrolling interest balance N/A $ 638.2 $ 35.0 (redeemable or otherwise) as of December 31, 2019 47
-------------------------------------------------------------------------------- For further information regarding our investment funds, including the associated risks, see 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.", Note 11, Project Equity Financing, Note 14, Pass-Through Financing Obligations, Note 15, VIE Arrangements and Note 16, Redeemable Noncontrolling Interests to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Pass -through Financing Obligations Pass-Through Financing Obligations. In this investment fund structure, we and the fund investor each utilize separate entities to facilitate the pass-through of the Commercial ITC orU.S. Treasury grants to the fund investors. We contribute solar energy systems to an "owner" entity in exchange for interests in the owner entity, and the fund investors contribute cash to a "tenant" entity in exchange for interests in the tenant entity. Under our pass-through financing obligation structure, in accordance with the provisions of FASB, Accounting Standards Codification Topic 810 ("ASC 810") Consolidation, we have determined that we are the primary beneficiary of the owner entity, and accordingly, we consolidate that entity. We have also determined that we are not the primary beneficiary of the tenant entity, and accordingly, we do not consolidate that entity. In this investment fund structure, the investors make a series of large up-front payments as well as, in some instances, subsequent smaller quarterly lease payments through their respective tenant entity to the corresponding owner entity in exchange for the assignment of cash flows from Customer Agreements and certain other benefits associated with the Customer Agreements and related solar energy systems. We account for the payments from investors as borrowings by recording the proceeds received as financing obligations. The financing obligation is reduced over a period of approximately 22 years by customer payments under the Customer Agreements,U.S. Treasury grants (where applicable); and proceeds from the contracted resale of SRECs as they are received by the investor. In addition, funds paid for the Commercial ITC value upfront are initially recorded as a refund liability and recognized as revenue as the associated solar system reaches permission to operate ("PTO"). We account for these investment funds in our consolidated financial statements as if we have not assigned the Customer Agreement to the investor, and we record on our consolidated financial statements activities arising from the Customer Agreements and any relatedU.S. Treasury grants, Commercial ITCs monetized as part of the upfront payments received from the investor and SREC sales. The interest charge on our pass-through financing obligations is imputed at the inception of the fund based on the effective interest rate in the arrangement giving rise to the obligation and is updated prospectively as appropriate. In certain arrangements, we agree to defer a portion of the up-front payments by arranging a loan between one of our indirectly wholly owned subsidiaries to a subsidiary of the investor's tenant entity.Consolidated Joint Ventures Partnership Flips. Under partnership flip structures, we and our fund investors contribute cash into a partnership entity. The partnership uses the cash to acquire solar energy systems developed by us with signed Customer Agreements. Each fund investor receives a rate of return, typically on an after-tax basis, which varies by investment fund. Prior to the fund investor receiving its contractual rate of return or for a time period specified in the contractual arrangements, the fund investor receives a significant portion of the value attributable to customer payments, a majority of the accelerated tax depreciation and substantially all of the Commercial ITCs. After the fund investor receives its contractual rate of return or after the specified time period, we receive substantially all of the value attributable to the remaining customer payments and SREC sales. Included within the Partnership Flips is the project equity financing we entered into inDecember 2016 . We pooled and transferred our interests in certain financing funds into a special purpose entity ("SPE") with a new investor. We did not recognize a gain or loss on the transfer of its interests in the financing funds and continue to consolidate the financing funds. The SPE's assets and cash flows are not available to our other creditors, and the investor has no recourse to our other assets. 48 -------------------------------------------------------------------------------- Under our partnership flip structures, we have determined that we control the partnership entity which is a variable interest entity ("VIE"), and accordingly we consolidate the entity and record the investor's interest as either noncontrolling interests or redeemable noncontrolling interests in our consolidated balance sheets. Inverted Leases. Under our inverted lease structure, we and the fund investor set up a multi-tiered investment vehicle that is comprised of two partnership entities which facilitate the pass through of the tax benefits to the fund investors. In this structure we contribute solar energy systems to an "owner" partnership entity in exchange for interests in the owner partnership and the fund investors contribute cash to a "tenant" partnership in exchange for interests in the tenant partnership, which in turn makes an investment in the owner partnership entity in exchange for interests in the owner partnership. The owner partnership uses the cash contributions received from the tenant partnership to purchase systems from us and/or fund installation of such systems. Under our existing JV inverted lease structure, a substantial portion of the value generated by the solar energy systems is provided to the fund investor for a specified period of time, which is generally based upon the period of time corresponding to the expiry of the recapture period associated with the Commercial ITCs. After that point in time, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives. Generally, under the terms of each agreement, the investors' contributions include the value of Commercial ITCs earned or grants to be received by the fund investor. Any other proceeds are allocated on a pro rata basis to the fund investor and us in accordance with their ownership percentages. SinceSunrun has the power to control both the owner and tenant entities, both entities are included in our consolidated financial statements. We also have one JV inverted lease fund whereby we have a pro rata interest in the entity and we account for the noncontrolling interest's share of income on a pro rata basis. Accordingly, the noncontrolling interest of this fund is carried on our balance sheet at the cumulative amount of capital contributions, reduced by cumulative distributions paid to the investor, as well as the pro rata share of their income. Under our JV inverted lease structure, we have determined that we control each VIE, and accordingly we consolidate the entity and record investor's interest as a noncontrolling interest or redeemable noncontrolling interest. For all of our partnership flips and JV inverted leases, the redeemable noncontrolling interest is carried on our balance sheet at the greater of the redemption value or the amount calculated under the HLBV method. The HLBV method estimates the amount that, if the fund's assets were hypothetically sold at their book value, the investor would be entitled to receive according to the liquidation waterfall in the partnership agreement. 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 Annual Report on Form 10-K 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. • 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 49
-------------------------------------------------------------------------------- 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 toJuly 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 ofDecember 31, 2019 2018
Cumulative Megawatts Deployed (end of period) 1,987 1,575
As of December 31, 2019 2018 (in thousands) Gross Earning Assets Under Energy Contract$ 2,536,612 $ 2,099,532 Gross Earning Assets Value of Purchase or Renewal 1,147,450 962,948 Gross Earning Assets$ 3,684,062 $ 3,062,480 50
--------------------------------------------------------------------------------
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 December 31, 2019 Discount rate Default rate 4% 5% 6% 7% 8% (in thousands) 5%$ 2,898,185 $ 2,671,315 $ 2,471,500 $ 2,294,895 $ 2,138,269 0%$ 2,978,733 $ 2,743,480 $ 2,536,612 $ 2,353,424 $ 2,191,244
Gross Earning Assets Value of Purchase or Renewal:
As of December 31, 2019 Discount rate Purchase or Renewal rate 4% 5% 6% 7% 8% (in thousands) 80%$ 1,501,655 $ 1,223,473 $ 1,000,418 $ 820,941 $ 676,032 90%$ 1,722,461 $ 1,403,285 $ 1,147,450 $ 941,415 $ 775,140 100%$ 1,943,267 $ 1,583,096 $ 1,294,286 $ 1,061,890 $ 874,248 Total Gross Earning Assets: As of December 31, 2019 Discount rate Purchase or Renewal rate 4% 5% 6% 7% 8% (in thousands) 80%$ 4,480,388 $ 3,966,954 $ 3,537,030 $ 3,174,365 $ 2,867,276 90%$ 4,701,194 $ 4,146,765 $ 3,684,062 $ 3,294,839 $ 2,966,384 100%$ 4,922,000 $ 4,326,576 $ 3,830,898 $ 3,415,314 $ 3,065,492 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 inthe 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 Annual Report on Form 10-K. 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. 51 -------------------------------------------------------------------------------- Principles of Consolidation Our consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling financial interest. The typical condition for a controlling financial interest is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling financial interests. We consolidate any VIE of which we are the primary beneficiary, which is defined as the party that has (1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the VIE. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. Our financial statements reflect the assets and liabilities of VIEs that we consolidate. All intercompany transactions and balances have been eliminated in consolidation. For further information regarding consolidation of our investment funds, see "-Investment Funds" above. Revenue Recognition We recognize revenue when control of goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Customer Agreements and Incentives Revenue. Customer agreements and incentives revenue is primarily comprised of revenue from our Customer Agreements and sales of Commercial ITCs and SRECs to third parties. We recognize revenue from a Customer Agreement when PTO for the applicable solar energy system is given by the local utility company or on the date daily operation commences if utility approval is not required. We recognize revenue evenly over the time that we satisfy our performance obligations over the initial term of the Customer Agreements. Customer Agreements typically have an initial term of 20 or 25 years. After the initial 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. We also apply for and receive SRECs associated with the energy generated by our solar energy systems and sell them to third parties in certain jurisdictions. SREC revenue is estimated net of any variable consideration related to possible liquidated damages if we were to deliver fewer SRECs than contractually committed, and is generally recognized upon delivery of the SRECs to the counterparty. Certain upfront payments related to Customer Agreements and SRECs are deemed to have a financing component, and therefore increase both revenue and interest expense by the same amount over the term of the related agreement. The additional revenue is included in the total transaction price to be recorded over the term of the agreement and is recognized based on the timing of the delivery. The interest expense is recognized based upon an amortization schedule which typically decreases throughout the term of the related agreement. For pass-through financing obligation Funds, the value attributable to the Commercial ITCs is recognized in the period a solar system is granted PTO, at which point we have met our obligation to the investor. The Commercial ITCs are subject to recapture under the Internal Revenue Code ("Code") if the underlying solar energy system either ceases to be a qualifying property or undergoes a change in ownership within five years of its placed-in-service date. The recapture amount decreases on the anniversary of the PTO date. We have not historically incurred a material recapture of Commercial ITCs, and do not expect to experience a material recapture of Commercial ITCs in the future. Consideration from customers is considered variable due to the performance guarantee under Customer Agreements and liquidated damage provisions under SREC contracts in the event minimum deliveries are not achieved. Performance guarantees provide a credit to the customer if the system's cumulative production, as measured on various PTO anniversary dates, is below our guarantee of a specified minimum. Revenue is recognized to the extent it is probable that a significant reversal of such revenue will not occur. Solar Energy Systems and Product Sales. Solar energy systems sales are comprised of revenue from the sale of solar energy systems directly to customers. We recognize revenue from solar energy systems sold to customers when the solar energy system passes inspection by the authority having jurisdiction, which inspection generally occurs after installation but prior to PTO, at which time we have met the performance obligation in the contract. 52 -------------------------------------------------------------------------------- Product sales revenue consists of revenue from the sale of solar panels, inverters, racking systems and other solar energy products sold to resellers, as well as the sale of customer leads to third parties, including our partners and other solar providers. Product sales revenue is recognized when control is transferred, generally upon shipment. Customer lead revenue is recognized at the time the lead is delivered. Impairment of Long-Lived Assets The carrying amounts of our long-lived assets, including solar energy systems and definite-lived intangible assets, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Factors that we consider in deciding when to perform an impairment review would include significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of these assets is measured by comparison of the carrying amount of each asset group to the future undiscounted cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life. Provision for Income Taxes We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards and other tax credits measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, estimates of future taxable income, reversing taxable temporary differences, and ongoing tax planning strategies in assessing the need for a valuation allowance. As ofDecember 31, 2019 , we have recorded a valuation allowance of$12.1 million for certain federal tax credits, state tax credits and state deferred tax assets that we believe is more likely than not that the deferred tax assets will not be realized. We sell solar energy systems to the investment funds. As the investment funds are consolidated by us, the gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for book purposes, beforeJanuary 1, 2017 , any tax expense incurred related to these intercompany sales was deferred and recorded as a prepaid tax asset and there was no recognition of a deferred tax asset related to our increased tax basis in the partnership as a result of such sales. The prepaid tax asset was amortized over the estimated useful life of the underlying solar energy systems which has been estimated to be 35 years. With the adoption of ASU 2016-16 onJanuary 1, 2017 we reversed net prepaid tax assets of$378.5 million and recorded the gross deferred tax assets associated with the historical intercompany sales of solar energy systems, which in turn reduced the deferred tax liabilities on investment in partnerships by$378.2 million with the remaining$0.3 million being recorded as a cumulative effect of adoption in our Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders' Equity. The adoption did not have an impact on our Consolidated Statement of Operations. We determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. 53
-------------------------------------------------------------------------------- Noncontrolling Interests and Redeemable Noncontrolling Interests Our noncontrolling interests and redeemable noncontrolling interests represent fund investors' interests in the net assets of certain investment funds, which we consolidate, that we have entered into in order to finance the costs of solar energy facilities under Customer Agreements. We have determined that the provisions in the contractual arrangements of the investment funds represent substantive profit-sharing arrangements, which gives rise to the noncontrolling interests and redeemable noncontrolling interests. We have further determined that for all but one of these arrangements, the appropriate methodology for attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach using the HLBV method. Attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests under the HLBV method requires the use of significant assumptions to calculate the amounts that fund investors would receive upon a hypothetical liquidation. Changes in these assumptions, including change in tax rates, can have a significant impact on the amount that fund investors would receive upon a hypothetical liquidation. We classify certain noncontrolling interests with redemption features that are not solely within our control outside of permanent equity on our consolidated balance sheets. Redeemable noncontrolling interests are reported using the greater of their carrying value at each reporting date as determined by the HLBV method or their estimated redemption value in each reporting period. Estimating the redemption value of the redeemable noncontrolling interests requires the use of significant assumptions and estimates such as projected future cash flows at the time the redemption feature can be exercised. We determine the net income (loss) attributable to common stockholders by deducting from net loss, the net loss attributable to noncontrolling interests and redeemable noncontrolling interests in these funds. The net loss attributable to noncontrolling interests and redeemable noncontrolling interests represents the fund investors' allocable share in the results of operations of these investment funds. For these funds, we have determined that the provisions in the contractual arrangements represent substantive profit sharing arrangements, where the allocations to the partners sometimes differ from the stated ownership percentages. We have further determined that, for these arrangements, the appropriate methodology for attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach using the HLBV method. Under the HLBV method, the amounts of income and loss attributed to the noncontrolling interests and redeemable noncontrolling interests in the consolidated statements of operations reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual provisions of these funds, assuming the net assets of the respective investment funds were liquidated at the carrying value determined in accordance with GAAP. The fund investors' interest in the results of operations of these investment funds is initially determined by calculating the difference in the noncontrolling interests and redeemable noncontrolling interests' claim under the HLBV method at the start and end of each reporting period, after taking into account any contributions and distributions between the fund and the fund investors and subject to the redemption provisions in certain funds. 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 Annual Report on Form 10-K. Our Annual Report on Form 10-K for the year endedDecember 31, 2018 includes a discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2017 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 54 --------------------------------------------------------------------------------
Year Ended December 31, 2019 2018 (in thousands, except per share amounts) Revenue: Customer agreements and incentives $ 387,835$ 404,466 Solar energy systems and product sales 470,743 355,515 Total revenue 858,578 759,981 Operating expenses: Cost of customer agreements and incentives 280,344 240,857 Cost of solar energy systems and product sales 365,485 294,066 Sales and marketing 275,148 207,232 Research and development 23,563 18,844 General and administrative 125,023 116,659 Amortization of intangible assets 4,755 4,204 Total operating expenses 1,074,318 881,862 Loss from operations (215,740 ) (121,881 ) Interest expense, net 174,246 131,771 Other expenses (income), net 9,254 (2,788 ) Loss before income taxes (399,240 ) (250,864 ) Income tax (benefit) expense (8,218 ) 9,322 Net loss (391,022 ) (260,186 ) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests (417,357 ) (286,843 ) Net income attributable to common stockholders $ 26,335 $ 26,657 Net income per share attributable to common stockholders Basic $ 0.23 $ 0.24 Diluted $ 0.21 $ 0.23 Weighted average shares used to compute net income per share attributable to common stockholders Basic 116,397 110,089 Diluted 123,876 117,112 Comparison of the Years EndedDecember 31, 2019 and 2018 Revenue Year Ended December 31, Change 2019 2018 $ % (in thousands) Customer agreements$ 345,486 $ 272,672 $ 72,814 27 % Incentives 42,349 131,794 (89,445 ) (68 )% Customer agreements and incentives 387,835 404,466 (16,631 ) (4 )% Solar energy systems 283,429 186,512 96,917 52 % Products 187,314 169,003 18,311 11 % Solar energy systems and product sales 470,743 355,515 115,228 32 % Total revenue$ 858,578 $ 759,981 $ 98,597 13 % Customer Agreements and Incentives. The$72.8 million increase in revenue from Customer Agreements was due to both an increase in solar energy systems under Customer Agreements being placed in service in 2019 55 -------------------------------------------------------------------------------- and a full year of revenue recognized in 2019 for systems placed in service in 2018 versus only a partial amount of such revenue related to the period in which the assets were in service in 2018. The$89.4 million decrease in revenue from incentives was primarily due to the sale of Commercial ITCs under a financing obligation fund opened in 2018, with PTO activity in that fund primarily concluding in the second quarter of 2019. There was no such comparable fund opened in 2019. Solar Energy Systems and Product Sales. Revenue from solar energy systems sales increased by$96.9 million compared to the prior year due to increased demand through retail partners. Product sales increased by$18.3 million compared to the prior year primarily due to an increase in the volume of wholesale products sold. Operating Expenses Year Ended December 31, Change 2019 2018 $ % (in thousands)
Cost of customer agreements and incentives
$ 39,487 16 % Cost of solar energy systems and product sales 365,485 294,066 71,419 24 % Sales and marketing 275,148 207,232 67,916 33 % Research and development 23,563 18,844 4,719 25 % General and administrative expense 125,023 116,659 8,364 7 % Amortization of intangible assets 4,755 4,204 551 13 % Total operating expenses$ 1,074,318 $ 881,862 $ 192,456 22 % Cost of Customer Agreements and Incentives. The$39.5 million increase in Cost of customer agreements and incentives was due to the increase in solar energy systems placed in service in 2019, plus a full year of costs recognized in 2019 for systems placed in service in 2018 versus only a partial amount of such expenses related to the period in which the assets were in service in 2018. The Cost of customer agreements and incentives increased to 72% of customer agreements and incentives revenue during 2019, from 60% during 2018 due to the$89.4 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$71.4 million increase in Cost of solar energy systems and product sales was due to the corresponding net increase in solar energy systems and product sales discussed above. Sales and Marketing Expense. The$67.9 million increase in Sales and marketing expense was primarily attributable to an increase in headcount driving higher employee compensation, as well as an increase in costs to acquire customers through our retail channels and sales lead generating partners. Included in sales and marketing expense is$11.8 million and$8.6 million of amortization of costs to obtain Customer Agreements for 2019 and 2018, respectively. Research and Development Expense. The$4.7 million increase in Research and development was primarily attributable to hiring of personnel to support the recent and future growth of our business. General and Administrative Expense. The$8.4 million increase in General and administrative expenses is primarily attributable to increased employee compensation, as well as a temporary duplication of rent expense of$2.1 million during the transition of corporate office spaces inSan Francisco andDenver in 2019. 56 --------------------------------------------------------------------------------
Non-Operating Expenses Year Ended December 31, Change 2019 2018 $ % (in thousands) Interest expense, net$ 174,246 $ 131,771 $ 42,475 32 % Other expenses (income), net 9,254 (2,788 )
12,042 (432 )%
Total interest and other expenses, net
Interest expense, net. The increase in Interest expense, net of$42.5 million was related to additional non-recourse and pass-through financing obligation debt entered into in 2019. Included in net interest expense is$28.6 million and$22.9 million of non-cash interest imputed under prepaid Customer Agreements for 2019 and 2018, respectively. Other expenses (income), net. The increase in Other expenses (income), net of$12.0 million relates primarily to losses on extinguishment of debt related to an early repayment of a pass-through financing obligation and certain non-recourse debt in 2019. Income Tax (Benefit) Expense Year Ended December 31, Change 2019 2018 $ % (in thousands) Income tax (benefit) expense$ (8,218 ) $ 9,322 $ (17,540 ) (188 )% The decrease in Income tax (benefit) expense of$17.5 million was related to a decrease in state income taxes, an increase in benefits from share based compensation, and less of an increase in valuation allowance compared to the prior year. Given our net operating loss carryforwards as ofDecember 31, 2019 , we do not expect to pay income tax, including in connection with our 2019 income tax provision, until our net operating losses are fully utilized. As ofDecember 31, 2019 , the Company had net operating loss carryforwards for federal and state income tax purposes of approximately$718.1 million and$1.3 billion , respectively, which will begin to expire in 2028 for federal purposes and in 2024 for state purposes. In addition, federal and certain state net operating loss carryforwards generated in tax years beginning afterDecember 31, 2017 total$535.1 million and$102.4 million , respectively, and have indefinite carryover periods and do not expire. Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests Year Ended December 31, Change 2019 2018 $ % (in thousands) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (417,357 ) $ (286,843 ) $
(130,514 ) 46 %
The increase in Net loss attributable to noncontrolling interests and redeemable noncontrolling interests was primarily a result of entering into more new partnership funds in 2019 compared with 2018. Generally, new partnership funds generate larger losses attributable to noncontrolling interests and redeemable noncontrolling interests under the HLBV method in the first years after formation. In 2019, all new funds used the HLBV method. 57 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofDecember 31, 2019 , 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. As ofDecember 31, 2019 , we had outstanding borrowings of$239.5 million on our$250.0 million corporate bank line of credit maturing inApril 2022 . 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. 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: Year EndedDecember 31, 2019 2018 (in thousands)
Consolidated cash flow data:
Net cash used in operating activities
(843,255 ) (811,316 )
Net cash provided by financing activities 1,106,572 936,386 Net increase in cash
$ 58,830 $ 62,609 Operating Activities During 2019, we used$204.5 million in net cash in operating activities. The driver of our operating cash inflow consists of payments received from customers as well as incentives. The driver of our operating cash outflows primarily relate to the costs of our revenue, as well as sales, marketing and general and administrative costs. During 2019, our operating cash outflows were$174.7 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$29.7 million . During 2018, we used$62.5 million in net cash in operating activities. The driver of our operating cash inflow consists of payments received from customers as well as incentives. The driver of our operating cash outflows primarily relate to the costs of our revenue, as well as sales, marketing and general and administrative costs. During 2018, our operating cash outflows were$47.3 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$15.2 million . Investing Activities During 2019, we used$843.3 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 2018, we used$811.3 million in cash in investing activities. Of this amount, we used$806.4 million to design, acquire and install solar energy systems and components under our long-term Customer Agreements, and$4.9 million for capitalized software projects and the acquisition of office equipment. 58 -------------------------------------------------------------------------------- Financing Activities During 2019, we generated$1.1 billion from financing activities. This was primarily driven by$632.2 million in net proceeds from fund investors,$474.8 million in net proceeds from debt, offset by$13.9 million in repayments under finance lease obligations. During 2018, we generated$936.4 million from financing activities. This was primarily driven by$483.8 million in net proceeds from fund investors,$438.1 million in proceeds from debt, net of debt issuance costs and repayments, offset by$9.0 million in repayments under finance lease obligations. Debt, Equity, and Financing Fund Commitments Debt Instruments For a discussion of the terms and conditions of debt instruments and changes thereof in the period, refer to Note 11, Project Equity Financing and Note 12, Indebtedness, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Equity Instruments Warrant. InAugust 2017 , we entered into an agreement with an affiliate ("Contractor") of Comcast Corporation ("Comcast") whereby Contractor will receive lead or sales fees for new customers it brings to us over a 40-month term. We also issued Comcast a warrant to purchase up to 11,793,355 shares of our common stock, at an exercise price of$0.01 per warrant share. The warrant would initially vest 50.05% when both (i) Contractor had earned a lead or sales fee with respect to 30,000 of installed solar energy systems, and (ii) Contractor or its affiliates had spent at least$10.0 million in marketing and sales in connection with the agreement. Thereafter, the warrant would vest in five additional increments for each additional 6,000 installed solar energy systems. OnNovember 7, 2018 the warrant vesting schedule was modified so that it would initially vest either (i) as to 10.0% if Contractor had earned a lead or sales fee with respect to 6,000 of installed solar energy systems bySeptember 30, 2019 or (ii) as to 13.3% if Contractor had earned a lead or sales fee with respect to 8,000 of installed solar energy systems byDecember 31, 2019 , provided that, in either case, Contractor or its affiliates had spent at least$25.0 million in marketing and sales in connection with the agreement. Thereafter, the warrant would vest in additional 8.3% increments for each additional 5,000 installed solar energy systems. The initial vesting conditions were not met byDecember 31, 2019 , and as a result, the warrant expired unvested. Investment Fund Commitments As ofDecember 31, 2019 , we had undrawn committed capital of approximately$581.3 million which may only be used to purchase and install solar energy systems. We intend to establish new investment funds in the future, and we may also use debt, equity or other financing strategies to finance our business. For a discussion of our project equity financing, refer to Note 11, Project Equity Financing, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 59 -------------------------------------------------------------------------------- Contractual Obligations and Other Commitments The following table summarizes our contractual obligations as ofDecember 31, 2019 : Payments Due by Period Less Than 1 to 3 3 to 5 More Than 1 Year Years Years 5 Years Total (in thousands) Contractual Obligations: Debt obligations (including future interest)$ 164,274 $ 646,203 $ 931,591 $ 1,361,203 $ 3,103,271 Purchase commitments 52,370 26,100 - - 78,470 Distributions payable to noncontrolling interests and redeemable noncontrolling interests (1) 16,062 - - - 16,062 Financing lease obligations (including accrued interest) 10,741 12,316 1,160 4 24,221 Operating lease obligations, net of sublease income 11,247 20,168 13,042 7,999 52,456 Total contractual obligations$ 254,694 $ 704,787 $ 945,793
(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 statement included elsewhere in this Annual Report on Form 10-K.
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