SUNRUN INC. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q.
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. OnOctober 8, 2020 , we completed the acquisition of Vivint Solar, Inc. ("Vivint Solar") a leading full-service residential solar provider inthe United States , at an estimated purchase price of$5.0 billion , pursuant to an Agreement and Plan of Merger, dated as ofJuly 6, 2020 , by and amongSunrun , Vivint Solar andViking Merger Sub, Inc. , aDelaware corporation and direct wholly owned subsidiary of the Company ("Merger Sub"). Further information about the acquisition of Vivint Solar can be found in Note 18, Acquisitions, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We are engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems ("Projects") inthe United States . 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. 39 -------------------------------------------------------------------------------- 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- or 25-year initial term. 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 well as through our acquisition of Vivint Solar in 2020. As ofSeptember 30, 2021 , we operated the largest fleet of residential solar energy systems inthe United States . We have a Networked Solar Energy Capacity of 4,457 Megawatts as ofSeptember 30, 2021 , which represents the aggregate megawatt production capacity of our solar energy systems that have been recognized as deployments, from our inception through the measurement date. Gross Earning Assets as ofSeptember 30, 2021 were approximately$9.2 billion . Please see the section entitled "Key Operating Metrics" for more details on how we calculate Networked Solar Energy Capacity 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. The Opportunity of Home Electrification and a Clean, Resilient GridThe United States is on the precipice of a once-in-a-generation transformation of our energy system. The decarbonization of the American economy will require powering our energy supply - including our homes, appliances and automobiles - with clean energy.Sunrun's next goal and chapter of growth is to be the go-to company for clean and reliable home electrification--providing our customers with affordable renewable energy throughout their homes and our communities with a cleaner, more resilient grid. We intend to pursue these opportunities on a variety of fronts. For instance, inMay 2020 , we announced a partnership with Ford Motor Company to be the preferred installer forFord's Charge Station Pro and Intelligent Backup Power System, debuting with the all-electric F-150 Lightning. Under the partnership, we are co-developingFord's Home Integration System, including the bi-directional inverter, which enables the F-150 Lightning to serve as a reliable home backup energy source by powering the home during an outage event. Through this partnership, customers in participating markets will also be provided with the opportunity to install a solar and battery system on their home, enabling them to power their household with clean, affordable energy and charge their truck with the power of the sun. 40 -------------------------------------------------------------------------------- We also continue to pursue the development of our grid services business, creating virtual power plants that lead to a cleaner, more resilient grid. In collaboration with grid managers, we can deploy our battery systems where they will add the most value for utilities, the grid, and customers. We are actively delivering demand response and capacity services to meet operational needs in multiple geographies, and partnering with grid managers to build a more resilient electricity system that integrates the new energy technologies customers want. We believe the electrification ofU.S. households with renewable energy, and the accompanying development of an inter-connected, smart grid will provide a number of market opportunities beyond our traditional solar and battery storage offerings, including EV chargers, battery retrofits, re-powered or expanding systems, home energy management services, and other home electrification products. Additionally, we believe our omni-channel model and geographic reach provides us with the capabilities to execute on these opportunities in a variety of markets. To further expand such future upsell and retrofit opportunities, from time to time, we may pursue acquisitions of previously installed solar systems. While we do not expect such acquisitions to represent a material portion of our growth on an annual basis, we plan to pursue such transactions opportunistically. For instance, in the third quarter, we completed a strategic transaction that added approximately 2,000 Customers and 13 MW of Networked Solar Energy Capacity. In sum, we believe the electrification of theU.S. economy with renewable energy presents an unprecedented economic opportunity, as well as our country's best path to achieving net zero emissions by 2050. Through these electrification opportunities and our grid services business, we aim to be the consumer brand synonymous with repowering our customers' homes with renewable energy and providing a pathway to a cleaner, healthier future. 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, enabled our entire salesforce to complete sales consultations in a virtual setting, and employed extensive use of drone technology to complete rooftop surveys. We believe this transition towards a digital model for many sales channels will position us well to realize sustaining reductions in customer acquisition costs. The COVID-19 pandemic has had an unprecedented impact on theU.S. economy, resulting in governments and organizations implementing public health measures in an effort to contain the virus, including physical distancing, work from home, supply chain logistical changes and closure of non-essential businesses. With vaccine administration and adoption rising, governments and organizations have responded by adjusting such restrictions and guidelines accordingly. We are monitoring this fluid situation and will continue to follow official regulations to protect our employees and customers. The ultimate impact of the COVID-19 pandemic (and virus variants) is still 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 actions that we determine are necessary in order to mitigate these impacts. 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 41 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , we had 60 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 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, consolidated entities tenant entity not consolidated 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 permission to operate ("PTO") date Method of calculating investor interest Effective Greater of HLBV or Greater of HLBV or interest rate redemption value; or redemption value; method pro rata or pro rata
Liability balance as of
N/A N/A Noncontrolling interest balance (redeemable N/A $ 1,295.9 $ 19.5
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.
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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.
•Networked Solar Energy Capacity 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 (inclusive of acquisitions of
installed systems), 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. Systems that have met this criteria are
considered to be deployed.
•Gross Earning Assets is calculated as Gross Earning Assets Contracted Period plus Gross Earning Assets Renewal Period.
•Gross Earning Assets Contracted Period represents the present value of the remaining net cash flows (discounted at 5%) during the initial term of our Customer Agreements as of the measurement date. It is calculated as the present value of cash flows (discounted at 5%) we expect to receive from Subscribers in future periods, after deducting expected operating and maintenance costs, equipment replacements costs, distributions to tax equity partners in consolidated joint venture partnership flip structures, and distributions to project equity investors. We include cash flows we expect to receive in future periods from state incentive and rebate programs, contracted sales of solar renewable energy credits, and awarded net cash flows from grid service programs with utility or grid operators. •Gross Earning Assets Renewal Period is the forecasted net present value we would receive upon or following the expiration of the initial Customer Agreement term but before the 30th anniversary of the system's activation (either in the form of cash payments during any applicable renewal period or a system purchase at the end of the initial term), for Subscribers as of the measurement date. We calculate the Gross Earning Assets Renewal Period amount at the expiration of the initial contract term assuming either a system purchase or a renewal, forecasting only a 30-year customer relationship (although the customer may renew for additional years, or 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 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 utility power prices.
•Subscribers represent the cumulative number of Customer Agreements for systems that have been recognized as deployments through the measurement date.
•Customers represent the cumulative number of deployments, from our inception through 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. The definitions of Gross Earning Assets, Gross Earning Assets Contracted Period, and Gross Earning Assets Renewal Period use a discount rate of 5%; whereas the definitions used in our periodic reports prior toDecember 31, 2020 used a discount rate of 6%. 43 -------------------------------------------------------------------------------- As ofSeptember 30, 2021
2020
Networked Solar Energy Capacity (megawatts) 4,457 2,272
Customers 630,441 316,056
As of September 30,
2021 2020
(in thousands)
Gross Earning Assets Contracted Period
2,928,806 1,542,472
Gross Earning Assets $ 9,158,252 $ 4,538,402
As a result of the acquisition of Vivint Solar in October 2020 , we added $2.9
billion of Gross Earning Assets, of which $2.0 billion related to Gross Earning
Assets Contracted Period and $0.9 billion related to Gross Earning Assets
Renewal Period.
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 Contracted Period:
As of September 30, 2021
Discount rate
Default rate 3% 4% 5% 6% 7%
(in thousands)
5% $ 7,203,404 $ 6,591,089 $ 6,056,424 $ 5,587,671 $ 5,175,083
0% $ 7,420,557 $ 6,784,533 $ 6,229,446 $ 5,743,033 $ 5,315,117 Gross Earning Assets Renewal Period:
As of September 30, 2021
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 3,802,291 $ 3,102,519 $ 2,540,942 $ 2,088,637 $ 1,723,049
90% $ 4,381,633 $ 3,575,687 $ 2,928,806 $ 2,407,715 $ 1,986,459
100% $ 4,960,974 $ 4,048,853 $ 3,316,669 $ 2,726,792 $ 2,249,868 Total Gross Earning Assets:
As of September 30, 2021
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 11,222,848 $ 9,887,052 $ 8,770,387 $ 7,831,670 $ 7,038,166
90% $ 11,802,190 $ 10,360,219 $ 9,158,252 $ 8,150,748 $ 7,301,577
100% $ 12,381,531 $ 10,833,386 $ 9,546,115 $ 8,469,825 $ 7,564,986
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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 of our annual report on Form 10-K for the year endedDecember 31, 2020 . We believe that policies associated with our principles of consolidation, revenue recognition, goodwill, impairment of long-lived assets, provision for income taxes, business combinations 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.
Results of Operations
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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.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except per share data)
Revenue:
Customer agreements and incentives $ 231,869 $ 114,485 $ 625,939 $ 319,704
Solar energy systems and product
sales 206,896 95,275 548,786 282,081
Total revenue 438,765 209,760 1,174,725 601,785
Operating expenses:
Cost of customer agreements and
incentives 174,457 77,350 512,073 239,049
Cost of solar energy systems and
product sales 172,538 75,679 458,208 231,023
Sales and marketing 171,462 70,720 442,174 210,691
Research and development 5,602 5,205 16,624 14,222
General and administrative 51,290 41,829 199,836 111,659
Amortization of intangible assets 1,341 1,167 4,029 3,817
Total operating expenses 576,690 271,950 1,632,944 810,461
Loss from operations (137,925) (62,190) (458,219) (208,676)
Interest expense, net (89,096) (51,368) (238,365) (152,013)
Other (expenses) income, net (4,332) 864 18,462 766
Loss before income taxes (231,353) (112,694) (678,122) (359,923)
Income tax benefit (expense) 9,980 (27,293) (19,058) (30,424)
Net loss (241,333) (85,401) (659,064) (329,499)
Net loss attributable to
noncontrolling interests and
redeemable noncontrolling
interests (265,462) (122,848) (618,160) (325,425)
Net income (loss) attributable to
common stockholders $ 24,129 $ 37,447 $ (40,904) $ (4,074)
Net income (loss) per share
attributable to common
stockholders
Basic $ 0.12 $ 0.30 $ (0.20) $ (0.03)
Diluted $ 0.11 $ 0.28 $ (0.20) $ (0.03)
Weighted average shares used to
compute income (loss) per share
attributable to common
stockholders
Basic 206,103 125,003 204,355 121,813
Diluted 213,016 134,548 204,355 121,813
46-------------------------------------------------------------------------------- Comparison of the Three Months EndedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, Change 2021 2020 $ % (in thousands) Customer agreements $ 194,924$ 102,213 $ 92,711 91 % Incentives 36,945 12,272 24,673 201 % Customer agreements and incentives 231,869 114,485 117,384 103 % Solar energy systems 127,936 52,238 75,698 145 % Products 78,960 43,037 35,923 83 % Solar energy systems and product sales 206,896 95,275 111,621 117 % Total revenue $ 438,765$ 209,760 $ 229,005 109 % Customer Agreements and Incentives. The$92.7 million increase in revenue from Customer Agreements was primarily due to both an increase in solar energy systems under Customer Agreements being added to our fleet upon the acquisition of Vivint Solar inOctober 2020 , as well as new systems placed in service in the period fromOctober 1, 2020 throughSeptember 30, 2021 , plus a full quarter of revenue recognized in the third quarter of 2021 for systems placed in service in the third quarter of 2020 versus only a partial quarter of such revenue related to the period in which the assets were in service in 2020. Revenue from incentives primarily consists of sales of SRECs, which increased by$24.7 million during the three months endedSeptember 30, 2021 , compared to the prior year, due to the timing of sales and market conditions. Solar Energy Systems and Product Sales. Revenue from solar energy systems sales increased by$75.7 million compared to the prior year primarily due to solar energy systems sales from Vivint Solar, as well as increased demand through retail partners. Product sales increased by$35.9 million , primarily due to lower volume of wholesale products sold in 2020, which was impacted by COVID-19. Operating Expenses Three Months Ended September 30, Change 2021 2020 $ % (in thousands)
Cost of customer agreements and incentives $ 174,457
126 %
Cost of solar energy systems and product
sales 172,538 75,679 96,859 128 %
Sales and marketing 171,462 70,720 100,742 142 %
Research and development 5,602 5,205 397 8 %
General and administrative 51,290 41,829 9,461 23 %
Amortization of intangible assets 1,341 1,167 174 15 %
Total operating expenses $ 576,690 $ 271,950 $ 304,740 112 %
Cost of Customer Agreements and Incentives. The $97.1 million increase in Cost
of customer agreements and incentives was primarily due to the increase in solar
energy systems added to our fleet upon the acquisition of Vivint Solar in
October 2020 , as well as new systems placed in service in the period from
October 1, 2020 through September 30, 2021 , plus a full quarter of costs
recognized in 2021 for systems placed in service in the third quarter of 2020
versus only a partial quarter of such expenses related to the period in which
the assets were in service in 2020.
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The cost of Customer Agreements and incentives increased to 75% of revenue from
customer agreements and incentives during the three months ended September 30,
2021 , compared with 68% during the three months ended September 30, 2020 . The
increase was impacted by the acquisition of Vivint Solar and the increase in
depreciation expense of approximately $32.0 million related to recording the
acquired solar systems at fair value, which was greater than the then-existing
book value, upon the acquisition of Vivint Solar.
Cost of Solar Energy Systems and Product Sales. The $96.9 million increase in
Cost of solar energy systems and product sales was due to the corresponding net
increase in the solar energy systems and product sales discussed above.
Sales and Marketing Expense. The $100.7 million increase in Sales and marketing
expense was attributable to increases in headcount, which were primarily driven
by the acquisition of Vivint Solar in October 2020 , resulting in higher employee
compensation in the three months ended September 30, 2021 compared to the same
period in the prior year. Additionally, we spent more in costs to acquire
customers through our sales and retail lead generating partners. Additionally,
there was an increase of $0.2 million in non-recurring costs incurred during the
three months ended September 30, 2021 . Included in sales and marketing expense
is $6.5 million and $3.7 million of amortization of costs to obtain Customer
Agreements for the three months ended September 30, 2021 and 2020, respectively.
Research and Development Expense. Research and development expense increased
$0.4 million during the three months ended September 30, 2021 , which was
primarily attributable to the acquisition of Vivint Solar, resulting in an
increase in headcount driving higher employee compensation costs.
General and Administrative Expense. The $9.5 million increase in General and
administrative expenses was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation, consulting costs, partially offset by a decrease of $8.3 million
in nonrecurring (primarily acquisition-related) costs during the three months
ended September 30, 2021 .
Non-Operating Expenses
Three Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Interest expense, net $ (89,096) $ (51,368) $ (37,728) 73 %
Other (expense) income, net $ (4,332) $ 864 $ (5,196) (601) %
Interest Expense, net. The increase in Interest expense, net of $37.7 million is
primarily related to the $27.5 million of interest expense associated with the
debt acquired with Vivint Solar. Included in net interest expense is $6.6
million and $6.2 million of non-cash interest recognized under Customer
Agreements that have a significant financing component for the three months
ended September 30, 2021 and 2020, respectively.
Other (Expense) Income, net. The increase in other expenses of $5.2 million
relates primarily to a loss on the early extinguishment of certain debt
instruments recognized in the three months ended September 30, 2021 , with no
such comparable activity in the three months ended September 30, 2020 .
Income Tax Expense (Benefit)
Three Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Income tax benefit $ 9,980 $ (27,293) $ 37,273 (137) %
The increase in income tax expense of
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Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Three Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Net loss attributable to noncontrolling
interests and redeemable noncontrolling
interests $ (265,462) $ (122,848) $ (142,614) 116 %
Net loss attributable to noncontrolling interests and redeemable noncontrolling
interests was primarily the result of an addition of five new investment funds
since September 30, 2020 , for which the HLBV method was used in determining the
amount of net loss attributable to noncontrolling interests. Partially
offsetting these losses was approximately $2.4 million of net income related
Vivint Solar's noncontrolling interests and redeemable noncontrolling interests.
Redeemable noncontrolling interests generally allocates more loss to the
noncontrolling interest in the first several years after fund formation.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenue
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Customer agreements $ 549,689 $ 294,991 $ 254,698 86 %
Incentives 76,250 24,713 51,537 209 %
Customer agreements and incentives 625,939 319,704 306,235 96 %
Solar energy systems 307,408 168,094 139,314 83 %
Products 241,378 113,987 127,391 112 %
Solar energy systems and product
sales 548,786 282,081 266,705 95 %
Total revenue $ 1,174,725 $ 601,785 $ 572,940 95 %
Customer Agreements and Incentives. The $254.7 million increase in revenue from
Customer Agreements was primarily due to both an increase in solar energy
systems under Customer Agreements being added to our fleet upon the acquisition
of Vivint Solar in October 2020 , as well as new systems placed in service in the
period from October 1, 2020 through September 30, 2021 , plus a full nine months
of revenue recognized in 2021 for systems placed in service in the first nine
months of 2020 versus only a partial amount of such revenue related to the
period in which the assets were in service in 2020. Revenue from incentives
primarily consists of sales of SRECs, which increased by $51.5 million during
the nine months ended September 30, 2021 , compared to the prior year, due to the
timing of sales and market conditions.
Solar Energy Systems and Product Sales. Revenue from solar energy systems sales
increased by $139.3 million compared to the prior year primarily due to solar
energy systems sales from Vivint Solar, as well as increased demand through
retail partners. Product sales increased by $127.4 million , primarily due to
lower volume of wholesale products sold in 2020, which was impacted by COVID-19,
and customers' reduced purchases in 2020 after purchasing safe harbor materials
in 2019 for use in 2020.
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Operating Expenses
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Cost of customer agreements and incentives $ 512,073 $ 239,049 $ 273,024 114 %
Cost of solar energy systems and product
sales 458,208 231,023 227,185 98 %
Sales and marketing 442,174 210,691 231,483 110 %
Research and development 16,624 14,222 2,402 17 %
General and administrative 199,836 111,659 88,177 79 %
Amortization of intangible assets 4,029 3,817 212 6 %
Total operating expenses $ 1,632,944 $ 810,461 $ 822,483 101 %
Cost of Customer Agreements and Incentives. The $273.0 million increase in Cost
of customer agreements and incentives was primarily due to the increase in solar
energy systems added to our fleet upon the acquisition of Vivint Solar in
October 2020 , as well as new systems placed in service in the period from
October 1, 2020 through September 30, 2021 , plus a full nine months of costs
recognized in 2021 for systems placed in service in the nine months of 2020
versus only a partial amount of such expenses related to the period in which the
assets were in service in 2020.
The cost of Customer Agreements and incentives increased to 82% of revenue from
customer agreements and incentives during the nine months ended September 30,
2021 , from 75% during the nine months ended September 30, 2020 . The increase was
impacted by the acquisition of Vivint Solar, which had negative gross margins
due to seasonality during the winter months at the beginning of the year when
solar production is lower, as well as the increase in depreciation expense of
approximately $95.9 million related to the step up in solar systems fair value
upon the acquisition of Vivint Solar.
Cost of Solar Energy Systems and Product Sales. The $227.2 million increase in
Cost of solar energy systems and product sales was due to the corresponding net
increase in the solar energy systems and product sales discussed above.
Sales and Marketing Expense. The $231.5 million increase in Sales and marketing
expense was attributable to increases in headcount, which were primarily driven
by the acquisition of Vivint Solar in October 2020 , resulting in higher employee
compensation. Additionally, we spent more in costs to acquire customers through
our sales lead generating partners in the first nine months of 2021 compared to
the prior year period. Partially offsetting these increases in Sales and
marketing expense is a decrease in costs related to retail lead generating
partners, as well as a decrease of $7.6 million in non-recurring and
restructuring costs incurred during the nine months ended September 30, 2021 .
Included in sales and marketing expense is $16.1 million and $10.7 million of
amortization of costs to obtain Customer Agreements for the nine months ended
September 30, 2021 and 2020, respectively.
Research and Development Expense. The $2.4 million increase in Research and
development expense was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation costs, consulting costs and $0.2 million of nonrecurring
acquisition related costs.
General and Administrative Expense. The $88.2 million increase in General and
administrative expenses was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation and consulting costs, partially offset by a decrease of $4.9
million in nonrecurring (primarily acquisition-related) costs during the nine
months ended September 30, 2021 .
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Non-Operating Expenses
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Interest expense, net $ (238,365) $ (152,013) $ (86,352) 57 %
Other income, net $ 18,462 $ 766 $ 17,696 2,310 %
Interest Expense, net. The increase in Interest expense, net of $86.4 million
included $73.0 million of interest expense associated with the debt acquired
with Vivint Solar. The remaining increase is primarily related to additional
non-recourse debt entered into subsequent to September 30, 2020 . Included in net
interest expense is $19.5 million and $18.5 million of non-cash interest
recognized under Customer Agreements that have a significant financing component
for the nine months ended September 30, 2021 and 2020, respectively.
Other Income, net. The increase in other income of $17.7 million relates
primarily to gains on derivatives recognized in the nine months ended September
30, 2021 , with no such comparable activity in the nine months ended September
30, 2020 .
Income Tax Expense (Benefit)
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Income tax benefit $ (19,058) $ (30,424) $ 11,366 (37) %
The decrease in income tax benefit of $11.4 million primarily relates to an
increase in losses allocable to noncontrolling interest and redeemable
noncontrolling interest, a decrease in state income tax benefit, and a decrease
in stock-based compensation deductions. These changes were offset by an
increased pre-tax loss and a decrease in valuation allowance.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands)
Net loss attributable to noncontrolling
interests and redeemable noncontrolling
interests $ (618,160) $ (325,425) $ (292,735) 90 %
Net loss attributable to noncontrolling interests and redeemable noncontrolling
interests was primarily the result of an addition of five other new investment
funds since September 30, 2020 , for which the HLBV method was used in
determining the amount of net loss attributable to noncontrolling interests, as
well as $69.0 million of net loss related Vivint Solar's noncontrolling
interests and redeemable noncontrolling interests. Redeemable noncontrolling
interests generally allocates more loss to the noncontrolling interest in the
first several years after fund formation.
Liquidity and Capital Resources
As ofSeptember 30, 2021 , we had cash of$717.6 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, cash generated from our sources of revenue and borrowings from secured credit facilities arrangements with syndicates of banks and from secured, long-term non-recourse loan arrangements. In 2020, we received$595.0 million of new commitments on secured credit facilities arrangements with syndicates of banks and$1.3 billion of commitments from secured, long-term non-recourse loan 51 -------------------------------------------------------------------------------- arrangements. 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 ofSeptember 30, 2021 , we had outstanding borrowings of$209.3 million on our$250.0 million corporate bank line of credit maturing inApril 2022 . Additionally, we have purchase commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase$30.0 million of photovoltaic modules, inverters and batteries by the end of 2022. InJanuary 2021 , we issued$400.0 million of convertible senior notes with a maturity date ofFebruary 1, 2026 , for net proceeds of approximately$389.0 million . Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. The solar energy systems that are operational are expected to generate a positive return rate over the term of the Customer Agreement, typically 20 or 25 years. However, in order to grow, we will continue to be dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we anticipate raising additional required capital from new and existing investors. We believe our cash, investment fund commitments and available borrowings as further described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2021 2020 (in thousands) Consolidated cash flow data: Net cash used in operating activities$ (535,829) $ (166,759) Net cash used in investing activities (1,197,970)
(686,752)
Net cash provided by financing activities 1,966,712
871,796
Net change in cash and restricted cash$ 232,913
Operating Activities During the nine months endedSeptember 30, 2021 , we used$535.8 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 nine months endedSeptember 30, 2021 , our operating cash outflows were$208.2 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$327.6 million . During the nine months endedSeptember 30, 2020 , we used$166.8 million in net cash from operating activities. The driver of our operating cash inflow consists of the costs of our revenue, as well as sales, marketing and general and administrative costs. During the nine months endedSeptember 30, 2020 , our operating cash outflows were$146.3 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash inflow of$20.5 million . Investing Activities During the nine months endedSeptember 30, 2021 , we used$1,198.0 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 nine months endedSeptember 30, 2020 , we used$686.8 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 nine months endedSeptember 30, 2021 , we generated$1,966.7 million from financing activities. This was primarily driven by$748.1 million in net proceeds from fund investors and$1,246.1 million in net proceeds from debt, offset by acquisition of noncontrolling interest of$41.6 million and$9.2 million in repayments under finance lease obligations. 52 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2020 , we generated$871.8 million from financing activities. This was primarily driven by$555.0 million in net proceeds from fund investors and$211.7 million in net proceeds from debt, offset by$7.8 million in repayments under finance lease obligations. Debt and Investing Fund Commitments As ofSeptember 30, 2021 , we had committed and available capital of approximately$495.3 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. Convertible Senior Notes Offering OnJanuary 25, 2021 , we entered into a purchase agreement (the "Purchase Agreement") withCredit Suisse Securities (USA) LLC andMorgan Stanley & Co. LLC , as representatives of the several initial purchasers (the "Purchasers"), to issue and sell$350.0 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the "Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes were sold to the Purchasers pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. In addition, we granted the Purchasers an option to purchase, during a 13-day period beginning on, and including, the date on which the Notes were first issued, up to an additional$50.0 million aggregate principal amount of Notes on the same terms and conditions. The Purchasers exercised their option in full onJanuary 26, 2021 . The net proceeds from the sale of the Notes issued onJanuary 28, 2021 (after deducting the Purchasers' discount and estimated offering expenses) was approximately$389.0 million . OnJanuary 28, 2021 , we entered into an Indenture (the "Indenture") withWells Fargo Bank, National Association , as trustee (the "Trustee"), pursuant to which we issued$400.0 million aggregate principal amount of Notes. The Notes will not bear regular interest, and the principal amount of the notes will not accrete. The Notes may bear special interest under specified circumstances relating to our failure to comply with our reporting obligations under the Indenture or if the Notes are not freely tradable as required by the Indenture. The Notes will mature onFebruary 1, 2026 , unless earlier repurchased by us, redeemed by us or converted pursuant to their terms. In connection with the offering of the Notes, onJanuary 25, 2021 andJanuary 26, 2021 , we entered into privately negotiated capped call transactions withCredit Suisse Capital LLC , represented byCredit Suisse Securities (USA) LLC ,Morgan Stanley & Co. LLC , Barclays Bank PLC, through its agentBarclays Capital Inc. , and Royal Bank of Canada, represented byRBC Capital Markets, LLC (the "Capped Calls"). The Capped Calls each have an initial strike price of approximately$117.91 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of$157.22 per share. The Capped Calls cover, subject to anti-dilution adjustments, approximately 3.4 million shares of common stock. The Capped Calls are expected generally to reduce the potential dilution to the common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes, as the case may be, in the event the market price per share of common stock, as measured under the Capped Calls, is greater than the strike price of the Capped Call, with such offset subject to a cap. If, however, the market price per share of the common stock, as measured under the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the common stock exceeds the cap price. We used approximately$28.0 million from the net proceeds from the issuance and sale of the Notes to purchase the Capped Calls. The final components of the Capped Calls are scheduled to expire onJanuary 29, 2026 .
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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