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 (the "Company") 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"). 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. 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 with 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. 35 -------------------------------------------------------------------------------- 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, 2022 , we operated the largest fleet of residential solar energy systems inthe United States . We have a Networked Solar Energy Capacity of 5,392 megawatts as ofSeptember 30, 2022 , 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, 2022 were approximately$11.5 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.
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. We also implemented a company-wide COVID-19 vaccine rewards campaign to encourage vaccination among team members. 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 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, 2022 , we had 62 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 36 -------------------------------------------------------------------------------- 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 redemption value
method
Liability balance as of
N/A N/A Noncontrolling interest balance (redeemable N/A $ 1,428.1 $ 6.7
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.
37
--------------------------------------------------------------------------------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 these 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. We believe
it is useful for investors to evaluate the future expected cash flows from all
customers that have been deployed through the respective measurement date, less
estimated costs to maintain such systems and estimated distributions to tax
equity partners in consolidated joint venture partnership flip structures, and
distributions to project equity investors.
38
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As of September 30,
2022 2021
Networked Solar Energy Capacity (megawatts) 5,392 4,457
Customers 759,937 630,441
As of September 30,
2022 2021
(in thousands)
Gross Earning Assets Contracted Period
3,358,679 2,928,806
Gross Earning Assets $ 11,518,274 $ 9,158,252 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, 2022
Discount rate
Default rate 3% 4% 5% 6% 7%
(in thousands)
5% $ 9,489,070 $ 8,653,051 $ 7,926,863 $ 7,293,376 $ 6,738,447
0% $ 9,783,286 $ 8,914,152 $ 8,159,595 $ 7,501,707 $ 6,925,705 Gross Earning Assets Renewal Period:
As of September 30, 2022
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 4,348,699 $ 3,554,999 $ 2,917,670 $ 2,403,932 $ 1,988,249
90% $ 5,004,295 $ 4,091,652 $ 3,358,679 $ 2,767,731 $ 2,289,481
100% $ 5,659,888 $ 4,628,302 $ 3,799,685 $ 3,131,528 $ 2,590,712
Total Gross Earning Assets:
As of September 30, 2022
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 14,131,985 $ 12,469,151 $ 11,077,265 $ 9,905,638 $ 8,913,954
90% $ 14,787,580 $ 13,005,804 $ 11,518,274 $ 10,269,438 $ 9,215,186
100% $ 15,443,174 $ 13,542,454 $ 11,959,281 $ 10,633,235 $ 9,516,416
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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, 2021 . 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.
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 begin to 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. For Customer
Agreements that include a fixed fee per month which entitles the customer to any
and all electricity generated by the system, we recognize revenue evenly over
the time that we satisfy our performance obligations over the initial term of
Customer Agreements. For Customer Agreements that charge a fixed price per
kilowatt hour, revenue is recognized based on the actual amount of power
generated at rates specified under the contracts. 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.
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. Customer Agreements
with a performance guarantee 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
40
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occur. If our estimate of the future production shortfall amount for Customer
Agreements with a performance guarantee was 10% higher, the additional reduction
to revenue in the nine months ended September 30, 2022 would have been less than
$2.2 million . Our estimated production shortfall reduced revenue during the nine
months ended September 30, 2022 by less than $5.5 million more than the prior
year's period. We have historically estimated an immaterial amount of liquidated
damages pursuant to SREC contracts, and actual damages have not been materially
different from estimates, nor material in amount during the nine months ended
September 30, 2022 and 2021.
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
generally 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. For solar energy
system sales that include delivery obligations up until interconnection to the
local power grid with permission to operate, we recognize revenue at PTO.
Certain solar energy systems sold to customers include fees for extended
warranty and maintenance services. These fees are recognized over the life of
the service agreement.
Product sales revenue consists of revenue from the sale of solar panels,
inverters, racking systems, roof repair, 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, or as services are delivered.
Customer lead revenue is recognized at the time the lead is delivered.
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed.Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. We have determined that we operate as one reporting unit and our goodwill is tested for impairment at the enterprise level. We perform our annual impairment test of goodwill onOctober 1 of each fiscal year or whenever events or circumstances change or occur that would indicate that goodwill might be impaired. When assessing goodwill for impairment, we use qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350,Goodwill . We also consider our enterprise value and if necessary, a discounted cash flow model, which involves assumptions and estimates, including our future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require us to perform a quantitative impairment test include a significant decline in our financial results, a significant decline in our enterprise value relative to our net book value, a sustained decline in our stock price, or an unanticipated change in competition or our market share and a significant change in our strategic plans. As ofOctober 1, 2022 , we concluded that our fair value exceeded our carrying value. SinceDecember 31, 2021 , the price of our common stock has declined. A sustained decrease in the price of our common stock is one of the qualitative factors to be considered as part of an impairment test when evaluating whether events or changes in circumstances may indicate that it is more likely than not that a potential goodwill impairment exists. We will continue monitoring the analysis of the qualitative and quantitative factors used as a basis for the goodwill impairment test during the remainder of fiscal year 2022.
In performing the assessment, we performed a qualitative assessment and
determined there were no indicators of impairment. To corroborate this
conclusion, we compared the carrying value of our one reporting unit to our
market capitalization and concluded that there was no goodwill impairment during
the nine months ended
41
--------------------------------------------------------------------------------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. During the nine months endedSeptember 30, 2022 and 2021, there were no indicators of impairment and therefore no cash flow analysis was performed.
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 two 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 various inputs to calculate the amounts that fund investors would receive upon a hypothetical liquidation. Changes in these inputs, 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. The calculation of HLBV does not require estimates since each HLBV calculation is based upon the liquidation provisions of each fund's contractual agreement. The calculation of the redeemable noncontrolling interest balance involves estimates such as a discount rate used in net present value calculations, and customer default rates. If the assumptions used for each of these were 10% higher, the impact to the aggregate redeemable noncontrolling interest balance as ofSeptember 30, 2022 would be a reduction of$7.4 million . 42 --------------------------------------------------------------------------------
Results of Operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Quarterly Report on Form 10-Q.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands, except per share data)
Revenue:
Customer agreements and incentives $ 271,211 $ 231,869 $ 740,789 $ 625,939
Solar energy systems and product
sales 360,695 206,896 971,481 548,786
Total revenue 631,906 438,765 1,712,270 1,174,725
Operating expenses:
Cost of customer agreements and
incentives 209,539 174,457 613,878 512,073
Cost of solar energy systems and
product sales 311,782 172,538 854,105 458,208
Sales and marketing 193,992 171,462 556,346 442,174
Research and development 4,398 5,602 16,794 16,624
General and administrative 47,099 51,290 140,126 199,836
Amortization of intangible assets 1,341 1,341 4,023 4,029
Total operating expenses 768,151 576,690 2,185,272 1,632,944
Loss from operations (136,245) (137,925) (473,002) (458,219)
Interest expense, net (117,214) (89,096) (312,513) (238,365)
Other income (expense), net 97,953 (4,332) 263,784 18,462
Loss before income taxes (155,506) (231,353) (521,731) (678,122)
Income tax expense (benefit) - 9,980 - (19,058)
Net loss (155,506) (241,333) (521,731) (659,064)
Net loss attributable to
noncontrolling interests and
redeemable noncontrolling
interests (366,066) (265,462) (632,087) (618,160)
Net income (loss) attributable to
common stockholders $ 210,560 $ 24,129 $ 110,356 $ (40,904)
Net income (loss) per share
attributable to common
stockholders
Basic $ 0.99 $ 0.12 $ 0.52 $ (0.20)
Diluted $ 0.96 $ 0.11 $ 0.51 $ (0.20)
Weighted average shares used to
compute income (loss) per share
attributable to common
stockholders
Basic 212,696 206,103 210,609 204,355
Diluted 220,850 213,016 218,662 204,355
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Comparison of the Three Months Ended
Revenue
Three Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Customer agreements $ 234,219 $ 194,924 $ 39,295 20 %
Incentives 36,992 36,945 47 - %
Customer agreements and incentives 271,211 231,869 39,342 17 %
Solar energy systems 241,697 127,936 113,761 89 %
Products 118,998 78,960 40,038 51 %
Solar energy systems and product
sales 360,695 206,896 153,799 74 %
Total revenue $ 631,906 $ 438,765 $ 193,141 44 %
Customer Agreements and Incentives. The $39.3 million increase in revenue from
Customer Agreements was primarily due to new systems placed in service in the
period from October 1, 2021 through September 30, 2022 , plus a full quarter of
revenue recognized in the third quarter of 2022 for systems placed in service in
the third quarter of 2021 versus only a partial amount of such revenue related
to the period in which the assets were in service in 2021. Revenue from
incentives consists primarily of sales of SRECs. Revenue from incentives
remained consistent with the prior year period.
Solar Energy Systems and Product Sales. Revenue from solar energy systems sales
increased by $113.8 million compared to the prior year due to overall increased
demand for solar energy systems in the marketplace, particularly through retail
partners. Additionally, the average price of system sales increased 12% from the
prior year period. Product sales increased by $40.0 million , primarily due to
overall increased demand for solar energy related products and services in the
marketplace.
Operating Expenses
Three Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Cost of customer agreements and incentives $ 209,539
20 %
Cost of solar energy systems and product
sales 311,782 172,538 139,244 81 %
Sales and marketing 193,992 171,462 22,530 13 %
Research and development 4,398 5,602 (1,204) (21) %
General and administrative 47,099 51,290 (4,191) (8) %
Amortization of intangible assets 1,341 1,341 - - %
Total operating expenses $ 768,151 $ 576,690 $ 191,461 33 %
Cost of Customer Agreements and Incentives. The $35.1 million increase in Cost
of customer agreements and incentives was primarily due to the new systems
placed in service in the period from October 1, 2021 through September 30, 2022 ,
plus a full quarter of costs recognized in the third quarter of 2022 for systems
placed in service in the third quarter of 2021 versus only a partial amount of
such expenses related to the period in which the assets were in service in 2021.
The cost of Customer Agreements and incentives increased to 77% of revenue from
customer agreements and incentives during the three months ended September 30,
2022 , from 75% during the three months ended September 30, 2021 . For the three
months ended September 30, 2022 , the cost of Customer Agreement and incentives
includes $2.0 million related to upgrading some of our fleet, as necessary, to
enable the transition from 3G to 4G technology.
44
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Cost of Solar Energy Systems and Product Sales. The $139.2 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.
The cost of solar energy systems and product sales increased to 86% of revenue
from solar energy systems and product sales during the three months ended
September 30, 2022 , from 83% during the three months ended September 30, 2021 ,
primarily as a result of operational efficiencies, as well as pricing increases.
Sales and Marketing Expense. The $22.5 million increase in Sales and marketing
expense was primarily attributable increases in headcount driving higher
employee compensation and costs to acquire customers through our sales lead
generating partners. Additionally, there was an increase of $0.5 million in
severance related costs incurred during the three months ended September 30,
2022 . Included in sales and marketing expense is $9.8 million and $6.5 million
of amortization of costs to obtain Customer Agreements for the three months
ended September 30, 2022 and 2021, respectively.
Research and Development Expense. The
General and Administrative Expense. The$4.2 million decrease in General and administrative expenses was primarily attributable to decreases in headcount driving lower employee compensation. Non-Operating Expenses, net Three Months Ended September 30, Change 2022 2021 $ % (in thousands) Interest expense, net $ (117,214)$ (89,096) $ (28,118) 32 % Other income (expenses), net $ 97,953$ (4,332) $ 102,285 (2,361) % Interest Expense, net. The increase in Interest expense, net of$28.1 million is primarily related to additional non-recourse debt entered into subsequent toSeptember 30, 2021 . Included in net interest expense is$7.1 million and$6.6 million of non-cash interest recognized under Customer Agreements that have a significant financing component for the three months endedSeptember 30, 2022 and 2021, respectively. Other Income (Expenses), net. The increase in other income (expenses), net of$102.3 million relates primarily to gains on derivatives recognized in the three months endedSeptember 30, 2022 , with no such comparable activity in the three months endedSeptember 30, 2021 . Additionally, there was a net gain of$26.0 million recognized on the extinguishment of debt in the three months endedSeptember 30, 2022 , compared with a net loss of$6.0 million on the early extinguishment of debt in the three months endedSeptember 30, 2021 . Income Tax Expense Three Months Ended September 30, Change 2022 2021 $ % (in thousands) Income tax expense $ -$ 9,980 $ (9,980) (100) % The decrease in income tax expense of$10.0 million is primarily attributable to an increase in tax benefit related to the valuation allowance, offset by an increase of the allocation of losses on noncontrolling interests and decreased losses before income taxes. 45 -------------------------------------------------------------------------------- Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests Three Months Ended September 30, Change 2022 2021 $ % (in thousands) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (366,066) $ (265,462) $ (100,604) 38 % Net loss attributable to noncontrolling interests and redeemable noncontrolling interests was primarily the result of an addition of five other new investment funds sinceSeptember 30, 2021 , for which the HLBV method is used in determining the amount of net loss attributable to 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
Revenue
Nine Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Customer agreements $ 656,724 $ 549,689 $ 107,035 19 %
Incentives 84,065 76,250 7,815 10 %
Customer agreements and incentives 740,789 625,939 114,850 18 %
Solar energy systems 651,010 307,408 343,602 112 %
Products 320,471 241,378 79,093 33 %
Solar energy systems and product
sales 971,481 548,786 422,695 77 %
Total revenue $ 1,712,270 $ 1,174,725 $ 537,545 46 %
Customer Agreements and Incentives. The $107.0 million increase in revenue from
Customer Agreements was primarily due to new systems placed in service in the
period from October 1, 2021 through September 30, 2022 , plus a full nine months
of revenue recognized in 2022 for systems placed in service in the first nine
months of 2021 versus only a partial amount of such revenue related to the
period in which the assets were in service in 2021. Revenue from incentives
consists primarily of sales of SRECs. The $7.8 million increase relates to the
timing and volume of SREC sales which are responsive to market conditions.
Solar Energy Systems and Product Sales. Revenue from solar energy systems sales
increased by $343.6 million compared to the prior year due to overall increased
demand for solar energy systems in the marketplace, particularly through retail
partners. Additionally, the average price of system sales increased 15% from the
prior year period. Product sales increased by $79.1 million , primarily due to
overall increased demand for solar energy related products and services in the
marketplace.
46
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Operating Expenses
Nine Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Cost of customer agreements and incentives $ 613,878
20 %
Cost of solar energy systems and product
sales 854,105 458,208 395,897 86 %
Sales and marketing 556,346 442,174 114,172 26 %
Research and development 16,794 16,624 170 1 %
General and administrative 140,126 199,836 (59,710) (30) %
Amortization of intangible assets 4,023 4,029 (6) - %
Total operating expenses $ 2,185,272 $ 1,632,944 $ 552,328 34 %
Cost of Customer Agreements and Incentives. The $101.8 million increase in Cost
of customer agreements and incentives was primarily due to the new systems
placed in service in the period from October 1, 2021 through September 30, 2022 ,
plus a full nine months of costs recognized in 2022 for systems placed in
service in the nine months of 2021 versus only a partial amount of such expenses
related to the period in which the assets were in service in 2021.
The cost of Customer Agreements and incentives remained consistent with the
prior year's period at 83% of revenue from customer agreements and incentives
during the nine months ended September 30, 2022 . For the nine months ended
September 30, 2022 , the cost of Customer Agreement and incentives includes $12.5
million related to upgrading some of our fleet, as necessary, to enable the
transition from 3G to 4G technology.
Cost of Solar Energy Systems and Product Sales. The $395.9 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.
The cost of solar energy systems and product sales increased to 88% of revenue
from solar energy systems and product sales during the nine months ended
September 30, 2022 , from 83% during the nine months ended September 30, 2021 ,
primarily as a result of operational efficiencies, as well as pricing increases.
Sales and Marketing Expense. The $114.2 million increase in Sales and marketing
expense was primarily attributable increases in headcount driving higher
employee compensation and costs to acquire customers through our sales lead
generating partners. Additionally, there was an increase of $4.2 million in
severance related costs incurred during the nine months ended September 30,
2022 . Included in sales and marketing expense is $27.1 million and $16.1 million
of amortization of costs to obtain Customer Agreements for the nine months ended
September 30, 2022 and 2021, respectively.
Research and Development Expense. The
General and Administrative Expense. The$59.7 million decrease in General and administrative expenses was primarily attributable to a decrease in stock-based compensation expense. This decrease in stock-based compensation was primarily attributable to$36.4 million of expense for Vivint Solar recognized during the nine months endedSeptember 30, 2021 , which was based on the fair value at the time of the acquisition and the underlying awards have since fully vested. Additionally, there were decreases related to consulting costs and$11.7 million in severance related integration costs, when compared to the nine months endedSeptember 30, 2021 . 47 --------------------------------------------------------------------------------
Non-Operating Expenses, net
Nine Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Interest expense, net $ (312,513) $ (238,365) $ (74,148) 31 %
Other income, net $ 263,784 $ 18,462 $ 245,322 1,329 %
Interest Expense, net. The increase in Interest expense, net of $74.1 million is
primarily related to additional non-recourse debt entered into subsequent to
September 30, 2021 . Included in net interest expense is $21.0 million and $19.5
million of non-cash interest recognized under Customer Agreements that have a
significant financing component for the nine months ended September 30, 2022 and
2021, respectively.
Other Income, net. The increase in other income of $245.3 million relates
primarily to gains on derivatives recognized in the nine months ended September
30, 2022 , as well as a $47.3 million gain on an equity investment, with no such
comparable activity in the nine months ended September 30, 2021 .
Income Tax Benefit
Nine Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Income tax benefit $ - $ (19,058) $ 19,058 (100) %
The decrease in income tax benefit of $19.1 million is primarily attributable to
a decrease of losses before income taxes and decrease of tax benefit from
stock-based compensation, offset by an increase in tax benefit related to the
valuation allowance.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Nine Months Ended September 30, Change
2022 2021 $ %
(in thousands)
Net loss attributable to noncontrolling
interests and redeemable noncontrolling
interests $ (632,087) $ (618,160) $ (13,927) 2 %
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, 2021 , for which the HLBV method is used in determining
the amount of net loss attributable to 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, 2022 , we had cash of$672.1 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 2021, we received$1.8 billion of new commitments on secured credit facilities arrangements with syndicates of banks and$888.7 million of commitments from secured, long-term non-recourse loan 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, 2022 , we had outstanding borrowings of$506.0 million on our$600.0 million corporate bank line of credit maturing inJanuary 2025 . Additionally, we have purchase commitments, which 48 -------------------------------------------------------------------------------- have the ability to be canceled without significant penalties, with multiple suppliers to purchase$433.5 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$389.0 million . Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. The solar energy systems that are operational are expected to generate a positive return rate over the term of the Customer Agreement, typically 20 or 25 years. However, in order to grow, we will continue to be dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we anticipate raising additional required capital from new and existing investors. We believe our cash, investment fund commitments and available borrowings as further described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and available credit via our credit facilities. The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2022 2021 (in thousands) Consolidated cash flow data: Net cash used in operating activities$ (544,120) $ (535,829) Net cash used in investing activities (1,567,376)
(1,197,970)
Net cash provided by financing activities 2,217,118
1,966,712
Net change in cash and restricted cash$ 105,622 $ 232,913 Operating Activities During the nine months endedSeptember 30, 2022 , we used$544.1 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, 2022 , our operating cash outflows were$282.6 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$261.5 million . 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 inflow of$327.6 million .
Investing Activities
During the nine months endedSeptember 30, 2022 , we used$1,567.4 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. Included within cash used in investing activities during the nine months endedSeptember 30, 2022 , was a$75.0 million contribution we made as an additional investment in our home electrification venture withSK E&S Co., Ltd.
During the nine months ended
Financing Activities
During the nine months endedSeptember 30, 2022 , we generated$2,217.1 million from financing activities. This was primarily driven by$774.9 million in net proceeds from fund investors,$1,467.5 million in net proceeds from debt and$22.6 million in net proceeds from stock-based awards activity, offset by$37.4 million in acquisition of noncontrollling interests and$10.5 million in repayments under finance lease obligations. 49 -------------------------------------------------------------------------------- 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,$1,246.1 million in net proceeds from debt and$23.4 million in net proceeds from stock-based awards activity, offset by$41.6 million in acquisition of noncontrollling interests and$9.2 million in repayments under finance lease obligations.
Debt and Investing Fund Commitments
As ofSeptember 30, 2022 , we had committed and available capital of approximately$288.4 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.
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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