Sunrun(US:RUN)2023-10-31 16:00Part I – Financial Information Financial Statements (Unaudited) Sunrun reported a $1.47 billion net loss in Q3 2023, driven by a $1.16 billion goodwill impairment, with total revenue decreasing 11% to $563.2 million as system sales declined Consolidated Balance Sheets As of September 30, 2023, total assets grew to $20.03 billion from $19.27 billion at year-end 2022, primarily due to an increase in net solar energy systems, while total liabilities rose significantly to $12.95 billion from $11.09 billion, driven by a substantial increase in non-recourse debt Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash | $643,787 | $740,508 | | Solar energy systems, net | $12,528,617 | $10,988,361 | | Goodwill | $3,122,168 | $4,280,169 | | Total Assets | $20,027,115 | $19,268,805 | | Liabilities & Equity | | | | Non-recourse debt (current & non-current) | $9,325,713 | $7,501,109 | | Total Liabilities | $12,952,737 | $11,089,788 | | Total Stockholders' Equity | $5,611,108 | $6,708,122 | Consolidated Statements of Operations For Q3 2023, Sunrun's total revenue decreased 11% year-over-year to $563.2 million, as a 32% drop in system and product sales overshadowed a 17% increase in customer agreement and incentive revenue, leading to a $1.47 billion net loss due to a $1.16 billion goodwill impairment charge Q3 2023 vs Q3 2022 Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Total Revenue | $563,181 | $631,906 | | - Customer agreements and incentives | $316,528 | $271,211 | | - Solar energy systems and product sales | $246,653 | $360,695 | | Goodwill Impairment | $1,158,000 | $0 | | Loss from Operations | $(1,347,477) | $(136,245) | | Net Loss | $(1,470,938) | $(155,506) | | Net (Loss) Income Attributable to Common Stockholders | $(1,069,459) | $210,560 | | Diluted (Loss) Income Per Share | $(4.92) | $0.96 | Nine Months 2023 vs 2022 Performance (in thousands, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | Total Revenue | $1,743,223 | $1,712,270 | | Goodwill Impairment | $1,158,000 | $0 | | Loss from Operations | $(1,781,112) | $(473,002) | | Net Loss | $(2,147,435) | $(521,731) | | Net (Loss) Income Attributable to Common Stockholders | $(1,254,373) | $110,356 | | Diluted (Loss) Income Per Share | $(5.81) | $0.51 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash used in operating activities was $704.7 million, funded by $2.66 billion in net cash provided by financing activities, mainly from non-recourse debt proceeds and contributions from noncontrolling interests Consolidated Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(704,733) | $(544,120) | | Net cash used in investing activities | $(1,952,019) | $(1,567,376) | | Net cash provided by financing activities | $2,655,674 | $2,217,118 | | Net change in cash and restricted cash | $(1,078) | $105,622 | Notes to Consolidated Financial Statements Key notes highlight a $1.2 billion non-cash goodwill impairment charge due to a sustained decline in market capitalization, with total debt at $10.24 billion, and approximately $23.6 billion in contracted but not yet recognized revenue - Due to a sustained decline in its market capitalization, the company performed a quantitative assessment and recorded a non-cash goodwill impairment charge of $1.2 billion in Q3 202353 - As of September 30, 2023, the company had approximately $23.6 billion in contracted but not yet recognized revenue, with about 5% expected to be recognized in the next 12 months58 - The company has purchase commitments of $208.2 million for photovoltaic modules, inverters, and batteries to be fulfilled by the end of 2023117 - The IRS is auditing one of the company's investment funds regarding the fair market value determination of its solar energy systems, which is covered by a 2018 insurance policy120 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant headwinds from rising interest rates and California's Net Billing Tariff (NBT), which impacted originations, while Networked Solar Energy Capacity grew to 6,462 MW, and the $1.2 billion goodwill impairment significantly affected profitability Market & Macroeconomic Environment The company faces significant macroeconomic challenges, including rising interest rates which increase the cost of capital and may reduce financing proceeds, while California's new Net Billing Tariff (NBT) has limited the financial attractiveness of solar-only systems - Rising interest rates have resulted in a decrease in advance rates, reducing proceeds from certain investment funds and increasing the cost of capital135 - California's new Net Billing Tariff (NBT) has limited the financial attractiveness of solar-only systems, causing originations in the state to be below pre-transition levels136138 - The NBT policy significantly enhances the value proposition of storage offerings, and the company believes California will become a predominantly solar-plus-storage market136 Key Operating Metrics As of September 30, 2023, Sunrun's key operating metrics showed continued growth, with Networked Solar Energy Capacity increasing to 6,462 megawatts, total customers growing to 903,270, and Gross Earning Assets reaching $13.3 billion Key Operating Metrics | Metric | As of Sep 30, 2023 | As of Sep 30, 2022 | | :--- | :--- | :--- | | Networked Solar Energy Capacity (MW) | 6,462 | 5,392 | | Customers | 903,270 | 759,937 | | Gross Earning Assets (in thousands) | $13,299,394 | $11,518,274 | Results of Operations In Q3 2023, revenue fell 11% year-over-year due to a $106.2 million decrease in solar energy system sales, partially offset by a $55.5 million increase in customer agreement revenue, while operating expenses surged 149% primarily due to the $1.2 billion goodwill impairment - Q3 2023 revenue from solar energy systems sales decreased by $106.2 million (44%) year-over-year, attributed to more customers choosing customer agreements over outright purchases due to higher interest rates182183 - Q3 2023 cost of customer agreements and incentives increased by $74.2 million (35%) year-over-year, driven by the growth in new systems placed in service184 - A goodwill impairment charge of $1.2 billion was the primary driver for the 149% increase in total operating expenses for Q3 2023 compared to Q3 2022184191 Liquidity and Capital Resources As of September 30, 2023, Sunrun had $643.8 million in cash, and for the first nine months of 2023, it used $704.7 million in cash from operations, funded by generating $2.66 billion from financing activities, primarily through debt issuance and contributions from fund investors - As of September 30, 2023, the company had cash of $643.8 million and outstanding borrowings of $517.2 million on its $600.0 million corporate bank line of credit211 Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(704,733) | $(544,120) | | Net cash used in investing activities | $(1,952,019) | $(1,567,376) | | Net cash provided by financing activities | $2,655,674 | $2,217,118 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to changes in interest rates on its floating-rate debt, which it hedges using derivative instruments like interest rate swaps, with no material changes since December 31, 2022 - The company's main market risk is from changes in interest rates on its floating-rate debt221 - Sunrun uses interest rate swaps to manage its interest rate exposure and does not use derivatives for speculative purposes221 Controls and Procedures Based on management's evaluation, including the CEO and CFO, the company concluded that its disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023223 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls224 Part II – Other Information Legal Proceedings The company is subject to various legal proceedings and claims in the ordinary course of business but does not believe any ongoing claims will have a material adverse effect on its financial position - The company is subject to legal proceedings in the ordinary course of business but does not currently expect them to have a material adverse effect121122 Risk Factors The company outlines extensive risks, with significant emphasis on the evolving solar industry, regulatory changes, and financing challenges, including the impact of California's new net metering policy (NBT), rising interest rates, supply chain reliance, and the need to raise substantial capital Risks Related to the Solar Industry The company faces risks from the evolving solar market, including uncertainty in market growth, reliance on government incentives, adverse changes to California's net metering policy (NBT), increased costs from supply chain issues and tariffs, and intense competition - Newly adopted changes to California's net metering policy (NBT) have limited the financial attractiveness of offerings, particularly for solar-only systems, and originations in California are below pre-transition levels231 - The business may be harmed by cost increases associated with tariffs (Section 201, AD/CVD) and trade restrictions related to forced labor concerns (UFLPA), which can cause supply chain delays and equipment shortages236237239 - Competition is faced from traditional utilities, other residential solar providers, and new entrants, competing on price, predictability, and service243245 Risks Related to Our Operating Structure and Financing Activities The company's growth is highly dependent on its ability to raise capital from third parties, particularly through tax equity investment funds, with rising interest rates increasing the cost of capital and the business carrying substantial debt that requires significant cash flow to service - Future success depends on the ability to raise capital from third parties, as the business has historically been funded through tax equity investment funds258 - Rising interest rates increase the cost of capital, may decrease financing advance rates, and could negatively impact the price competitiveness of solar service offerings263 - The company has substantial debt and expects to incur more in the future, which intensifies risks related to servicing debt obligations and complying with covenants265270 Risks Related to Regulation and Policy The customer value proposition is heavily influenced by government policies, with key risks including adverse changes to net metering, particularly in California where the new NBT structure has substantially decreased the value of exported electricity, and potential new fixed charges on utility customers - The value of solar offerings is impacted by policies on retail electricity prices, the valuation of exported electricity (net metering), and rate design279280 - In California, the new Net Billing Tariff (NBT) structure substantially decreased the credit for exported electricity, presenting a significant change to the residential solar market284 - California regulators are considering income-graduated fixed charges for all residential utility customers, which could impact the value proposition for solar customers depending on the final design286 Risks Related to Our Business Operations Operational risks are significant and varied, including dependence on third-party solar partners and limited suppliers, construction and cost overrun risks, increased customer cancellations, high geographic concentration in California, and challenges in managing growth, product liability, and data security - The company depends on a limited number of suppliers for solar panels, batteries, and other components, making it susceptible to shortages, price changes, and quality issues297 - As the primary contractor, the company is subject to risks of construction cost overruns, delays, and customer cancellations, which have increased in some markets304306 - The business is geographically concentrated, with over 45% of its customer base in California, making it susceptible to adverse economic, regulatory, and weather conditions in that state316 Risks Related to Taxes and Accounting The company's business model relies on financing structures that monetize tax benefits like the federal Investment Tax Credit (ITC), with key risks including potential IRS challenges to the creditable basis of solar systems and the possibility of further goodwill impairment following the $1.2 billion charge in Q3 2023 - The business model relies on financing from tax equity investors who seek benefits like the federal ITC, and the availability of this financing is subject to many factors, including changes in tax law375376 - The IRS may challenge the fair market value claimed for solar systems, which could reduce the ITC and require the company to make significant indemnity payments to fund investors386387 - A $1.2 billion goodwill impairment was recorded in Q3 2023 due to a sustained decline in stock price, and further impairment losses are possible if adverse conditions persist403404 Risks Related to Ownership of Our Common Stock Ownership of the company's common stock involves risks including high volatility in the stock price, significant control by executive officers, directors, and principal stockholders (approximately 27.5%), and anti-takeover provisions that could depress the stock price or prevent a change in control - The market price of the company's common stock has been and may continue to be volatile408 - Executive officers, directors, and principal stockholders control approximately 27.5% of the outstanding common stock, allowing them to influence or control important corporate matters407 Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or issuer purchases of equity securities during the period - The company reported no unregistered sales of equity securities during the quarter429 Other Information On September 15, 2023, Ed Fenster, the company's Co-Executive Chair, adopted a Rule 10b5-1(c) trading plan for the exercise of stock options and the sale of common stock, contingent upon the stock price reaching certain thresholds - Co-Executive Chair Ed Fenster adopted a Rule 10b5-1 trading plan for the exercise and sale of company stock, set to expire on December 28, 2024431 Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files