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EX-32.1 - EXHIBIT 32.1 - Sunrun Inc.sunrunex3212017q2.htm
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EX-10.3 - EXHIBIT 10.3 - Sunrun Inc.sunrunex1032017q2.htm
EX-10.2 - EXHIBIT 10.2 - Sunrun Inc.sunrunex1022017q2.htm
EX-10.1 - EXHIBIT 10.1 - Sunrun Inc.sunrunex1012017q2.htm


 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q


(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37511 
 
Sunrun Inc.
(Exact name of registrant as specified in its charter)
 

Delaware
 
26-2841711
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

595 Market Street, 29th Floor
San Francisco, California 94105
(Address of principal executive offices and Zip Code)

(415) 580-6900
(Registrant’s telephone number, including area code) 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

As of August 3, 2017, the number of shares of the registrant’s common stock outstanding was 106,161,704.
 




Table of Contents


1




Sunrun Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Par Values)
 
 
June 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash
 
$
211,321

 
$
206,364

Restricted cash
 
15,672

 
11,882

Accounts receivable (net of allowances for doubtful accounts of $1,550 and $1,166 as of June 30, 2017 and December 31, 2016, respectively)
 
64,030

 
60,258

State tax credits receivable
 

 
13,713

Inventories
 
52,744

 
67,326

Prepaid expenses and other current assets
 
12,575

 
9,802

Total current assets
 
356,342

 
369,345

Restricted cash
 
5,952

 
6,117

Solar energy systems, net
 
2,951,260

 
2,629,366

Property and equipment, net
 
41,774

 
48,471

Intangible assets, net
 
16,397

 
18,499

Goodwill
 
87,543

 
87,543

Prepaid tax asset
 

 
378,541

Other assets
 
29,834

 
34,936

Total assets (1)
 
$
3,489,102

 
$
3,572,818

Liabilities and total equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
75,336

 
$
66,018

Distributions payable to noncontrolling interests and redeemable noncontrolling interests
 
13,212

 
10,654

Accrued expenses and other liabilities
 
52,961

 
59,261

Deferred revenue, current portion
 
70,601

 
70,849

Deferred grants, current portion
 
8,363

 
8,011

Capital lease obligations, current portion
 
8,525

 
10,015

Recourse debt, current portion
 
247,000

 

Long-term non-recourse debt, current portion
 
18,883

 
14,153

Lease pass-through financing obligation, current portion
 
5,869

 
5,823

Total current liabilities
 
500,750

 
244,784

Deferred revenue, net of current portion
 
578,484

 
583,401

Deferred grants, net of current portion
 
222,184

 
226,893

Capital lease obligations, net of current portion
 
8,745

 
12,965

Recourse debt, net of current portion
 

 
244,000

Long-term non-recourse debt, net of current portion
 
761,349

 
639,870

Lease pass-through financing obligation, net of current portion
 
139,249

 
137,958

Other liabilities
 
10,682

 
5,457

Deferred tax liabilities
 
54,376

 
415,397

Total liabilities (1)
 
2,275,819

 
2,510,725

Commitments and contingencies (Note 13)
 


 


Redeemable noncontrolling interests
 
163,077

 
137,907

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of June 30, 2017 and December 31, 2016; no shares issued and outstanding as of June 30, 2017 and December 31, 2016
 

 

Common stock, $0.0001 par value—authorized, 2,000,000 shares as of June 30, 2017 and December 31, 2016; issued and outstanding, 105,940 and 104,321 shares as of June 30, 2017 and December 31, 2016, respectively
 
11

 
10

Additional paid-in capital
 
679,066

 
668,076

Accumulated other comprehensive income
 
(3,132
)
 
437

Retained earnings
 
45,282

 
4,438

Total stockholders’ equity
 
721,227

 
672,961

Noncontrolling interests
 
328,979

 
251,225

Total equity
 
1,050,206

 
924,186

Total liabilities, redeemable noncontrolling interests and total equity
 
$
3,489,102

 
$
3,572,818






2



1)
The Company’s consolidated assets as of June 30, 2017 and December 31, 2016 include $2,379,224 and $2,065,232, respectively, in assets of variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. Solar energy systems, net, as of June 30, 2017 and December 31, 2016 were $2,237,670 and $1,920,330, respectively; cash as of June 30, 2017 and December 31, 2016 were $108,039 and $120,728, respectively; restricted cash as of June 30, 2017 and December 31, 2016 were $3,574 and $1,680, respectively; accounts receivable, net as of June 30, 2017 and December 31, 2016 were $27,547 and $20,771, respectively; prepaid expenses and other current assets as of June 30, 2017 and December 31, 2016 were $235 and $242, respectively and other assets as of June 30, 2017 and December 31, 2016 were $2,159 and $1,481, respectively. The Company’s consolidated liabilities as of June 30, 2017 and December 31, 2016 include $762,273 and $617,011, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of June 30, 2017 and December 31, 2016 of $22,196 and $14,873, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of June 30, 2017 and December 31, 2016 of $13,213 and $10,654, respectively; accrued expenses and other liabilities as of June 30, 2017 and December 31, 2016 of $1,471 and $782, respectively; deferred revenue as of June 30, 2017 and December 31, 2016 of $444,103 and $422,685, respectively; deferred grants as of June 30, 2017 and December 31, 2016 of $106,933 and $109,034, respectively; and long-term non-recourse debt as of June 30, 2017 and December 31, 2016 of $172,020 and $58,983, respectively.
The accompanying notes are an integral part of these consolidated financial statements.

3



Sunrun Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
 
Operating leases and incentives
 
$
65,337

 
$
45,394

 
$
113,435

 
$
79,934

Solar energy systems and product sales
 
72,511

 
77,144

 
128,530

 
141,347

Total revenue
 
137,848

 
122,538

 
241,965

 
221,281

Operating expenses:
 
 
 
 
 
 
 
 
Cost of operating leases and incentives
 
47,114

 
38,608

 
91,450

 
76,708

Cost of solar energy systems and product sales
 
60,938

 
61,600

 
110,369

 
119,112

Sales and marketing
 
32,784

 
43,716

 
64,460

 
86,904

Research and development
 
3,710

 
2,373

 
6,706

 
4,836

General and administrative
 
25,230

 
23,614

 
49,851

 
46,862

Amortization of intangible assets
 
1,051

 
1,051

 
2,102

 
2,103

Total operating expenses
 
170,827

 
170,962

 
324,938

 
336,525

Loss from operations
 
(32,979
)
 
(48,424
)
 
(82,973
)
 
(115,244
)
Interest expense, net
 
16,602

 
13,063

 
31,879

 
24,578

Other expenses (income), net
 
208

 
30

 
683

 
(502
)
Loss before income taxes
 
(49,789
)
 
(61,517
)
 
(115,535
)
 
(139,320
)
Income tax expense
 
15,453

 
3,210

 
22,791

 
3,210

Net loss
 
(65,242
)
 
(64,727
)
 
(138,326
)
 
(142,530
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
(90,364
)
 
(97,370
)
 
(176,175
)
 
(188,307
)
Net income available to common stockholders
 
$
25,122

 
$
32,643

 
$
37,849

 
$
45,777

Net income per share available to common stockholders
 
 
 
 
 
 
 
 
Basic
 
$
0.24

 
$
0.32

 
$
0.36

 
$
0.45

Diluted
 
$
0.23

 
$
0.31

 
$
0.35

 
$
0.44

Weighted average shares used to compute net income per share available to common stockholders
 
 
 
 
 
 
 
 
Basic
 
105,093

 
101,969

 
104,568

 
101,621

Diluted
 
107,347

 
104,768

 
106,911

 
104,494


The accompanying notes are an integral part of these consolidated financial statements.


4



Sunrun Inc.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income attributable to common stockholders
 
$
25,122

 
$
32,643

 
$
37,849

 
$
45,777

Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized loss on derivatives, net of income taxes
 
(3,709
)
 
165

 
(4,473
)
 
(5,633
)
Less interest expense on derivatives recognized into earnings, net of income taxes
 
(340
)
 
(120
)
 
(904
)
 
(645
)
Comprehensive income
 
$
21,753

 
$
32,928

 
$
34,280

 
$
40,789


5



Sunrun Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Operating activities:
 
 
 
 
Net loss
 
$
(138,326
)
 
$
(142,530
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization, net of amortization of deferred grants
 
65,282

 
46,564

Deferred income taxes
 
22,788

 
3,210

Stock-based compensation expense
 
11,389

 
8,647

Noncash interest expense
 
9,481

 
5,335

Interest on lease pass-through financing obligations
 
5,949

 
6,019

Reduction in lease pass-through financing obligations
 
(9,162
)
 
(9,491
)
Other noncash losses and expenses
 
4,590

 
2,924

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,215
)
 
3,884

Inventories
 
14,582

 
(16,839
)
Prepaid and other assets
 
(2,854
)
 
(2,760
)
Accounts payable
 
2,636

 
(9,889
)
Accrued expenses and other liabilities
 
(11,283
)
 
3,218

Deferred revenue
 
(4,314
)
 
3,295

Net cash used in operating activities
 
(33,457
)
 
(98,413
)
Investing activities:
 
 
 
 
Payments for the costs of solar energy systems, leased and to be leased
 
(356,726
)
 
(332,472
)
Purchases of property and equipment
 
(4,464
)
 
(8,208
)
Business acquisition, net of cash acquired
 

 
(5,000
)
Net cash used in investing activities
 
(361,190
)
 
(345,680
)
Financing activities:
 
 
 
 
Proceeds from state tax credits, net of recapture
 
13,171

 
9,123

Proceeds from issuance of recourse debt
 
91,400

 
257,400

Repayment of recourse debt
 
(88,400
)
 
(212,000
)
Proceeds from issuance of non-recourse debt
 
199,525

 
189,746

Repayment of non-recourse debt
 
(84,830
)
 
(16,543
)
Payment of debt fees
 
(4,955
)
 
(12,277
)
Proceeds from lease pass-through financing obligations
 
3,062

 
12,805

Contributions received from noncontrolling interests and redeemable noncontrolling interests
 
303,545

 
239,621

Distributions paid to noncontrolling interests and redeemable noncontrolling interests
 
(24,635
)
 
(18,257
)
(Payments) proceeds from exercises of stock options, net of withholding taxes on restricted stock units and issuance of shares in connection with the Employee Stock Purchase Plan
 
(425
)
 
3,616

Offering costs paid related to initial public offering
 

 
(437
)
Payment of capital lease obligations
 
(5,262
)
 
(6,416
)
Change in restricted cash
 
(2,592
)
 
1,068

Net cash provided by financing activities
 
399,604

 
447,449

 
 
 
 
 
Net change in cash
 
4,957

 
3,356

Cash, beginning of period
 
206,364

 
203,864

Cash, end of period
 
$
211,321

 
$
207,220

Supplemental disclosures of cash flow information
 
 
 
 
Cash paid for interest
 
$
17,434

 
$
10,676

Cash paid for taxes
 
$

 
$

Supplemental disclosures of noncash investing and financing activities
 
 
 
 
Purchases of solar energy systems and property and equipment included in accounts payable and accrued expenses
 
$
25,284

 
$
15,586

Purchases of solar energy systems included in non-recourse debt
 
$
12,873

 
$

Distributions payable to noncontrolling interests and redeemable noncontrolling interests
 
$
13,212

 
$
8,515

Vehicles acquired under capital leases
 
$
94

 
$
10,914


The accompanying notes are an integral part of these consolidated financial statements.

6



Sunrun Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Organization
Sunrun Inc. (“Sunrun” or the “Company”) was originally formed in 2007 as a California limited liability company and was converted into a Delaware corporation in 2008. The Company is engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems (“Projects”) in the United States.
Sunrun acquires customers directly and through relationships with various solar and strategic partners (“Partners”). The Projects are constructed either by Sunrun or by Sunrun’s Partners and are owned by the Company. Sunrun’s customers enter into a power purchase agreement (“PPA”) or a lease (each, a “Customer Agreement”) which typically has a term of 20 years. Sunrun monitors, maintains and insures the Projects. The Company also sells solar energy systems and products, such as panels and racking and solar leads generated to customers.
The Company has formed various subsidiaries (“Funds”) to finance the development of Projects. These Funds, structured as limited liability companies, obtain financing from outside investors and purchase or lease Projects from Sunrun under master purchase or master lease agreements. The Company currently utilizes three legal structures in its investment Funds, which are referred to as: (i) lease pass-throughs, (ii) partnership-flips and (iii) joint venture (“JV”) inverted leases.

Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. The unaudited consolidated financial statements are prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2017 or other future periods.
The consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries, including Funds, in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities (“VIEs”), through arrangements that do not involve controlling voting interests. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation, the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in ASC 810, is the party that has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it continues to be the primary beneficiary. The consolidated financial statements reflect the assets and liabilities of VIEs that are consolidated. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions, including, but not limited to, the estimates

7



that affect the collectability of accounts receivable, the valuation of inventories, the useful lives of solar energy systems, the useful lives of property and equipment, the valuation and useful lives of intangible assets, the fair value of assets acquired and liabilities assumed in business combinations, the effective interest rate used to amortize lease pass-through financing obligations, the fair value used to value solar energy systems, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, the fair value of debt instruments disclosed and the redemption value of redeemable noncontrolling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results may differ from such estimates.
Segment Information
The Company has one operating segment with one business activity, providing solar energy services and products to customers. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources. When evaluating performance and allocating resources, the CODM reviews financial information presented on a consolidated basis.
Revenues from external customers (including, but not limited to homeowners) for each group of similar products and services are as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Operating leases
 
$
47,034

 
$
32,980

 
$
82,096

 
$
58,307

Incentives
 
18,303

 
12,414

 
31,339

 
21,627

Operating leases and incentives
 
65,337

 
45,394

 
113,435

 
79,934

 
 
 
 
 
 
 
 
 
Solar energy systems
 
28,078

 
35,878

 
48,697

 
66,070

Products
 
44,433

 
41,266

 
79,833

 
75,277

Solar energy systems and product sales
 
72,511

 
77,144

 
128,530

 
141,347

Total revenue
 
$
137,848

 
$
122,538

 
$
241,965

 
$
221,281

Fair Value of Financial Instruments
The Company defines fair value as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation approaches to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Inputs that are unobservable, significant to the measurement of the fair value of the assets or liabilities and are supported by little or no market data.
The Company’s financial instruments include cash, receivables, accounts payable, accrued expenses, distributions payable to noncontrolling interests, derivatives, and recourse and non-recourse debt.
Recently Issued and Adopted Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606). The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements, and expands disclosure requirements. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2017 including the interim reporting

8



periods within that fiscal year. Adoption of this ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date.
The Company currently accounts for Customer Agreements pursuant to ASC 840, Leases. The Company currently believes the adoption of ASC 842, Leases ("ASC 842") will cause Customer Agreements to be accounted for under ASC 606. As such, the Company is considering adopting ASC 842 simultaneously with its adoption of ASC 606.
Under ASC 606, total consideration for Customer Agreements, including price escalators, may be recognized ratably over the term of the Customer Agreement. Customer Agreements with a prepaid element may include a significant financing component which will increase total consideration and interest expense using the effective interest rate method. The Company expects to accelerate the timing of revenue recognition for certain incentives recognized under "Operating leases and incentives." The accounting is not expected to materially differ for revenue currently recognized as "Solar energy systems and product sales."
The Company is continuing to assess the impact of such changes, as well as other potential impacts of the revenue and lease standards. The Company has a project plan in place to meet the requirements of these standards using internal resources and consultants. The Company has completed its initial assessment and is currently performing contract reviews and developing a preliminary accounting policy.
In February 2016, the FASB issued ASU No. 2016-02 to replace existing lease guidance with ASC 842, Leases. ASC 842 changes how the definition of a lease is applied and judgment may be required in applying the definition of a lease to certain arrangements. The new standard may result in certain contracts no longer being leases. For lessees, the standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and a lease liability. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also requires the Company to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company adopted the new ASU effective January 1, 2017. The Company elected to continue to estimate the number of awards that are expected to vest. Upon the adoption, deferred tax liabilities decreased by $3.3 million, and retained earnings increased by $3.3 million as of January 1, 2017.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a current expected credit losses model. The amendment applies to entities which hold financial assets and net investment in leases that are not accounted for at fair value through net income as well as loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach, with certain aspects requiring a prospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. As a result, a reporting entity will recognize the tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in the consolidated financial statements. Any deferred tax asset that arises in the buyer’s jurisdiction will also be recognized at the time of the transfer. The Company adopted the standard effective January 1, 2017. As the Company sells solar energy systems to Funds, the Company will record the current tax effects of the gain on such sales as well as a deferred tax asset related to the Company’s increased tax basis in the partnership as a result of such sales. As a result of the adoption, the Company reversed net prepaid tax assets of $378.5 million, recognized gross deferred tax assets of $378.2 million and recorded a cumulative adjustment decreasing retained earnings by $0.3 million as of January 1, 2017.

9



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which requires a statement of cash flows to present the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and restricted cash in the consolidated cash flow statements upon adoption in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendments in this update provide a screen to determine when a set of operations is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The Company early adopted the new ASU effective January 1, 2017 on a prospective basis.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Instead, under this amendment, an entity shall perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for annual or any interim goodwill impairment tests beginning in fiscal years after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard would only have an effect on the Company’s consolidated financial statements if it failed Step 1 of the goodwill impairment test, which has not occurred to date.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, Scope of Modification Accounting, which requires entities to apply modification accounting guidance when there are changes in the terms or conditions of a share-based payment award unless all of the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before modification, (ii) the vesting conditions of the modified award are the same as the original award immediately before modification, and (iii) the classification of the modified award is the same as the original award immediately before modification. The Company early adopted the new ASU effective April 1, 2017, on a prospective basis.

Note 3. Fair Value Measurement
At June 30, 2017 and December 31, 2016, the carrying value of receivables, accounts payable, accrued expenses and distributions payable to noncontrolling interests approximates fair value due to their short-term nature. The carrying values and fair values of debt instruments are as follows (in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Lines of credit
 
$
486,300

 
$
486,300

 
$
489,200

 
$
489,200

Syndicated term loans
 
309,713

 
309,713

 
189,989

 
189,989

Bank term loans
 
94,040

 
93,380

 
81,307

 
80,542

Note payable
 
38,328

 
38,459

 
36,232

 
35,396

Solar asset-backed notes
 
98,851

 
104,323

 
101,295

 
102,869

Total
 
$
1,027,232

 
$
1,032,175

 
$
898,023

 
$
897,996

At June 30, 2017 and December 31, 2016, the fair value of the Company’s lines of credit, syndicated term loans and certain bank term loans approximate their carrying values because their interest rates are variable rates that approximate rates currently available to the Company. At June 30, 2017 and December 31, 2016, the fair value of the Company’s other debt instruments are based on rates currently offered for debt with similar maturities and terms. The Company’s fair value of the debt instruments fell under the Level 3 hierarchy. These valuation approaches involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market.

10



The Company determines the fair value of its interest rate swaps using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and an evaluation of the Company’s credit risk in valuing derivative instruments. The valuation model uses various inputs including contractual terms, interest rate curves, credit spreads and measures of volatility.
The Company determines the fair value of its warrants issued using the Black-Scholes option-pricing model. The significant unobservable input used in the fair value measurement of the warrant liability was the expected volatility of the Company. Generally, increases (decreases) in the expected volatility of the Company would result in a directionally similar impact to the measurement of the Company’s warrants.
At June 30, 2017 and December 31, 2016, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):
 
 
June 30, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
5,059

 
$

 
$
5,059

Total
 
$

 
$
5,059

 
$

 
$
5,059

Derivative liabilities:
 
 
 
 
 
 
 
 
Warrants
 
$

 
$

 
$
7

 
$
7

Total
 
$

 
$

 
$
7

 
$
7


 
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
1,632

 
$

 
$
1,632

Total
 
$

 
$
1,632

 
$

 
$
1,632

Derivative liabilities:
 
 
 
 
 
 
 
 
Warrants
 
$

 
$

 
$
20

 
$
20

Total
 
$

 
$

 
$
20

 
$
20


Note 4. Inventories
Inventories consist of the following (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Raw materials
 
$
48,681

 
$
62,037

Work-in-process
 
4,063

 
5,289

Total
 
$
52,744

 
$
67,326
















11



Note 5. Solar Energy Systems, net
Solar energy systems, net consists of the following (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Solar energy system equipment costs
 
$
2,793,188

 
$
2,459,856

Inverters
 
287,833

 
260,011

Initial direct costs
 
134,325

 
117,587

Total solar energy systems
 
3,215,346

 
2,837,454

Less: accumulated depreciation and amortization
 
(359,288
)
 
(303,305
)
Add: construction-in-progress
 
95,202

 
95,217

Total solar energy systems, net
 
$
2,951,260

 
$
2,629,366

All solar energy systems, construction-in-progress and inverters have been leased to or are subject to signed Customer Agreements with customers. The Company recorded depreciation expense related to solar energy systems of $29.2 million and $22.5 million for the three months ended June 30, 2017 and 2016, respectively, and $56.8 million and $42.9 million for the six months ended June 30, 2017 and 2016, respectively. The depreciation expense was reduced by the amortization of deferred grants of $1.8 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, and $3.8 million and $7.4 million for the six months ended June 30, 2017 and 2016, respectively.

12



Note 6. Indebtedness
As of June 30, 2017, debt consisted of the following (in thousands, except percentages):
 
 
Carrying Values, net of debt discount
 
Unused Borrowing Capacity
 
Annual Contractual Interest Rate
 
Interest Rate
 
Maturity Date
 
 
Current
 
Long Term
 
Total
 
 
 
 
 
 
 
 
Recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank line of credit
 
$
247,000

 
$

 
$
247,000

 
$
406

 
Varies (1)

 
4.33% - 4.46%

 
April 2018
Total recourse debt
 
$
247,000

 
$

 
$
247,000

 
$
406

 
 
 
 
 
 
Non-recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term loan
 

 
121,532

 
121,532

 
12

 
Varies (2)

 
3.74% - 3.97%

 
April 2024
Line of credit (Aggregation Facility)
 

 
239,300

 
239,300

 
8,500

 
Varies (3)

 
3.67% - 3.72%

 
December 2020
Term Loan and Term Loan B
 
2,606

 
39,553

 
42,159

 

 
Varies (4)

 
6.17
%
 
December 2020 and 2021
Term Loan A
 
568

 
145,454

 
146,022

 
5,000

 
Varies (5)

 
3.92
%
 
December 2021
Bank term loans
 
1,530

 
32,307

 
33,837

 

 
LIBOR + 2.25%

 
3.48
%
 
September 2022
 
 
 
 
 
 
 
 
 
 
LIBOR + 3.00%

 
4.30
%
 
September 2022
Bank term loan
 
8,929

 
24,507

 
33,436

 

 
Varies (6)

 
6.70% - 10.20%

 
July 2021
Bank term loan
 
1,402

 
25,365

 
26,767

 

 
4.50
%
 
4.50
%
 
April 2022
Solar asset-backed notes
 
3,848

 
95,003

 
98,851

 

 
4.40% - Class A

 
4.40
%
 
July 2024
 
 
 
 
 
 
 
 
 
 
5.38% - Class B

 
5.38
%
 
July 2024
Note payable
 

 
38,328

 
38,328

 

 
12.00
%
 
12.00
%
 
December 2018
Total non-recourse debt
 
18,883

 
761,349

 
780,232

 
13,512

 
 
 
 
 
 
Total debt
 
$
265,883

 
$
761,349

 
$
1,027,232

 
$
13,918

 
 
 
 
 
 
As of December 31, 2016, debt consisted of the following (in thousands, except percentages):
 
 
Carrying Values, net of debt discount
 
Unused Borrowing Capacity
 
Annual Contractual Interest Rate
 
Interest Rate
 
Maturity Date
 
 
Current
 
Long Term
 
Total
 
 
 
 
 
 
 
 
Recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank line of credit
 
$

 
$
244,000

 
$
244,000

 
$
3,406

 
Varies (1)

 
3.96% - 5.75%

 
April 2018
Total recourse debt
 
$

 
$
244,000

 
$
244,000

 
$
3,406

 
 
 
 
 
 
Non-recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Line of credit (Aggregation Facility)
 

 
245,200

 
245,200

 
9,300

 
Varies (3)

 
2.93% - 3.39%

 
December 2020
Term Loan and Term Loan B
 
116

 
42,870

 
42,986

 

 
Varies (4)

 
6.00
%
 
December 2020 December 2021
Term Loan A
 
616

 
146,387

 
147,003

 
5,000

 
Varies (5)

 
3.64
%
 
December 2021
Bank term loan
 
1,074

 
21,249

 
22,323

 

 
LIBOR + 2.25%

 
2.86
%
 
September 2022
Bank term loan
 
7,286

 
23,802

 
31,088

 
1,032

 
Varies (6)

 
6.25% - 9.94%

 
July 2021
Bank term loan
 
1,331

 
26,565

 
27,896

 

 
4.50
%
 
4.50
%
 
April 2022
Solar asset-backed notes
 
3,730

 
97,565

 
101,295

 

 
4.40% - Class A

 
4.40
%
 
July 2024
 
 
 
 
 
 
 
 
 
 
5.38% - Class B

 
5.38
%
 
July 2024
Note payable
 

 
36,232

 
36,232

 

 
12.00
%
 
12.00
%
 
December 2018
Total non-recourse debt
 
14,153

 
639,870

 
654,023

 
15,332

 
 
 
 
 
 
Total debt
 
$
14,153

 
$
883,870

 
$
898,023

 
$
18,738

 
 
 
 
 
 

13



(1)
Loans under the facility bear interest at LIBOR +3.25% per annum or the Base Rate +2.25% per annum. The Base Rate is the highest of the Federal Funds Rate +0.50%, the Prime Rate, or LIBOR +1.00%.
(2)
Loans under the facility bear interest at LIBOR +2.75% per annum for the initial four-year period for LIBOR loans or the Base Rate +1.75% per annum for Base Rate Loans.
(3)
Loans under the facility bear interest at LIBOR +2.50% per annum for the initial three-year revolving availability period, stepping up to LIBOR +2.75% per annum in the following two-year period.
(4)
Term loan under the facility bears interest at LIBOR +5.00% per annum for the first three-year period, stepping up to LIBOR +6.50% per annum thereafter. Term loan B under the facility bears interest at LIBOR +5.00% per annum.
(5)
Loan under the facility bears interest at LIBOR +2.75% per annum, stepping up to LIBOR +3.00% per annum on the fourth anniversary.
(6)
Loans under the facility bear interest at LIBOR +5.50% per annum for contracted SRECs and LIBOR +9.00% per annum for uncontracted SRECs.
Bank Line of Credit
The Company has outstanding borrowings under a syndicated working capital facility with banks for a total commitment of up to $250.0 million. The working capital facility is secured by substantially all of the unencumbered assets of the Company, as well as ownership interests in certain subsidiaries of the Company.
Under the terms of the working capital facility, the Company is required to meet various restrictive covenants, such as the completion and presentation of audited consolidated financial statements, maintaining a minimum unencumbered liquidity of at least $25.0 million in the aggregate as of the last day of each calendar month and maintaining a modified interest coverage ratio of 2.00 or greater, measured quarterly as of the last day of each quarter. The Company was in compliance with all debt covenants as of June 30, 2017.
As of June 30, 2017, the balance under this facility was $247.0 million with a maturity date in April 2018. As of June 30, 2017, the Company’s cash balance was $211.3 million and as such, the Company does not currently have the funds required to fully repay the debt. As this facility has a three year term, the Company is in the process of negotiating refinancing options and plans to extend the maturity date of the facility. Although there is no assurance that the Company will be able to do so, the Company believes that it is probable that it will be able to extend or otherwise refinance the facility prior to maturity.
Syndicated Credit Facilities
Each of the Company's syndicated credit facilities contain customary covenants including the requirement to maintain certain financial measurements and provide lender reporting. Each of the syndicated credit facilities also contain certain provisions in the event of default which entitle lenders to take certain actions including acceleration of amounts due under the facilities and acquisition of membership interests and assets that are pledged to the lenders under the terms of the credit facilities. The Company was in compliance with all debt covenants as of June 30, 2017.
Term loan due in April 2024
In May 2017, a subsidiary of the Company entered into an arrangement for senior secured credit facilities that was syndicated with various lenders. The credit facilities totaled $202.0 million and consisted of a $195.0 million delayed draw term loan facility and a $7.0 million revolving debt service reserve letter of credit facility. The amount outstanding at June 30, 2017 was $121.5 million. The facilities are non-recourse to the Company and are secured by net cash flows from Customer Agreements and solar renewable energy credits ("SRECs"), less certain operating, maintenance and other expenses which are available to the borrower after distributions to tax equity investors. Prepayments are permitted under the delayed draw term loan facility.
Line of credit (Aggregation Facility) and Term Loan
As of June 30, 2017, certain subsidiaries of the Company have an outstanding balance of $261.8 million on secured credit facilities agreements, as amended, with a syndicate of banks. The facilities include a revolving aggregation facility (“Aggregation Facility”), a term loan (“Term Loan”) and a revolving debt service reserve letter of credit facility. The facilities are non-recourse to the Company and are secured by net cash flows of certain subsidiaries from Customer Agreements, less certain operating, maintenance and other expenses which are

14



available to the borrowers after distributions to tax equity investors. Term Loan prepayment penalties range from 0% - 1% depending on the timing of the prepayment.
Term Loan A and Term Loan B
As of June 30, 2017, certain subsidiaries of the Company have an outstanding balance of $165.7 million on secured credit facilities agreements with a syndicate of banks. These facilities include a senior term loan (“Term Loan A”) and a subordinated term loan (“Term Loan B”). In addition, the credit facilities also include a working capital revolver commitment and a revolving debt service reserve letter of credit facility which draws are solely for the purpose of satisfying the required debt service reserve amount if necessary. The facilities are non-recourse to the Company and are secured by net cash flows of certain subsidiaries from Customer Agreements, less certain operating, maintenance and other expense which are available to the borrowers after distributions to tax equity investors. Prepayments are permitted under Term Loan A and Term Loan B at par without premium or penalty.
Bank Term Loans
Bank term loans due in September 2022
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $12.8 million on a non-recourse loan. The loan is secured by substantially all of the assets of a subsidiary including this subsidiary’s membership interests and assets in its investment funds. The loan contains certain provisions in the event of default which entitles the lender to take certain actions including acceleration of amounts due under the loan. The Company was in compliance with all debt covenants as of June 30, 2017.
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $21.0 million on a secured, non-recourse loan agreement. The loan will be repaid through cash flows from a lease pass-through arrangement previously entered into by the Company. The loan agreement contains customary covenants including the requirement to maintain certain financial measurements and provide lender reporting. The loan also contains certain provisions in the event of default which entitles the lender to take certain actions including acceleration of amounts due under the loan. The Company was in compliance with all debt covenants as of June 30, 2017.
Bank term loan due in July 2021
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $33.4 million on a secured credit agreement. The facility is non-recourse to the Company and is secured by substantially all of the assets of the subsidiary, including its rights in and the net cash flows from the generation of contracted and uncontracted SRECs by certain subsidiaries. The facility contains customary covenants including the requirement to provide lender reporting. The Company guarantees the delivery of SRECs on the subsidiary’s underlying contracts in the event of a delivery shortfall pursuant to the SREC contracts with counterparties. The Company does not guarantee payments of principal or interest on the loan. The credit facility also contains certain provisions in the event of default which entitles the lender to take certain actions including acceleration of amounts due under the facilities. The Company was in compliance with all debt covenants as of June 30, 2017.
Bank term loan due in April 2022
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $26.8 million on a term loan. The loan is secured by the assets and related cash flow of this subsidiary and is non-recourse to the Company’s other assets. The Company was in compliance with all debt covenants as of June 30, 2017.
Solar Asset-Backed Notes
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $98.9 million on solar asset-backed notes ("Notes") secured by associated customer contracts (“Solar Assets”) held by a special purpose entity (“Issuer”). As of June 30, 2017 and December 31, 2016, these Solar Assets had a carrying value of $177.4 million and $181.8 million, respectively, and are included under solar energy systems, net, in the consolidated balance sheets. The Notes were issued at a discount of 0.08%.
In connection with the transaction, the Company modified two lease pass-through arrangements with an investor. The modified lease-pass through arrangements require the majority of the cash flows generated by the

15



Solar Assets to be passed on to the Issuer through monthly lease payments from the Fund investor. Those cash flows are used to service the monthly principal of the Notes and interest payments and satisfy the Issuer’s expenses, and any residual cash flows are retained by the Fund investor and recorded as a reduction in the remaining financing obligation. The Company recognizes revenue earned from the associated Customer Agreements in accordance with the Company’s revenue recognition policy. The assets and cash flows generated by the Solar Assets are not available to the other creditors of the Company, and the creditors of the Issuer, including the Note holders, have no recourse to the Company’s other assets. The Company was in compliance with all debt covenants as of June 30, 2017.
Notes Payable
As of June 30, 2017, a subsidiary of the Company has an outstanding balance of $38.3 million on a note purchase agreement with an investor for the issuance of senior notes. On the last business day of each quarter, commencing with March 31, 2014, to the extent the Company’s subsidiary has insufficient funds to pay the full amount of the stated interest of the outstanding loan balance, a payment-in-kind (“PIK”) interest rate of 12% is accrued and added to the outstanding balance. As of June 30, 2017 and December 31, 2016, the portion of the outstanding loan balance that related to PIK interest was $11.5 million and $9.5 million, respectively. The senior notes are secured by the assets and related cash flows of certain of the Company’s subsidiaries and are non-recourse to the Company’s other assets. The Company was in compliance with all debt covenants as of June 30, 2017.

Note 7. Derivatives
Interest Rate Swaps
The Company uses interest rate swaps to hedge variable interest payments due on certain of its term loans and aggregation facility. These swaps allow the Company to incur fixed interest rates on these loans and receive payments based on variable interest rates with the swap counterparty based on the one or three month LIBOR on the notional amounts over the life of the swaps.
The interest rate swaps have been designated as cash flow hedges. The credit risk adjustment associated with these swaps is the risk of non-performance by the counterparties to the contracts. In the six months ended June 30, 2017, the hedge relationships on the Company’s interest rate swaps have been assessed as highly effective as the critical terms of the interest rate swaps match the critical terms of the underlying forecasted hedged transactions. Accordingly, changes in the fair value of these derivatives are recorded as a component of accumulated other comprehensive income, net of income taxes. Changes in the fair value of these derivatives are subsequently reclassified into earnings, and are included in interest expense, net in the Company’s statements of operations, in the period that the hedged forecasted transactions affects earnings.
The Company recorded an unrealized loss of $3.7 million and $4.5 million for the three and six months ended June 30, 2017 respectively, net of applicable tax benefit of $2.4 million and $2.9 million, respectively. The Company recorded an unrealized gain of $0.2 million and an unrealized loss of $5.6 million for the three and six months ended June 30, 2016 respectively, net of applicable tax benefit of $3.6 million for the three and six months ended June 30, 2016. The Company recognized interest expense on derivatives into earnings of $0.3 million and $0.9 million for the three and six months ended June 30, 2017, respectively, net of tax expense of $0.2 million and $0.6 million, respectively. The Company recognized interest expense on derivatives into earnings of $0.1 million and $0.6 million for the three and six months ended June 30, 2016, respectively, net of tax benefit of $0.4 million for the three and six months ended June 30, 2016. During the next twelve months, the Company estimates that an additional $2.1 million will be reclassified as an increase to interest expense. There were no undesignated derivative instruments recorded by the Company as of June 30, 2017.

16



At June 30, 2017, the Company had designated derivative instruments classified as derivative assets as reported in other assets of $0.3 million and derivative liabilities as reported in other liabilities of $5.3 million in the Company’s balance sheet. At December 31, 2016, the Company had designated derivative instruments classified as derivative assets as reported in other assets of $1.6 million in the Company’s balance sheet. At June 30, 2017, the Company had the following derivative instruments (in thousands, other than quantity and interest rates):
Type
 
Quantity
 
Maturity Dates
 
Hedge Interest Rates
 
Notional Amount
 
Fair Market Value
Interest rate swap
 
1

 
8/31/2022
 
1.27% - 1.29%
 
$
16,563

 
$
315

Interest rate swap
 
1

 
9/30/2022
 
2.37%
 
$
12,610

 
$
(243
)
Interest rate swaps
 
4

 
4/30/2024
 
2.16% - 2.25%
 
$
96,544

 
$
(909
)
Interest rate swaps
 
2

 
10/31/2024
 
2.62% - 2.69%
 
$
62,633

 
$
(1,297
)
Interest rate swaps
 
4

 
10/31/2028
 
2.17% - 2.18%
 
$
125,100

 
$
(43
)
Interest rate swap
 
1

 
9/30/2031
 
3.23%
 
$
9,905

 
$
(231
)
Interest rate swaps
 
5

 
7/31/2034
 
2.48% - 3.04%
 
$
144,379

 
$
(1,223
)
Interest rate swaps
 
5

 
7/31/2035
 
2.56% - 2.95%
 
$
132,432

 
$
(1,428
)

Note 8. Lease Pass-Through Financing Obligations
The Company has five ongoing transactions referred to as “lease pass-through arrangements.” Under lease pass-through arrangements, the Company leases solar energy systems to Fund investors under a master lease agreement, and these investors in turn are assigned the leases with customers. The Company receives all of the value attributable to the accelerated tax depreciation and some or all of the value attributable to the other incentives. The Company assigns to the Fund investors the value attributable to the investment tax credit (“ITC”) and, for the duration of the master lease term, the long-term recurring customer payments. Given the assignment of the operating cash flows, these arrangements are accounted for as financing obligations. In addition, in one of the lease pass-through structures, the Company sold, as well as leased, solar energy systems to a Fund investor under a master purchase agreement. As the substantial risks and rewards in the underlying solar energy systems were retained by the Company, this arrangement was also accounted for as a financing obligation.
Under these lease pass-through arrangements, wholly owned subsidiaries of the Company finance the cost of solar energy systems with investors for an initial term of 2025 years. The solar energy systems are subject to Customer Agreements with an initial term not exceeding 20 years. These solar energy systems are reported under the line item solar energy systems, net in the consolidated balance sheets. As of June 30, 2017 and December 31, 2016, the cost of the solar energy systems placed in service under the lease pass-through arrangements was $494.0 million and $494.9 million, respectively. The accumulated depreciation related to these assets as of June 30, 2017 and December 31, 2016 was $59.8 million and $50.8 million, respectively.
In 2015, the Company entered into a lease pass-through arrangement and in connection with this arrangement, the Company agreed to defer a portion (up to 25%) of the amounts required to be paid upfront under the arrangement through a loan between an indirect wholly owned subsidiary of the Company and a subsidiary of the Fund investor. The loan is collateralized by the related cash flows assigned to the Fund investor. There is a legal right to offset the loan if an event of default has occurred. Therefore, the lease pass-through financing obligation related to this arrangement is recorded net of the loan. As of June 30, 2017 and December 31, 2016, the loan amount was $21.9 million and $23.2 million, respectively.












17



Note 9. VIE Arrangements
The Company consolidated various VIEs at June 30, 2017 and December 31, 2016. The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets are as follows (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
108,039

 
$
120,728

Restricted cash
 
3,574

 
1,680

Accounts receivable, net
 
27,547

 
20,771

Prepaid expenses and other current assets
 
235

 
242

Total current assets
 
139,395

 
143,421

Solar energy systems, net
 
2,237,670

 
1,920,330

Other assets
 
2,159

 
1,481

Total assets
 
$
2,379,224

 
$
2,065,232

Liabilities
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
22,196

 
$
14,873

Distributions payable to noncontrolling interests and redeemable noncontrolling interests
 
13,213

 
10,654

Accrued expenses and other liabilities
 
1,471

 
782

Deferred revenue, current portion
 
27,468

 
25,827

Deferred grants, current portion
 
3,623

 
3,644

Long-term non-recourse debt, current portion
 
10,331

 
8,616

Total current liabilities
 
78,302

 
64,396

Deferred revenue, net of current portion
 
416,635

 
396,858

Deferred grants, net of current portion
 
103,310

 
105,390

Long-term non-recourse debt, net of current portion
 
161,689

 
50,367

Other liabilities
 
2,337

 

Total liabilities
 
$
762,273

 
$
617,011

The Company holds a variable interest in an entity that provides the noncontrolling interest with a right to terminate the leasehold interests in all of the leased projects on the tenth anniversary of the effective date of the master lease. In this circumstance, the Company would be required to pay the noncontrolling interest an amount equal to the fair market value, as defined in the governing agreement of all leased projects as of that date.
The Company holds certain variable interests in nonconsolidated VIEs established as a result of five lease pass-through Fund arrangements as further explained in Note 8, Lease Pass-Through Financing Obligations. The Company does not have material exposure to losses as a result of its involvement with the VIEs in excess of the amount of the financing liability recorded in the Company’s consolidated financial statements. The Company is not considered the primary beneficiary of the VIEs.


18



Note 10. Redeemable Noncontrolling Interests and Equity
The changes in redeemable noncontrolling interests, total stockholders’ equity and noncontrolling interests were as follows (in thousands):
 
 
Redeemable Noncontrolling Interests
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance — January 1, 2017
 
$
137,907

 
$
672,961

 
$
251,225

 
$
924,186

Exercise of stock options
 

 
529

 

 
529

Issuance of restricted stock units, net of tax withholdings
 

 
(2,099
)
 

 
(2,099
)
Shares issued in connection with the Employee Stock Purchase Plan
 

 
1,145

 

 
1,145

Stock based compensation
 

 
11,416

 

 
11,416

Contributions from noncontrolling interests and redeemable noncontrolling interests
 
75,169

 

 
231,123

 
231,123

Distributions to noncontrolling interests and redeemable noncontrolling interests
 
(7,666
)
 

 
(19,527
)
 
(19,527
)
Cumulative effect of adoption of new ASUs
 

 
2,996

 

 
2,996

Net income (loss)
 
(42,333
)
 
37,848

 
(133,842
)
 
(95,994
)
Other comprehensive loss, net of taxes
 

 
(3,569
)
 

 
(3,569
)
Balance — June 30, 2017
 
$
163,077

 
$
721,227

 
$
328,979

 
$
1,050,206

The carrying value of redeemable noncontrolling interests was greater than the redemption value except for six and four Funds at June 30, 2017 and December 31, 2016, respectively, where the carrying value has been adjusted to the redemption value.

Note 11. Stock-Based Compensation
Stock Options
The following table summarizes the activity for all stock options under all of the Company’s equity incentive plans for the six months ended June 30, 2017 (shares and aggregate intrinsic value in thousands):
 
 
Number of Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding at January 1, 2017
 
12,897

 
$
5.94

 
7.49
 

Granted
 
4,585

 
5.03

 

 

Exercised
 
(207
)
 
2.49

 

 

Cancelled
 
(524
)
 
7.82

 

 

Outstanding at June 30, 2017
 
16,751

 
$
5.68

 
7.75
 
$
32,028

 
 
 
 
 
 
 
 
 
Options vested and exercisable at June 30, 2017
 
7,961

 
$
5.40

 
6.34
 
$
18,378


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Restricted Stock Units
The following table summarizes the activity for all restricted stock units (“RSUs”) under all of the Company’s equity incentive plans for the six months ended June 30, 2017 (shares in thousands):
 
 
Number of Awards
 
Weighted Average Grant Date Fair Value
Unvested balance at January 1, 2017
 
4,106

 
$
6.87

Granted
 
2,887

 
5.10

Issued
 
(538
)
 
6.15

Forfeited
 
(644
)
 
5.79

Unvested balance at June 30, 2017
 
5,811

 
$
6.13

Employee Stock Purchase Plan
In the quarter ended June 30, 2017, the Company modified the Company's 2015 Employee Stock Purchase Plan ("ESPP") by increasing the offering period to 24 months with four six month purchase periods and increasing the maximum number of shares an eligible employee can purchase during a purchase period to 10,000 shares. Each purchase period begins on the first trading day on or after May 15 and November 15 of each year. Employees may purchase a limited number of shares of the Company’s common stock via regular payroll deductions at a discount of 15% of the lower of the fair market value of the Company’s common stock on the first trading date of each offering period or on the exercise date. Employees may deduct up to 15% of payroll, with a cap of $25,000 of fair market value of shares in any calendar year.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense, including ESPP expenses, in the consolidated statements of operations as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Cost of operating leases and incentives
 
$
1,110

 
$
632

 
$
1,861

 
$
839

Cost of solar energy systems and product sales
 
156

 
117

 
270

 
198

Sales and marketing
 
807

 
1,890

 
2,724

 
3,508

Research and development
 
186

 
149

 
335

 
246

General and administration
 
3,256

 
2,050

 
6,199

 
3,856

Total
 
$
5,515

 
$
4,838

 
$
11,389

 
$
8,647


Note 12. Income Taxes
The income tax expense rate for the three and six months ended June 30, 2017 was (31.0)% and (19.7)%, respectively. The income tax expense rate for the three and six months ended June 30, 2016 was (5.2)% and (2.3)%, respectively, The differences between the actual consolidated effective income tax rate and the U.S. federal statutory rate were primarily attributable to the allocation of losses on noncontrolling interests and redeemable noncontrolling interests, which assumes a hypothetical liquidation of these partnerships as of the reporting dates.
The Company sells solar energy systems to investment Funds. As the investment Funds are consolidated by the Company, the gain on the sale of the assets has been eliminated in the consolidated financial statements. These transactions are treated as intercompany sales and any tax expense incurred related to these sales prior to fiscal year 2017 was deferred. As described in Note 2, Summary of Significant Accounting Policies – Recently Issued Accounting Standards, ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. As a result, a reporting entity would recognize the tax expense from the sale of assets in the seller’s tax

20



jurisdiction when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in the consolidated financial statements. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. As the Company sells solar energy systems to Funds, the Company will record the current tax effect of the gain on the sale as well as a deferred tax asset related to the Company’s increased tax basis in the partnership as a result of the sale. As a result of the adoption of ASU 2016-16, the Company recognized in retained earnings the reversal of the net prepaid tax assets of $378.5 million previously recorded for the tax deferral, and recognized gross a deferred tax asset of $378.2 million at January 1, 2017.
The Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. As a result of the adoption, the Company has increased its federal and state deferred tax assets by $3.3 million for the cumulative unrecognized federal and state gross windfall net operating loss carryover at December 31, 2016 of $8.6 million and $6.8 million, respectively, with an offsetting adjustment to retained earnings of $3.3 million.
Uncertain Tax Positions
As of June 30, 2017 and December 31, 2016, the Company had $1.5 million of unrecognized tax benefits related to an acquisition in 2015. In addition, there was $0.4 million and $0.3 million of interest and penalties for uncertain tax positions as of June 30, 2017 and December 31, 2016, respectively. The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized benefits will increase or decrease within the next 12 months. The Company is subject to taxation and files income tax returns in the United States, and various state and local jurisdictions. Due to the Company’s net losses, substantially all of its federal, state and local income tax returns since inception are still subject to audit.
Net Operating Loss Carryforwards
As a result of the Company’s net operating loss carryforwards as of June 30, 2017 and December 31, 2016, the Company does not expect to pay income tax, including in connection with its income tax provision for the six months ended June 30, 2017 until the Company’s net operating losses are fully utilized. As of December 31, 2016, the Company’s federal and state net operating loss carryforwards were $571.3 million and $524.9 million, respectively. If not utilized, the federal net operating loss will begin to expire in the year 2028 and the state net operating losses will begin to expire in the year 2024.

Note 13. Commitments and Contingencies
Letters of Credit
As of June 30, 2017 and December 31, 2016, the Company had $11.2 million and $6.2 million, respectively, of unused letters of credit outstanding, which carry fees of 2.50% - 3.00% per annum and 2.50% per annum, respectively.
Non-cancellable Operating Leases
The Company leases facilities and equipment under non-cancellable operating leases. Total operating lease expenses were $3.2 million and $2.9 million for the three months ended June 30, 2017 and 2016, respectively, and $6.3 million and $5.6 million for the six months ended June 30, 2017 and 2016, respectively.
Certain operating leases contain rent escalation clauses, which are recorded on a straight-line basis over the initial term of the lease with the difference between the rent paid and the straight-line rent recorded as a deferred rent liability. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction to rent expense. Deferred rent liabilities were $2.7 million and $2.9 million as of June 30, 2017 and December 31, 2016, respectively.
Capital Lease Obligations
As of June 30, 2017 and December 31, 2016, capital lease obligations were $17.3 million and $23.0 million, respectively. The capital lease obligations bear interest at rates up to 10% per annum.


21



Warranty Accrual
The Company accrues warranty costs when revenue is recognized for solar energy systems sales, based on the estimated future costs of meeting its warranty obligations. Warranty costs primarily consist of replacement costs for supplies and labor costs for service personnel since warranties for equipment and materials are covered by the original manufacturer’s warranty (other than a small deductible in certain cases). As such, the warranty reserve is immaterial in all periods presented. The Company makes and revises these estimates based on the number of solar energy systems under warranty, the Company’s historical experience with warranty claims, assumptions on warranty claims to occur over a systems’ warranty period and the Company’s estimated replacement costs.
Guarantees
The Company guarantees one of its investors in one of its Funds an internal rate of return, calculated on an after-tax basis, in the event that it purchases the investor’s interest or the investor sells its interest to the Company. The Company does not expect the internal rate of return to fall below the guaranteed amount; however, due to uncertainties associated with estimating the timing and amount of distributions to the investor and the possibility for and timing of the liquidation of the Fund, the Company is unable to determine the potential maximum future payments that it would have to make under this guarantee.
ITC and Cash Grant Indemnification
The Company is contractually committed to compensate certain investors for any losses that they may suffer in certain limited circumstances resulting from reductions in ITCs or U.S. Treasury grants. Generally, such obligations would arise as a result of reductions to the value of the underlying solar energy systems as assessed by the Internal Revenue Service (the “IRS”) or U.S. Treasury Department. At each balance sheet date, the Company assesses and recognizes, when applicable, the potential exposure from this obligation based on all the information available at that time, including any audits undertaken by the IRS. The Company believes that this obligation is not probable based on the facts known as of the filing date of this Quarterly Report on Form 10-Q. The maximum potential future payments that the Company could have to make under this obligation would depend on the difference between the fair values of the solar energy systems sold or transferred to the Funds as determined by the Company and the values the IRS would determine as the fair value for the systems for purposes of claiming ITCs. ITCs are claimed based on the statutory regulations from the IRS. The Company uses fair values determined with the assistance of an independent third-party appraisal as the basis for determining the ITCs that are passed-through to and claimed by the Fund investors. Since the Company cannot determine how the IRS will evaluate system values used in claiming ITCs, the Company is unable to reliably estimate the maximum potential future payments that it could have to make under this obligation as of each balance sheet date.
Litigation
The Company is subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of its business. The Company records a provision for a liability when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.
In July 2012, the U.S. Treasury Department and the Department of Justice (together, the “Government”) opened a civil investigation into the participation by residential solar developers in the Section 1603 grant program. The Government served subpoenas on several developers, including Sunrun, along with their investors and valuation firms. The focus of the investigation is the claimed fair market value of the solar systems the developers submitted to the Government in their grant applications. The Company has cooperated fully with the Government and plans to continue to do so. No claims have been brought against the Company. The Company is not able to estimate the ultimate outcome or a range of possible loss at this point in time.
On April 13, 2016, a purported shareholder class action captioned Pytel v. Sunrun Inc., et al., Case No. CIV 538215, was filed in the Superior Court of California, County of San Mateo, against the Company, certain of the Company’s directors and officers, the underwriters of the Company’s initial public offering and certain other defendants. The complaint generally alleges that the defendants violated Sections 11, 12 and 15 of the Securities

22



Act of 1933 by making false or misleading statements in connection with the Company’s August 5, 2015 initial public offering regarding the continuation of net metering programs. The plaintiffs seek to represent a class of persons who acquired the Company’s common stock pursuant or traceable to the initial public offering. Plaintiffs seek compensatory damages, including interest, rescission or rescissory damages, an award of reasonable costs and attorneys’ fees, and any equitable or injunctive relief deemed appropriate by the court. On April 21, 2016, a purported shareholder class action captioned Mancy v. Sunrun Inc., et al., Case No. CIV 538303, was filed in the Superior Court of California, County of San Mateo. On April 22, 2016, a purported shareholder class action captioned Brown et al. v. Sunrun Inc., et al., Case No. CIV 538311, was filed in the Superior Court of California, County of San Mateo. On April 29, 2016, a purported shareholder class action captioned Baker et al. v. Sunrun Inc., et al., Case No. CIV 538419, was filed in the Superior Court of California, County of San Mateo. On May 10, 2016, a purported shareholder class action captioned Nunez v. Sunrun Inc., et al., Case No. CIV 538593, was filed in the Superior Court of California, County of San Mateo. On June 10, 2016, a purported shareholder class action captioned Steinberg v. Sunrun Inc., et al., Case No. 539064, was filed in the Superior Court of California, County of San Mateo. The Mancy, Brown, Baker, Nunez and Steinberg complaints are substantially similar to the Pytel complaint, and seek similar relief against similar defendants on behalf of the same purported class.
On April 21, 2016, a purported shareholder class action captioned Cohen, et al. v. Sunrun Inc., et al., Case No. CIV 538304, was filed in the Superior Court of California, County of San Mateo, against the Company, certain of the Company’s directors and officers, and the underwriters of the Company’s initial public offering. The complaint generally alleges that the defendants violated Sections 11, 12 and 15 of the Securities Act of 1933 by making false or misleading statements in connection with an August 5, 2015 initial public offering regarding the Company’s business practices and its dependence on complex financial instruments. The Cohen plaintiffs seek to represent the same class and seek similar relief as the plaintiffs in the Pytel, Mancy, Brown, Nunez, Steinberg and Baker actions.
On September 26, 2016, the Baker, Brown, Cohen, Mancy, Nunez, Pytel and Steinberg actions were consolidated.
On May 3, 2017, a purported shareholder class action captioned Fink, et al. v. Sunrun Inc., et al., Case No. 3:17-cv-02537, was filed in the United States District Court, Northern District of California, against the Company and certain of the Company’s directors and officers. The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5, by making false or misleading statements in connection with public filings made between September 15, 2015 and March 8, 2017 regarding the number of customers who canceled contracts after signing up for the Company’s home-solar energy system. The plaintiff seeks compensatory damages, including interest, attorney's fees, and costs, on behalf of all persons other than the defendants who purchased the Company's securities between September 16, 2015 and May 2, 2017. On May 4, 2017, a purported shareholder class action captioned Hall, et al. v. Sunrun Inc., et al., Case No. 3:17-cv-02571, was filed in the United States District Court, Northern District of California. On May 18, 2017, a purported shareholder class action captioned Sanogo, et al. v. Sunrun Inc., et al., Case No. 3:17-cv-02865, was filed in the United States District Court, Northern California District of California. The Hall and Sanogo complaints are substantially similar to the Fink complaint, and seeks similar relief against similar defendants on behalf of a substantially similar class.

On June 29, 2017, a shareholder derivative complaint captioned Barbara Sue Sklar Living Trust v. Sunrun Inc. et al., was filed in the United States District Court, Northern District of California, against the Company and certain of the Company’s directors and officers. The complaint generally alleges that the defendants violated Section 14(a) of the Exchange Act of 1934 by making false or misleading statements in connection with public filings, including proxy statements, made between September 10, 2015 and May 3, 2017 regarding the number of customers who cancelled contracts after signing up for the Company’s home solar energy system. The Plaintiff seeks, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees.









23





Note 14. Earnings Per Share
The computation of the Company’s basic and diluted net income per share are as follows (in thousands, except per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 

 
 

Net income attributable to common stockholders
 
$
25,122

 
$
32,643

 
$
37,849

 
$
45,777

Denominator:
 
 
 
 
 
 

 
 

Weighted average shares used to compute net income per share attributable to common stockholders, basic
 
105,093

 
101,969

 
104,568

 
101,621

Weighted average effect of potentially dilutive shares to purchase common stock
 
2,254

 
2,799

 
2,343

 
2,873

Weighted average shares used to compute net income per share attributable to common stockholders, diluted
 
107,347

 
104,768

 
106,911

 
104,494

Net income per share attributable to common stockholders
 
 
 
 
 
 

 
 

Basic
 
$
0.24

 
$
0.32

 
$
0.36

 
$
0.45

Diluted
 
$
0.23

 
$
0.31

 
$
0.35

 
$
0.44


The following shares were excluded from the computation of diluted net income per share as the impact of including those shares would be anti-dilutive (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Warrants
 
1,251

 
1,251

 
1,251

 
1,251

Outstanding stock options
 
13,712

 
8,060

 
13,712

 
8,060

Unvested restricted stock units
 
1,256

 
1,328

 
1,256

 
1,328

Total
 
16,219

 
10,639

 
16,219

 
10,639


Note 15. Related Party Transactions
An individual who previously served as one of the Company’s directors until March 2017 has direct and indirect ownership interests in Enphase Energy, Inc. (“Enphase”). For the three months ended June 30, 2017 and 2016, the Company recorded $3.0 million and $1.4 million, respectively, and $4.4 million and $14.4 million for the six months ended June 30, 2017 and 2016, respectively, in purchases from Enphase and had outstanding payables to Enphase of $2.7 million and $0.4 million as of June 30, 2017 and December 31, 2016, respectively.



24




Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our ability to finance solar energy systems through financing arrangements with fund or other investors;
our ability and intent to establish new investment funds;
our dependence on the availability of rebates, tax credits and other financial incentives;
determinations by the Internal Revenue Service or the U.S. Treasury Department of the fair market value of our solar energy systems;
the retail price of utility-generated electricity or electricity from other energy sources;
regulatory and policy development and changes;
our ability to maintain an adequate rate of revenue growth;
our industry’s continued ability to cut costs associated with solar service offerings;
our strategic partnerships and expected benefits of such partnerships;
the sufficiency of our cash, investment fund commitments and available borrowings to meet our anticipated cash needs;
our need to raise capital and finance our operations from new and existing investors;
our ability to refinance existing debt;
the potential impact of interest rates on our interest expense;
our business plan and our ability to effectively manage our growth;
our ability to further penetrate existing markets, expand into new markets and our expectations regarding market growth (including, but not limited to, expected cancellation rates);
our expectations concerning relationships with third parties, including the attraction and retention of qualified channel partners;
the impact of seasonality on our business;
our investment in research and development;
our expectations regarding certain performance objectives; and
the calculation of certain of our key financial and operating metrics and accounting policies.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

25



You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission (the “SEC”) as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
Overview
We provide clean, solar energy to homeowners at a significant savings compared to traditional utility energy. We have been selling solar energy to residential customers through a variety of offerings since we were founded in 2007. We, either directly or through one of our solar partners, install a solar energy system on a customer’s home and either sell the system to the homeowner or, as is more often the case, sell the energy generated by the system to the homeowner pursuant to a lease or power purchase agreement (“PPA”) with no or low upfront costs. We refer to these leases and PPAs as “Customer Agreements.” Following installation, a system is interconnected to the local utility grid. The home’s energy usage is provided by the solar energy system, with any additional energy needs provided by the local utility. Unless the solar energy system is connected to a battery, any excess solar energy that is not immediately used by the homeowners is exported to the utility grid using a bi-directional utility net meter, and the homeowner generally receives a credit for the excess energy from their utility to offset future usage of utility-generated energy.
We offer our solar service offerings both directly to the homeowner and through our solar partners, which include sales and installation partners, and strategic partners, which include retail partners. In addition, we sell solar energy systems directly to customers for cash. We also sell solar energy panels and other products (such as racking) to resellers. As of June 30, 2017, we provided our solar services to customers in 22 states, plus the District of Columbia, and sold solar energy panels and other products to resellers throughout the United States. Approximately half of our cumulative systems deployed are in California.
We compete mainly with traditional utilities. In the markets we serve, our strategy is to price the energy we sell below prevailing local retail electricity rates. As a result, the price our customers pay to buy energy from us through our solar service offerings varies depending on the state where the customer lives, the local traditional utility that otherwise provides electricity to the customer, as well as the prices other solar energy companies charge in that region. Even within the same neighborhood, site-specific characteristics drive meaningful variability in the revenue and cost profiles of each home. Using our proprietary technology, we target homes with advantageous revenue and cost characteristics, which means we are often able to offer pricing that allows customers to save more on their energy bill while maintaining our ability to meet our targeted returns. For example, with the insights provided by our technology, we can offer competitive pricing to customers with homes that have favorable characteristics, such as roofs that allow for easy installation, high electricity consumption, or low shading, effectively passing through the cost savings we are able to achieve on these installations to the homeowner.
Our ability to offer Customer Agreements depends in part on our ability to finance the purchase and installation of the solar energy systems by monetizing the resulting customer cash flows and related investment tax credits (“ITCs”), accelerated tax depreciation and other incentives from governments and local utilities. We monetize these incentives under tax equity investment funds which are generally structured as non-recourse project financings. From inception to August 3, 2017, we have established 32 investment funds, which represent financing for an estimated $5.7 billion in value of solar energy systems on a cumulative basis. We intend to establish additional investment funds and may also use debt, equity and other financing strategies to fund our growth.

Investment Funds
Our Customer Agreements provide for recurring customer payments, typically over 20 years, and the related solar energy systems are generally eligible for 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

26



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 ITCs, accelerated depreciation and certain government or utility incentives associated with the funds’ ownership of solar energy systems.
From inception to August 3, 2017, we have formed 32 investment funds. Of these 32 funds, 27 are currently active and 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 a Sunrun 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) lease pass-throughs, (ii) partnership flips and (iii) joint venture (“JV”) inverted leases. We reflect lease pass-through arrangements on our consolidated balance sheet as a lease pass-through financing obligation. We record the investor’s interest in partnership flips or JV inverted leases (which we define collectively as “consolidated joint ventures”) as noncontrolling interests or redeemable noncontrolling interests. These consolidated joint ventures are usually redeemable at our option and, in certain cases, at the investor’s option. If redemption is at our option or the consolidated joint ventures are not redeemable, we record the investor’s interest as a noncontrolling interest and account for the interest using the hypothetical liquidation at book value (“HLBV”) method. If the investor has the option to put their interest to us, we record the investor’s interest as redeemable noncontrolling interest at the greater of the HLBV and the redemption value.

27



The table below provides an overview of our current investment funds (in millions, except number of funds and MW Deployed):
 
 
 
 
Consolidated Joint Ventures
 
 
Lease Pass-Through
 
Partnership Flip
 
JV Inverted Lease
Consolidation
 
Owner entity consolidated, tenant entity not consolidated
 
Single entity, consolidated
 
Owner and tenant entities consolidated
 
Owner and tenant entities consolidated
Balance sheet classification
 
Lease pass-through financing obligation
 
Redeemable noncontrolling interests and noncontrolling interests
 
Redeemable noncontrolling interests and noncontrolling interests
 
Noncontrolling interests
Revenue from ITCs
 
Recognized annually over 5 years as the recapture period elapses
 
None
 
None
 
None
Method of calculating investor interest
 
Effective interest rate method
 
Greater of HLBV or redemption value
 
Greater of HLBV or redemption value
 
Pro rata
Liability balance as of June 30, 2017
 
$
145.1

 
N/A

 
N/A

 
N/A

Noncontrolling interest balance (redeemable or otherwise) as of June 30, 2017
 
N/A

 
$
411.1

 
$
74.2

 
$
6.8

Number of funds (as of June 30, 2017)
 
5

 
17