Sunrun Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - Sunrun Inc.	sunrunex3122018q1.htm
EX-32.1 - EXHIBIT 32.1 - Sunrun Inc.	sunrunex3212018q1.htm
EX-31.1 - EXHIBIT 31.1 - Sunrun Inc.	sunrunex3112018q1.htm
EX-10.3 - EXHIBIT 10.3 - Sunrun Inc.	sunrunex1032018q1.htm
EX-10.2 - EXHIBIT 10.2 - Sunrun Inc.	sunrunex1022018q1.htm
EX-10.1 - EXHIBIT 10.1 - Sunrun Inc.	sunrunex1012018q1.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 March 31, 2018



☐	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 May 7, 2018, the number of shares of the registrant’s common stock outstanding was 108,998,647.

Table of Contents



		Page

Item 1	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 5.	Other Information	72
Item 6.	Exhibits	72
	Signatures	74

Sunrun Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

(Unaudited)



	March 31, 2018		December 31, 2017
Assets
Current assets:
Cash	$	203,189	$	202,525
Restricted cash	40,139		39,265
Accounts receivable (net of allowances for doubtful accounts of $2,454 and $1,665 as of March 31, 2018 and December 31, 2017, respectively)	111,012		112,069
State tax credits receivable	11,085		11,085
Inventories	87,902		94,427
Prepaid expenses and other current assets	6,488		9,202
Total current assets	459,815		468,573
Solar energy systems, net	3,285,804		3,161,570
Property and equipment, net	33,291		36,402
Intangible assets, net	13,243		14,294
Goodwill	87,543		87,543
Other assets	221,535		194,754
Total assets ⁽¹⁾	$	4,101,231	$	3,963,136
Liabilities and total equity
Current liabilities:
Accounts payable	$	99,695	$	115,193
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	15,134		13,583
Accrued expenses and other liabilities	92,793		97,230
Deferred revenue, current portion	43,659		42,609
Deferred grants, current portion	8,185		8,193
Finance lease obligations, current portion	6,737		7,421
Non-recourse debt, current portion	28,646		21,529
Pass-through financing obligation, current portion	5,439		5,387
Total current liabilities	300,288		311,145
Deferred revenue, net of current portion	528,423		522,243
Deferred grants, net of current portion	225,278		227,519
Finance lease obligations, net of current portion	4,438		5,811
Recourse debt	247,000		247,000
Non-recourse debt, net of current portion	1,108,383		1,026,416
Pass-through financing obligation, net of current portion	132,848		132,823
Other liabilities	33,340		42,743
Deferred tax liabilities	96,481		83,119
Total liabilities ⁽¹⁾	2,676,479		2,598,819
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests	133,524		123,801
Stockholders’ equity:
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of March 31, 2018 and December 31, 2017; no shares issued and outstanding as of March 31, 2018 and December 31, 2017	—		—
Common stock, $0.0001 par value—authorized, 2,000,000 shares as of March 31, 2018 and December 31, 2017; issued and outstanding, 108,681 and 107,350 shares as of March 31, 2018 and December 31, 2017, respectively	11		11
Additional paid-in capital	693,077		682,950
Accumulated other comprehensive income	10,825		(4,113		)
Retained earnings	230,766		202,734
Total stockholders’ equity	934,679		881,582
Noncontrolling interests	356,549		358,934
Total equity	1,291,228		1,240,516
Total liabilities, redeemable noncontrolling interests and total equity	$	4,101,231	$	3,963,136

The Company’s consolidated assets as of March 31, 2018 and December 31, 2017 include $2,746,338 and $2,568,378, respectively, in assets of variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, as of March 31, 2018 and December 31, 2017 of $2,525,977 and $2,385,329, respectively; cash as of March 31, 2018 and December 31, 2017 of $144,822 and $118,352, respectively; restricted cash as of March 31, 2018 and December 31, 2017 of $5,991 and $2,699, respectively; accounts receivable, net as of March 31, 2018 and December 31, 2017 of $62,233 and $57,402, respectively; prepaid expenses and other current assets as of March 31, 2018 and December 31, 2017 of $694 and $917, respectively and other assets as of March 31, 2018 and December 31, 2017 of $6,621 and $3,679, respectively. The Company’s consolidated liabilities as of March 31, 2018 and December 31, 2017 include $711,213 and $677,955, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of March 31, 2018 and December 31, 2017 of $17,575 thousand and $15,929 thousand, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of March 31, 2018 and December 31, 2017 of $15,134 and $13,526, respectively; accrued expenses and other liabilities as of March 31, 2018 and December 31, 2017 of $5,851 and $5,200, respectively; deferred revenue as of March 31, 2018 and December 31, 2017 of $419,496 and $409,761, respectively; deferred grants as of March 31, 2018 and December 31, 2017 of $30,070 and $30,406, respectively; and non-recourse debt as of March 31, 2018 and December 31, 2017 of $222,951 and $201,285, respectively.

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

Sunrun Inc.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)



	Three Months Ended March 31,
	2018			2017
Revenue:
Customer agreements and incentives	$	66,990		$	49,090
Solar energy systems and product sales	77,373			56,019
Total revenue	144,363			105,109
Operating expenses:
Cost of customer agreements and incentives	54,576			42,613
Cost of solar energy systems and product sales	64,579			49,431
Sales and marketing	44,079			33,132
Research and development	3,896			2,996
General and administrative	32,893			24,608
Amortization of intangible assets	1,051			1,051
Total operating expenses	201,074			153,831
Loss from operations	(56,711		)	(48,722		)
Interest expense, net	28,198			20,558
Other expenses (income), net	(1,692		)	475
Loss before income taxes	(83,217		)	(69,755		)
Income tax expense	8,203			5,400
Net loss	(91,420		)	(75,155		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(119,452		)	(85,037		)
Net income available to common stockholders	$	28,032		$	9,882
Net income per share available to common stockholders
Basic	$	0.26		$	0.09
Diluted	$	0.25		$	0.09
Weighted average shares used to compute net income per share available to common stockholders
Basic	107,449			104,038
Diluted	110,781			106,469

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

Sunrun Inc.

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)



	Three Months Ended March 31,
	2018		2017
Net income available to common stockholders	$	28,032	$	9,882
Other comprehensive income:
Unrealized gain (loss) on derivatives, net of income taxes	16,171		(764		)
Less interest income (expense) on derivatives recognized into earnings, net of income taxes	1,233		(563		)
Comprehensive income	$	42,970	$	9,681

Sunrun Inc.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



	Three Months Ended March 31,
	2018			2017
Operating activities:
Net loss	$	(91,420	)	$	(75,155	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization, net of amortization of deferred grants	36,186			29,948
Deferred income taxes	8,203			5,399
Stock-based compensation expense	10,694			5,874
Interest on pass-through financing obligations	3,099			3,118
Reduction in pass-through financing obligations	(5,028		)	(4,552		)
Other noncash losses and expenses	5,667			5,580
Changes in operating assets and liabilities:
Accounts receivable	(360		)	3,465
Inventories	6,525			7,723
Prepaid and other assets	(6,746		)	(9,819		)
Accounts payable	(12,982		)	(4,357		)
Accrued expenses and other liabilities	(7,048		)	(11,297		)
Deferred revenue	7,456			6,593
Net cash used in operating activities	(45,754		)	(37,480		)
Investing activities:
Payments for the costs of solar energy systems	(163,190		)	(159,754		)
Purchases of property and equipment	(1,521		)	(2,610		)
Net cash used in investing activities	(164,711		)	(162,364		)
Financing activities:
Proceeds from state tax credits, net of recapture	(49		)	13,388
Proceeds from issuance of recourse debt	2,000			57,400
Repayment of recourse debt	(2,000		)	(54,000		)
Proceeds from issuance of non-recourse debt	95,900			38,225
Repayment of non-recourse debt	(7,122		)	(4,904		)
Payment of debt fees	(3,880		)	—
Proceeds from pass-through financing obligations	1,502			1,448
Contributions received from noncontrolling interests and redeemable noncontrolling interests	143,604			162,565
Distributions paid to noncontrolling interests and redeemable noncontrolling interests	(15,263		)	(12,887		)
Proceeds from exercises of stock options, net of withholding taxes paid on restricted stock units	(576		)	(1,067		)
Payment of finance lease obligations	(2,113		)	(2,749		)
Net cash provided by financing activities	212,003			197,419
Net change in cash and restricted cash	1,538			(2,425		)
Cash and restricted cash, beginning of period	241,790			224,363
Cash and restricted cash, end of period	$	243,328		$	221,938
Supplemental disclosures of cash flow information
Cash paid for interest	$	16,446		$	9,347
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	$	17,233		$	22,468
Purchases of solar energy systems included in non-recourse debt	$	—		$	12,873
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	$	15,134		$	11,157
Right-of-use assets obtained in exchange for new finance lease liabilities	$	99		$	76

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

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 an agreement to utilize the solar system (“Customer Agreement”) which typically has an initial 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) pass-through financing obligations, (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, 2017. The Company has restated certain prior period amounts to conform to the current period presentation as described in the Recently Issued and Adopted Accounting Standards section below. The results of the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2018 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.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

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, for revenue recognition, constraints which result in variable consideration, and the discount rate used to adjust the promised amount of consideration for the effects of a significant financing component, the estimates 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 effective interest rate used to amortize pass-through financing obligations, the discount rate used for operating and finance leases, 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 March 31,
	2018		2017
Customer agreements	$	61,649	$	46,325
Incentives	5,341		2,765
Customer agreements and incentives	66,990		49,090

Solar energy systems	37,883		20,619
Products	39,490		35,400
Solar energy systems and product sales	77,373		56,019
Total revenue	$	144,363	$	105,109

Cash and Restricted Cash

The following table provides a reconciliation of cash, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows. Cash and restricted cash consists of the following (in thousands):



	March 31, 2018		December 31, 2017
Cash	$	203,189	$	202,525
Restricted cash	40,139		39,265
Total	$	243,328	$	241,790

Restricted cash represents amounts related to replacement of solar energy system components and obligations under certain financing transactions.

Accounts Receivable

Accounts receivable consist of amounts due from customers as well as rebates due from government agencies and utility companies. Under Customer Agreements, the customers typically assign incentive rebates to the Company.

Unbilled receivables typically arise from fixed price escalators in long-term Customer Agreements which are included in the estimated transaction price and recognized as revenue evenly over the term. Such unbillable amounts become billable over time and will increase for an individual Customer Agreement when the billing rate is less than the average rate under the Customer Agreement and then the balance of the unbilled amount will gradually decrease to zero as amounts billed are greater than the amount recognized.

Accounts receivable, net consists of the following (in thousands):



	March 31, 2018			December 31, 2017
Customer receivables	$	52,567		$	59,263
Unbilled receivables	58,445			52,278
Other receivables	816			751
Rebates receivable	1,638			1,442
Allowance for doubtful accounts	(2,454		)	(1,665		)
Total	$	111,012		$	112,069

Deferred Revenue

When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to delivering goods or services to the customer under the terms of a Customer Agreement, the Company records deferred revenue. Such deferred revenue consists of amounts for which the criteria for revenue recognition have not yet been met and includes amounts that are collected or assigned from customers, including upfront deposits and prepayments, and rebates. Deferred revenue relating to financing components represents the cumulative excess of interest expense recorded on financing component elements over the related revenue recognized to date and will eventually net to zero by the end of the initial term. Amounts received related to the sales of solar renewable energy credits (“SRECs”) which have not yet been delivered to the counterparty are recorded as deferred revenue.

The opening balance of deferred revenue was $525.4 million as of December 31, 2016. Deferred revenue consists of the following (in thousands):



	March 31, 2018		December 31, 2017
Under Customer Agreements:
Payments received	$	523,475	$	517,544
Financing component balance	32,494		30,736
	555,969		548,280

Under SREC contracts:
Payments received	14,314		14,805
Financing component balance	1,799		1,767
	16,113		16,572

Total	$	572,082	$	564,852

In the three months ended March 31, 2018 and 2017, the Company recognized revenue of $12.8 million and $11.5 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized and includes deferred revenue as well as amounts that will be invoiced and recognized as revenue in future periods. Contracted but not yet recognized revenue was approximately $4.3 billion as of March 31, 2018, of which the Company expects to recognize approximately 6% over the next 12 months and the remainder thereafter through the next 20 years. The annual amount of recognition of the existing deferred revenue balance at March 31, 2018 is not expected to vary significantly over the next 10 years, and then it is expected to gradually decline as the 20 year initial term expires on individual Customer Agreements.

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.

Revenue Recognition

The Company recognizes revenue when control of goods or services is transferred to its customers, in an amount that reflects the consideration it expected to be entitled to in exchange for those goods or services.

Customer agreements and incentives

Customer agreements and incentives revenue is primarily comprised of revenue from Customer Agreements in which the Company provides continuous access to a functioning solar system and revenue from the sales of SRECs generated by the Company’s solar energy systems to third parties.

The Company begins to recognize revenue on Customer Agreements when permission to operate (“PTO”) is given by the local utility company or on the date daily operation commences if utility approval is not required. Revenue recognition does not necessarily follow the receipt of cash. The Company recognizes revenue evenly over the time that it satisfies its performance obligations over the initial term of the Customer Agreements. Customer Agreements typically have an initial term of 20 years and include an option to renewal for up to 10 additional years.

SREC revenue arises from the sale of environmental credits generated by solar energy systems and is generally recognized upon delivery of the SRECs to the counterparty.

In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money when the timing of payments provides it with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. When adjusting the promised amount of consideration for a significant financing component, the Company uses the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception and recognizes the revenue amount on a straight-line basis over the term of the Customer Agreement, and interest expense using the effective interest rate method.

Consideration from customers is considered variable due to the performance guarantee under Customer Agreements, and liquidating provisions under SREC contracts. Performance guarantees provide a credit to the customer if the system's cumulative production, as measured on various PTO anniversary dates, is below the Company's guarantee of a specified minimum. Revenue is recognized to the extent it is probable that a significant reversal of such revenue will not occur.

The Company capitalizes incremental costs incurred to obtain a contract in Other Assets in the consolidated balance sheets. These amounts are amortized on a straight-line basis over the term of the Customer Agreements, and are included in Sales and marketing in the consolidated statements of operations.

Solar energy systems and product sales

For solar energy systems sold to customers, the Company recognizes revenue when the solar energy system passes inspection by the authority having jurisdiction. The Company’s installation projects are typically completed in a short period of time.

Product sales consist of solar panels, racking systems, inverters, other solar energy products sold to resellers and customer leads. Product sales revenue is recognized at the time when control is transferred, generally upon shipment. Consideration from customers is considered variable when volume discounts are given to customers, and are recorded as a reduction of revenue. Customer lead revenue, included in product sales, is recognized at the time the lead is delivered.

Taxes assessed by government authorities that are directly imposed on revenue producing transactions are excluded from solar energy systems and product sales.

Cost of Revenue

Customer agreements and incentives

Cost of revenue for customer agreements and incentives is primarily comprised of the (1) depreciation of the cost of the solar energy systems, as reduced by amortization of deferred grants, (2) solar energy system operations, monitoring and maintenance costs including associated personnel costs, and (3) allocated corporate overhead costs. Upon adoption of Accounting Standards Update ("ASU") No. 2014-09 Revenue from Contracts with Customers (Topic 606), the Company no longer records initial direct costs from the origination of Customer Agreements. Instead, the Company records costs to obtain a contract as described in Revenue Recognition above.

Solar energy systems and product sales

Cost of revenue for solar energy systems and non-lead generation product sales consist of direct and indirect material and labor costs for solar energy systems installations and product sales. Also included are engineering and design costs specific to an individual customer project, estimated warranty costs, freight costs, allocated corporate overhead costs, vehicle depreciation costs and personnel costs associated with supply chain, logistics, operations management, safety and quality control. Cost of revenue for lead generations consists of costs related to direct-response advertising activities associated with generating customer leads.

Recently Issued and Adopted Accounting Standards

Accounting standards adopted January 1, 2018 causing restatement of prior periods:

In May 2014, the FASB issued 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. The Company adopted Topic 606 effective January 1, 2018, using the full retrospective method, which required the Company to restate each prior reporting period presented. The Company has elected to use the practical expedient under Topic 606 and has excluded disclosures of transaction prices allocated to remaining performance obligations and when the Company expects to recognize such revenue for all periods prior to the date of initial application.

In February 2016, the FASB issued ASU No. 2016-02 to replace existing lease guidance with ASC 842. 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 Company elected to early adopt the standard effective January 1, 2018 concurrent with the adoption of Topic 606 related to revenue recognition, using the modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements, which required the Company to restate each prior reporting period presented.

Upon the adoption of ASC 842, the Company's Customer Agreements are accounted for under Topic 606 due to changes in the definition of a lease under ASC 842 when the Company was considered a lessor. For operating leases in which the Company is the lessee, the Company concluded that all existing operating leases under ASC 840 continue to be classified as operating leases under ASC 842, and all existing capital leases under ASC 840 are classified as finance leases under ASC 842. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. The Company accounts for short-term leases on a straight-line basis over the lease term.

Under Topic 606, total consideration for Customer Agreements, including price escalators and performance guarantees, is estimated and recognized over the term of the Customer Agreement. This accounting for price escalators creates an unbilled receivable balance for the first half of the Customer Agreement which is then reduced over the second half. Customer Agreements and SRECs with a prepaid element are deemed to include a significant financing component, as defined under Topic 606, which increases both revenue and interest expense. For pass-through financing obligation funds which report investment tax credit ("ITC") revenue, the ITC revenue is now recognized in full at PTO. SREC revenues are estimated net of any variable consideration related to possible liquidated damages, and recognized upon delivery of SRECs to the counterparty. The accounting did not materially differ for revenue currently recognized as "Solar energy systems and product sales." The adoption of Topic 606 also

resulted in an adjustment to the Company's deferred tax liabilities, and impacted the analysis of the realizability of deferred tax assets, resulting in the release of valuation allowance related to state deferred tax assets.

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. The Company adopted Topic 230 effective January 1, 2018, using the retrospective transition method, which required the Company to restate each prior reporting period presented. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated cash flow statements.

Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Standards

The primary impact of adopting Topic 606 and ASC 842 includes the recognition of revenue from Customer Agreements, and certain incentives revenue, namely SRECs and ITCs. Previously, under ASC 840, the Company recognized revenue related to certain Customer Agreements as contingent revenue when earned. Under Topic 606, the Company has a continuous obligation to provide fully functional systems that provide electricity over the term of the Customer Agreement, and recognizes revenue evenly over the term of the Customer Agreements taking into account price escalators and performance guarantees when estimating variable consideration. Previously, the Company recognized revenue related to the sale of SRECs to the extent the cumulative value of delivered SRECs per contract exceeded any possible liquidated damages for non-delivery, if any. Under Topic 606, the Company estimates revenue net of any variable consideration related to possible liquidated damages, and recognizes revenue upon delivery of SRECs to the counterparty. Under Topic 605 and ASC 840, the Company previously reported ITC revenue over five years: following when the related solar system was granted PTO, with one-fifth of the monetized ITCs recognized on each anniversary of the solar energy systems' PTO date. Under Topic 606, the Company recognizes ITC revenue in full at PTO. Previously, under ASC 840, the Company capitalized direct and incremental costs as a component of Solar systems, net on the consolidated balance sheets. Under Topic 606, the Company capitalizes incremental costs incurred to obtain a contract in Other Assets in the consolidated balance sheets. These amounts are amortized on a straight-line basis over the term of the Customer Agreements, and are included in Sales and marketing in the consolidated statements of operations.

In addition to the impact of revenue recognition related to Customer Agreements, the impact of adopting ASC 842 includes a change in accounting for leases when the Company is the lessee, primarily the inclusion of right-of use ("ROU") assets included in Other Assets on the consolidated balance sheets, and operating lease liabilities included in Accrued expenses and other liabilities and Other liabilities on the consolidated balance sheets. The income tax impact as a result of the adoption of ASC 842 was immaterial.

The following table presents the effect of the adoption of Topic 606 and ASC 842 on the Company's condensed consolidated balance sheet as of December 31, 2017 (in thousands):



	December 31, 2017
	Previously Reported		Adoption Impact			Restated

Accounts receivable, net of allowances for doubtful accounts	$	76,198	$	35,871		$	112,069
Solar energy systems, net	3,319,708		(158,138		)	3,161,570
Other assets	37,225		157,529			194,754
Accrued expenses and other liabilities	85,639		11,591			97,230
Deferred revenue, current portion	77,310		(34,701		)	42,609
Deferred grants, current portion	8,269		(76		)	8,193
Pass-through financing obligation, current portion	6,087		(700		)	5,387
Deferred revenue, net of current portion	584,427		(62,184		)	522,243
Deferred grants, net of current portion	228,603		(1,084		)	227,519
Pass-through financing obligation, net of current portion	138,124		(5,301		)	132,823
Other liabilities	13,520		29,223			42,743
Deferred tax liabilities	59,131		23,988			83,119
Redeemable noncontrolling interests	123,737		64			123,801
Additional paid-in capital	684,141		(1,191		)	682,950
Retained earnings	131,959		70,775			202,734
Noncontrolling interests	354,076		4,858			358,934

The following table presents the effect of the adoption of Topic 606 and ASC 842 on the Company's condensed consolidated statement of operations for the three months ended March 31, 2017 (in thousands except per share amounts):



	Three Months Ended March 31, 2017
	Previously Reported			Adoption Impact			Restated

Revenue: Customer agreements and incentives	$	48,098		$	992		$	49,090
Cost of customer agreements and incentives	44,336			(1,723		)	42,613
Sales and marketing	31,676			1,456			33,132
General and administrative	24,621			(13		)	24,608
Interest expense, net	15,277			5,281			20,558
Income tax expense	7,338			(1,938		)	5,400
Net loss	(73,084		)	(2,071		)	(75,155		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(85,811		)	774			(85,037		)
Net income available to common stockholders	12,727			(2,845		)	9,882
Basic net income per share available to common stockholders	0.12			(0.03		)	0.09
Diluted net income per share available to common stockholders	0.12			(0.03		)	0.09

The following table presents the effect of the adoption of Topic 230, Topic 606 and ASC 842 on the Company's condensed consolidated statement of cash flows for the three months ended March 31, 2017 (in thousands):



	Three Months Ended March 31, 2017
	Previously Reported			Adoption Impact			Restated

Net loss	$	(73,084	)	$	(2,071	)	$	(75,155	)
Net cash used in operating activities	(29,107		)	(8,373		)	(37,480		)
Net cash used in investing activities	(170,759		)	8,395			(162,364		)
Net cash provided by financing activities	197,293			126			197,419
Net change in cash and restricted cash	(2,573		)	148			(2,425		)
Cash and restricted cash, beginning of period	206,364			17,999			224,363
Cash and restricted cash, end of period	203,791			18,147			221,938

Accounting standards to be adopted:

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 August 2017, the FASB issued 2017-12, Derivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities, which expands an entity's ability to hedge nonfinancial and financial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, and aligned the recognition and presentation of the effects of hedging instruments in the financial statements. The 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. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

Note 3. Fair Value Measurement

At March 31, 2018 and December 31, 2017, the carrying value of receivables, accounts payable, accrued expenses and distributions payable to noncontrolling interests approximates fair value due to their short-term nature and fall under the Level 2 hierarchy. The carrying values and fair values of debt instruments are as follows (in thousands):



	March 31, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Bank line of credit	$	247,000	$	247,000	$	247,000	$	247,000
Senior debt	899,979		899,710		808,455		807,698
Subordinated debt	112,232		111,094		111,488		111,095
Securitization debt	94,546		93,895		95,821		96,999
SREC Loans	30,272		30,272		32,181		32,181
Total	$	1,384,029	$	1,381,971	$	1,294,945	$	1,294,973

At March 31, 2018 and December 31, 2017, the fair value of the Company’s lines of credit, and certain senior, subordinated, and SREC loans approximate their carrying values because their interest rates are variable rates that approximate rates currently available to the Company. At March 31, 2018 and December 31, 2017, 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.

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.

At March 31, 2018 and December 31, 2017, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):



	March 31, 2018
	Level 1		Level 2		Level 3		Total
Derivative assets:
Interest rate swaps	$	—	$	15,897	$	—	$	15,897
Total	$	—	$	15,897	$	—	$	15,897
Derivative liabilities:
Interest rate swaps	$	—	$	817	$	—	$	817
Total	$	—	$	817	$	—	$	817



	December 31, 2017
	Level 1		Level 2		Level 3		Total
Derivative assets:
Interest rate swaps	$	—	$	1,917	$	—	$	1,917
Total	$	—	$	1,917	$	—	$	1,917
Derivative liabilities:
Interest rate swaps	$	—	$	8,568	$	—	$	8,568
Total	$	—	$	8,568	$	—	$	8,568

Note 4. Inventories

Inventories consist of the following (in thousands):



	March 31, 2018		December 31, 2017
Raw materials	$	82,134	$	87,927
Work-in-process	5,768		6,500
Total	$	87,902	$	94,427

Note 5. Solar Energy Systems, net

Solar energy systems, net consists of the following (in thousands):



	March 31, 2018			December 31, 2017
Solar energy system equipment costs	$	3,293,697		$	3,124,407
Inverters	333,822			317,390
Total solar energy systems	3,627,519			3,441,797
Less: accumulated depreciation and amortization	(430,780		)	(399,280		)
Add: construction-in-progress	89,065			119,053
Total solar energy systems, net	$	3,285,804		$	3,161,570

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 $32.4 million and $25.8 million for the three months ended March 31, 2018 and 2017, respectively. The depreciation expense was reduced by the amortization of deferred grants of $1.9 million and $2.0 million for the three months ended March 31, 2018 and 2017, respectively.

Note 6. Other Assets

Other assets consist of the following (in thousands):



	March 31, 2018			December 31, 2017
Costs to obtain contracts	$	169,266		$	157,970
Accumulated amortization of costs to obtain contracts	(18,361		)	(16,485		)
Operating lease right-of-use assets	24,451			25,465
Other assets	46,179			27,804
Total	$	221,535		$	194,754

The Company recorded amortization of costs to obtain contracts of $1.9 million and $1.5 million for three months ended March 31, 2018 and 2017, respectively, in the sales and marketing expense.

Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):



	March 31, 2018		December 31, 2017
Accrued employee compensation	$	27,267	$	28,698
Operating lease obligations	9,056		9,202
Accrued interest	6,927		6,054
Accrued professional fees	4,508		5,837
Other accrued expenses	45,035		47,439
Total	$	92,793	$	97,230

Note 8. Indebtedness

As of March 31, 2018, debt consisted of the following (in thousands, except percentages):



	Carrying Values, net of debt discount						Unused Borrowing Capacity		Interest Rate ⁽¹⁾		Maturity Date
	Current		Long Term		Total
Recourse debt:
Bank line of credit	$	—	$	247,000	$	247,000	$	406	4.98% - 5.24%		April 2020
Total recourse debt	$	—	$	247,000	$	247,000	$	406

Non-recourse debt:
Senior	4,224		895,755		899,979		6,413		3.90% - 5.30%		September 2020 - October 2024
Subordinated	2,296		109,936		112,232		—		6.71% - 7.70%		September 2020 - October 2024
Securitization Class A	3,589		80,968		84,557		—		4.40	%	July 2024
Securitization Class B	446		9,543		9,989		—		5.38	%	July 2024
SREC Loans	18,091		12,181		30,272		4,402		7.41	%	July 2021
Total non-recourse debt	$	28,646	$	1,108,383	$	1,137,029	$	10,815
Total debt	$	28,646	$	1,355,383	$	1,384,029	$	11,221


(1)	Reflects contractual, unhedged rates. See Note 9, Derivatives for hedge rates.

As of December 31, 2017, debt consisted of the following (in thousands, except percentages):



	Carrying Values, net of debt discount						Unused Borrowing Capacity		Interest Rate		Maturity Date
	Current		Long Term		Total
Recourse debt:
Bank line of credit	$	—	$	247,000	$	247,000	$	406	4.58% - 4.87%		April 2018
Total recourse debt	$	—	$	247,000	$	247,000	$	406

Non-recourse debt:
Senior	3,561		804,894		808,455		12,758		3.63% - 4.69%		September 2020 - October 2024
Subordinated	4,301		107,187		111,488		27		6.36% - 7.13%		September 2020 - October 2024
Securitization Class A	3,534		82,203		85,737		—		4.40	%	July 2024
Securitization Class B	440		9,644		10,084		—		5.38	%	July 2024
SREC Loans	9,693		22,488		32,181		—		7.28	%	July 2021
Total non-recourse debt	$	21,529	$	1,026,416	$	1,047,945	$	12,785
Total debt	$	21,529	$	1,273,416	$	1,294,945	$	13,191

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. 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%.

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 $30 million at the end of each calendar month and maintaining a minimum interest coverage ratio of 3.00 or greater, measured quarterly as of the last day of each quarter. The Company was in compliance with all debt covenants as of March 31, 2018. As of March 31, 2018, the balance under this facility was $247.0 million with a maturity date in April 2020.

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 facilities are non-recourse to the Company and are secured by net cash flows from Customer Agreements less certain operating, maintenance and other expenses which are available to the borrower after distributions to tax equity investors. The Company was in compliance with all debt covenants as of March 31, 2018.

As of March 31, 2018, certain subsidiaries of the Company have an outstanding balance of $286.4 million on secured credit facilities that were syndicated with various lenders due in October 2024. The credit facilities totaled $303.0 million and consisted of $293.0 million in term loans, and a $10.0 million revolving debt service reserve letter of credit facility. Term Loan A ("TLA") is a senior delayed draw term loan that bears interest at LIBOR +2.75% per annum for LIBOR loans or the Base Rate +1.75% per annum on Base Rate loans. Term Loan B ("TLB") is subordinated debt and consists of a Class A portion which accrues interest at a fixed interest rate of 7.03% per annum and a Class B portion which accrues interest at LIBOR +5.00% per annum or the Base Rate +4.00% per annum. The Base Rate is the highest of the Federal Funds Rate +0.50%, the Prime Rate, or LIBOR +1.00%. Under TLA, prepayments are permitted with no penalties. Under TLB, prepayments are permitted with associated penalties ranging from 0% - 5% depending on the timing of prepayments.

As of March 31, 2018, certain subsidiaries of the Company have an outstanding balance of $183.5 million on senior secured credit facilities that were syndicated with various lenders due in April 2024. These facilities are subject to the National Grid project equity transaction. The credit facilities totaled $202.0 million and consisted of a $195.0 million senior delayed draw term loan facility and a $7.0 million revolving debt service reserve letter of credit facility. Loans under the facility bear interest at LIBOR +2.25% per annum, as amended, for the remainder of the initial four-year period for LIBOR loans or the Base Rate +1.25% per annum for Base Rate Loans. The Base Rate is the highest of the Federal Funds Rate +0.50%, the Prime Rate, or LIBOR +1.00%. The facilities are non-recourse to the Company and are secured by net cash flows from Customer Agreements and 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.

As of March 31, 2018, certain subsidiaries of the Company have an outstanding balance of $214.3 million on secured credit facilities agreements, as amended, with a syndicate of banks due in March 2023. The facilities totaled $340.0 million and consisted of a revolving aggregation facility (“Aggregation Facility”), a term loan ("Term Loan") and a revolving debt service reserve letter of credit facility. As permitted by the amendment, the Company increased the total commitments available to $595.0 million in April 2018. Senior loans under the Aggregation 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. The subordinated Term Loan 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 prepayment penalties range from 0% - 1% depending on the timing of prepayments.

As of March 31, 2018, certain subsidiaries of the Company have an outstanding balance of $162.6 million on secured credit facilities agreements with a syndicate of banks due in December 2021. The facilities totaled $195.4 million and consisted of a senior term loan (“Term Loan A”), 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. Loans under Term Loan A bear interest at LIBOR +2.75% per annum, stepping up to LIBOR +3.00% per annum on the fourth anniversary. The facilities also include a subordinated term loan (“Term Loan B”) which bears interest at LIBOR +5.00% per annum. Prepayments are permitted under Term Loan A and Term Loan B at par without premium or penalty.

Senior Debt

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $110.9 million on a revolving loan facility due in September 2020. The facility is secured by the assets and related net cash flow of this subsidiary and is non-recourse to the Company's other assets. Loans under the facility bear interest at LIBOR +2.75% per annum for the senior secured loan, and LIBOR +5.50% per annum for the subordinated loan. The Company was in compliance with all debt covenants as of March 31, 2018.

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $23.7 million on a term loan due in April 2022. The loan is secured by the assets and related net 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 March 31, 2018.

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $11.8 million on a non-recourse loan due in September 2022. The loan is secured by substantially all of the assets of the 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. Loans under this facility bear interest at LIBOR +3.00% per annum. The financing agreement requires the Company to maintain certain financial covenants. At March 31, 2018, the Company was not in compliance with the interest rate hedging agreement that resulted in hedging greater than 100% of the aggregate principal amount; however, a waiver was obtained from the lender for this instance of noncompliance, and the noncompliance has been remedied.

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $19.0 million on a secured, non-recourse loan agreement due in September 2022. The loan will be repaid through cash flows from a pass-through financing obligation 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. Loans under this facility bear interest at LIBOR +2.25% per annum. The Company was in compliance with all debt covenants as of March 31, 2018.

Securitization Loans

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $94.5 million on solar asset-backed notes ("Notes") secured by associated customer contracts (“Solar Assets”) held by a special purpose entity (“Issuer”). As of March 31, 2018 and December 31, 2017, these Solar Assets had a carrying value of $170.6 million and $172.8 million, respectively, and are included under solar energy systems, net, in the consolidated balance sheets. The Company was in compliance with all debt covenants as of March 31, 2018.

SREC Loans

As of March 31, 2018, a subsidiary of the Company has an outstanding balance of $30.3 million on a secured credit agreement with a weighted average interest rate of 7.41% and 7.28% as of March 31, 2018 and December 31, 2017, respectively. The facility is non-recourse to the Company and is secured by substantially all of the assets of such subsidiary, including its rights in and the net cash flows from the generation of contracted and uncontracted SRECs by certain subsidiaries of the Company. Loans under the facility bear interest at LIBOR +5.50% per annum for contracted SRECs and LIBOR +9.00% per annum for uncontracted SRECs. 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 March 31, 2018.

Note 9. 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 three months ended March 31, 2018, 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 gain of $16.2 million and unrealized loss of $0.8 million for the three months ended March 31, 2018 and 2017, respectively, net of applicable tax expense of $5.5 million and tax benefit of $0.5 million, respectively. The Company recognized into earnings a decrease to interest expense on derivatives of $1.2 million and interest expense of $0.6 million for the three months ended March 31, 2018 and 2017, respectively, net of tax benefit of $0.4 million and tax expense of $0.4 million for the three months ended March 31, 2018 and 2017. During the next twelve months, the Company expects to reclassify $0.2 million of net gains on derivative instruments from accumulated other comprehensive income to earnings. There were no undesignated derivative instruments recorded by the Company as of March 31, 2018.

At March 31, 2018, the Company had designated derivative instruments classified as derivative assets as reported in other assets of $15.9 million and derivative liabilities as reported in other liabilities of $0.8 million in the Company’s balance sheet. At December 31, 2017, the Company had designated derivative instruments classified as hedges of variable interest payments as derivative assets that are reported in other assets of $1.9 million and derivative liabilities as reported in other liabilities of $8.6 million in the Company’s balance sheet. At March 31, 2018, the Company had the following derivative instruments (in thousands, other than quantity and interest rates):



Type	Quantity	Effective Dates	Maturity Dates	Hedge Interest Rates	Notional Amount		Adjusted Fair Market Value
Interest rate swaps	2	4/29/2016 - 12/30/2016	8/31/2022 - 9/30/2022	1.27%- 2.37%	$	27,256	$	715
Interest rate swaps	10	7/31/2017 - 1/31/2019	4/30/2024 - 10/31/2024	2.16%- 2.69%	$	335,740	$	6,259
Interest rate swaps	4	4/30/2015	10/31/2028	2.17%-2.18%	$	124,637	$	4,365
Interest rate swap	1	9/20/2020	6/20/2030	2.57%	$	67,013	$	551
Interest rate swap	1	9/30/2022	9/30/2031	3.23%	$	9,435	$	(156	)
Interest rate swap	1	9/20/2020	4/20/2032	2.60%	$	33,409	$	287
Interest rate swaps	5	1/31/2019 - 10/31/2024	7/31/2034	2.48% - 3.04%	$	144,379	$	1,645
Interest rate swaps	5	7/31/2017 - 4/30/2024	7/31/2035	2.56% - 2.95%	$	150,175	$	722
Interest rate swaps	5	1/31/2018 - 10/18/2024	10/31/2036	2.62% - 2.95%	$	182,267	$	690

Note 10. Pass-through Financing Obligations

The Company's pass-through financing obligations ("financing obligations") arise when the Company leases solar energy systems to Fund investors under a master lease agreement, and these investors in turn are assigned the Customer Agreements 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 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.

Under these financing obligation arrangements, wholly owned subsidiaries of the Company finance the cost of solar energy systems with investors for an initial term of 20 – 25 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 March 31, 2018 and December 31, 2017, the cost of the solar energy systems placed in service under the financing obligations was $463.3 million and $464.2 million, respectively. The accumulated depreciation related to these assets as of March 31, 2018 and December 31, 2017 was $67.7 million and $63.7 million, respectively.

The investors make a series of large up-front payments and, in certain cases, subsequent smaller quarterly payments (lease payments) to the subsidiaries of the Company. The Company accounts for the payments received from the investors under the arrangements as borrowings by recording the proceeds received as financing obligations. These financing obligations are reduced over a period of approximately 20 years by customer payments under the Customer Agreements, U.S. Treasury grants (where applicable), incentive rebates (where applicable), the fair value of the ITCs monetized (where applicable) and proceeds from the contracted resale of SRECs as they are received by the investor. Under this approach, the Company accounts for the Customer Agreements and any related U.S. Treasury grants or incentive rebates as well the resale of SRECs consistent with the Company’s revenue recognition accounting policies as described in Note 2, Summary of Significant Accounting Policies.

Interest is calculated on the financing obligations using the effective interest rate method. The effective interest rate, which is adjusted on a prospective basis, is the interest rate that equates the present value of the estimated cash amounts, including ITCs, to be received by the investor over the lease term with the present value of the cash amounts paid by the investor to the Company, adjusted for amounts received by the investor. The financing obligations are nonrecourse once the associated assets have been placed in service and all the contractual arrangements have been assigned to the investor.

Under the majority of the financing obligations, the investor has a right to extend its right to receive cash flows from the customers beyond the initial term in certain circumstances. Depending on the arrangement, the Company has the option to settle the outstanding financing obligation on the ninth or eleventh anniversary at a price equal to the higher of (a) the fair value of future remaining cash flows or (b) the amount that would result in the investor earning their targeted return. In several of these financing obligations, the investor has an option to require repayment of the entire outstanding balance on the tenth anniversary at a price equal to the fair value of the future remaining cash flows.

In one arrangement the investor has a right, on June 30, 2019, to purchase all of the systems leased at a price equal to the higher of (a) the sum of the present value of the expected remaining lease payments due by the investor, discounted at 5%, and the fair market value of the Company’s residual interest in the systems as determined through independent valuation or (b) a set value per kilowatt applied to the aggregate size of all leased systems.

Under all financing obligations, the Company is responsible for services such as warranty support, accounting, lease servicing and performance reporting to customers. As part of the warranty and performance guarantee with customers, the Company guarantees certain specified minimum annual solar energy production output for the solar energy systems leased to the customers, which the Company accounts for as disclosed in Note 2, Summary of Significant Accounting Policies.

Note 11. VIE Arrangements

The Company consolidated various VIEs at March 31, 2018 and December 31, 2017. The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets are as follows (in thousands):



	March 31, 2018		December 31, 2017
Assets
Current assets
Cash	$	144,822	$	118,352
Restricted cash	5,991		2,699
Accounts receivable, net	62,233		57,402
Prepaid expenses and other current assets	694		917
Total current assets	213,740		179,370
Solar energy systems, net	2,525,977		2,385,329
Other assets	6,621		3,679
Total assets	$	2,746,338	$	2,568,378
Liabilities
Current liabilities
Accounts payable	$	17,575	$	15,929
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	15,134		13,526
Accrued expenses and other liabilities	5,851		5,200
Deferred revenue, current portion	29,506		28,695
Deferred grants, current portion	1,018		1,021
Non-recourse debt, current portion	19,626		11,179
Total current liabilities	88,710		75,550
Deferred revenue, net of current portion	389,990		381,066
Deferred grants, net of current portion	29,052		29,385
Non-recourse debt, net of current portion	203,325		190,106
Other liabilities	136		1,848
Total liabilities	$	711,213	$	677,955

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 pass-through financing obligation Fund arrangements as further explained in Note 10, 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 pass-through financing obligation recorded in the Company’s consolidated financial statements. The Company is not considered the primary beneficiary of these VIEs.

Note 12. Redeemable Noncontrolling Interests and Equity

As of March 31, 2018, 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 — December 31, 2017	$	123,801		$	881,582		$	358,934		$	1,240,516
Exercise of stock options	—			1,908			—			1,908
Issuance of restricted stock units, net of tax withholdings	—			(2,484		)	—			(2,484		)
Stock based compensation	—			10,703			—			10,703
Contributions from noncontrolling interests and redeemable noncontrolling interests	31,103			—			112,501			112,501
Distributions to noncontrolling interests and redeemable noncontrolling interests	(2,608		)	—			(14,206		)	(14,206		)
Net income (loss)	(18,772		)	28,032			(100,680		)	(72,648		)
Other comprehensive loss, net of taxes	—			14,938			—			14,938
Balance — March 31, 2018	$	133,524		$	934,679		$	356,549		$	1,291,228

The carrying value of redeemable noncontrolling interests was greater than the redemption value except for six Funds at March 31, 2018 and December 31, 2017 where the carrying value has been adjusted to the redemption value.

As of March 31, 2017, 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 — December 31, 2016	$	140,996		$	742,771		$	252,957		$	995,728
Cumulative effect of adoption of ASU 2016-16 and ASU 2016-09	—			2,996			—			2,996
Exercise of stock options	—			101			—			101
Issuance of restricted stock units, net of tax withholdings	—			(1,168		)	—			(1,168		)
Stock based compensation	—			5,887			—			5,887
Contributions from noncontrolling interests and redeemable noncontrolling interests	35,168			—			130,144			130,144
Distributions to noncontrolling interests and redeemable noncontrolling interests	(3,843		)	—			(9,547		)	(9,547		)
Net income (loss)	(28,857		)	9,882			(56,180		)	(46,298		)
Other comprehensive loss, net of taxes	—			(201		)	—			(201		)
Balance — March 31, 2017	$	143,464		$	760,268		$	317,374		$	1,077,642

Note 13. 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 three months ended March 31, 2018 (shares and aggregate intrinsic value in thousands):



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 31, 2017	16,268		$	5.70	7.41	$	14,832
Granted	1,188		8.05
Exercised	(443	)	4.38
Cancelled / forfeited	(184	)	8.30
Outstanding at March 31, 2018	16,829		$	5.87	7.39	$	53,592

Options vested and exercisable at March 31, 2018	8,964		$	5.55	6.18	$	31,957

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 three months ended March 31, 2018 (shares in thousands):



	Number of Awards		Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2017	5,330		$	5.82
Granted	1,452		7.77
Issued	(888	)	6.93
Cancelled / forfeited	(406	)	5.41
Unvested balance at March 31, 2018	5,488		$	6.19

Employee Stock Purchase Plan

Under the Company's amended 2015 Employee Stock Purchase Plan ("ESPP"), eligible employees are offered shares bi-annually through a 24 month offering period which encompasses four six month purchase periods. 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 and 10,000 shares per employee per purchase period.

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 March 31,
	2018		2017
Cost of customer agreements and incentives	$	611	$	751
Cost of solar energy systems and product sales	170		114
Sales and marketing	4,150		1,917
Research and development	295		149
General and administration	5,468		2,943
Total	$	10,694	$	5,874

In August 2017, the Company entered into an agreement with an affiliate ("Contractor") of Comcast Corporation ("Comcast") whereby Contractor will receive lead or sales fees for new customers it brings to the Company over a 40-month term. The Company also issued Comcast a warrant to purchase up to 11,793,355 shares of the Company's common stock, at an exercise price of $0.01 per warrant share. The warrant initially vests 50.05% when both (i) Contractor has earned a lead or sales fee with respect to 30,000 of installed solar energy systems, and (ii) Contractor or its affiliates have spent at least $10.0 million in marketing and sales in connection with the agreement. Thereafter, the warrant will vest in five additional increments for each additional 6,000 installed solar energy systems.

Note 14. Income Taxes

The income tax expense rate for the three months ended March 31, 2018 and 2017 was (9.9)% and (7.7)%, 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 and therefore a deferred tax expense is calculated on the income available to common shareholders.

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.

Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, the current year and onwards, including, but not limited to, a reduction of the U.S. federal corporate tax rate from as high as 35% to 21%, net operating loss deduction limitations, interest expense limitations, revenue recognition changes and 100% disallowance of entertainment expense. The Company continues to analyze the Tax Act and implement relevant changes in the accounting for income taxes.

In addition on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes, for the year ended December 31, 2017. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. The Company has determined that the deduction related to officers compensation and the new tax statute needs further analysis to make their final assessment. The Company is still within the measurement period as of Q1 2018 and no further conclusions have been made, as the Company reviews the law change and the impact to the Company.

Uncertain Tax Positions

As of March 31, 2018 and December 31, 2017, the Company had $1.5 million of unrecognized tax benefits related to an acquisition in 2015. In addition, there was $0.4 million and $0.4 million of interest and penalties for uncertain tax positions as of March 31, 2018 and December 31, 2017, respectively. Due to expiration of federal and California statute of limitations, the Company expects the total amount of gross unrecognized tax benefits will decrease by $1.2 million within the next 12 months. The Company has accounted for an indemnification asset that will be written down concurrently and recorded through operating expenses. 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 March 31, 2018 and December 31, 2017, the Company does not expect to pay income tax, including in connection with its income tax provision for the three months ended March 31, 2018 until the Company’s net operating losses are fully utilized. As of December 31, 2017, the Company’s federal and state net operating loss carryforwards were $700.3 million and $630.7 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 15. Commitments and Contingencies

Letters of Credit

As of March 31, 2018 and December 31, 2017, the Company had $13.4 million and $16.4 million, respectively, of unused letters of credit outstanding, which carry fees of 2.50% - 3.25% per annum.

Operating and Finance Leases

The Company leases real estate under non-cancellable-operating leases and equipment under finance leases.

The components of lease expense were as follows (in thousands):



	Three Months Ended March 31,
	2018		2017
Finance lease cost:
Amortization of right-of-use assets	$	2,634	$	2,824
Interest on lease liabilities	119		197
Operating lease cost	2,629		2,511
Short-term lease cost	201		103
Variable lease cost	777		685
Total lease cost	$	6,360	$	6,320

Other information related to leases was as follows (in thousands):



	Three Months Ended March 31,
	2018			2017
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,600		$	2,523
Operating cash flows from finance leases	109			179
Financing cash flows from finance leases	2,159			2,802
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,117			3,360
Weighted average remaining lease term (years):
Operating leases	3.9			4.3
Finance leases	1.9			2.6
Weighted average discount rate:
Operating leases	4.1		%	4.0		%
Finance leases	3.1		%	3.0		%

Future minimum lease payments under non-cancellable leases as of March 31, 2018 were as follows (in thousands):



	Operating Leases			Finance Leases
2018	$	9,914		$	6,989
2019	6,734			3,750
2020	4,916			560
2021	3,424			210
2022	2,482			42
Thereafter	1,361			13
Total future lease payments	28,831			11,564
Less: Amount representing interest	(2,112		)	(389		)
Present value of future payments	26,719			11,175
Less: Current portion	(9,056		)	(6,737		)
Long-term portion	$	17,663		$	4,438

Purchase Commitment

In 2018, the Company entered into purchase commitments with multiple suppliers to purchase $265.6 million of photovoltaic modules and inverters over the next 24 months with the first modules delivered in January 2018.

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.

ITC and Cash Grant Indemnification

Sunrun Inc. - FORM 10-Q - May 9, 2018

Attached files