Document

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, 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 August 6, 2018, the number of shares of the registrant’s common stock outstanding was 110,909,399.

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	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 5.	Other Information	77
Item 6.	Exhibits	77
	Signatures	78

Sunrun Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

(Unaudited)



	June 30, 2018		December 31, 2017
Assets
Current assets:
Cash	$	215,706	$	202,525
Restricted cash	54,549		39,265
Accounts receivable (net of allowances for doubtful accounts of $2,187 and $1,665 as of June 30, 2018 and December 31, 2017, respectively)	123,334		112,069
State tax credits receivable	—		11,085
Inventories	81,304		94,427
Prepaid expenses and other current assets	9,114		9,202
Total current assets	484,007		468,573
Restricted cash	148		—
Solar energy systems, net	3,437,822		3,161,570
Property and equipment, net	32,816		36,402
Intangible assets, net	12,191		14,294
Goodwill	87,543		87,543
Other assets	244,841		194,754
Total assets ⁽¹⁾	$	4,299,368	$	3,963,136
Liabilities and total equity
Current liabilities:
Accounts payable	$	85,104	$	115,193
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	15,063		13,583
Accrued expenses and other liabilities	98,294		97,230
Deferred revenue, current portion	45,194		42,609
Deferred grants, current portion	8,173		8,193
Finance lease obligations, current portion	7,332		7,421
Non-recourse debt, current portion	24,571		21,529
Pass-through financing obligation, current portion	38,762		5,387
Total current liabilities	322,493		311,145
Deferred revenue, net of current portion	534,848		522,243
Deferred grants, net of current portion	223,019		227,519
Finance lease obligations, net of current portion	5,685		5,811
Recourse debt	247,000		247,000
Non-recourse debt, net of current portion	1,226,038		1,026,416
Pass-through financing obligation, net of current portion	221,405		132,823
Other liabilities	39,691		42,743
Deferred tax liabilities	103,939		83,119
Total liabilities ⁽¹⁾	2,924,118		2,598,819
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests	129,929		123,801
Stockholders’ equity:
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of June 30, 2018 and December 31, 2017; no shares issued and outstanding as of June 30, 2018 and December 31, 2017	—		—
Common stock, $0.0001 par value—authorized, 2,000,000 shares as of June 30, 2018 and December 31, 2017; issued and outstanding, 110,487 and 107,350 shares as of June 30, 2018 and December 31, 2017, respectively	11		11
Additional paid-in capital	704,146		682,950
Accumulated other comprehensive income	16,084		(4,113		)
Retained earnings	238,175		202,734
Total stockholders’ equity	958,416		881,582
Noncontrolling interests	286,905		358,934
Total equity	1,245,321		1,240,516
Total liabilities, redeemable noncontrolling interests and total equity	$	4,299,368	$	3,963,136

The Company’s consolidated assets as of June 30, 2018 and December 31, 2017 include $2,798,533 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 June 30, 2018 and December 31, 2017 of $2,627,741 and $2,385,329, respectively; cash as of June 30, 2018 and December 31, 2017 of $90,445 and $118,352, respectively; restricted cash as of June 30, 2018 and December 31, 2017 of $1,044 and $2,699, respectively; accounts receivable, net as of June 30, 2018 and December 31, 2017 of $70,108 and $57,402, respectively; prepaid expenses and other current assets as of June 30, 2018 and December 31, 2017 of $465 and $917, respectively and other assets as of June 30, 2018 and December 31, 2017 of $8,730 and $3,679, respectively. The Company’s consolidated liabilities as of June 30, 2018 and December 31, 2017 include $694,019 and $677,955, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of June 30, 2018 and December 31, 2017 of $17,104 and $15,929, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of June 30, 2018 and December 31, 2017 of $15,013 and $13,526, respectively; accrued expenses and other liabilities as of June 30, 2018 and December 31, 2017 of $6,260 and $5,200, respectively; deferred revenue as of June 30, 2018 and December 31, 2017 of $420,240 and $409,761, respectively; deferred grants as of June 30, 2018 and December 31, 2017 of $29,764 and $30,406, respectively; and non-recourse debt as of June 30, 2018 and December 31, 2017 of $196,184 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 June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue:
Customer agreements and incentives	$	91,605		$	58,111		$	158,595		$	107,201
Solar energy systems and product sales	78,933			72,511			156,306			128,530
Total revenue	170,538			130,622			314,901			235,731
Operating expenses:
Cost of customer agreements and incentives	57,769			45,289			112,345			87,902
Cost of solar energy systems and product sales	64,268			60,938			128,847			110,369
Sales and marketing	49,237			35,056			93,316			68,188
Research and development	5,052			3,710			8,948			6,706
General and administrative	28,130			25,228			61,023			49,836
Amortization of intangible assets	1,051			1,051			2,102			2,102
Total operating expenses	205,507			171,272			406,581			325,103
Loss from operations	(34,969		)	(40,650		)	(91,680		)	(89,372		)
Interest expense, net	31,872			21,971			60,070			42,529
Other expenses (income), net	508			208			(1,184		)	683
Loss before income taxes	(67,349		)	(62,829		)	(150,566		)	(132,584		)
Income tax expense	4,378			10,781			12,581			16,181
Net loss	(71,727		)	(73,610		)	(163,147		)	(148,765		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(79,136		)	(91,956		)	(198,588		)	(176,993		)
Net income available to common stockholders	$	7,409		$	18,346		$	35,441		$	28,228
Net income per share available to common stockholders
Basic	$	0.07		$	0.17		$	0.33		$	0.27
Diluted	$	0.06		$	0.17		$	0.31		$	0.26
Weighted average shares used to compute net income per share available to common stockholders
Basic	109,559			105,093			108,510			104,568
Diluted	117,067			107,347			113,930			106,911

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 June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
Net income available to common stockholders	$	7,409	$	18,346		$	35,441	$	28,228
Other comprehensive income:
Unrealized gain (loss) on derivatives, net of income taxes	5,662		(3,709		)	21,833		(4,473		)
Less interest income (expense) on derivatives recognized into earnings, net of income taxes	422		(340		)	1,636		(904		)
Comprehensive income	$	12,649	$	14,977		$	55,638	$	24,659

Sunrun Inc.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



	Six Months Ended June 30,
	2018			2017
Operating activities:
Net loss	$	(163,147	)	$	(148,765	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization, net of amortization of deferred grants	73,980			61,654
Deferred income taxes	12,582			16,179
Stock-based compensation expense	16,242			11,389
Interest on pass-through financing obligations	7,002			6,274
Reduction in pass-through financing obligations	(10,142		)	(8,142		)
Other noncash losses and expenses	12,131			10,152
Changes in operating assets and liabilities:
Accounts receivable	(13,044		)	(10,254		)
Inventories	13,123			14,582
Prepaid and other assets	(20,474		)	(16,067		)
Accounts payable	(32,840		)	2,636
Accrued expenses and other liabilities	(2,039		)	(6,511		)
Deferred revenue	(4,555		)	17,702
Net cash used in operating activities	(111,181		)	(49,171		)
Investing activities:
Payments for the costs of solar energy systems	(346,962		)	(339,979		)
Purchases of property and equipment	(2,762		)	(4,464		)
Net cash used in investing activities	(349,724		)	(344,443		)
Financing activities:
Proceeds from state tax credits, net of recapture	10,434			13,171
Proceeds from issuance of recourse debt	2,000			91,400
Repayment of recourse debt	(2,000		)	(88,400		)
Proceeds from issuance of non-recourse debt	250,232			199,525
Repayment of non-recourse debt	(48,677		)	(84,830		)
Payment of debt fees	(9,133		)	(4,955		)
Proceeds from pass-through financing and other obligations	151,632			3,062
Payment of finance lease obligations	(4,081		)	(5,262		)
Contributions received from noncontrolling interests and redeemable noncontrolling interests	167,468			303,545
Distributions paid to noncontrolling interests and redeemable noncontrolling interests	(33,301		)	(24,635		)
Proceeds from exercises of stock options, net of withholding taxes paid on restricted stock units	4,944			(425		)
Net cash provided by financing activities	489,518			402,196
Net change in cash and restricted cash	28,613			8,582
Cash and restricted cash, beginning of period	241,790			224,363
Cash and restricted cash, end of period	$	270,403		$	232,945
Supplemental disclosures of cash flow information
Cash paid for interest	$	33,509		$	17,434
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	$	22,472		$	25,284
Purchases of solar energy systems included in non-recourse debt	$	—		$	12,873
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	$	15,063		$	13,212
Right-of-use assets obtained in exchange for new finance lease liabilities	$	3,662		$	94

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 and six months ended June 30, 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 (“Topic 810”) Consolidation, the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in Topic 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.

Revenue from external customers (including, but not limited to homeowners) for each group of similar products and services is as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Customer agreements	$	66,658	$	51,220	$	128,307	$	97,545
Incentives	24,947		6,891		30,288		9,656
Customer agreements and incentives	91,605		58,111		158,595		107,201

Solar energy systems	40,734		28,079		74,732		48,698
Products	38,199		44,432		81,574		79,832
Solar energy systems and product sales	78,933		72,511		156,306		128,530
Total revenue	$	170,538	$	130,622	$	314,901	$	235,731

Revenue from Customer Agreements includes electricity revenues paid by customers as well as utility and other rebates assigned by the customer in the Customer Agreement. Revenue from incentives includes revenue from the sale of investment tax credits ("ITCs") and renewable energy credits (“SRECs”). The increase relates primarily to the sale of ITCs related to a financing obligation fund opened in 2018.

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):



	June 30, 2018		December 31, 2017
Cash	$	215,706	$	202,525
Restricted cash, current and long-term	54,697		39,265
Total	$	270,403	$	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. The balance of the unbilled amount will gradually decrease to zero once the amounts billed are greater than the amount recognized for a given Customer Agreement.

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



	June 30, 2018			December 31, 2017
Customer receivables	$	56,934		$	59,263
Unbilled receivables	65,417			52,278
Other receivables	702			751
Rebates receivable	2,468			1,442
Allowance for doubtful accounts	(2,187		)	(1,665		)
Total	$	123,334		$	112,069

Deferred Revenue

When the Company receives consideration, or when 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 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):



	June 30, 2018		December 31, 2017
Under Customer Agreements:
Payments received	$	530,010	$	517,544
Financing component balance	34,251		30,736
	564,261		548,280

Under SREC contracts:
Payments received	13,916		14,805
Financing component balance	1,865		1,767
	15,781		16,572

Total	$	580,042	$	564,852

In the three months ended June 30, 2018 and 2017, the Company recognized revenue of $13.0 million and $11.5 million, respectively, and in the six months ended June 30, 2018 and 2017, the Company recognized revenue of $25.8 million and $23.0 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 $4.4 billion as of June 30, 2018, of which the Company expects to recognize approximately 6% over the next 12 months and the remainder thereafter through the remaining initial term of the Customer Agreement. The annual amount of recognition of the existing deferred revenue balance at June 30, 2018 is not expected to vary significantly over the next 10 years, and then it is expected to gradually decline as the typically 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. After the initial contract term, our Customer Agreements typically automatically renew on an annual basis and the rate is initially set at up to a 10% discount to then-prevailing power prices.

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. For pass-through financing obligation Funds, the value attributable to the ITCs are recognized in the period a solar system is granted PTO - see Note 10, Pass-through Financing Obligations.

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 (1) the 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 consists 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 generation 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 Accounting Standards Codification Topic 842 ("Topic 842"), Leases. Topic 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. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. The clarifications address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. These amendments have the same effective date and transition requirements as the new leases standard, as such the Company adopted the new ASU and the impact of adopting this standard was not material to its financial statements.

Upon the adoption of Topic 842, the Company's Customer Agreements are accounted for under Topic 606 due to changes in the definition of a lease under Topic 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 Accounting Standards Codification Topic 840 ("Topic 840"), Leases, continue to be classified as operating leases under Topic 842, and all existing capital leases under Topic 840 are classified as finance leases under Topic 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 that report investment tax credit revenue, the ITC revenue is now recognized in full at PTO. SREC revenue is 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 Topic 842 includes the recognition of revenue from Customer Agreements, and certain incentives revenue, namely SRECs and ITCs. Previously, under Topic 840, the Company recognized revenue related to certain Customer Agreements as contingent revenue when earned. Under Topic 606, because the Company has a continuous obligation to provide fully functional systems that provide electricity over the term of the Customer Agreement, it 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 Topic 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 Topic 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 Topic 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 Topic 842 was immaterial.

The following table presents the effect of the adoption of Topic 606 and Topic 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 Topic 842 on the Company's condensed consolidated statement of operations for the three and six months ended June 30, 2017 (in thousands except per share amounts):



	Three Months Ended June 30, 2017									Six Months Ended June 30, 2017
	Previously Reported			Adoption Impact			Restated			Previously Reported			Adoption Impact			Restated

Revenue: Customer agreements and incentives	$	65,337		$	(7,226	)	$	58,111		$	113,435		$	(6,234	)	$	107,201
Cost of customer agreements and incentives	47,114			(1,825		)	45,289			91,450			(3,548		)	87,902
Sales and marketing	32,784			2,272			35,056			64,460			3,728			68,188
General and administrative	25,230			(2		)	25,228			49,851			(15		)	49,836
Interest expense, net	16,602			5,369			21,971			31,879			10,650			42,529
Income tax expense	15,453			(4,672		)	10,781			22,791			(6,610		)	16,181
Net loss	(65,242		)	(8,368		)	(73,610		)	(138,326		)	(10,439		)	(148,765		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(90,364		)	(1,592		)	(91,956		)	(176,175		)	(818		)	(176,993		)
Net income available to common stockholders	25,122			(6,776		)	18,346			37,849			(9,621		)	28,228
Basic net income per share available to common stockholders	0.24			(0.07		)	0.17			0.36			(0.09		)	0.27
Diluted net income per share available to common stockholders	0.23			(0.06		)	0.17			0.35			(0.09		)	0.26

The following table presents the effect of the adoption of Topic 230, Topic 606 and Topic 842 on the Company's condensed consolidated statement of cash flows for the six months ended June 30, 2017 (in thousands):



	Six Months Ended June 30, 2017
	Previously Reported			Adoption Impact			Restated

Net loss	$	(138,326	)	$	(10,439	)	$	(148,765	)
Net cash used in operating activities	(33,457		)	(15,714		)	(49,171		)
Net cash used in investing activities	(361,190		)	16,747			(344,443		)
Net cash provided by financing activities	399,604			2,592			402,196
Net change in cash and restricted cash⁽¹⁾	4,957			3,625			8,582
Cash and restricted cash, beginning of period⁽¹⁾	206,364			17,999			224,363
Cash and restricted cash, end of period⁽¹⁾	211,321			21,624			232,945

⁽¹⁾Pursuant to Topic 230, restricted cash is included in the restated balances in the statement of cashflows, as described above. The amounts in the previously reported column include only cash.

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.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which is intended to align the accounting for share-based payment awards issued to employees and nonemployees, however, this amendment does not apply to instruments issued in a financing transaction nor to equity instruments granted to a customer under a contract in the scope of Topic 606. Currently, performance conditions are recognized once the performance conditions are met. Under this new amendment, equity-classified nonemployee share-based payments will be measured at the grant-date fair value and will be recognized based on the probable outcome of the performance conditions. This ASU is effective for fiscal periods beginning after December 15, 2018.The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 are effective for periods beginning after December 15, 2018. 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 June 30, 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):



	June 30, 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	1,003,688		1,003,328		808,455		807,698
Subordinated debt	153,674		152,214		111,488		111,095
Securitization debt	93,247		88,726		95,821		96,999
SREC Loans	—		—		32,181		32,181
Total	$	1,497,609	$	1,491,268	$	1,294,945	$	1,294,973

At June 30, 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 June 30, 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 that 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 June 30, 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):



	June 30, 2018
	Level 1		Level 2		Level 3		Total
Derivative assets:
Interest rate swaps	$	—	$	24,257	$	—	$	24,257
Total	$	—	$	24,257	$	—	$	24,257
Derivative liabilities:
Interest rate swaps	$	—	$	1,437	$	—	$	1,437
Total	$	—	$	1,437	$	—	$	1,437



	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):



	June 30, 2018		December 31, 2017
Raw materials	$	73,710	$	87,927
Work-in-process	7,594		6,500
Total	$	81,304	$	94,427

Note 5. Solar Energy Systems, net

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



	June 30, 2018			December 31, 2017
Solar energy system equipment costs	$	3,455,457		$	3,124,407
Inverters	353,422			317,390
Total solar energy systems	3,808,879			3,441,797
Less: accumulated depreciation and amortization	(463,983		)	(399,280		)
Add: construction-in-progress	92,926			119,053
Total solar energy systems, net	$	3,437,822		$	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 $33.9 million and $27.4 million for the three months ended June 30, 2018 and 2017, respectively, and $66.2 million and $53.2 million for the six months ended June 30, 2018 and 2017, respectively. The depreciation expense was reduced by the amortization of deferred grants of $1.9 million and $1.8 million for the three months ended June 30, 2018 and 2017, respectively, and $3.8 million and $3.8 million for the six months ended June 30, 2018 and 2017, respectively.

Note 6. Other Assets

Other assets consist of the following (in thousands):



	June 30, 2018			December 31, 2017
Costs to obtain contracts	$	183,870		$	157,970
Accumulated amortization of costs to obtain contracts	(20,376		)	(16,485		)
Operating lease right-of-use assets	21,620			25,465
Other assets	59,727			27,804
Total	$	244,841		$	194,754

The Company recorded amortization of costs to obtain contracts of $2.1 million and $1.6 million for the three months ended June 30, 2018 and 2017, respectively, and $4.0 million and $3.1 million for the six months ended June 30, 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):



	June 30, 2018		December 31, 2017
Accrued employee compensation	$	26,903	$	28,698
Operating lease obligations	8,620		9,202
Accrued interest	8,921		6,054
Accrued professional fees	9,974		5,837
Other accrued expenses	43,876		47,439
Total	$	98,294	$	97,230

Note 8. Indebtedness

As of June 30, 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	5.31% - 5.42%		April 2020
Total recourse debt	$	—	$	247,000	$	247,000	$	406

Non-recourse debt:
Senior	15,701		987,987		1,003,688		5,000		4.23% - 5.34%		September 2020 - October 2024
Subordinated	4,774		148,900		153,674		—		6.71% - 7.82%		September 2020 - October 2024
Securitization Class A	3,644		79,716		83,360		—		4.40	%	July 2024
Securitization Class B	452		9,435		9,887		—		5.38	%	July 2024
Total non-recourse debt	$	24,571	$	1,226,038	$	1,250,609	$	5,000
Total debt	$	24,571	$	1,473,038	$	1,497,609	$	5,406


(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 June 30, 2018. As of June 30, 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 June 30, 2018.

As of June 30, 2018, certain subsidiaries of the Company have an outstanding balance of $286.7 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 June 30, 2018, certain subsidiaries of the Company have an outstanding balance of $188.1 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 in March 2018, 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 June 30, 2018, certain subsidiaries of the Company have an outstanding balance of $313.8 million on secured credit facilities agreements, as amended, with a syndicate of banks due in March 2023. The facilities totaled $595.0 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. 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 June 30, 2018, certain subsidiaries of the Company have an outstanding balance of $161.6 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 June 30, 2018, a subsidiary of the Company has an outstanding balance of $154.4 million on a revolving loan facility due in September 2020. The facility is non-recourse to the Company and is secured by the assets of such subsidiary and its net cash flows, including the net cash flows from the generation of contracted SRECs by certain subsidiaries of the Company. 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 under this loan facility as of June 30, 2018.

As of June 30, 2018, a subsidiary of the Company has an outstanding balance of $22.9 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 under this loan as of June 30, 2018.

As of June 30, 2018, a subsidiary of the Company has an outstanding balance of $11.6 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 June 30, 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 June 30, 2018, a subsidiary of the Company has an outstanding balance of $18.3 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 under this loan as of June 30, 2018.

Securitization Loans

As of June 30, 2018, a subsidiary of the Company has an outstanding balance of $93.2 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, 2018 and December 31, 2017, these Solar Assets had a carrying value of $168.5 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 June 30, 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 six months ended June 30, 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 $5.7 million and $21.8 million for the three and six months ended June 30, 2018 respectively, net of applicable tax expense of $(2.1) million and $(7.6) million, respectively. 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 recognized into earnings interest expense on derivatives of $0.4 million and interest expense of $1.6 million for the three and six months ended June 30, 2018, respectively, net of tax benefit of $0.2 million and tax expense of $0.6 million, respectively. The Company recognized into earnings interest expense on derivatives of $0.3 million and interest expense of $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.

During the next 12 months, the Company expects to reclassify $1.1 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 June 30, 2018.

At June 30, 2018, the Company had designated derivative instruments classified as derivative assets as reported in other assets of $24.3 million and derivative liabilities as reported in other liabilities of $1.4 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 June 30, 2018, the Company had the following derivative instruments (dollars in thousands):



Type	Quantity	Effective Dates	Maturity Dates	Hedge Interest Rates	Notional Amount		Adjusted Fair Market Value
Interest rate swap	1	5/21/2018	9/20/2020	2.69%	$	110,242	$	(165	)
Interest rate swaps	2	4/29/2016 - 12/30/2016	8/31/2022 - 9/30/2022	1.27%- 2.37%	$	25,726	$	826
Interest rate swaps	10	7/31/2017 - 1/31/2019	4/30/2024 - 10/31/2024	2.16%- 2.69%	$	342,631	$	9,241
Interest rate swaps	3	4/30/2021	10/30/2026 - 10/31/2026	2.89% - 3.08%	$	102,720	$	(426	)
Interest rate swaps	4	4/30/2015	10/31/2028	2.17%-2.18%	$	124,492	$	5,581
Interest rate swap	1	9/20/2020	6/20/2030	2.57%	$	67,013	$	963
Interest rate swap	1	9/30/2022	9/30/2031	3.23%	$	8,642	$	(101	)
Interest rate swap	1	9/20/2020	4/20/2032	2.60%	$	33,409	$	530
Interest rate swaps	5	1/31/2019 - 10/31/2024	7/31/2034	2.48% - 3.04%	$	144,379	$	3,010
Interest rate swaps	5	7/31/2017 - 4/30/2024	7/31/2035	2.56% - 2.95%	$	151,869	$	1,880
Interest rate swaps	5	1/31/2018 - 10/18/2024	10/31/2036	2.62% - 2.95%	$	182,267	$	2,049
Interest rate swaps	3	10/30/2026 - 10/31/2026	1/31/2038	3.01% - 3.16%	$	101,135	$	(568	)

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 of typically 20 years that automatically renew on an annual basis. These solar energy systems are reported under the line item solar energy systems, net in the consolidated balance sheets. As of June 30, 2018 and December 31, 2017, the cost of the solar energy systems placed in service under the financing obligations was $499.4 million and $464.2 million, respectively. The accumulated depreciation related to these assets as of June 30, 2018 and December 31, 2017 was $71.9 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 of the Fund inception 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 of the Fund inception 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 June 30, 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):



	June 30, 2018		December 31, 2017
Assets
Current assets
Cash	$	90,445	$	118,352
Restricted cash	1,044		2,699
Accounts receivable, net	70,108		57,402
Prepaid expenses and other current assets	465		917
Total current assets	162,062		179,370
Solar energy systems, net	2,627,741		2,385,329
Other assets	8,730		3,679
Total assets	$	2,798,533	$	2,568,378
Liabilities
Current liabilities
Accounts payable	$	17,104	$	15,929
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	15,013		13,526
Accrued expenses and other liabilities	6,260		5,200
Deferred revenue, current portion	30,410		28,695
Deferred grants, current portion	1,016		1,021
Non-recourse debt, current portion	2,140		11,179
Total current liabilities	71,943		75,550
Deferred revenue, net of current portion	389,830		381,066
Deferred grants, net of current portion	28,748		29,385
Non-recourse debt, net of current portion	194,044		190,106
Other liabilities	9,454		1,848
Total liabilities	$	694,019	$	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 June 30, 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	—			8,068			—			8,068
Issuance of restricted stock units, net of tax withholdings	—			(4,878		)	—			(4,878		)
Shares issued in connection with the Employee Stock Purchase Plan	—			1,755			—			1,755
Stock based compensation	—			16,251			—			16,251
Contributions from noncontrolling interests and redeemable noncontrolling interests	51,447			—			116,021			116,021
Distributions to noncontrolling interests and redeemable noncontrolling interests	(5,385		)	—			(29,396		)	(29,396		)
Net income (loss)	(39,934		)	35,441			(158,654		)	(123,213		)
Other comprehensive loss, net of taxes	—			20,197			—			20,197
Balance — June 30, 2018	$	129,929		$	958,416		$	286,905		$	1,245,321

The carrying value of redeemable noncontrolling interests was greater than the redemption value except for five Funds at June 30, 2018 and December 31, 2017 where the carrying value has been adjusted to the redemption value.

As of June 30, 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	—			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		)
Net income (loss)	(44,366		)	28,228			(132,627		)	(104,399		)
Other comprehensive loss, net of taxes	—			(3,569		)	—			(3,569		)
Balance — June 30, 2017	$	164,133		$	781,417		$	331,926		$	1,113,343

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 six months ended June 30, 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	1,436		8.33
Exercised	(1,529	)	5.25
Cancelled / forfeited	(480	)	4.33
Outstanding at June 30, 2018	15,695		$	5.94	7.27	$	114

Options vested and exercisable at June 30, 2018	8,624		$	5.52	6.18	$	66,074

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, 2018 (shares in thousands):



	Number of Awards		Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2017	5,330		$	5.82
Granted	1,778		8.12
Issued	(1,206	)	6.57
Cancelled / forfeited	(820	)	6.72
Unvested balance at June 30, 2018	5,082		$	6.49

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 June 30,		Six Months Ended June 30,
2018	2017	2018