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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37511 
 
Sunrun Inc.
(Exact name of registrant as specified in its charter)
 

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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
 
 
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  





Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
RUN
Nasdaq Global Select Market

As of May 6, 2019, the number of shares of the registrant’s common stock outstanding was 115,130,399.
 




Table of Contents

 
 
 
Page
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 5.
 
Item 6.
 
 
 

1




Sunrun Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Par Values)
(Unaudited)
 
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash
 
$
245,604

 
$
226,625

Restricted cash
 
64,182

 
77,626

Accounts receivable (net of allowances for doubtful accounts of $2,282 and $2,228 as of March 31, 2019 and December 31, 2018, respectively)
 
67,522

 
66,435

State tax credits receivable
 

 
2,697

Inventories
 
76,184

 
79,467

Prepaid expenses and other current assets
 
9,568

 
8,563

Total current assets
 
463,060

 
461,413

Restricted cash
 
148

 
148

Solar energy systems, net
 
3,976,504

 
3,820,017

Property and equipment, net
 
35,281

 
34,893

Intangible assets, net
 
9,195

 
10,088

Goodwill
 
87,543

 
87,543

Other assets
 
367,951

 
335,685

Total assets (1)
 
$
4,939,682

 
$
4,749,787

Liabilities and total equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
105,977

 
$
131,278

Distributions payable to noncontrolling interests and redeemable noncontrolling interests
 
15,628

 
15,847

Accrued expenses and other liabilities
 
103,764

 
98,636

Deferred revenue, current portion
 
55,795

 
47,407

Deferred grants, current portion
 
7,961

 
7,885

Finance lease obligations, current portion
 
9,459

 
9,193

Non-recourse debt, current portion
 
26,937

 
35,484

Pass-through financing obligation, current portion
 
11,281

 
26,461

Total current liabilities
 
336,802

 
372,191

Deferred revenue, net of current portion
 
637,666

 
544,218

Deferred grants, net of current portion
 
219,583

 
221,739

Finance lease obligations, net of current portion
 
10,246

 
9,992

Recourse debt
 
239,035

 
247,000

Non-recourse debt, net of current portion
 
1,558,250

 
1,466,438

Pass-through financing obligation, net of current portion
 
329,501

 
337,282

Other liabilities
 
84,068

 
48,210

Deferred tax liabilities
 
84,804

 
93,633

Total liabilities (1)
 
3,499,955

 
3,340,703

Commitments and contingencies (Note 15)
 


 


Redeemable noncontrolling interests
 
137,616

 
126,302

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of March 31, 2019 and December 31, 2018; no shares issued and outstanding as of March 31, 2019 and December 31, 2018
 

 

Common stock, $0.0001 par value—authorized, 2,000,000 shares as of March 31, 2019 and December 31, 2018; issued and outstanding, 114,739 and 113,149 shares as of March 31, 2019 and December 31, 2018, respectively
 
11

 
11

Additional paid-in capital
 
730,126

 
722,429

Accumulated other comprehensive loss
 
(21,866
)
 
(3,124
)
Retained earnings
 
216,269

 
229,391

Total stockholders’ equity
 
924,540

 
948,707

Noncontrolling interests
 
377,571

 
334,075

Total equity
 
1,302,111

 
1,282,782

Total liabilities, redeemable noncontrolling interests and total equity
 
$
4,939,682

 
$
4,749,787









2



1)
The Company’s consolidated assets as of March 31, 2019 and December 31, 2018 include $2,981,910 and $2,905,295, respectively, in assets of variable interest entities (“VIEs”) that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, as of March 31, 2019 and December 31, 2018 of $2,761,312 and $2,712,377, respectively; cash as of March 31, 2019 and December 31, 2018 of $135,548 and $105,494, respectively; restricted cash as of March 31, 2019 and December 31, 2018 of $969 and $2,071, respectively; accounts receivable, net as of March 31, 2019 and December 31, 2018 of $16,988 and $18,539, respectively; prepaid expenses and other current assets as of March 31, 2019 and December 31, 2018 of $386 and $387, respectively; and other assets as of March 31, 2019 and December 31, 2018 of $66,707 and $66,427, respectively. The Company’s consolidated liabilities as of March 31, 2019 and December 31, 2018 include $701,595 and $660,758, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of March 31, 2019 and December 31, 2018 of $10,979 and $12,136, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of March 31, 2019 and December 31, 2018 of $15,545 and $15,797, respectively; accrued expenses and other current liabilities as of March 31, 2019 and December 31, 2018 of $7,315 and $7,122, respectively; deferred revenue as of March 31, 2019 and December 31, 2018 of $438,765 and $396,920, respectively; deferred grants as of March 31, 2019 and December 31, 2018 of $28,964 and $29,229, respectively; non-recourse debt as of March 31, 2019 and December 31, 2018 of $189,294 and $190,711, respectively; and other liabilities as of March 31, 2019 and December 31, 2018 of $10,733 and $8,843, respectively.
The accompanying notes are an integral part of these consolidated financial statements.

3



Sunrun Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenue:
 
 
 
 
Customer agreements and incentives
 
$
99,850

 
$
66,990

Solar energy systems and product sales
 
94,654

 
77,373

Total revenue
 
194,504

 
144,363

Operating expenses:
 
 
 
 
Cost of customer agreements and incentives
 
69,493

 
54,576

Cost of solar energy systems and product sales
 
77,799

 
64,579

Sales and marketing
 
55,953

 
44,079

Research and development
 
5,474

 
3,896

General and administrative
 
29,063

 
32,893

Amortization of intangible assets
 
893

 
1,051

Total operating expenses
 
238,675

 
201,074

Loss from operations
 
(44,171
)
 
(56,711
)
Interest expense, net
 
41,340

 
28,198

Other expenses (income), net
 
4,756

 
(1,692
)
Loss before income taxes
 
(90,267
)
 
(83,217
)
Income tax (benefit) expense
 
(3,361
)
 
8,203

Net loss
 
(86,906
)
 
(91,420
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
(73,044
)
 
(119,452
)
Net (loss) income attributable to common stockholders
 
$
(13,862
)
 
$
28,032

Net (loss) income per share attributable to common stockholders
 
 
 
 
Basic
 
$
(0.12
)
 
$
0.26

Diluted
 
$
(0.12
)
 
$
0.25

Weighted average shares used to compute net (loss) income per share attributable to common stockholders
 
 
 
 
Basic
 
113,912

 
107,449

Diluted
 
113,912

 
110,781


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


4



Sunrun Inc.
Consolidated Statements of Comprehensive (Loss) Income
(In Thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net (loss) income attributable to common stockholders
 
$
(13,862
)
 
$
28,032

Other comprehensive (loss) income:
 
 
 
 
Unrealized (loss) gain on derivatives, net of income taxes
 
(17,013
)
 
16,171

Interest expense on derivatives recognized into earnings, net of income taxes
 
(989
)
 
(1,233
)
Other comprehensive (loss) income
 
(18,002
)
 
14,938

Comprehensive (loss) income
 
$
(31,864
)
 
$
42,970


5



Sunrun Inc.
Consolidated Statements of Redeemable Noncontrolling Interests and Stockholders' Equity
(In Thousands)
(Unaudited)

 
 
Three Months Ended March 31, 2018
 
 
Redeemable
Noncontrolling
Interests
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings (Accumulated Deficit)
 
Total
Stockholders'
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
 
$
123,801

 
 

 
$

 
107,350

 
$
11

 
$
682,950

 
$
(4,113
)
 
$
202,734

 
$
881,582

 
$
358,934

 
$
1,240,516

Exercise of stock options
 

 
 

 

 
443

 

 
1,908

 

 

 
1,908

 

 
1,908

Issuance of restricted stock units, net of tax withholdings
 

 
 

 

 
888

 

 
(2,484
)
 

 

 
(2,484
)
 

 
(2,484
)
Stock-based compensation
 

 
 

 

 

 

 
10,703

 

 

 
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 (loss) income
 
(18,772
)
 
 

 

 

 

 

 

 
28,032

 
28,032

 
(100,680
)
 
(72,648
)
Other comprehensive loss, net of taxes
 

 
 

 

 

 

 

 
14,938

 

 
14,938

 

 
14,938

Balance - March 31, 2018
 
$
133,524

 
 

 
$

 
108,681

 
$
11

 
$
693,077

 
$
10,825

 
$
230,766

 
$
934,679

 
$
356,549

 
$
1,291,228


 
 
Three Months Ended March 31, 2019
 
 
Redeemable
Noncontrolling
Interests
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings (Accumulated Deficit)
 
Total
Stockholders'
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2018
 
$
126,302

 
 

 
$

 
113,149

 
$
11

 
$
722,429

 
$
(3,124
)
 
$
229,391

 
$
948,707

 
$
334,075

 
$
1,282,782

Cumulative effect of adoption of new ASU (No. 2018-02)
 

 
 

 

 

 

 

 
(740
)
 
740

 

 

 

Exercise of stock options
 

 
 

 

 
1,139

 

 
4,279

 

 

 
4,279

 

 
4,279

Issuance of restricted stock units, net of tax withholdings
 

 
 

 

 
451

 

 
(3,442
)
 

 

 
(3,442
)
 

 
(3,442
)
Stock-based compensation
 

 
 

 

 

 

 
5,783

 

 

 
5,783

 

 
5,783

Contributions from noncontrolling interests and redeemable noncontrolling interests
 
31,610

 
 

 

 

 

 

 

 

 

 
120,539

 
120,539

Distributions to noncontrolling interests and redeemable noncontrolling interests
 
(3,126
)
 
 

 

 

 

 

 

 

 

 
(15,103
)
 
(15,103
)
Net (loss) income
 
(17,170
)
 
 

 

 

 

 

 

 
(13,862
)
 
(13,862
)
 
(55,874
)
 
(69,736
)
Acquisition of noncontrolling interest
 

 
 

 

 

 

 
1,077

 

 

 
1,077

 
(6,066
)
 
(4,989
)
Other comprehensive loss, net of taxes
 

 
 

 

 

 

 

 
(18,002
)
 

 
(18,002
)
 

 
(18,002
)
Balance - March 31, 2019
 
$
137,616

 
 

 
$

 
114,739

 
$
11

 
$
730,126

 
$
(21,866
)
 
$
216,269

 
$
924,540

 
$
377,571

 
$
1,302,111



6



Sunrun Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Operating activities:
 
 
 
 
Net loss
 
$
(86,906
)
 
$
(91,420
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization, net of amortization of deferred grants
 
43,661

 
36,186

Deferred income taxes
 
(3,361
)
 
8,203

Stock-based compensation expense
 
5,783

 
10,694

Interest on pass-through financing obligations
 
6,472

 
3,099

Reduction in pass-through financing obligations
 
(9,986
)
 
(5,028
)
Other noncash losses and expenses
 
1,489

 
5,667

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(147
)
 
6,217

Inventories
 
3,283

 
6,525

Prepaid and other assets
 
(35,868
)
 
(13,323
)
Accounts payable
 
(22,577
)
 
(12,982
)
Accrued expenses and other liabilities
 
7,724

 
(7,048
)
Deferred revenue
 
101,848

 
7,456

Net cash provided by (used in) operating activities
 
11,415

 
(45,754
)
Investing activities:
 
 
 
 
Payments for the costs of solar energy systems
 
(198,880
)
 
(163,190
)
Purchases of property and equipment
 
(2,517
)
 
(1,521
)
Net cash used in investing activities
 
(201,397
)
 
(164,711
)
Financing activities:
 
 
 
 
Proceeds from state tax credits, net of recapture
 
2,604

 
(49
)
Proceeds from issuance of recourse debt
 
40,000

 
2,000

Repayment of recourse debt
 
(47,965
)
 
(2,000
)
Proceeds from issuance of non-recourse debt
 
181,652

 
95,900

Repayment of non-recourse debt
 
(99,248
)
 
(7,122
)
Payment of debt fees
 
(2,654
)
 
(3,880
)
Proceeds from pass-through financing and other obligations
 
1,785

 
1,502

Early repayment of pass-through financing obligation
 
(7,597
)
 

Payment of finance lease obligations
 
(3,001
)
 
(2,113
)
Contributions received from noncontrolling interests and redeemable noncontrolling interests
 
152,149

 
143,604

Distributions paid to noncontrolling interests and redeemable noncontrolling interests
 
(18,447
)
 
(15,263
)
Acquisition of noncontrolling interest
 
(4,600
)
 

Proceeds from exercises of stock options, net of withholding taxes paid on restricted stock units
 
839

 
(576
)
Net cash provided by financing activities
 
195,517

 
212,003

Net change in cash and restricted cash
 
5,535

 
1,538

Cash and restricted cash, beginning of period
 
304,399

 
241,790

Cash and restricted cash, end of period
 
$
309,934

 
$
243,328

Supplemental disclosures of cash flow information
 
 
 
 
Cash paid for interest
 
$
20,058

 
$
16,446

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
 
$
24,303

 
$
17,233

Right-of-use assets obtained in exchange for new finance lease liabilities
 
$
3,543

 
$
99


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

7



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 or 25 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 (the "SEC") 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, 2018. The results of the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2019 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.

8



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 estimates and assumptions, including, but not limited to, revenue recognition constraints that result in variable consideration, 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 uses for operating and financing 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 for each group of similar products and services is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Customer agreements
 
$
78,528

 
$
61,649

Incentives
 
21,322

 
5,341

Customer agreements and incentives
 
99,850

 
66,990

 
 
 
 
 
Solar energy systems
 
58,436

 
33,998

Products
 
36,218

 
43,375

Solar energy systems and product sales
 
94,654

 
77,373

Total revenue
 
$
194,504

 
$
144,363


Revenue from Customer Agreements includes payments by customers for the use of the solar system as well as utility and other rebates assigned by the customer to the Company in the Customer Agreement. Revenue from incentives includes revenue from the sale of investment tax credits ("ITCs") and renewable energy credits (“SRECs”).

9



Cash and Restricted Cash
Restricted cash represents amounts related to replacement of solar energy system components and obligations under certain financing transactions.
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, 2019
 
December 31, 2018
Cash
 
$
245,604

 
$
226,625

Restricted cash, current and long-term
 
64,330

 
77,774

Total
 
$
309,934

 
$
304,399


Accounts Receivable
Accounts receivable consist of amounts due from customers, as well as state and utility rebates due from government agencies and utility companies. Under Customer Agreements, the customers typically assign incentive rebates to the Company.
The opening balance of Accounts receivable, net was $66.4 million as of December 31, 2017. Accounts receivable, net consists of the following (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Customer receivables
 
$
64,598

 
$
64,180

Other receivables
 
2,179

 
1,466

Rebates receivable
 
3,027

 
3,017

Allowance for doubtful accounts
 
(2,282
)
 
(2,228
)
Total
 
$
67,522

 
$
66,435

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.

10



The opening balance of deferred revenue was $564.9 million as of December 31, 2017. Deferred revenue consists of the following (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Under Customer Agreements:
 
 
 
 
Payments received
 
$
543,945

 
$
538,926

Financing component balance
 
39,577

 
37,801

 
 
583,522

 
576,727

 
 
 
 
 
Under SREC contracts:
 
 
 
 
Payments received
 
108,002

 
12,977

Financing component balance
 
1,937

 
1,921

 
 
109,939

 
14,898

 
 
 
 
 
Total
 
$
693,461

 
$
591,625


In the three months ended March 31, 2019 and 2018, the Company recognized revenue of $14.0 million and $12.8 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 $5.6 billion as of March 31, 2019, of which the Company expects to recognize approximately 6% over the next 12 months. The annual recognition is not expected to vary significantly over the next 10 years as the vast majority of existing Customer Agreements have at least 10 years remaining, given that the average age of the Company's fleet of residential solar energy systems under Customer Agreements is less than four years due to the Company being formed in 2007 and having experienced significant growth in the last few years. The annual recognition on these existing contracts will gradually decline over the midpoint of the Customer Agreements over the following 10 years as the typical 20 or 25-year initial term expires on individual Customer Agreements. During the three months ended March 31, 2019, deferred revenue increased by $95.5 million arising from a sale of the right to SRECs to be generated over the next 10 - 15 years by a group of solar energy systems. In connection with the sale, the Company repaid debt previously drawn against the rights to these SRECs.
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.

11



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 ITCs and 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 or 25 years. After the initial contract term, the Company's 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 monetization of ITCs is 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 liquidated damage provisions under SREC contracts in the event minimum deliveries are not achieved. 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 less than 12 months.
Product sales consist of solar panels, racking systems, inverters, other solar energy products sold to resellers and customer leads. Product sales revenue is recognized upon shipment, which is at the time control is transferred. Customer lead revenue 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.

12



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, 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, 2019:
In February 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement -- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The Company adopted ASU No. 2018-02 effective January 1, 2019, resulting in a current period adjustment of $0.7 million for the reclassification, as reflected in its consolidated statement of redeemable noncontrolling interests and stockholders' equity. The Company uses the aggregate portfolio approach when reclassing stranded tax effects from accumulated other comprehensive income.
In June 2018, the FASB issued ASU No. 2018-07, Compensation -- Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which aligns 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. Under this new amendment, equity-classified nonemployee share-based payments are measured at the grant-date fair value and recognized based on the probable outcome of the performance conditions. The Company adopted ASU No. 2018-07 effective January 1, 2019, and there was no material impact to its 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 Company adopted ASU No. 2018-09 effective January 1, 2019, and there was no material impact to its consolidated financial statements.
In August 2018, the SEC adopted a Disclosure Update and Simplification release, which outlines Regulation S-X amendments to eliminate outdated or duplicative disclosure requirements. The final rule also amends the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. These amendments are effective for all filings made 30 days after the amendments are published in the Federal Register, which was on October 4, 2018. The SEC announced that it would not object if the first presentation of the changes in stockholders’ equity for a calendar year end filer were made in the Company’s March 31, 2019 Form 10-Q. Effective with this interim report on Form 10-Q, the Company is now presenting consolidated statements of redeemable noncontrolling interests and stockholders' equity.
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.

13



In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework--Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements as part of its disclosure framework project. Under this amendment, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. However, for Level 3 fair value measurements, disclosures around the range and weighted average used to develop significant unobservable inputs will be required. This ASU is effective for fiscal periods beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, Intangibles--Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, which aligns the evaluation of decision-making fees under the variable interest entity guidance. Under this new guidance, in order to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. 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, 2019 and December 31, 2018, 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 falls under the Level 2 hierarchy. The carrying values and fair values of debt instruments are as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Bank line of credit
 
$
239,035

 
$
239,035

 
$
247,000

 
$
247,000

Senior debt
 
913,787

 
913,710

 
828,517

 
828,309

Subordinated debt
 
278,910

 
284,887

 
273,337

 
272,937

Securitization debt
 
392,490

 
406,818

 
400,068

 
394,756

Total
 
$
1,824,222

 
$
1,844,450

 
$
1,748,922

 
$
1,743,002

At March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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 2 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.

14



At March 31, 2019 and December 31, 2018, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy, are as follows (in thousands):
 
 
March 31, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
590

 
$

 
$
590

Total
 
$

 
$
590

 
$

 
$
590

Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
28,314

 
$

 
$
28,314

Total
 
$

 
$
28,314

 
$

 
$
28,314


 
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
6,958

 
$

 
$
6,958

Total
 
$

 
$
6,958

 
$

 
$
6,958

Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
11,910

 
$

 
$
11,910

Total
 
$

 
$
11,910

 
$

 
$
11,910



Note 4. Inventories
Inventories consist of the following (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Raw materials
 
$
65,598

 
$
64,256

Work-in-process
 
10,586

 
15,211

Total
 
$
76,184

 
$
79,467



Note 5. Solar Energy Systems, net
Solar energy systems, net consists of the following (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Solar energy system equipment costs
 
$
4,012,116

 
$
3,823,853

Inverters
 
416,088

 
396,054

Total solar energy systems
 
4,428,204

 
4,219,907

Accumulated depreciation and amortization
 
(575,094
)
 
(535,891
)
Construction-in-progress
 
123,394

 
136,001

Total solar energy systems, net
 
$
3,976,504

 
$
3,820,017

All solar energy systems, including construction-in-progress, have been leased to or are subject to signed Customer Agreements with customers. The Company recorded depreciation expense related to solar energy systems of $39.4 million and $32.4 million for the three months ended March 31, 2019 and 2018, respectively. The depreciation expense was reduced by the amortization of deferred grants of $2.0 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.


15



Note 6. Other Assets
Other assets consist of the following (in thousands): 
 
 
March 31, 2019
 
December 31, 2018
Costs to obtain contracts- customer agreements
 
$
232,567

 
$
219,307

Costs to obtain contracts- incentives
 
2,481

 

Accumulated amortization of costs to obtain contracts
 
(27,641
)
 
(24,992
)
Unbilled receivables
 
90,578

 
81,703

Operating lease right-of-use assets
 
38,051

 
20,257

Other assets
 
31,915

 
39,410

Total
 
$
367,951

 
$
335,685

The Company recorded amortization of costs to obtain contracts of $2.7 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively, in Sales and marketing in the consolidated statements of operations.

The majority of unbilled receivables arise from fixed price escalators included in the Company's long-term Customer Agreements.  The escalator is included in calculating the total estimated transaction value for an individual Customer Agreement.  The total estimated transaction value is then recognized evenly over the term of the Customer Agreement.  The amount of unbilled receivables increases while current period billings for an individual Customer Agreement are less than the current period revenue recognized for that Customer Agreement.  Conversely, the amount of unbilled receivables decreases when the actual current period billings become higher than the current period revenue recognized. At the end of the initial term of a Customer Agreement, the cumulative amounts recognized as revenue and billed to date are the same, therefore the unbilled receivable balance for an individual Customer Agreement will be zero. 

Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands): 
 
 
March 31, 2019
 
December 31, 2018
Accrued employee compensation
 
$
35,393

 
$
39,738

Operating lease obligations
 
9,462

 
7,857

Accrued interest
 
12,942

 
8,436

Accrued professional fees
 
12,185

 
9,199

Other accrued expenses
 
33,782

 
33,406

Total
 
$
103,764

 
$
98,636



16



Note 8. Indebtedness
As of March 31, 2019, 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
 
$

 
$
239,035

 
$
239,035

 
$

 
5.59% - 5.90%

 
April 2020
Total recourse debt
 

 
239,035

 
239,035

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
Senior
 
12,679

 
901,108

 
913,787

 

 
4.50% - 5.49%

 
September 2020 - October 2024
Subordinated
 
5,715

 
273,195

 
278,910

 

 
7.03% - 10.00%

 
September 2020 - January 2030
Securitization Class A
 
8,072

 
374,875

 
382,947

 

 
4.40% - 5.31%

 
July 2024 - April 2049
Securitization Class B
 
471

 
9,072

 
9,543

 

 
5.38
%
 
July 2024
Total non-recourse debt
 
26,937

 
1,558,250

 
1,585,187

 

 
 
 
 
Total debt
 
$
26,937

 
$
1,797,285

 
$
1,824,222

 
$

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

 
5.45% - 5.77%

 
April 2020
Total recourse debt
 

 
247,000

 
247,000

 
406

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse debt:
 
 
 
 
 
 
 
 
 
 
 
 
Senior
 
19,070

 
809,447

 
828,517

 

 
4.50% - 5.54%

 
September 2020 - October 2024
Subordinated
 
5,824

 
267,513

 
273,337

 

 
7.03% - 10.00%

 
September 2020 - January 2030
Securitization Class A
 
10,125

 
380,299

 
390,424

 

 
4.40% - 5.31%

 
July 2024 - April 2049
Securitization Class B
 
465

 
9,179

 
9,644

 

 
5.38
%
 
July 2024
Total non-recourse debt
 
35,484

 
1,466,438

 
1,501,922

 

 
 
 
 
Total debt
 
$
35,484

 
$
1,713,438

 
$
1,748,922

 
$
406

 
 
 
 
(1)  
Reflects contractual, unhedged rates. See Note 9, Derivatives for hedge rates.
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 $25 million at the end of each calendar month, maintaining quarter end liquidity of at least $30 million, 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, 2019. As of March 31, 2019, the balance under this facility was $239.0 million with a maturity date in April 2020. Although there is no assurance that the Company will be able to do so, the Company believes that it is probable that it will be able to extend or otherwise refinance the facility prior to maturity.

17



Senior and Subordinated
Each of the Company's senior and subordinated debt facilities contains customary covenants including the requirement to maintain certain financial measurements and provide lender reporting. Each of the senior and subordinated debt facilities also contain certain provisions in the event of default that 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 senior and subordinated debt 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 that are available to the borrower after distributions to tax equity investors, where applicable. The Company was in compliance with all debt covenants as of March 31, 2019.
As of March 31, 2019, certain subsidiaries of the Company have an outstanding balance of $281.8 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, 2019, certain subsidiaries of the Company have an outstanding balance of $183.8 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, for 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 that 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, 2019, certain subsidiaries of the Company have an outstanding balance of $362.6 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 March 31, 2019, a subsidiary of the Company has an outstanding balance of $210.2 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.
As of March 31, 2019, a subsidiary of the Company has an outstanding balance of $20.0 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. Loans under this facility bear interest at 4.50% per annum.
As of March 31, 2019, a subsidiary of the Company has an outstanding balance of $16.1 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 that 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.

18



As of March 31, 2019, a subsidiary of the Company has an outstanding balance of $118.2 million on a term loan due in January 2030. 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. Loans under this facility bear interest at 10.00% per annum.
Securitization Loans
Each of the Company's securitized loans contains customary covenants including the requirement to provide reporting to the indenture trustee and ratings agencies. Each of the securitized loans also contain certain provisions in the event of default which entitle the indenture trustee 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 securitized loans. 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 that are available to the borrower after distributions to tax equity investors, where applicable. The Company was in compliance with all debt covenants as of March 31, 2019.
As of March 31, 2019, a subsidiary of the Company has an outstanding balance of $89.1 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, 2019 and December 31, 2018, these Solar Assets had a carrying value of $162.7 million and $164.7 million, respectively, and are included under solar energy systems, net, in the consolidated balance sheets. The Notes were issued at a discount of 0.08%
As of March 31, 2019, a subsidiary of the Company has an outstanding balance of $303.4 million on solar asset-backed notes secured by net cash flows from Customer Agreements less certain operating, maintenance and other expenses that are available to the issuer after distributions to tax equity investors. The Notes were issued at a discount of 1.47%. The assets and cash flows generated by the Solar Assets are not available to the other creditors of the Company, and the creditors of the Issuer, including the Note holders, have no recourse to the Company's other assets.

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, 2019, 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.

19



The following table summarizes the post-tax amount of unrealized gain or loss recognized in Accumulated other comprehensive income (loss) ("OCI") in the consolidated statements of redeemable noncontrolling interests and stockholders' equity (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Derivatives designated as cash flow hedges:
 
 
 
 
Loss in OCI at the beginning of the period
 
$
(3,124
)
 
$
(4,113
)
Unrealized (loss) gain recognized in OCI
 
(17,013
)
 
16,171

Amount reclassified from OCI to earnings
 
(989
)
 
(1,233
)
Net (loss) gain on derivatives (net of tax effect of $6,093 and $5,134)
 
(18,002
)
 
14,938

Cumulative effect of adoption of new ASU (No. 2018-02)
 
(740
)
 

(Loss) gain in OCI at the end of the period
 
(21,866
)
 
10,825


During the next 12 months, the Company expects to reclassify $0.1 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 March 31, 2019.
The Company’s master netting and other similar arrangements allow net settlements under certain conditions. When those conditions are met, the Company presents derivatives at net fair value. As of March 31, 2019 the information related to these offsetting arrangements were as follows (in thousands):
Instrument Description
 
Gross Amounts of Recognized Assets / Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets / Liabilities Included in the Consolidated Balance Sheet
Assets:
 
 
 
 
 
 
Derivatives
 
$
590

 
$
(276
)
 
$
314

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
(28,314
)
 
276

 
(28,038
)
Total
 
$
(27,724
)
 
$

 
$
(27,724
)

20



As of December 31, 2018 the information related to these offsetting arrangements were as follows (in thousands):
Instrument Description
 
Gross Amounts of Recognized Assets / Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets / Liabilities Included in the Consolidated Balance Sheet
Assets:
 
 
 
 
 
 
Derivatives
 
$
6,958

 
$
(1,605
)
 
$
5,353

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
(11,910
)
 
1,605

 
(10,305
)
Total
 
$
(4,952
)
 
$

 
$
(4,952
)
At March 31, 2019, the Company had the following derivative instruments (dollars in thousands):
Type
 
Quantity
 
Effective Dates
 
Maturity Dates
 
Hedge Interest Rates
 
Notional Amount
 
Adjusted Net Fair Market Value
Interest rate swap
 
1

 
5/21/2018
 
9/20/2020
 
2.69%
 
$
80,500

 
$
(437
)
Interest rate swap
 
1

 
4/29/2016
 
8/31/2022
 
1.27%- 1.29%
 
13,179

 
314

Interest rate swaps
 
8

 
7/31/2017 - 1/31/2018
 
4/30/2024 - 10/20/2024
 
2.16%- 2.39%
 
283,160

 
(384
)
Interest rate swaps
 
3

 
4/30/2021
 
10/30/2026 - 10/31/2026
 
2.89% - 3.08%
 
102,720

 
(3,631
)
Interest rate swap
 
1

 
10/22/2018
 
9/20/2027
 
2.97%
 
30,023

 
(1,011
)
Interest rate swaps
 
2

 
4/22/2019 - 9/20/2020
 
3/20/2030 - 6/20/2030
 
2.22% - 2.57%
 
160,401

 
(1,177
)
Interest rate swap
 
1

 
9/20/2020
 
1/20/2031
 
2.61%
 
9,899

 
(332
)
Interest rate swaps
 
3

 
1/31/2020
 
4/30/2034
 
2.78%
 
200,000

 
(6,545
)
Interest rate swaps
 
5

 
7/31/2017 - 4/30/2024
 
7/31/2035
 
2.56% - 2.95%
 
151,610

 
(2,197
)
Interest rate swaps
 
5

 
1/31/2018 - 10/18/2024
 
10/31/2036
 
2.62% - 2.95%
 
183,398

 
(2,710
)
Interest rate swaps
 
3

 
1/31/2019 - 4/30/2021
 
4/30/2037
 
3.28% - 3.30%
 
100,000

 
(7,099
)
Interest rate swaps
 
3

 
10/30/2026 - 10/31/2026
 
1/31/2038
 
3.01% - 3.16%
 
101,135

 
(2,515
)
Total
 
 
 
 
 
 
 
 
 
$
1,416,025

 
$
(27,724
)

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 who are considered commercial customers 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. Given the assignment of operating cash flows, these arrangements are accounted for as financing obligations. The Company also sells the rights and related value attributable to the ITC to these investors.
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 typically 20 or 22 years. The solar energy systems are subject to Customer Agreements with an initial term of typically 20 or 25 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 March 31, 2019 and December 31, 2018, the cost of the solar energy systems placed in service under the financing obligation arrangements was $656.5 million and $664.1 million, respectively. The accumulated depreciation related to these assets as of March 31, 2019 and December 31, 2018 was $79.8 million and $82.1 million, respectively.

21



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 financing obligation arrangements as borrowings by recording the proceeds received as financing obligations on its consolidated balance sheets, and cash provided by financing activities in its consolidated statement of cash flows. These financing obligations are reduced over a period of approximately 22 years by customer payments under the Customer Agreements, U.S. Treasury grants (where applicable), incentive rebates (where applicable) and proceeds from the contracted resale of SRECs as they are received by the investor. In addition, funds paid for the ITC value upfront are initially recorded as a refund liability and recognized as revenue as the associated solar system reaches PTO. The ITC value is reflected in the cash provided by operations on the consolidated statement of cash flows. The Company accounts for the Customer Agreements and any related U.S. Treasury grants or incentive rebates as well as 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 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.
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 the 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.
During the three months ended March 31, 2019, the Company made an early repayment of one of its financing obligations for $11.7 million, which resulted in a debt extinguishment expense of $4.4 million.


22



Note 11. VIE Arrangements
The Company consolidated various VIEs at March 31, 2019 and December 31, 2018. The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets are as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
135,548

 
$
105,494

Restricted cash
 
969

 
2,071

Accounts receivable, net
 
16,988

 
18,539

Prepaid expenses and other current assets
 
386

 
387

Total current assets
 
153,891

 
126,491

Solar energy systems, net
 
2,761,312

 
2,712,377

Other assets
 
66,707

 
66,427

Total assets
 
$
2,981,910

 
$
2,905,295

Liabilities
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
10,979

 
$
12,136

Distributions payable to noncontrolling interests and redeemable noncontrolling interests
 
15,545

 
15,797

Accrued expenses and other liabilities
 
7,315

 
7,122

Deferred revenue, current portion
 
33,504

 
29,102

Deferred grants, current portion
 
982

 
982

Non-recourse debt, current portion
 
4,336

 
4,217

Total current liabilities
 
72,661

 
69,356

Deferred revenue, net of current portion
 
405,261

 
367,818

Deferred grants, net of current portion
 
27,982

 
28,247

Non-recourse debt, net of current portion
 
184,958

 
186,494

Other liabilities
 
10,733

 
8,843

Total liabilities
 
$
701,595

 
$
660,758

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 six pass-through 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.
During the three months ended March 31, 2019, the Company acquired an investor's interest in a consolidated VIE for total cash consideration of $4.6 million. This transaction increased the Company's additional paid-in-capital, net of the related tax impact, by $1.1 million.


23



Note 12. Redeemable Noncontrolling Interests and Equity
During certain specified periods of time (the “Early Exit Periods”), noncontrolling interests in certain funding arrangements have the right to put all of their membership interests to the Company (the “Put Provisions”). During a specific period of time (the “Call Periods”), the Company has the right to call all membership units of the related redeemable noncontrolling interests.
The carrying value of redeemable noncontrolling interests was greater than the redemption value except for seven and six Funds at March 31, 2019 and December 31, 2018, respectively, where the carrying value has been adjusted to the redemption value.


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, 2019 (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, 2018
 
13,590

 
$
6.07

 
6.63
 
$
66,462

Granted
 
1,064

 
14.57

 

 

Exercised
 
(1,139
)
 
3.86

 

 

Cancelled
 
(17
)
 
10.30

 

 

Outstanding at March 31, 2019
 
13,498

 
$
6.92

 
6.71
 
$
97,127

 
 
 
 
 
 
 
 
 
Options vested and exercisable at March 31, 2019
 
8,154

 
$
6.21

 
5.67
 
$
64,261

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, 2019 (shares in thousands):
 
 
Number of Awards
 
Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2018
 
4,182

 
$
7.05

Granted
 
1,524

 
14.42

Issued
 
(451
)
 
6.75

Cancelled / forfeited
 
(295
)
 
7.20

Unvested balance at March 31, 2019
 
4,960

 
$
9.33

Employee Stock Purchase Plan
Under the Company's 2015 Employee Stock Purchase Plan ("ESPP"), as amended in May 2017, eligible employees are offered shares bi-annually through a 24-month offering period that 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.

24



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,
 
 
2019
 
2018
Cost of customer agreements and incentives
 
$
632

 
$
611

Cost of solar energy systems and product sales
 
167

 
170

Sales and marketing
 
1,128

 
4,150

Research and development
 
336

 
295

General and administration
 
3,520

 
5,468

Total
 
$
5,783

 
$
10,694


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. Comcast may also earn a warrant to purchase up to 11,793,355 shares of the Company's outstanding 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. On November 7, 2018 the warrant vesting schedule was modified so that it will initially vest either (i) as to 10.0% if Contractor has earned a lead or sales fee with respect to 6,000 of installed solar energy systems by September 30, 2019 or (ii) as to 13.3% if Contractor has earned a lead or sales fee with respect to 8,000 of installed solar energy systems by December 31, 2019, provided that, in either case, Contractor or its affiliates have spent at least $25.0 million in marketing and sales in connection with the agreement.  Thereafter, the warrant will vest in additional 8.3% increments for each additional 5,000 installed solar energy systems.  If the initial vesting conditions have not been met by December 31, 2019, the Warrant will expire.  As of May 8, 2019, none of the shares under this amended warrant have vested and, therefore, no expense has been recognized to date.


Note 14. Income Taxes    
The income tax expense rate for the three months ended March 31, 2019 and 2018 was 3.7% and (9.9)%, respectively. The differences between the actual consolidated effective income tax rate and the U.S. federal statutory rate were primarily attributable to an increase in valuation allowance on deferred tax assets and the allocation of losses on noncontrolling interests and redeemable noncontrolling interests.
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, however gains on sale are recognized for tax purposes.
Tax Cuts and Jobs Act
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”). While the Company has fully accounted for the impact of the Tax Act, it will continue to monitor additional clarification and guidance from the IRS, including guidance related to Section 451(c) income recognition that could lead to the Company utilizing a portion of its net operating losses.
Uncertain Tax Positions
 
As of March 31, 2019 and December 31, 2018, the Company had $0.6 million of unrecognized tax benefits related to an acquisition in 2015. In addition, there was $0.2 million of interest and penalties for uncertain tax positions as of March 31, 2019 and December 31, 2018. Due to the expiration of federal and California statute of limitations, the Company expects the total amount of gross unrecognized tax benefits will decrease by $0.5 million within 12 months of March 31, 2019.

25



Net Operating Loss Carryforwards
As a result of the Company’s net operating loss carryforwards as of March 31, 2019 and December 31, 2018, the Company does not expect to pay income tax, including in connection with its income tax provision for the three months ended March 31, 2019. As of December 31, 2018, the Company had net operating loss carryforwards for federal, California, and other state income tax purposes of approximately $1.1 billion, $572.2 million, 535.8 million, respectively, which will begin to expire in the year 2028, 2028, and 2024, respectively, if not utilized. The Company does not expect to pay any income taxes until the Company's net operating losses are fully utilized. Federal and certain state net operating loss carryforwards generated in tax years beginning after December 31, 2017 have indefinite carryover periods and do not expire, but are limited to the amount that can be utilized in any one year.

Note 15. Commitments and Contingencies
Letters of Credit
As of March 31, 2019 and December 31, 2018, the Company had $14.4 million and $9.7 million, respectively, of unused letters of credit outstanding, which carry fees of 2.75% - 3.25% per annum and 2.50% - 3.25% per annum, respectively.
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):