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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, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37511

 

Sunrun Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-2841711

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

595 Market Street, 29th Floor

San Francisco, California 94105

(Address of principal executive offices and Zip Code)

(415) 580-6900

(Registrant’s telephone number, including area code)

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

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

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

As of May 8, 2017, the number of shares of the registrant’s common stock outstanding was 105,444,765.

 

 

 

 


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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

62

 

 

Signatures

 

63

 

 

 

1


Sunrun Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

203,791

 

 

$

206,364

 

Restricted cash

 

 

12,030

 

 

 

11,882

 

Accounts receivable (net of allowances for doubtful accounts of $1,088 and $1,166 as

   of March 31, 2017 and December 31, 2016, respectively)

 

 

54,065

 

 

 

60,258

 

State tax credits receivable

 

 

 

 

 

13,713

 

Inventories

 

 

59,603

 

 

 

67,326

 

Prepaid expenses and other current assets

 

 

11,585

 

 

 

9,802

 

Total current assets

 

 

341,074

 

 

 

369,345

 

Restricted cash

 

 

6,117

 

 

 

6,117

 

Solar energy systems, net

 

 

2,790,424

 

 

 

2,629,366

 

Property and equipment, net

 

 

44,925

 

 

 

48,471

 

Intangible assets, net

 

 

17,448

 

 

 

18,499

 

Goodwill

 

 

87,543

 

 

 

87,543

 

Prepaid tax asset

 

 

 

 

 

378,541

 

Other assets

 

 

31,497

 

 

 

34,936

 

Total assets (1)

 

$

3,319,028

 

 

$

3,572,818

 

Liabilities and total equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

65,520

 

 

$

66,018

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

 

11,157

 

 

 

10,654

 

Accrued expenses and other liabilities

 

 

48,675

 

 

 

59,261

 

Deferred revenue, current portion

 

 

74,284

 

 

 

70,849

 

Deferred grants, current portion

 

 

8,394

 

 

 

8,011

 

Capital lease obligations, current portion

 

 

9,198

 

 

 

10,015

 

Long-term non-recourse debt, current portion

 

 

15,797

 

 

 

14,153

 

Lease pass-through financing obligation, current portion

 

 

5,872

 

 

 

5,823

 

Total current liabilities

 

 

238,897

 

 

 

244,784

 

Deferred revenue, net of current portion

 

 

578,425

 

 

 

583,401

 

Deferred grants, net of current portion

 

 

224,217

 

 

 

226,893

 

Capital lease obligations, net of current portion

 

 

10,701

 

 

 

12,965

 

Recourse debt

 

 

247,400

 

 

 

244,000

 

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

 

 

686,078

 

 

 

639,870

 

Lease pass-through financing obligation, net of current portion

 

 

138,050

 

 

 

137,958

 

Other liabilities

 

 

5,646

 

 

 

5,457

 

Deferred tax liabilities

 

 

41,068

 

 

 

415,397

 

Total liabilities (1)

 

 

2,170,482

 

 

 

2,510,725

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

142,012

 

 

 

137,907

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value—authorized, 200,000 shares as of

   March 31, 2017 and December 31, 2016; no shares issued and outstanding

   as of March 31, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.0001 par value—authorized, 2,000,000 shares as of

   March 31, 2017 and December 31, 2016; issued and outstanding, 104,643 and

   104,321 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

672,896

 

 

 

668,076

 

Accumulated other comprehensive income

 

 

236

 

 

 

437

 

Retained earnings

 

 

20,161

 

 

 

4,438

 

Total stockholders’ equity

 

 

693,303

 

 

 

672,961

 

Noncontrolling interests

 

 

313,231

 

 

 

251,225

 

Total equity

 

 

1,006,534

 

 

 

924,186

 

Total liabilities, redeemable noncontrolling interests and total equity

 

$

3,319,028

 

 

$

3,572,818

 

 


2


(1)

The Company’s consolidated assets as of March 31, 2017 and December 31, 2016 include $2,224,280 and $2,065,232, respectively, in assets of variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. Solar energy systems, net, as of March 31, 2017 and December 31, 2016 were $2,083,079 and $1,920,330, respectively; cash as of March 31, 2017 and December 31, 2016 were $114,974 and $120,728, respectively; restricted cash as of March 31, 2017 and December 31, 2016 were $1,631 and $1,680, respectively; accounts receivable, net as of March 31, 2017 and December 31, 2016 were $22,916 and $20,771, respectively; prepaid expenses and other current assets as of March 31, 2017 and December 31, 2016 were $202 and $242, respectively and other assets as of March 31, 2017 and December 31, 2016 were $1,478 and $1,481, respectively. The Company’s consolidated liabilities as of March 31, 2017 and December 31, 2016 include $638,951 and $617,011, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of March 31, 2017 and December 31, 2016 of $22,564 and $14,873, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of March 31, 2017 and December 31, 2016 of $11,157 and $10,654, respectively; accrued expenses and other liabilities as of March 31, 2017 and December 31, 2016 of $1,600 and $782, respectively; deferred revenue as of March 31, 2017 and December 31, 2016 of $433,804 and $422,685, respectively; deferred grants as of March 31, 2017 and December 31, 2016 of $108,088 and $109,034, respectively; and long-term non-recourse debt as of March 31, 2017 and December 31, 2016 of $61,738 and $58,983, respectively.

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

 

 

3


Sunrun Inc.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Operating leases and incentives

 

$

48,098

 

 

$

34,540

 

Solar energy systems and product sales

 

 

56,019

 

 

 

64,203

 

Total revenue

 

 

104,117

 

 

 

98,743

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of operating leases and incentives

 

 

44,336

 

 

 

38,100

 

Cost of solar energy systems and product sales

 

 

49,431

 

 

 

57,512

 

Sales and marketing

 

 

31,676

 

 

 

43,188

 

Research and development

 

 

2,996

 

 

 

2,463

 

General and administrative

 

 

24,621

 

 

 

23,248

 

Amortization of intangible assets

 

 

1,051

 

 

 

1,052

 

Total operating expenses

 

 

154,111

 

 

 

165,563

 

Loss from operations

 

 

(49,994

)

 

 

(66,820

)

Interest expense, net

 

 

15,277

 

 

 

11,515

 

Other expenses (income), net

 

 

475

 

 

 

(532

)

Loss before income taxes

 

 

(65,746

)

 

 

(77,803

)

Income tax expense

 

 

7,338

 

 

 

 

Net loss

 

 

(73,084

)

 

 

(77,803

)

Net loss attributable to noncontrolling interests and

   redeemable noncontrolling interests

 

 

(85,811

)

 

 

(90,937

)

Net income available to common stockholders

 

$

12,727

 

 

$

13,134

 

 

 

 

 

 

 

 

 

 

Net income per share available to common stockholders

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.13

 

Diluted

 

$

0.12

 

 

$

0.13

 

Weighted average shares used to compute net income per

   share available to common stockholders

 

 

 

 

 

 

 

 

Basic

 

 

104,038

 

 

 

101,273

 

Diluted

 

 

106,469

 

 

 

104,219

 

 

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

 

 

4


Sunrun Inc.

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Net income attributable to common stockholders

 

$

12,727

 

 

$

13,134

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized loss on derivatives, net of income taxes

 

 

(764

)

 

 

(5,798

)

Less: Interest expense on derivatives recognized into

   earnings, net of income taxes

 

 

(563

)

 

 

(525

)

Comprehensive income

 

$

12,526

 

 

$

7,861

 

 

 

 

5


Sunrun Inc.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(73,084

)

 

$

(77,803

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization, net of amortization of deferred grants

 

 

31,710

 

 

 

21,596

 

Deferred income taxes

 

 

7,337

 

 

 

 

Stock-based compensation expense

 

 

5,874

 

 

 

3,809

 

Noncash interest expense

 

 

5,931

 

 

 

3,502

 

Interest on lease pass-through financing obligations

 

 

2,961

 

 

 

3,002

 

Reduction in lease pass-through financing obligations

 

 

(4,546

)

 

 

(4,236

)

Other noncash losses and expenses

 

 

2,898

 

 

 

1,657

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,362

 

 

 

3,595

 

Inventories

 

 

7,723

 

 

 

(23,314

)

Prepaid and other assets

 

 

(1,441

)

 

 

(4,355

)

Accounts payable

 

 

(4,357

)

 

 

(10,103

)

Accrued expenses and other liabilities

 

 

(15,445

)

 

 

(317

)

Deferred revenue

 

 

(1,030

)

 

 

5,572

 

Net cash used in operating activities

 

 

(29,107

)

 

 

(77,395

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Payments for the costs of solar energy systems, leased and to be leased

 

 

(168,149

)

 

 

(164,629

)

Purchases of property and equipment

 

 

(2,610

)

 

 

(5,023

)

Net cash used in investing activities

 

 

(170,759

)

 

 

(169,652

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from state tax credits, net of recapture

 

 

13,388

 

 

 

9,202

 

Proceeds from issuance of recourse debt

 

 

57,400

 

 

 

141,000

 

Repayment of recourse debt

 

 

(54,000

)

 

 

(147,000

)

Proceeds from issuance of non-recourse debt

 

 

38,225

 

 

 

106,400

 

Repayment of non-recourse debt

 

 

(4,904

)

 

 

(2,160

)

Payment of debt fees

 

 

 

 

 

(9,369

)

Proceeds from lease pass-through financing obligations

 

 

1,448

 

 

 

9,746

 

Contributions received from noncontrolling interests and redeemable noncontrolling interests

 

 

162,565

 

 

 

154,944

 

Distributions paid to noncontrolling interests and redeemable noncontrolling interests

 

 

(12,887

)

 

 

(9,986

)

(Payments) proceeds from exercises of stock options, net of withholding taxes on restricted stock units

 

 

(1,067

)

 

 

452

 

Offering costs paid related to initial public offering

 

 

 

 

 

(437

)

Payment of capital lease obligations

 

 

(2,749

)

 

 

(3,115

)

Change in restricted cash

 

 

(126

)

 

 

1,819

 

Net cash provided by financing activities

 

 

197,293

 

 

 

251,496

 

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

(2,573

)

 

 

4,449

 

Cash, beginning of period

 

 

206,364

 

 

 

203,864

 

Cash, end of period

 

$

203,791

 

 

$

208,313

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,347

 

 

$

4,681

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of solar energy systems and property and equipment included in accounts payable and

   accrued expenses

 

$

22,468

 

 

$

15,769

 

Purchases of solar energy systems included in non-recourse debt

 

$

12,873

 

 

$

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

$

11,157

 

 

$

7,368

 

Vehicles acquired under capital leases

 

$

76

 

 

$

7,318

 

 

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

 

 

 

 

 

 

 

 

6


 

 

Sunrun Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1. Organization

Sunrun Inc. (“Sunrun” or the “Company”) was originally formed in 2007 as a California limited liability company and was converted into a Delaware corporation in 2008. The Company is engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems (“Projects”) in the United States.

Sunrun acquires customers directly and through relationships with various solar and strategic partners (“Partners”). The Projects are constructed either by Sunrun or by Sunrun’s Partners and are owned by the Company. Sunrun’s customers enter into a power purchase agreement (“PPA”) or a lease (each, a “Customer Agreement”) which typically has a term of 20 years. Sunrun monitors, maintains and insures the Projects. The Company also sells solar energy systems and products, such as panels and racking and solar leads generated to customers.

The Company has formed various subsidiaries (“Funds”) to finance the development of Projects. These Funds, structured as limited liability companies, obtain financing from outside investors and purchase or lease Projects from Sunrun under master purchase or master lease agreements. The Company currently utilizes three legal structures in its investment Funds, which are referred to as: (i) lease pass-throughs, (ii) partnership-flips and (iii) joint venture (“JV”) inverted leases.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. The unaudited consolidated financial statements are prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three months ended March 30, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2017 or other future periods.

The consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries, including Funds, in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities (“VIEs”), through arrangements that do not involve controlling voting interests. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation, the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in ASC 810, is the party that has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it continues to be the primary beneficiary. The consolidated financial statements reflect the assets and liabilities of VIEs that are consolidated. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions, including, but not limited to, the estimates that affect the collectability of accounts receivable, the valuation of inventories, the useful lives of solar energy systems, the useful lives of property and equipment, the valuation and useful lives of intangible assets, the fair value of assets acquired and liabilities assumed in business combinations, the effective interest rate used to amortize lease pass-through financing

7


 

obligations, the fair value used to value solar energy systems, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, the fair value of debt instruments disclosed and the redemption value of redeemable noncontrolling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results may differ from such estimates.

Segment Information

The Company has one operating segment with one business activity, providing solar energy services and products to customers. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources. When evaluating performance and allocating resources, the CODM reviews financial information presented on a consolidated basis.

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating leases

 

$

35,062

 

 

$

25,327

 

Incentives

 

 

13,036

 

 

 

9,213

 

Operating leases and incentives

 

 

48,098

 

 

 

34,540

 

 

 

 

 

 

 

 

 

 

Solar energy systems

 

 

20,619

 

 

 

30,192

 

Products

 

 

35,400

 

 

 

34,011

 

Solar energy systems and product sales

 

 

56,019

 

 

 

64,203

 

Total revenue

 

$

104,117

 

 

$

98,743

 

 

Fair Value of Financial Instruments

The Company defines fair value as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation approaches to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Inputs that are unobservable, significant to the measurement of the fair value of the assets or liabilities and are supported by little or no market data.

The Company’s financial instruments include cash, receivables, accounts payable, accrued expenses, distributions payable to noncontrolling interests, derivatives, and recourse and non-recourse debt.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606), to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements for revenue from contracts with customers. The core principle of this standard is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The FASB has issued several updates to the standard which (i) clarify the application of the principal versus agent guidance; (ii) clarify the guidance relating to performance obligations and licensing; and (iii) clarify assessment of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. This ASU is effective for the Company for annual reporting

8


 

periods beginning after December 15, 2017 including the interim reporting periods within that fiscal year. Adoption of this ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is evaluating whether certain of its Customer Agreements will no longer meet the definition of a lease under ASU 842, Leases, and whether such arrangements would then need to be accounted for under ASC 606. The Company is continuing to assess the impact of such a change, as well as other potential impacts of the standard on its various revenue streams, including Customer Agreements. The Company has a project plan in place to meet the requirements of this standard using internal resources by the effective date. The Company has completed its initial assessment and is currently performing contract reviews and developing a preliminary accounting policy.

In February 2016, the FASB issued ASU No. 2016-02 to replace existing lease guidance with ASC 842, Leases. Entities are required to determine whether a contract is a lease or contains a lease at the inception of the contract. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The accounting for lessors is largely unchanged. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach. The Company currently accounts for Customer Agreements pursuant to ASC 840, Leases. The Company is evaluating whether the Customer Agreements will continue to meet the definition of a lease pursuant to ASC 842, Leases, or whether such agreements will be accounted for in accordance with ASC 606, Revenue from Contracts with Customers. The Company is continuing to assess all potential impacts of this standard, including the timing of adoption and the potential application of the standard’s practical expedients.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also requires the Company to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company adopted the new ASU effective January 1, 2017. The Company elected to continue to estimate the number of awards that are expected to vest. Upon the adoption, deferred tax liabilities decreased by $3.3 million, and retained earnings increased by $3.3 million as of January 1, 2017.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a current expected credit losses model. The amendment applies to entities which hold financial assets and net investment in leases that are not accounted for at fair value through net income as well as loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach, with certain aspects requiring a prospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. As a result, a reporting entity will recognize the tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in the consolidated financial statements. Any deferred tax asset that arises in the buyer’s jurisdiction will also be recognized at the time of the transfer. The Company adopted the standard effective January 1, 2017. As the Company sells solar energy systems to Funds, the Company will record the current tax effects of the gain on such sales as well as a deferred tax asset related to the Company’s increased tax basis in the partnership as a result of such sales. As a result of the adoption, the Company reversed net prepaid tax assets of $378.5 million, recognized gross deferred tax assets of $378.2 million and recorded a cumulative adjustment decreasing retained earnings by $0.3 million as of January 1, 2017.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which require a statement of cash flows to present the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and restricted cash in the consolidated cash flow statements upon adoption in the first quarter of 2018.

9


 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Instead, under this amendment, an entity shall perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for annual or any interim goodwill impairment tests beginning in fiscal years after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard would only have an effect on the Company’s consolidated financial statements if it failed Step 1 of the goodwill impairment test, which has not occurred to date.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendments in this update provide a screen to determine when a set of operations is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The Company early adopted the new ASU effective January 1, 2017 on a prospective basis.

Note 3. Fair Value Measurement

At March 31, 2017 and December 31, 2016, the carrying value of receivables, accounts payable, accrued expenses and distributions payable to noncontrolling interests approximates fair value due to their short-term nature. The carrying values and fair values of debt instruments are as follows (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Lines of credit

 

$

526,300

 

 

$

526,300

 

 

$

489,200

 

 

$

489,200

 

Syndicated term loans

 

 

189,163

 

 

 

189,165

 

 

 

189,989

 

 

 

189,989

 

Bank term loans

 

 

96,258

 

 

 

95,450

 

 

 

81,307

 

 

 

80,542

 

Note payable

 

 

37,363

 

 

 

36,404

 

 

 

36,232

 

 

 

35,396

 

Solar asset-backed notes

 

 

100,191

 

 

 

104,599

 

 

 

101,295

 

 

 

102,869

 

Total

 

$

949,275

 

 

$

951,918

 

 

$

898,023

 

 

$

897,996

 

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

The Company determines the fair value of its interest rate swaps using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and an evaluation of the Company’s credit risk in valuing derivative instruments. The valuation model uses various inputs including contractual terms, interest rate curves, credit spreads and measures of volatility.

The Company determines the fair value of its warrants issued using the Black-Scholes option-pricing model. The significant unobservable input used in the fair value measurement of the warrant liability was the expected volatility of the Company. Generally, increases (decreases) in the expected volatility of the Company would result in a directionally similar impact to the measurement of the Company’s warrants.

10


 

At March 31, 2017 and December 31, 2016, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):

 

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

804

 

 

$

 

 

$

804

 

Total

 

$

 

 

$

804

 

 

$

 

 

$

804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

 

 

$

 

 

$

27

 

 

$

27

 

Total

 

$

 

 

$

 

 

$

27

 

 

$

27

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

1,632

 

 

$

 

 

$

1,632

 

Total

 

$

 

 

$

1,632

 

 

$

 

 

$

1,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

 

 

$

 

 

$

20

 

 

$

20

 

Total

 

$

 

 

$

 

 

$

20

 

 

$

20

 

 

Note 4. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Raw materials

 

$

56,290

 

 

$

62,037

 

Work-in-process

 

 

3,313

 

 

 

5,289

 

Total

 

$

59,603

 

 

$

67,326

 

 

Note 5. Solar Energy Systems, net

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

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Solar energy system equipment costs

 

$

2,637,668

 

 

$

2,459,856

 

Inverters

 

 

275,267

 

 

 

260,011

 

Initial direct costs

 

 

125,980

 

 

 

117,587

 

Total solar energy systems

 

 

3,038,915

 

 

 

2,837,454

 

Less: accumulated depreciation and amortization

 

 

(330,427

)

 

 

(303,305

)

Add: construction-in-progress

 

 

81,936

 

 

 

95,217

 

Total solar energy systems, net

 

$

2,790,424

 

 

$

2,629,366

 

 

All solar energy systems, construction-in-progress and inverters have been leased to or are subject to signed Customer Agreements with customers. The Company recorded depreciation expense related to solar energy systems of $27.6 million and $20.4 million for the three months ended March 31, 2017 and 2016, respectively. The depreciation expense was reduced by the amortization of deferred grants of $2.0 million and $4.0 million for the three months ended March 31, 2017 and 2016, respectively.

 

 

11


 

Note 6. Indebtedness

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused

 

 

Annual

 

 

 

 

 

 

 

 

Carrying Values, net of

 

 

Borrowing

 

 

Contractual

 

Interest

 

 

Maturity

 

 

debt discount

 

 

Capacity

 

 

Interest Rate

 

Rate

 

 

Date

 

 

Current

 

 

Long Term

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank line of credit

 

$

 

 

$

247,400

 

 

$

247,400

 

 

$

6

 

 

Varies (1)

 

4.19% - 6.25%

 

 

April 2018

Total recourse debt

 

$

 

 

$

247,400

 

 

$

247,400

 

 

$

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

   (Aggregation Facility)

 

 

 

 

 

278,900

 

 

 

278,900

 

 

 

5,200

 

 

Varies (2)

 

3.35% - 3.54%

 

 

December 2020

Term Loan A

 

 

575

 

 

 

145,854

 

 

 

146,429

 

 

 

5,000

 

 

LIBOR + 2.75%

 

 

3.79

%

 

December 2021

Bank term loans due in

   September 2022

 

 

1,504

 

 

 

33,015

 

 

 

34,519

 

 

 

 

 

LIBOR + 2.25%

 

 

3.03

%

 

September 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR + 3.00%

 

 

4.03

%

 

September 2022

Bank term loan due in

   April 2022

 

 

1,372

 

 

 

25,886

 

 

 

27,258

 

 

 

 

 

4.50%

 

 

4.50

%

 

April 2022

Solar asset-backed

   notes

 

 

3,789

 

 

 

96,402

 

 

 

100,191

 

 

 

 

 

4.40% - Class A

 

 

4.40

%

 

July 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.38% - Class B

 

 

5.38

%

 

July 2024

Term Loan and Term

   Loan B

 

 

116

 

 

 

42,618

 

 

 

42,734

 

 

 

 

 

LIBOR + 5.00%

 

 

6.04

%

 

December 2020

and 2021

Bank term loan due in

   July 2021

 

 

8,441

 

 

 

26,040

 

 

 

34,481

 

 

 

 

 

Varies (3)

 

6.55% - 10.05%

 

 

July 2021

Note payable

 

 

 

 

 

37,363

 

 

 

37,363

 

 

 

 

 

12.00%

 

 

12.00

%

 

December 2018

Total non-recourse

   debt

 

 

15,797

 

 

 

686,078

 

 

 

701,875

 

 

 

10,200

 

 

 

 

 

 

 

 

 

Total debt

 

$

15,797

 

 

$

933,478

 

 

$

949,275

 

 

$

10,206

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016, debt consisted of the following (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused

 

 

Annual

 

 

 

 

 

 

 

 

Carrying Values, net of

 

 

Borrowing

 

 

Contractual

 

Interest

 

 

Maturity

 

 

debt discount

 

 

Capacity

 

 

Interest Rate

 

Rate

 

 

Date

 

 

Current

 

 

Long Term

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank line of credit

 

$

 

 

$

244,000