Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.19.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Letters of Credit
As of June 30, 2019 and December 31, 2018, the Company had $12.0 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):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Finance lease cost:
 
 
 
 
 
 
 
 
Amortization of right-of-use assets
 
$
3,748

 
$
2,723

 
$
7,232

 
$
5,357

Interest on lease liabilities
 
433

 
128

 
672

 
247

Operating lease cost
 
3,620

 
2,505

 
6,499

 
5,134

Short-term lease cost
 
621

 
154

 
1,145

 
355

Variable lease cost
 
1,019

 
730

 
1,896

 
1,507

Sublease income
 
(193
)
 
(119
)
 
(349
)
 
(225
)
Total lease cost
 
$
9,248

 
$
6,121

 
$
17,095

 
$
12,375

Other information related to leases was as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
 
 
 
 
Operating cash flows from operating leases
 
$
2,968

 
$
2,655

 
$
5,535

 
$
5,255

Operating cash flows from finance leases
 
238

 
95

 
439

 
204

Financing cash flows from finance leases
 
3,440

 
1,968

 
6,445

 
4,081

Right-of-use assets obtained in exchange for lease obligations:
 
 
 
 
 
 
 
 
Operating leases
 
(245
)
 
(1,026
)
 
20,150

 
91

Finance leases
 
9,371

 
4,043

 
12,937

 
4,142

Weighted average remaining lease term (years):
 
 
 
 
 
 
 
 
Operating leases
 
5.3

 
3.7

 
5.3

 
3.7

Finance leases
 
3.1

 
2.2

 
3.1

 
2.2

Weighted average discount rate:
 
 
 
 
 
 
 
 
Operating leases
 
5.2
%
 
4.1
%
 
5.2
%
 
4.1
%
Finance leases
 
4.2
%
 
3.7
%
 
4.2
%
 
3.7
%

Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows (in thousands):
 
 
Operating Leases
 
Sublease Income
 
Net Operating Leases
 
Finance Leases
2019
 
$
11,953

 
$
781

 
$
11,172

 
$
11,912

2020
 
11,739

 
757

 
10,982

 
7,541

2021
 
10,327

 
276

 
10,051

 
5,063

2022
 
8,920

 

 
8,920

 
2,250

2023
 
7,321

 

 
7,321

 
60

Thereafter
 
9,737

 

 
9,737

 
21

Total future lease payments
 
59,997

 
1,814

 
58,183

 
26,847

Less: Amount representing interest
 
5,693

 

 
5,693

 
1,278

Present value of future payments
 
54,304

 
1,814

 
52,490

 
25,569

Less: Short term leases not recorded as a liability
 
11,386

 

 
11,386

 

Less: Tenant incentives
 
204

 

 
204

 

Revised Present value of future payments
 
42,714

 
1,814

 
40,900

 
25,569

Less: Current portion
 
10,072

 

 
10,072

 
11,206

Long-term portion
 
$
32,642

 
$
1,814

 
$
30,828

 
$
14,363


During the six months ended June 30, 2019, the Company entered into two non-cancellable operating lease agreements for corporate office space in San Francisco, California and Denver, Colorado for the next five and seven years, respectively, to replace existing office space whose lease terms expire in 2019.
Purchase Commitment
The Company entered into commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase $87.8 million of photovoltaic modules and inverters by the end of 2019.
Warranty Accrual
The Company accrues warranty costs when revenue is recognized for solar energy systems sales, based on the estimated future costs of meeting its warranty obligations. Warranty costs primarily consist of replacement costs for supplies and labor costs for service personnel since warranties for equipment and materials are covered by the original manufacturer’s warranty (other than a small deductible in certain cases). As such, the warranty reserve is immaterial in all periods presented. The Company makes and revises these estimates based on the number of solar energy systems under warranty, the Company’s historical experience with warranty claims, assumptions on warranty claims to occur over a systems’ warranty period and the Company’s estimated replacement costs.
ITC and Cash Grant Indemnification
The Company is contractually committed to compensate certain investors for any losses that they may suffer in certain limited circumstances resulting from reductions in ITCs or U.S. Treasury grants. Generally, such obligations would arise as a result of reductions to the value of the underlying solar energy systems as assessed by the Internal Revenue Service (the “IRS”). At each balance sheet date, the Company assesses and recognizes, when applicable, the potential exposure from this obligation based on all the information available at that time, including any audits undertaken by the IRS. The Company believes that this obligation is not probable based on the facts known as of the filing date of this Quarterly Report on Form 10-Q. The maximum potential future payments that the Company could have to make under this obligation would depend largely on the difference between the prices at which the solar energy systems were sold or transferred to the Funds (or, in certain structures, the fair market value claimed in respect of such systems (referred to as "claimed values")) and the eligible basis determined by the IRS. The Company set the purchase prices and claimed values based on fair market values determined with the assistance of an independent third-party appraisal with respect to the systems that generate ITCs that are passed-through to, and claimed by, the Fund investors. Since the Company cannot determine how the IRS may evaluate system values used in claiming ITCs, the Company is unable to reliably estimate the maximum potential future payments that it could have to make under this obligation as of each balance sheet date, though any potential future payments are mitigated by the insurance policy. In April 2018, the Company purchased an insurance policy providing for certain payments by the insurers in the event there is any final determination (including a judicial determination) that reduced the ITCs claimed in respect of solar energy systems sold or transferred to most Funds through April 2018, or later, in the case of Funds added to the policy after such date. In general, the policy indemnifies the Company and related parties for additional taxes (including penalties and interest) owed in respect of lost ITCs, gross-up costs and expenses incurred in defending such claim, subject to negotiated exclusions from, and limitations to, coverage.
Litigation
The Company is subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of its business. The Company records a provision for a liability when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.
On November 20, 2015, a putative class action captioned Slovin et al. v. Sunrun Inc. and Clean Energy Experts, LLC, Case No. 4:15-cv-05340, was filed in the United States District Court, Northern District of California. The complaint generally alleged violations of the Telephone Consumer Protection Act (the “TCPA”) on behalf of an individual and putative classes of persons alleged to be similarly situated. Plaintiffs filed a First Amended Complaint on December 2, 2015, and a Second Amended Complaint on March 25, 2016, also asserting individual and putative class claims under the TCPA. By Order entered on April 28, 2016, the Court granted the Company’s motion to strike the class allegations set forth in the Second Amended Complaint, and granted leave to amend. Plaintiffs filed a Third Amended Complaint on July 12, 2016 asserting individual and putative class claims under the TCPA. On October 12, 2016, the Court denied the Company’s motion to again strike the class allegations set forth in the Third Amended Complaint. On October 3, 2017, plaintiffs filed a motion for leave to file a Fourth Amended Complaint, seeking to, among other things, revise the definitions of the classes that plaintiffs seek to represent. In each iteration of their complaint, plaintiffs seek statutory damages, equitable and injunctive relief, and attorneys’ fees and costs, on behalf of themselves and the absent classes. On April 12, 2018, the Company and plaintiffs advised the Court that they reached a settlement in principle, and the Court vacated all deadlines relating to the motion for class
certification. On September 27, 2018, Plaintiffs filed a motion for preliminary approval to settle all claims against the Company for $5.5 million, which was accrued as of March 31, 2018. On November 27, 2018, a hearing was held on Plaintiff's motion for preliminary approval. The Court requested certain clarifications be made to the proposed settlement agreement and notice documents. On January 11, 2019, Plaintiffs filed revised settlement documents reflecting the changes requested by the Court, and on July 19, 2019, the Court granted final approval of the settlement.
Most, if not all, of the claims asserted in the lawsuit relate to activities allegedly engaged in by third-party vendors, for which the Company denies any responsibility. The vendors are contractually obligated to indemnify the Company for losses related to the conduct alleged. The Company has denied, and continues to deny, the claims alleged and the settlement does not reflect any admission of fault, wrongdoing or liability.
On June 29, 2017, a shareholder derivative complaint captioned Barbara Sue Sklar Living Trust v. Sunrun Inc. et al., was filed in the United States District Court, Northern District of California, against the Company and certain of the Company’s directors and officers. The complaint generally alleges that the defendants violated Section 14(a) of the Exchange Act by making false or misleading statements in connection with public filings, including proxy statements, made between September 10, 2015 and May 3, 2017 regarding the number of customers who cancelled contracts after signing up for the Company’s home solar energy system. The Plaintiff seeks, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees.
On April 5, 2018, a stockholder derivative complaint captioned Leonard Olsen v. Sunrun Inc. et al., was filed in the United States District Court, District of Delaware, against the Company and certain of the Company’s directors and officers. The Olsen complaint is substantially similar to the Sklar complaint, alleges that the defendants breached their fiduciary duties and violated Section 14(a) of the Exchange Act in connection with public statements made between September 16, 2015 and May 21, 2017, and seeks similar relief.

On January 28, 2019, the Company reached an agreement in principle to settle all claims asserted in the Sklar and Olsen derivative actions against all defendants. Under the terms of the proposed settlement, the Company agreed to adopt certain corporate governance measures in the future. The Company and all defendants have denied, and continue to deny, the claims alleged in the derivative actions and the settlement does not reflect any admission of fault, wrongdoing or liability as to any defendant. The settlement is subject to definitive documentation and court approval.