Sunrun Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

Commitments and Contingencies

12 Months Ended

Dec. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

Letters of Credit

As of December 31, 2022 and 2021, the Company had $44.4 million and $23.2 million, respectively, of unused letters of credit outstanding, which each carry fees of 0.50% - 3.25% per annum and 1.25% - 3.25% per annum, respectively.

Guarantees

Certain tax equity funds and debt facilities require the Company to maintain an aggregate amount of $35.0 million of unencumbered cash and cash equivalents at the end of each month.

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):


	For the Year Ended December 31,
	2022		2021		2020
Finance lease cost:
Amortization of right-of-use assets	$	15,873	$	13,358	$	10,151
Interest on lease liabilities	1,127		958		890
Operating lease cost	31,966		26,906		15,592
Short-term lease cost	2,602		4,819		689
Variable lease cost	9,246		7,261		4,135
Sublease income	(3,780)		(1,095)		(782)
Total lease cost	$	57,034	$	52,207	$	30,675

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


	For the Year Ended December 31,
	2022			2021			2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	34,233		$	28,230		$	15,756
Operating cash flows from finance leases	896			952			854
Financing cash flows from finance leases	14,146			12,352			10,578
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	38,543			41,068			2,071
Finance leases	21,030			11,055			4,265
Weighted average remaining lease term (years):
Operating leases	5.26			6.15			7.24
Finance leases	2.86			2.47			2.59
Weighted average discount rate:
Operating leases	3.8		%	3.8		%	4.2		%
Finance leases	3.7		%	3.1		%	4.3		%

Future minimum lease commitments under non-cancellable leases as of December 31, 2022 were as follows (in thousands):


	Operating Leases		Sublease Income		Net Operating Leases		Finance leases
2023	$	35,769	$	4,338	$	31,431	$	12,229
2024	29,269		2,774		26,495		8,897
2025	25,158		1,459		23,699		6,554
2026	21,815		975		20,840		2,461
2027	12,699		838		11,861		89
Thereafter	21,060		—		21,060		2
Total future lease payments	145,770		10,384		135,386		30,232
Less: Amount representing interest	(13,695)		—		(13,695)		(1,486)
Present value of future payments	132,075		10,384		121,691		28,746
Less: Amount for tenant incentives	—		—		—		—
Revised Present value of future payments	132,075		10,384		121,691		28,746
Less: Current portion	(31,307)		(4,338)		(26,969)		(11,444)
Long term portion	$	100,768	$	6,046	$	94,722	$	17,302

Purchase Commitment

The Company entered into purchase commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase $360.1 million of photovoltaic modules, inverters and batteries by the end of 2023.

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. A warranty is provided for solar energy systems sold. However, for the solar energy systems under Customer Agreements, the Company does not accrue a warranty liability because those systems are owned by consolidated subsidiaries of the Company. Instead, any repair costs on those solar energy systems are expensed when they are incurred as a component of customer agreements and incentives costs of revenue.

Commercial ITC Indemnification

The Company is contractually committed to compensate its investors for any losses that they may suffer in certain limited circumstances resulting from reductions in Commercial ITCs, including any reduction in depreciable basis. 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”). 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 Commercial ITCs (and the associated depreciable basis) that are passed-through to, and claimed by, the Fund investors. In April 2018, the Company purchased an insurance policy providing for certain payments by the insurers in the event there is a final determination (including a judicial determination) that reduced the Commercial ITCs and depreciation 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 Commercial ITCs, depreciation, gross-up costs and expenses incurred in defending such claim, subject to negotiated exclusions from, and limitations to, coverage. The Company purchased similar additional insurance policies in January 2021 and in October 2022.

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 IRS is auditing one of our investors in an audit involving a review of the fair market value determination of our solar energy systems in the investment fund, which is covered by the Company’s 2018 insurance policy. If this audit results in an adverse final determination, we may be subject to an indemnity obligation to our investor, which may result in certain limited out-of-pocket costs and potential increased insurance premiums in the future.

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.

In the normal course of business, the Company has from time to time been named as a party to various legal claims, actions, or complaints. While the outcome of these matters cannot currently be predicted with certainty, the Company does not currently believe that the outcome of any of these claims will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows.

The Company accrues for losses that are probable and can be reasonably estimated. The Company evaluates the adequacy of its legal reserves based on its assessment of many factors, including interpretations of the law and assumptions about the future outcome of each case based on available information.