Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
We provide clean, solar energy to customers at a significant savings compared to traditional utility energy. We have been selling solar energy to residential customers through a variety of offerings since we were founded in 2007. We, either directly or through one of our solar partners, install a solar energy system on a customer’s home and either sell the system to the customer or, as is more often the case, sell the energy generated by the system to the customer pursuant to a lease or power purchase agreement (“PPA”) with no or low upfront costs. We refer to these leases and PPAs as “Customer Agreements.” Following installation, a system is interconnected to the local utility grid. The home’s energy usage is provided by the solar energy system, with any additional energy needs provided by the local utility. Any excess solar energy, including amounts in excess of battery storage, that is not immediately used by the customers is exported to the utility grid using a bi-directional utility net meter, and the customer generally receives a credit for the excess energy from their utility to offset future usage of utility-generated energy.
On July 6, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Vivint Solar and Viking Merger Sub, Inc., a Delaware corporation and our direct wholly owned subsidiary. The acquisition of Vivint Solar was completed on October 8, 2020 pursuant to the terms of the Merger Agreement. As part of this merger, we welcomed approximately 3,800 employees from Vivint Solar to Sunrun, bringing the total employees to approximately 8,500 as of December 31, 2020. We also added approximately 210,000 customers and 1,441 megawatts to our existing fleet. The merger is expected to support continued growth through stronger differentiated sales channels, expanding customers’ access to the best offerings including battery storage solutions, improving cost efficiency from greater scale and improved access to project finance and other capital at lower costs and better terms.
We offer our solar service offerings both directly to the customer and through our solar partners, which include sales and installation partners, and strategic partners, which include retail partners. In addition, we sell solar energy systems directly to customers for cash. We also sell solar energy panels and other products (such as racking) to resellers. As of December 31, 2020, we provided our solar services to customers and sold solar energy panels and other products to resellers throughout the United States. More than 40% of our cumulative systems deployed are in California.
We compete mainly with traditional utilities. In the markets we serve, our strategy is to price the energy we sell below prevailing local retail electricity rates. As a result, the price our customers pay under our solar service offerings varies depending on the state where the customer lives, the local traditional utility that otherwise provides electricity to the customer, as well as the prices other solar energy companies charge in that region. Even within the same neighborhood, site-specific characteristics drive meaningful variability in the revenue and cost profiles of each home. Using our proprietary technology, we target homes with advantageous revenue and cost characteristics, which means we are often able to offer pricing that allows customers to save more on their energy bill while maintaining our ability to meet our targeted returns. For example, with the insights provided by our technology, we can offer competitive pricing to customers with homes that have favorable characteristics, such as roofs that allow for easy installation, high electricity consumption, or low shading, effectively passing through the cost savings we are able to achieve on these installations to the customer.
Our ability to offer Customer Agreements depends in part on our ability to finance the purchase and installation of the solar energy systems by monetizing the resulting customer cash flows and related commercial investment tax credits (“Commercial ITCs”), accelerated tax depreciation and other incentives from governments and local utilities. We monetize these incentives under tax equity investment funds, which are generally structured as non-recourse project financings. Since inception we have raised numerous tax equity investment funds to finance the installation of solar energy systems. From time to time, we may repurchase investors' interests in our tax equity investment funds after the recapture period of the relevant tax incentives. We intend to establish additional investment funds and may also use debt, equity and other financing strategies to fund our growth.
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In addition, completing the sale and installation of a solar energy system requires many different steps including a site audit, completion of designs, permitting, installation, electrical sign-off and interconnection. Customers may cancel their Customer Agreements with us, subject to certain conditions, during this process until commencement of installation. Customer cancellation rates can change over time and vary between markets.
Recent Developments
Convertible Senior Notes Offering
On January 25, 2021, we entered into a purchase agreement (the “Purchase Agreement”) with Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC, as representatives of the several initial purchasers (the “Purchasers”), to issue and sell $350 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes were sold to the Purchasers pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. In addition, we granted the Purchasers an option to purchase, during a 13-day period beginning on, and including, the date on which the Notes were first issued, up to an additional $50 million aggregate principal amount of Notes on the same terms and conditions. The Purchasers exercised their option in full on January 26, 2021. The net proceeds from the sale of the Notes issued on January 28, 2021 (after deducting the Purchasers’ discount and estimated offering expenses) was approximately $389.0 million.
On January 28, 2021, we entered into an Indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee (the “Trustee”), pursuant to which we issued $400 million aggregate principal amount of Notes. The Notes will not bear regular interest, and the principal amount of the notes will not accrete. The Notes may bear special interest under specified circumstances relating to our failure to comply with our reporting obligations under the Indenture or if the Notes are not freely tradeable as required by the Indenture. The Notes will mature on February 1, 2026, unless earlier repurchased by us, redeemed by us or converted pursuant to their terms.
In connection with the offering of the Notes, on January 25. 2021 and January 26, 2021, we entered into privately negotiated capped call transactions with Credit Suisse Capital LLC, represented by Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Barclays Bank PLC, through its agent Barclays Capital Inc., and Royal Bank of Canada, represented by RBC Capital Markets, LLC (the “Capped Calls”). The Capped Calls each have an initial strike price of approximately $117.91 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $157.22 per share. The Capped Calls cover, subject to anti-dilution adjustments, approximately 3.4 million shares of Common Stock. The Capped Calls are expected generally to reduce the potential dilution to the Common Stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes, as the case may be, in the event the market price per share of Common Stock, as measured under the Capped Calls, is greater than the strike price of the Capped Call, with such offset subject to a cap. If, however, the market price per share of the Common Stock, as measured under the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the Common Stock exceeds the cap price. We used approximately $28.0 million from the net proceeds from the issuance and sale of the Notes to purchase the Capped Calls. The final components of the Capped Calls are scheduled to expire on January 29, 2026.
Vivint Acquisition
On October 8, 2020, we completed the acquisition of Vivint Solar pursuant to the terms of the Merger Agreement. Each share of Vivint Solar common stock issued and outstanding immediately prior to the effective time of the merger was converted automatically into the right to receive 0.55 shares of our common stock.
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Impacts of COVID-19 on Our Business
The COVID-19 pandemic and the resulting impact on the U.S. economy have accelerated many of our operational initiatives to deliver best-in-class customer value and to reduce costs. We have invested in technology to streamline our installation processes, including online permitting and interconnection in many locations, as well as employing extensive use of drone technology to complete rooftop surveys. While we continue to install solar systems in most markets, we are monitoring this fluid situation and will follow official regulations to protect our employees and customers.
Following the first shelter-in-place orders in California, we enabled our entire salesforce to complete sales consultations in a virtual setting. Despite the fact that we have at times paused sourcing leads through certain channels, we have seen more leads through our digital channels at similar or more attractive customer acquisition costs. We believe this transition towards a digital model for many sales channels will position us well to realize sustaining reductions in customer acquisition costs. We are gradually returning to retail sales, and our direct-to-home sales professionals, after adapting to remote sales practices, have subsequently been able to resume direct-to-home sales activities in most markets.
The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and we do not yet know the full extent of potential delays or impacts on our business, operations or the global economy as a whole. We will continue to monitor developments affecting our workforce, our customers, and our business operations generally and will take actions that we determine are necessary in order to mitigate these impacts.
Investment Funds
Our Customer Agreements provide for recurring customer payments, typically over 20 or 25 years, and the related solar energy systems are generally eligible for Commercial ITCs, accelerated tax depreciation and other government or utility incentives. Our financing strategy is to monetize these benefits at a low weighted average cost of capital. This low cost of capital enables us to offer attractive pricing to our customers for the energy generated by the solar energy system on their homes. Historically, we have monetized a portion of the value created by our Customer Agreements and the related solar energy systems through investment funds. These assets are attractive to fund investors due to the long-term, recurring nature of the cash flows generated by our Customer Agreements, the high credit scores of our customers, the fact that energy is a non-discretionary good and our low loss rates. In addition, fund investors can receive attractive after-tax returns from our investment funds due to their ability to utilize Commercial ITCs, accelerated depreciation and certain government or utility incentives associated with the funds’ ownership of solar energy systems.
As of December 31, 2020, we had 63 active investment funds, which are described below. We have established different types of investment funds to implement our asset monetization strategy. Depending on the nature of the investment fund, cash may be contributed to the investment fund by the investor upfront or in stages based on milestones associated with the design, construction or interconnection status of the solar energy systems. The cash contributed by the fund investor is used by the investment fund to purchase solar energy systems. The investment funds either own or enter into a master lease with a Sunrun subsidiary for the solar energy systems, Customer Agreements and associated incentives. We receive on-going cash distributions from the investment funds representing a portion of the monthly customer payments received. We use the upfront cash, as well as on-going distributions to cover our costs associated with designing, purchasing and installing the solar energy systems. In addition, we also use debt, equity and other financing strategies to fund our operations. The allocation of the economic benefits between us and the fund investor and the corresponding accounting treatment varies depending on the structure of the investment fund.
We currently utilize three legal structures in our investment funds, which we refer to as: (i) pass-through financing obligations, (ii) partnership flips and (iii) joint venture (“JV”) inverted leases. We reflect pass-through financing obligations on our consolidated balance sheet as a pass-through financing obligation. We record the investor’s interest in partnership flips or JV inverted leases (which we define collectively as “consolidated joint ventures”) as noncontrolling interests or redeemable noncontrolling interests. These consolidated joint ventures are usually redeemable at our option and, in certain cases, at the investor’s option. If redemption is at our option or the consolidated joint ventures are not redeemable, we record the investor’s interest as a noncontrolling interest and account for the interest using the hypothetical liquidation at book value (“HLBV”) method. If the investor has the option to put their interest to us, we record the investor’s interest as a redeemable noncontrolling interest at the greater of the HLBV and the redemption value.
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The table below provides an overview of our current investment funds (dollars in millions):
Consolidated Joint Ventures
Pass-Through Financing Obligations Partnership Flip JV Inverted Lease
Consolidation Owner entity consolidated, tenant entity not consolidated Single entity, consolidated Owner and tenant entities consolidated
Balance sheet classification Pass-through financing obligation Redeemable noncontrolling interests and noncontrolling interests Redeemable noncontrolling interests and noncontrolling interests
Revenue from Commercial ITCs Recognized on the PTO date None None
Method of calculating investor interest Effective interest rate method Greater of HLBV or redemption value; or pro rata Greater of HLBV or redemption value; or pro rata
Liability balance as of December 31, 2020 $ 340.4 N/A N/A
Noncontrolling interest balance (redeemable or otherwise) as of December 31, 2020 N/A $ 1,167.6 $ 43.9
For further information regarding our investment funds, including the associated risks, see Item 1A. Risk Factors —" Our ability to provide our solar service offerings to customers on an economically viable basis depends in part on our ability to finance these systems with fund investors who seek particular tax and other benefits. ", Note 11, Project Equity Financing , Note 13, Pass-Through Financing Obligations , Note 14, VIE Arrangements and Note 15, Redeemable Noncontrolling Interests to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Pass-through Financing Obligations
Pass-Through Financing Obligations. In this investment fund structure, we and the fund investor each utilize separate entities to facilitate the pass-through of the Commercial ITC or U.S. Treasury grants to the fund investors. We contribute solar energy systems to an “owner” entity in exchange for interests in the owner entity, and the fund investors contribute cash to a “tenant” entity in exchange for interests in the tenant entity.
Under our pass-through financing obligation structure, in accordance with the provisions of FASB, Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation , we have determined that we are the primary beneficiary of the owner entity, and accordingly, we consolidate that entity. We have also determined that we are not the primary beneficiary of the tenant entity, and accordingly, we do not consolidate that entity.
In this investment fund structure, the investors make a series of large up-front payments as well as, in some instances, subsequent smaller quarterly lease payments through their respective tenant entity to the corresponding owner entity in exchange for the assignment of cash flows from Customer Agreements and certain other benefits associated with the Customer Agreements and related solar energy systems. We account for the payments from investors as borrowings by recording the proceeds received as financing obligations. The financing obligation is reduced over a period of approximately 22 years, or over seven years in the case of one fund, by customer payments under the Customer Agreements, U.S. Treasury grants (where applicable); and proceeds from the contracted resale of SRECs as they are received by the investor. In addition, funds paid for the Commercial ITC value upfront are initially recorded as a refund liability and recognized as revenue as the associated solar system reaches permission to operate ("PTO").
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We account for these investment funds in our consolidated financial statements as if we have not assigned the Customer Agreement to the investor, and we record on our consolidated financial statements activities arising from the Customer Agreements and any related U.S. Treasury grants, Commercial ITCs monetized as part of the upfront payments received from the investor and SREC sales. The interest charge on our pass-through financing obligations is imputed at the inception of the fund based on the effective interest rate in the arrangement giving rise to the obligation and is updated prospectively as appropriate.
In certain arrangements, we agree to defer a portion of the up-front payments by arranging a loan between one of our indirectly wholly owned subsidiaries to a subsidiary of the investor’s tenant entity.
Consolidated Joint Ventures
Partnership Flips . Under partnership flip structures, we and our fund investors contribute cash into a partnership entity. The partnership uses the cash to acquire solar energy systems developed by us with signed Customer Agreements. Each fund investor receives a rate of return, typically on an after-tax basis, which varies by investment fund. Prior to the fund investor receiving its contractual rate of return or for a time period specified in the contractual arrangements, the fund investor receives a significant portion of the value attributable to customer payments, a majority of the accelerated tax depreciation and substantially all of the Commercial ITCs. After the fund investor receives its contractual rate of return or after the specified time period, we receive substantially all of the value attributable to the remaining customer payments and SREC sales.
Included within the Partnership Flips is the project equity financing we entered into in December 2016. We pooled and transferred our interests in certain financing funds into a special purpose entity (“SPE”) with a new investor. We did not recognize a gain or loss on the transfer of its interests in the financing funds and continue to consolidate the financing funds. The SPE’s assets and cash flows are not available to our other creditors, and the investor has no recourse to our other assets.
Under our partnership flip structures, we have determined that we control the partnership entity which is a variable interest entity (“VIE”), and accordingly we consolidate the entity and record the investor’s interest as either noncontrolling interests or redeemable noncontrolling interests in our consolidated balance sheets.
Inverted Leases . Under our inverted lease structure, we and the fund investor set up a multi-tiered investment vehicle that is comprised of two partnership entities which facilitate the pass through of the tax benefits to the fund investors. In this structure we contribute solar energy systems to an “owner” partnership entity in exchange for interests in the owner partnership and the fund investors contribute cash to a “tenant” partnership in exchange for interests in the tenant partnership, which in turn makes an investment in the owner partnership entity in exchange for interests in the owner partnership. The owner partnership uses the cash contributions received from the tenant partnership to purchase systems from us and/or fund installation of such systems. Under our existing JV inverted lease structure, a substantial portion of the value generated by the solar energy systems is provided to the fund investor for a specified period of time, which is generally based upon the period of time corresponding to the expiry of the recapture period associated with the Commercial ITCs. After that point in time, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives. Generally, under the terms of each agreement, the investors’ contributions include the value of Commercial ITCs earned or grants to be received by the fund investor. Any other proceeds are allocated on a pro rata basis to the fund investor and us in accordance with their ownership percentages. Since Sunrun has the power to control both the owner and tenant entities, both entities are included in our consolidated financial statements.
We also have one JV inverted lease fund whereby we have a pro rata interest in the entity and we account for the noncontrolling interest’s share of income on a pro rata basis. Accordingly, the noncontrolling interest of this fund is carried on our balance sheet at the cumulative amount of capital contributions, reduced by cumulative distributions paid to the investor, as well as the pro rata share of their income. Under our JV inverted lease structure, we have determined that we control each VIE, and accordingly we consolidate the entity and record investor’s interest as a noncontrolling interest or redeemable noncontrolling interest.
For all of our partnership flips and JV inverted leases, the redeemable noncontrolling interest is carried on our balance sheet at the greater of the redemption value or the amount calculated under the HLBV method. The HLBV method estimates the amount that, if the fund’s assets were hypothetically sold at their book value, the investor would be entitled to receive according to the liquidation waterfall in the partnership agreement.
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Key Operating Metrics
We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Some of our key operating metrics are estimates that are based on our management’s beliefs and assumptions and on information currently available to management. Although we believe that we have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions that may prove to be inaccurate over time. Any inaccuracies could be material to our actual results when compared to our calculations. Please see the section titled “Risk Factors” in this Annual Report on Form 10-K for more information. Furthermore, other companies may calculate these metrics differently than we do now or in the future, which would reduce their usefulness as a comparative measure.
• Networked Solar Energy Capacity represents the aggregate megawatt production capacity of our solar energy systems, whether sold directly to customers or subject to executed Customer Agreements (i) for which we have confirmation that the systems are installed on the roof, subject to final inspection; (ii) in the case of certain system installations by our partners, for which we have accrued at least 80% of the expected project cost, or (iii) for multi-family and any other systems that have reached NTP, measured on the percentage of the project that has been completed based on expected project cost. Systems that have met this criteria are considered to be deployed.
• Gross Earning Assets is calculated as Gross Earning Assets Contracted Period plus Gross Earning Assets Renewal Period.
◦ Gross Earning Assets Contracted Period represents the present value of the remaining net cash flows (discounted at 5%) during the initial term of our Customer Agreements as of the measurement date. It is calculated as the present value of cash flows (discounted at 5%) we expect to receive from Subscribers in future periods, after deducting expected operating and maintenance costs, equipment replacements costs, distributions to tax equity partners in consolidated joint venture partnership flip structures, and distributions to project equity investors. We include cash flows we expect to receive in future periods from state incentive and rebate programs, contracted sales of solar renewable energy credits, and awarded net cash flows from grid service programs with utility or grid operators.
◦ Gross Earning Assets Renewal Period is the forecasted net present value we would receive upon or following the expiration of the initial Customer Agreement term but before the 30th anniversary of the system’s activation (either in the form of cash payments during any applicable renewal period or a system purchase at the end of the initial term), for Subscribers as of the measurement date. We calculate the Gross Earning Assets Renewal Period amount at the expiration of the initial contract term assuming either a system purchase or a renewal, forecasting only a 30-year customer relationship (although the customer may renew for additional years, or purchase the system), at a contract rate equal to 90% of the customer’s contractual rate in effect at the end of the initial contract term. After the initial contract term, our Customer Agreements typically automatically renew on an annual basis and the rate is initially set at up to a 10% discount to then-prevailing utility power prices.
◦ Subscribers represent the cumulative number of Customer Agreements for systems that have been recognized as deployments through the measurement date.
• Customers represent the cumulative number of deployments, from our inception through the measurement date.
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Gross Earning Assets is forecasted as of a specific date. It is forward-looking, and we use judgment in developing the assumptions used to calculate it. Factors that could impact Gross Earning Assets include, but are not limited to, customer payment defaults, or declines in utility rates or early termination of a contract in certain circumstances, including prior to installation.
The definitions of Gross Earning Assets, Gross Earning Assets Contracted Period, and Gross Earning Assets Renewal Period use a discount rate of 5%; whereas the definitions used previously in our periodic reports used a discount rate of 6%.
As of December 31,
2020 2019
Networked Solar Energy Capacity (megawatts) 3,885 1,987
Customers 550,078 277,228
As of December 31,
2020 2019
(in thousands)
Gross Earning Assets Contracted Period $ 5,234,164 $ 2,743,480
Gross Earning Assets Renewal Period 2,539,311 1,403,285
Gross Earning Assets $ 7,773,475 $ 4,146,765
As a result of the acquisition of Vivint Solar on October 8, 2020, we added $2.9 billion of Gross Earning Assets, of which $2.0 billion related to Gross Earning Assets Contracted Period and $0.9 billion related to Gross Earning Assets Renewal Period.
The tables below provide a range of Gross Earning Asset amounts if different default, discount and purchase and renewal assumptions were used.
Gross Earning Assets Contracted Period:
As of December 31, 2020
Discount rate
Default rate 3% 4% 5% 6% 7%
(in thousands)
5% $ 6,006,969 $ 5,515,319 $ 5,083,793 $ 4,838,052 $ 4,367,424
0% $ 6,187,229 $ 5,676,625 $ 5,234,164 $ 4,839,584 $ 4,485,564
Gross Earning Assets Renewal Period:
As of December 31, 2020
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 3,389,572 $ 2,758,673 $ 2,201,277 $ 1,846,547 $ 1,518,468
90% $ 3,902,973 $ 3,176,476 $ 2,539,311 $ 2,083,517 $ 1,748,360
100% $ 4,416,373 $ 3,594,277 $ 2,935,505 $ 2,405,744 $ 1,978,252
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Total Gross Earning Assets:
As of December 31, 2020
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 9,576,800 $ 8,435,299 $ 7,435,440 $ 6,686,131 $ 6,004,032
90% $ 10,090,202 $ 8,853,102 $ 7,773,474 $ 6,923,101 $ 6,233,925
100% $ 10,603,602 $ 9,270,903 $ 8,169,668 $ 7,245,328 $ 6,463,816
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results could differ significantly from our estimates. Our future financial statements will be affected to the extent that our actual results materially differ from these estimates. For further information on all of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe that policies associated with our principles of consolidation, revenue recognition, goodwill, impairment of long-lived assets, provision for income taxes, business combinations and calculation of noncontrolling interests and redeemable noncontrolling interests have the greatest impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Principles of Consolidation
Our consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling financial interest. The typical condition for a controlling financial interest is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling financial interests. We consolidate any VIE of which we are the primary beneficiary, which is defined as 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 losses or receive benefits of the VIE that could potentially be significant to the VIE. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. Our financial statements reflect the assets and liabilities of VIEs that we consolidate. All intercompany transactions and balances have been eliminated in consolidation. For further information regarding consolidation of our investment funds, see “—Investment Funds” above.
Revenue Recognition
We recognize revenue when control of goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Customer Agreements and Incentives Revenue . Customer agreements and incentives revenue is primarily comprised of revenue from our Customer Agreements and sales of Commercial ITCs and SRECs to third parties.
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We recognize revenue from a Customer Agreement when PTO for the applicable solar energy system is given by the local utility company or on the date daily operation commences if utility approval is not required. For Customer Agreements that include a fixed fee per month which entitles the customer to any and all electricity generated by the system, we recognize revenue evenly over the time that we satisfy our performance obligations over the initial term of Customer Agreements. For Customer Agreements that charge a fixed price per kilowatt hour, revenue is recognized based on the actual amount of power generated at rates specified under the contracts. Customer Agreements typically have an initial term of 20 or 25 years. After the initial contract term, our Customer Agreements typically automatically renew on an annual basis.
We also apply for and receive SRECs associated with the energy generated by our solar energy systems and sell them to third parties in certain jurisdictions. SREC revenue is estimated net of any variable consideration related to possible liquidated damages if we were to deliver fewer SRECs than contractually committed, and is generally recognized upon delivery of the SRECs to the counterparty.
Certain upfront payments related to Customer Agreements and SRECs are deemed to have a financing component, and therefore increase both revenue and interest expense by the same amount over the term of the related agreement. The additional revenue is included in the total transaction price to be recorded over the term of the agreement and is recognized based on the timing of the delivery. The interest expense is recognized based upon an amortization schedule which typically decreases throughout the term of the related agreement.
For pass-through financing obligation Funds, the value attributable to the Commercial ITCs is recognized in the period a solar system is granted PTO, at which point we have met our obligation to the investor. The Commercial ITCs are subject to recapture under the Internal Revenue Code (“Code”) if the underlying solar energy system either ceases to be a qualifying property or undergoes a change in ownership within five years of its placed-in-service date. The recapture amount decreases on the anniversary of the PTO date. We have not historically incurred a material recapture of Commercial ITCs, and do not expect to experience a material recapture of Commercial ITCs in the future.
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. Customer Agreements with a performance guarantee provide a credit to the customer if the system's cumulative production, as measured on various PTO anniversary dates, is below our guarantee of a specified minimum. Revenue is recognized to the extent it is probable that a significant reversal of such revenue will not occur.
Solar Energy Systems and Product Sales . Solar energy systems sales are comprised of revenue from the sale of solar energy systems directly to customers. We generally recognize revenue from solar energy systems sold to customers when the solar energy system passes inspection by the authority having jurisdiction, which inspection generally occurs after installation but prior to PTO, at which time we have met the performance obligation in the contract. For solar energy system sales that include delivery obligations up until interconnection to the local power grid with permission to operate, we recognize revenue at PTO.
Product sales revenue consists of revenue from the sale of solar panels, inverters, racking systems,
roofing services, fees for extended services on solar energy systems sold to customers and other solar energy products sold to resellers, as well as the sale of customer leads to third parties, including our partners and other solar providers. Product sales revenue is recognized when control is transferred, generally upon shipment. Customer lead revenue is recognized at the time the lead is delivered.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. We have determined that we operate as one reporting unit and our goodwill is tested for impairment at the enterprise level. We perform our annual impairment test of goodwill on October 1 of each fiscal year or whenever events or circumstances change or occur that would indicate that goodwill might be impaired. When assessing goodwill for impairment, we use qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350, Goodwill. We also consider our enterprise value and if necessary, a discounted cash flow model, which involves assumptions and estimates, including our future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.
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Circumstances that could indicate impairment and require us to perform a quantitative impairment test include a significant decline in our financial results, a significant decline in our enterprise value relative to our net book value, an unanticipated change in competition or our market share and a significant change in our strategic plans.
Impairment of Long-Lived Assets
The carrying amounts of our long-lived assets, including solar energy systems and definite-lived intangible assets, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Factors that we consider in deciding when to perform an impairment review would include significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of these assets is measured by comparison of the carrying amount of each asset group to the future undiscounted cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life.
Provision for Income Taxes
We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards and other tax credits measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, estimates of future taxable income, reversing taxable temporary differences, and ongoing tax planning strategies in assessing the need for a valuation allowance. We recognize the effect of tax rate and law changes on deferred taxes in the reporting period in which the legislation is enacted.
We sell solar energy systems to the investment funds. As the investment funds are consolidated by us, the gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. We account for the income tax consequences of these intra-entity transfers, both current and deferred, as a component of income tax expense and deferred tax liability, net during the period in which the transfers occur.
We account for investment tax credits as a reduction of income tax expense in the year in which the credits arise.
We determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.
Business Combinations
We allocate the fair value of purchase price to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to the solar energy systems acquired as part of our acquisition of Vivint Solar.
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Significant estimates in valuing certain tangible and intangible assets include but are not limited to discount rates. These estimates are inherently uncertain and unpredictable.
See Note 3, Acquisition to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Noncontrolling Interests and Redeemable Noncontrolling Interests
Our noncontrolling interests and redeemable noncontrolling interests represent fund investors’ interests in the net assets of certain investment funds, which we consolidate, that we have entered into in order to finance the costs of solar energy facilities under Customer Agreements. We have determined that the provisions in the contractual arrangements of the investment funds represent substantive profit-sharing arrangements, which gives rise to the noncontrolling interests and redeemable noncontrolling interests. We have further determined that for all but two of these arrangements, the appropriate methodology for attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach using the HLBV method.
Attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests under the HLBV method requires the use of various inputs to calculate the amounts that fund investors would receive upon a hypothetical liquidation. Changes in these inputs, including change in tax rates, can have a significant impact on the amount that fund investors would receive upon a hypothetical liquidation.
We classify certain noncontrolling interests with redemption features that are not solely within our control outside of permanent equity on our consolidated balance sheets. Redeemable noncontrolling interests are reported using the greater of their carrying value at each reporting date as determined by the HLBV method or their estimated redemption value in each reporting period. Estimating the redemption value of the redeemable noncontrolling interests requires the use of significant assumptions and estimates such as projected future cash flows at the time the redemption feature can be exercised.
We determine the net income (loss) attributable to common stockholders by deducting from net loss, the net loss attributable to noncontrolling interests and redeemable noncontrolling interests in these funds. The net loss attributable to noncontrolling interests and redeemable noncontrolling interests represents the fund investors’ allocable share in the results of operations of these investment funds. For these funds, we have determined that the provisions in the contractual arrangements represent substantive profit sharing arrangements, where the allocations to the partners sometimes differ from the stated ownership percentages. We have further determined that, for these arrangements, the appropriate methodology for attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach using the HLBV method. Under the HLBV method, the amounts of income and loss attributed to the noncontrolling interests and redeemable noncontrolling interests in the consolidated statements of operations reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual provisions of these funds, assuming the net assets of the respective investment funds were liquidated at the carrying value determined in accordance with GAAP. The fund investors’ interest in the results of operations of these investment funds is initially determined by calculating the difference in the noncontrolling interests and redeemable noncontrolling interests’ claim under the HLBV method at the start and end of each reporting period, after taking into account any contributions and distributions between the fund and the fund investors and subject to the redemption provisions in certain funds.
Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Our Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018 in Item 7. of Part II, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
We completed the acquisition of Vivint Solar on October 8, 2020, which plays a significant role in the year over year changes discussed below, as commencing from the acquisition date our consolidated financial statements include the assets, liabilities, operating results and cashflows of Vivint Solar. Further information about the acquisition of Vivint Solar can be found in Note 3, Acquisitions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Year Ended December 31,
2020 2019
(in thousands, except per share amounts)
Revenue:
Customer agreements and incentives $ 484,160 $ 387,835
Solar energy systems and product sales 438,031 470,743
Total revenue 922,191 858,578
Operating expenses:
Cost of customer agreements and incentives 385,650 280,344
Cost of solar energy systems and product sales 357,876 365,485
Sales and marketing 352,299 275,148
Research and development 19,548 23,563
General and administrative 266,746 125,023
Amortization of intangible assets 5,180 4,755
Total operating expenses 1,387,299 1,074,318
Loss from operations (465,108) (215,740)
Interest expense, net (230,601) (174,246)
Other income (expenses), net 8,188 (9,254)
Loss before income taxes (687,521) (399,240)
Income tax benefit (60,573) (8,218)
Net loss (626,948) (391,022)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests (453,554) (417,357)
Net (loss) income attributable to common stockholders $ (173,394) $ 26,335
Net (loss) income per share attributable to common stockholders
Basic $ (1.24) $ 0.23
Diluted $ (1.24) $ 0.21
Weighted average shares used to compute net (loss) income per share attributable to common stockholders
Basic 139,606 116,397
Diluted 139,606 123,876
Comparison of the Years Ended December 31, 2020 and 2019
Revenue
Year Ended
December 31, Change
2020 2019 $ %
(in thousands)
Customer agreements $ 432,527 $ 345,486 $ 87,041 25 %
Incentives 51,633 42,349 9,284 22 %
Customer agreements and incentives 484,160 387,835 96,325 25 %
Solar energy systems 269,866 283,429 (13,563) (5) %
Products 168,165 187,314 (19,149) (10) %
Solar energy systems and product sales 438,031 470,743 (32,712) (7) %
Total revenue $ 922,191 $ 858,578 $ 63,613 7 %
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Customer Agreements and Incentives . Revenue from Customer Agreements increased by $87.0 million. Revenue from Vivint Solar Customer Agreements from the acquisition date through December 31, 2020, accounted for $32.5 million of the increase. The remaining $54.5 million increase was due to both an increase in solar energy systems under Customer Agreements being placed in service in 2020 and a full year of revenue recognized in 2020 for systems placed in service in 2019 versus only a partial amount of such revenue related to the period in which the assets were in service in 2019. Revenue from incentives, which consists of sales of Commercial ITCs and SRECs, increased by $9.3 million when compared to the prior year. Approximately $18.9 million of this increase relates to activity for Vivint Solar incentives from the acquisition date through December 31, 2020. Offsetting this increase was a decrease due to the sale of Commercial ITCs under a financing obligation fund opened in 2018, with PTO activity in that fund primarily concluding during the second quarter of 2019. There has been no such comparable fund opened in 2019 or 2020.
Solar Energy Systems and Product Sales . Revenue from solar energy systems sales decreased by $13.6 million compared to the prior year due to decreased demand through retail partners. This decrease was offset by revenue of $27.2 million from solar energy systems sales by Vivint Solar from the acquisition date through December 31, 2020. Product sales decreased by $19.1 million compared to the prior year primarily due to a decrease in the volume of wholesale products sold, which has been impacted by COVID-19 and customers' reduced purchases in 2020 after purchasing safe harbor materials in 2019 for use in 2020. Partially offsetting this decline was approximately $2.7 million of product sales by Vivint Solar from the acquisition date through December 31, 2020.
Operating Expenses
Year Ended
December 31, Change
2020 2019 $ %
(in thousands)
Cost of customer agreements and incentives $ 385,650 $ 280,344 $ 105,306 38 %
Cost of solar energy systems and product sales 357,876 365,485 (7,609) (2) %
Sales and marketing 352,299 275,148 77,151 28 %
Research and development 19,548 23,563 (4,015) (17) %
General and administrative expense 266,746 125,023 141,723 113 %
Amortization of intangible assets 5,180 4,755 425 9 %
Total operating expenses $ 1,387,299 $ 1,074,318 $ 312,981 29 %
Cost of Customer Agreements and Incentives . The $105.3 million increase in Cost of customer agreements and incentives was due to the increase in solar energy systems placed in service in 2020, plus a full year of costs recognized in 2019 for systems placed in service in 2019 versus only a partial amount of such expenses related to the period in which the assets were in service in 2019. Additionally, there was an increase of $60.1 million related to Vivint Solar’s costs from the acquisition date through December 31, 2020, which included $29.7 million of depreciation expense on solar fixed assets recorded in the initial purchase accounting for the acquisition. The depreciable basis of Vivint Solar’s solar fixed assets increased by $1.1 billion based on the excess of fair value over book value as of the acquisition date.
The Cost of customer agreements and incentives increased to 80% of customer agreements and incentives revenue during 2020, from 72% during 2019. The increase was impacted by the acquisition of Vivint Solar, which had negative gross margins due to seasonality, as well as the increase in depreciable basis discussed above.
Cost of Solar Energy Systems and Product Sales . There was a $7.6 million decrease in Cost of solar energy systems and product sales which was the result of a $34.3 million decrease related to the decreases in the solar energy systems and product sales discussed above, offset by the addition of $26.7 million of the Vivint Solar costs from the acquisition date through December 31, 2020. Vivint Solar’s cost of solar energy systems sales were impacted by a $7.7 million increase in inventory based on the excess of fair value over book value as of the acquisition date.
Sales and Marketing Expense. The $77.2 million increase in Sales and marketing expense was primarily attributable to $67.9 million related to the inclusion of Vivint Solar from the acquisition date through December 31, 2020, which included $43.7 million of stock-based compensation expense based on the fair value at the time of the
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acquisition. The remaining increase in Sales and marketing expense is primarily attributable to $9.6 million in non-recurring and restructuring costs incurred during the twelve months ended December 31, 2020, as well as increases in costs to acquire customers through our retail and sales lead generating partners and in advertising costs, partially offset by a decrease in headcount driving lower compensation, as well as a fair value adjustment on contingent consideration. Included in sales and marketing expense were $14.4 million and $11.8 million of amortization of costs to obtain Customer Agreements for 2020 and 2019, respectively.
Research and Development Expense . The $4.0 million decrease in Research and development expense was primarily attributable to a decrease in consulting fees, as well as a decrease in headcount resulting in lower employee compensation. Partially offsetting these decreases was approximately $0.4 million related to Vivint Solar from the acquisition date through December 31, 2020.
General and Administrative Expense . The $141.7 million increase in General and administrative expenses was primarily attributable to $89.8 million related to the inclusion of Vivint Solar from the acquisition date through December 31, 2020, which included $73.3 million of stock-based compensation expense based on the fair value at the time of the acquisition. The remaining increases related to a $6.7 million legal settlement accrual, $35.6 million in nonrecurring (primarily acquisition-related) costs incurred during 2020, as well as an increase in stock-based compensation.
Non-Operating Expenses
Year Ended
December 31, Change
2020 2019 $ %
(in thousands)
Interest expense, net $ (230,601) $ (174,246) $ (56,355) 32 %
Other income (expenses), net 8,188 (9,254) 17,442 (188) %
Total interest and other expenses, net $ (222,413) $ (183,500) $ (38,913) 21 %
Interest expense, net. The increase in Interest expense, net of $56.4 million included $25.2 million of interest expense associated with the debt acquired with Vivint Solar. The remaining increase is primarily related to additional non-recourse and pass-through financing obligation debt entered into in 2020. Included in net interest expense is $24.8 million and $28.6 million of non-cash interest imputed under prepaid Customer Agreements for 2020 and 2019, respectively.
Other income (expenses), net. The decrease in other expenses of $17.4 million relates primarily to losses on extinguishment of debt related to an early repayment of a pass-through financing obligation and certain non-recourse debt in 2019, with no such comparable activity in 2020. Additionally, there was a $6.5 million gain on extinguishment of debt recognized in 2020.
Income Tax Benefit
Year Ended
December 31, Change
2020 2019 $ %
(in thousands)
Income tax benefit $ (60,573) $ (8,218) $ (52,355) 637 %
The increase in Income tax benefit of $52.4 million primarily relates to an increase in tax benefit related to a higher pre-tax loss and an increase in stock compensation deductions that was offset by an increase in noncontrolling interest and redeemable noncontrolling interests and valuation allowance.
Given our net operating loss carryforwards as of December 31, 2020, we do not expect to pay income tax, including in connection with our 2020 income tax provision, until our net operating losses are fully utilized. As of December 31, 2020, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $720.7 million and $2.1 billion, respectively, which will begin to expire in 2028 for federal purposes
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and in 2024 for state purposes. In addition, federal and certain state net operating loss carryforwards generated in tax years beginning after December 31, 2017 total $1.1 billion and $176.3 million, respectively, and have indefinite carryover periods and do not expire.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
Year Ended
December 31, Change
2020 2019 $ %
(in thousands)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests $ (453,554) $ (417,357) $ (36,197) 9 %
The increase in Net loss attributable to noncontrolling interests and redeemable noncontrolling interests was primarily the result of an additional $25.3 million net loss related Vivint Solar's noncontrolling interests and redeemable noncontrolling interests from the acquisition date through December 31, 2020.
Liquidity and Capital Resources
As of December 31, 2020, we had cash of $520.0 million, which consisted of cash held in checking and savings accounts with financial institutions. This balance included $433.2 million of cash assumed as a result of the acquisition of Vivint Solar. We finance our operations mainly through a variety of financing fund arrangements that we have formed with fund investors, cash generated from our sources of revenue and borrowings from secured credit facilities arrangements with syndicates of banks and from secured, long-term non-recourse loan arrangements. In 2020, we received $595.0 million of new commitments on secured credit facilities arrangements with syndicates of banks and $1.3 billion of commitments from secured, long-term non-recourse loan arrangements. Our principal uses of cash are funding our business, including the costs of acquisition and installation of solar energy systems, satisfaction of our obligations under our debt instruments and other working capital requirements. As of December 31, 2020, we had outstanding borrowings of $230.7 million on our $250.0 million corporate bank line of credit maturing in April 2022, as well as outstanding borrowings of $60.0 million on our $200.0 million corporate asset financing facility maturing in June 2023. Additionally, we have purchase commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase $56.9 million of photovoltaic modules, inverters and batteries by the end of 2022. In January 2021, we issued $400.0 million of convertible senior notes with a maturity date of February 1, 2026, for net proceeds of approximately $389.0 million. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. The solar energy systems that are operational are expected to generate a positive return rate over the term of the Customer Agreement, typically 20 or 25 years. However, in order to grow, we will continue to be dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we anticipate raising additional required capital from new and existing investors. We believe our cash, investment fund commitments and available borrowings as further described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2020 2019
(in thousands)
Consolidated cash flow data:
Net cash used in operating activities
$ (317,972) $ (204,487)
Net cash used in investing activities
(497,789) (843,255)
Net cash provided by financing activities
1,160,740 1,106,572
Net increase in cash
$ 344,979 $ 58,830
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Operating Activities
During 2020, we used $318.0 million in net cash from operating activities. The driver of our operating cash inflow consists of payments received from customers as well as incentives. The driver of our operating cash outflow consists of the costs of our revenue, as well as sales, marketing and general and administrative costs. During 2020, our operating cash outflows were $239.0 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of $79.0 million.
During 2019, we used $204.5 million in net cash from operating activities. The driver of our operating cash inflow consists of payments received from customers as well as incentives. The driver of our operating cash outflow consists of the costs of our revenue, as well as sales, marketing and general and administrative costs. During 2019, our operating cash outflows were $174.7 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of $29.7 million.
Investing Activities
During 2020, we used $497.8 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. During 2020, we contributed $65.4 million as an investment in a home electrification venture. Offsetting these outflows was $537.2 million of cash and restricted cash provided by the acquisition of Vivint Solar on October 8, 2020.
During 2019, we used $843.3 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements.
Financing Activities
During 2020, we generated $1.2 billion from financing activities. This was primarily driven by $712.8 million in net proceeds from fund investors, $329.1 million in net proceeds from debt, offset by $10.6 million in repayments under finance lease obligations. Additionally, during 2020, we received $75.0 million from the sale and issuance of shares pursuant to a subscription agreement with SK E&S Co., Ltd.
During 2019, we generated $1.1 billion from financing activities. This was primarily driven by $632.2 million in net proceeds from fund investors, $474.8 million in net proceeds from debt, offset by $13.9 million in repayments under finance lease obligations.
Debt, Equity, and Financing Fund Commitments
Debt Instruments
For a discussion of the terms and conditions of debt instruments and changes thereof in the period, refer to Note 11, Indebtedness, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Investment Fund Commitments
As of December 31, 2020, we had committed and available capital of approximately $332.5 million that may only be used to purchase and install solar energy systems. We intend to establish new investment funds in the future, and we may also use debt, equity or other financing strategies to finance our business.
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Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statement included elsewhere in this Annual Report on Form 10-K.
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