# Sunrun Inc. (RUN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sunrun Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1469367/000146936722000033/run-20211231.htm
Accession: 0001469367-22-000033
Filing date: 2022-02-17
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/RUN/
All MD&A years: /company/RUN/mda/
Next year: /company/RUN/mda/fy2022/ (FY 2022)

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, 2020 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 in Item 7. of Part II, “Management's Discussion and Analysis of Financial Condition and Results of Operations.” 

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[[/GREPCENT_TABLE]]

Comparison of the Years Ended December 31, 2021 and 2020

Revenue

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[[/GREPCENT_TABLE]]

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Customer Agreements and Incentives. The $292.7 million increase in Revenue from Customer Agreements was primarily due to both an increase in solar energy systems under Customer Agreements being added to our fleet upon the acquisition of Vivint Solar in October 2020, as well as new systems placed in service in 2021 and a full year of revenue recognized in 2021 for systems placed in service in 2020 versus only a partial amount of such revenue related to the period in which the assets were in service in 2020. Revenue from incentives, which primarily consists of the sale of SRECs, increased by $49.7 million when compared to the prior year due to the timing of sales and market prices.

Solar Energy Systems and Product Sales. Revenue from solar energy systems sales increased by $201.4 million compared to the prior year primarily due to solar energy systems sales from an expanded sales force following the acquisition of Vivint Solar, as well as increased demand through retail partners. Product sales increased by $143.9 million compared to the prior year primarily due to lower volume of wholesale products sold in 2020, which was impacted by COVID-19, and customers' reduced purchases in 2020 after purchasing safe harbor materials in 2019 for use in 2020.

Operating Expenses

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[[/GREPCENT_TABLE]]

Cost of Customer Agreements and Incentives. The $313.5 million increase in Cost of customer agreements and incentives was primarily due to the increase in solar energy systems added to our fleet upon the acquisition of Vivint Solar in October 2020, as well as new systems placed in service in 2021, plus a full year of costs recognized in 2021 for systems placed in service in 2020 versus only a partial amount of such expenses related to the period in which the assets were in service in 2020.

The Cost of customer agreements and incentives increased to 85% of customer agreements and incentives revenue during 2021, from 80% during 2020. The increase was impacted by the acquisition of Vivint Solar, which resulted in an increase in depreciation expense of approximately $107.6 million related to the step up in solar systems fair value upon the acquisition of Vivint Solar.

Cost of Solar Energy Systems and Product Sales. There was a $308.5 million increase in Cost of solar energy systems and product sales which was primarily due to the corresponding net increase in the solar energy systems and product sales discussed above.

Sales and Marketing Expense. The $270.7 million increase in Sales and marketing expense was primarily attributable to increases in headcount, which were primarily driven by the acquisition of Vivint Solar in October 2020, resulting in higher employee compensation. Additionally, we spent more in costs to acquire customers through our sales lead generating partners in 2021 compared to the prior year. Partially offsetting these increases in Sales and marketing expense is an $8.9 million decrease in non-recurring and restructuring costs incurred compared to the prior year which had $9.6 million in such costs following the acquisition of Vivint Solar. Included in sales and marketing expense were $23.3 million and $14.4 million of amortization of costs to obtain Customer Agreements for 2021 and 2020, respectively.

Research and Development Expense. The $3.6 million increase in Research and development expense was primarily attributable to the acquisition of Vivint Solar, resulting in an increase in headcount driving higher employee compensation costs.

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General and Administrative Expense. The $7.6 million decrease in General and administrative expenses was primarily attributable to a decrease of $16.3 million in nonrecurring (primarily acquisition-related) costs incurred during 2021, partially offset by the acquisition of Vivint Solar, which resulted in an increase in headcount driving higher employee compensation and consulting costs.

Non-Operating Expenses

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[[/GREPCENT_TABLE]]

Interest expense, net. The increase in Interest expense, net of $97.1 million included $73.0 million for a full year of interest expense associated with the debt acquired with Vivint Solar. The remaining increase is primarily related to additional non-recourse debt entered into in 2021. Included in net interest expense is $26.3 million and $24.8 million of non-cash interest recognized under Customer Agreements that have a significant financing component for 2021 and 2020, respectively.

Other income, net. The increase in other income, net of $14.4 million relates primarily to gains on derivatives recognized in 2021, with no such comparable activity in 2020.

Income Tax Expense (Benefit)

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[[/GREPCENT_TABLE]]

The decrease in Income tax benefit of $69.8 million primarily relates to an increase in noncontrolling interest and redeemable noncontrolling interests, an increase in valuation allowance on certain federal and state tax credits and net operating losses, and decrease in stock based compensation that was offset by an increase in tax benefit related to a higher pre-tax loss.

Given our net operating loss carryforwards as of December 31, 2021, we do not expect to pay income tax, including in connection with our 2021 income tax provision, until our net operating losses are fully utilized. As of December 31, 2021, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $720.7 million and $2.3 billion, respectively, which will begin to expire in 2028 for federal purposes 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 $1.4 billion and $198.7 million, respectively, and have indefinite carryover periods and do not expire.

Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests 

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[[/GREPCENT_TABLE]]

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Net loss attributable to noncontrolling interests and redeemable noncontrolling interests was primarily the result of an addition of six new investment funds since December 31, 2020, for which the HLBV method was used in determining the amount of net loss attributable to noncontrolling interests, as well as $66.4 million of net loss related Vivint Solar's noncontrolling interests and redeemable noncontrolling interests. Redeemable noncontrolling interests generally allocates more loss to the noncontrolling interest in the first several years after fund formation.

Liquidity and Capital Resources

As of December 31, 2021, we had cash of $617.6 million, which consisted of cash held in checking and savings accounts with financial institutions. 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 2021, we received $1.8 billion of new commitments on secured credit facilities arrangements with syndicates of banks and $888.7 million 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, 2021, we had outstanding borrowings of $211.1 million on our $250.0 million corporate bank line of credit maturing in April 2022, however, in January 2022, we retired this corporate bank line of credit, repaid the outstanding balance, and replaced it with a $425.0 million credit facility maturing in January 2025. Additionally, we have purchase commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase $558.0 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:

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[[/GREPCENT_TABLE]]

Operating Activities

During 2021, we used $817.2 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 2021, our operating cash outflows were $332.2 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of $485.1 million.

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.

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Investing Activities

During 2021, we used $1.7 billion 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 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 of cash and restricted cash provided by the acquisition of Vivint Solar on October 8, 2020.

Financing Activities

During 2021, we generated $2.6 billion from financing activities. This was primarily driven by $1.0 billion in net proceeds from fund investors, $1.6 billion in net proceeds from debt, $36.1 million in net proceeds from stock-based awards activity, offset by $42.0 million in acquisition of noncontrollling interests.

During 2020, we generated $1.2 billion from financing activities. This was primarily driven by $705.0 million in net proceeds from fund investors, $329.1 million in net proceeds from debt and $48.7 million in net proceeds from stock-based awards activity, offset by $2.7 million in acquisition of noncontrolling interests. 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.

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.

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 $350.0 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 $50.0 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 $400.0 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 tradable 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

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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.

Investment Fund Commitments

As of December 31, 2021, we had committed and available capital of approximately $288.7 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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