Q3 2021 Sunrun Inc Earnings Call
Yeah.
In my first months I, particularly enjoyed working directly in the fields with our customer facing teams are dedicated installation crews are partners and most importantly, with our customers.
First I will touch on our performance in the quarter and then I will discuss my priorities for the company in the months ahead. The Sunrun team delivered a strong third quarter growing our customer base by over 30000 customers, reflecting in 18% growth of solar energy capacity installed compared to the prior quarter we.
Continue to see very strong sales activities as well with more than 20% sequential growth and customer orders.
Our volumes included records and our new homes business are channel partner business and our direct business. We also set records again with our highest battery installations in Q3, achieving more than 100% year over year growth, providing what customers want to power through grid outages and to optimize when and how they consume.
Energy.
This is an incredibly powerful accomplishment and bodes incredibly well for our work going forward on dramatically advancing whole home electrification.
We continue to expect 30% growth and new solar energy capacity installed this year as the team continues to execute and homeowners demand clean affordable energy options importantly, we delivered a strong improvement in our net subscriber value, which increased over $2000 sequentially and we expect to report even higher net.
Subscriber values again in queue for.
As many of you know the industry continues to navigate a very dynamic supply chain environment with higher logistics and material costs. In addition to continue tightness on battery supply. This is why I am so pleased that sunrun was able to onboard a third battery supplier and we are seeing that titanous gradually improve for our customers as everyone in the industry.
Facing these cost increases and limitations on battery availability, we have selectively and modestly raise prices several times during the quarter to mitigate some of these effects that said it is important to put these price increases in the context of utility rates, which are continuing to escalate a rapid pace, which means our value proposition continues to grow.
Particularly when you consider that we offer a form of resilience that customers are demanding and utilities simply aren't able to provide.
I am filled with optimism and hope simply because today, we have the tools to address the comatic challenges and provide customers with clean affordable and resilient energy, which the centralized grandpa's grids simply cannot do our electric grid system is failing more frequently and fundamentally not built for climate change.
Provides meaningful tailwinds to our business consumers want to charge their cars with clean affordable energy and often consider a solar and battery system when they make the switch to an EV. It also provides us the opportunity to increase the size of systems, which can carry high incremental margins and bring even more value to customers. We believe we are well on our way is the leader inland.
<unk> on distributed energy paired with a clear strategy to be a trusted partner on whole home electrification to sum it up I am very excited about our progress thus far the path we are on and the opportunities in front of US I believe 2022 will be another breakout year for sunrun with above market sustainable growth accelerating <unk>.
Estimates and innovation and driving continued differentiation by launching more whole home electrification offerings. I also believe that are leaving scale operating discipline and strong capital markets will enable us to generate significant value for our stakeholders will provide more specifics as we finalize are 2022 plan and see what emerge.
<unk> from D C before I turn the call over to Ed and Tom I really like to thank our employees our customers our partners for their contributions to our success and for their dedication to our mission over to you Ed.
Thanks Mary.
We continue to exceed our own expectations and capital market execution and today I'll provide an update on our progress and strategy.
I'll also touch on a couple of policy matters.
As we discussed last quarter, we've decided principally to pursue a strategy that will drive near term cash generation using nonrecourse debt.
I have been saying for years that cost of capital in residential solar transactions should be lower than in utility scale transactions.
I concluded this because the diversity of customer equipment location and regulation and a residential solar transaction make for less risk than in utility scale transactions, which lack diversity and typically include a single customer with a weak investment grade credit rating.
In addition, similar in finances billions of dollars against the same form contract, whereas utility scale transactions are all bespoke and some more costly for lenders to review.
This quarter, we made my vision of reality.
At least in the senior debt market, where we priced an asset backed security at a spread to the bench benchmark swap rate of 120 basis points.
So lowering the cost of financing we increased our nonrecourse warehouse lending facility to $1 8 billion in commitments an increase of $1 billion.
While also reducing the interest cost to a spread of 200 basis points over LIBOR.
Cash flow in Q3 was reduced by two factors, one temporary and one permanent.
First in connection with the retirement of our old warehouse facility. We settled several out of the money interest rate swaps many of which we entered into during 2018.
As a reminder, our strategy is to enter into interest rate swaps to mitigate the impact of interest rate fluctuations on our business.
Because rates were higher in 2018. This swap termination resulted in a cash outflow of approximately $45 million.
We do not swap we did not include swap mark to market and our net earning assets calculation. This unusual repayment created a dollar for dollar headwind to NEA in the quarter.
In addition, we made two draws on the new subordinated debt placement one in Q3 and the other in Q4.
While the transactions, we executed in Q3 serve as proof points that our large scale affords us access to the lowest cost capital in the industry.
The same large ticket sizes that afford us disadvantage also make our free cash flow generation a little lumpy.
Over the near term cash flow generation may also be non linear due to investments in working capital. However.
Under this financing strategy over several quarters, and especially next year the cash flow generation of the business should be substantial.
We continue to maintain a robust project finance runway.
As of November 4th closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 270 megawatts for subscribers beyond what was deployed through the third quarter.
Given likely tax law changes and the reconciliation Bill which is currently being discussed in Congress. We are advancing a handful of additional transactions without formal term sheets. This is because of the proposed tax law changes once finalized will require modifications to financing structures and terms and likely expand our business strategy.
Including these advanced stage discussions and our runway would add about two quarters worth of additional tax equity capacity.
Key among the considerations are an increase in the investment tax credit from 26% to 30% of potential.
Additional 10% to 20% credit for systems deployed in certain census tracks or to certain multifamily buildings and direct path.
While also marketing another quarter of growing our cash balance importantly, we were able to reiterate our strong 30% growth outlook for the year.
And deliver meaningful total value generated for the full year.
Turning first of all Humes.
In the third quarter customer editions, where approximately 30700, including approximately 24800 subscriber additions.
Solar energy capacity installed was 219 megawatts in the third quarter of 2021, and 18% increase from the second quarter of this year and a 40% increase in the third quarter of last year pro forma to include Vin solar.
We continue to experience strong customer demand for our products and services in Q3 with sales growth outpacing install growth.
But the gap between sales and installs was narrowed meaningfully versus what we experienced in the second quarter.
Installation growth was strong across all of our channels with double digit install growth rates versus prior year and every route to market. There was notable strengthen our direct a new homes businesses in the quarter.
Our continued customer additions offer us the opportunity to upsell additional products and services over time, such as battery retrofits EV Chargers Repowered are expanded systems and home energy management offerings.
Additionally, increasing our total fleet of assets helps unlock valuable opportunities to grow our virtual powerplant business.
To this point the inability of a small competitor to perform created an opportunity to add approximately 2000 customers are 13 megawatts to this quarter's growth in our fleet of solar systems.
While such opportunities may present themselves again in the future we do not expect more in the near term, but we'll evaluate future opportunities to further consolidate the industry and grow our customer base if they arise.
Installation volumes, an attachment rates of batteries have increased again in Q3 to record levels.
We continue to expect battery installations to increase more than 100% in 2021 compared to the prior year.
Although battery supply and logistics constraints have lowered are expected battery volumes meaningfully in the near term compared to the prior outlook.
Our network solar energy capacity was 4.5 Gigawatts at the end of Q3, an increase of 20% compared to the prior year also pro forma to include Vin solar.
We ended Q3 with approximately 630000 customers in nearly 546000 subscribers are subscribers generate significant recurring revenue with most under 20 or 25 year contracts for the clean energy we provide.
We already saw a strong increase from Q2.
Is the difference between sales activities and installation activities normalizes, our battery mix increases recent price adjustments are reflected in installations and as we realize more synergies from the <unk> acquisition, we expect net subscriber values to be strong in 2022.
We continue to estimate cost synergies derived from the acquisition of event solar to be approximately $120 million in run rate synergies exiting this year.
While 2021 is not yet over the work we've undertaken this year to integrate vivid solar into our operations realize valuable cost synergies from that transaction invest in our growth and competitive positioning across all routes to market and extend our leadership in project based financing capabilities has set us up for another excellent year in 2022.
We believe we are well positioned for strong above market volume growth and healthy net subscriber values, resulting in meaningful cash generation likely more than $300 million in 2022.
We anticipate sharing more details on our specific 2022 volume margin and cash generation outlook on the Q4 conference call in February.
We will also share more details about how we will approach our capital structure strategy to optimize shareholder returns at that time.
With that let's open the line for questions. Please.
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We'll take our first question from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions.
Maybe Tom on that last point, you made the $300 million of cash flow generation in 2022, I appreciate the sneak preview on that.
And they give us.
Is your definition still sort of.
Cash at year end versus cash.
Plus 200.
That's how you define it and then a lot of it is going to happen.
How are you.
Raise capital.
Correct.
Here I am.
Much of visibility do you already have locked in at this point to that cash flow metric for next year.
Yes, Thanks, Brian.
The definition, we're using here is the change in total cash net of any changes to recourse debt given our working capital facility and corporate revolver can size up and down. So this is.
Total change in cash to the parent entity net of changes in that so.
As we've looked at the.
The variety of scenarios in front of us on the federal policy front supply chain disruptions.
Modeled out a number of different views on volume and margins and pricing. Unlike.
And feel really confident with the $300 million level at this time and as we work through clarity on those couple of items that will come back with a more precise view of the whole picture inclusive of volumes and margins on the Q4 call.
Alright fair enough and then I know you said the lower mix of battery installs it impacting the 2021 subscriber value generation guidance before you had said 100% year on year growth can you kind of give us a sense of what youre seeing now and then.
Maybe taking a step back what's your supply situation on that new product is still the key vendors or what have you done to maybe source more supply there as we head into 2022.
Yeah. So the the reduction in near term battery supply is bringing our total value generative guidance to around $700 million. We definitely are expecting lower battery attach on installs in Q4 than we previously expected, but still north of 100% so still reaffirming that guidance we had.
As expected quite a bit of headroom above that and now a bit closer to that.
We've diversified our supply chain and Mary mentioned that we've added a new supplier into the mix.
This is in.
In the process of launching here and so continue to.
To maintain optionality across a variety of suppliers to navigate the environment, we think.
Partners, we we generally strive to sign up the majority of our partners under exclusive arrangements. Some as we first get going arent always exclusive and overtime as we deepen those relationships we convert many from nonexclusive to an exclusive relationship.
You can think of some notable examples there in <unk>.
In recent weeks for us as well.
Okay. Okay fair enough and then I did it was Tom that your inventories were up a good amount 30% sequentially is there something strategic move there or is that just a quarterly anomaly.
Inventory, yes.
So we are deliberately increasing inventory levels, just given some of the supply chain uncertainty in the marketplace between general logistics as around shipping and also.
More disruption in that in the.
Solar panel delivery markets.
We're carrying triple digits of days inventory.
Including on panels.
Likely into March.
We continue to take deliveries weekly, but it's obviously, a very dynamic environment right now and we just want to make sure that no matter what happens over the short term or even moderate term geopolitically, we're able to continue to meet our customer needs.
As we've discussed in the past week Codeveloped bidirectional charger.
Which can be used with the Ford F 150 electric truck that allows you to immediately operate your home from the truck in the event of a power outage in overtime.
Four virtual powerplant purposes as well.
Over time, as we get better and more significant launching electric vehicles. Other products are sure to follow around heat pumps, and what have you, but I would say right now the main focus is on continuing to dominate in the battery.
The storage space and the launch of our electric vehicles product.
Super helpful. Great and then just a follow up on the grid service, whose opportunity and senior you've talked about the $75 million backlog before.
Should we think about that is that $75 million associated with the 12 programs you have announced or that that has potential for programs that have yet to be announced in terms of the.
Project tunnel.
It's a combination of the 12 awarded deals and other deals that are in late stage negotiation within that pipeline and.
As you have seen giving hope to that number for a couple of quarters here.
Already know deals can be quite quite lumpy the contracting process with many of the counterparty sear it takes a while but.
We believe we are building.
Good headway, there and expanding that pipeline and will add to that in future quarters.
I appreciate it thank you guys very much.
We'll take our next question from Mark styles with J P. Morgan the floor is yours.
Yeah. Good afternoon, thanks for taking our questions.
Just wanted to go back again to the channel partners pretty good growth quarter over quarter.
Some of your large peers are are kind of rolling up a lot of dealer partners as well.
Yeah, and then kinda last point I mean, you you mentioned the 2000 customers are so that from a smaller competitor that they couldn't deliver.
Obviously some of these competitors may not be as distressed as that that particular competitor but.
Just curious how.
As we see further cost increases from the supply chain. We think we've got a lot of ability to offset that through price increases the backdrop of utility rates continuing to rise at faster and faster clips now.
Many instances of high single digit and even low double digit proposed rate cases before public utility commissions provides a great opportunity for us to continue to grow our business and grow margins, while also delivering more value for consumers.
Got it thank you.
We will take our next question from Joseph Osha with Guggenheim Partners. Please go ahead.
Oh, Hi, there yeah first I just wanted to go back to storage a little bit understand you may not want to speak near term to whats happening, but on the other side with some of these supply chain challenges can you talk a little bit about what your aspirational attach rate might be.
Yeah.
Yes.
We've said before that we certainly think over the long run.
Nearly every customer has storage, we think today with where the economics of that product are in the economics of solar relative to <unk>.
Utility rates.
Immediately get there we have markets, though Hawaii, Puerto Rico, where we're at 100% attach.
Other places, where we're certainly well north of 50%.
As battery costs come down, which we've got a lot of insight from our partnerships and just views into the supply chain that cost will come down pretty dramatically over the over the medium term, that's going to push more and more consumers to consider adding storage I think as they also move more customers to time of use rates and more whole home electrification occurs larger.
Some sizes. There is just much more of an incentive for customers to add batteries here to a whole solution and so.
How hard certain people in the market lobbied for cash pay for individuals I really don't think thats going to make a difference.
Between the leasing product and the loans that are currently.
Available and the fact that you can carry credits forward like I, just I really struggled to think that would make a big difference I think the largest impact of cash pay on the corporate side.
It is likely that we might expand the types of customers or credit profiles.
We're able to service.
Then also.
So far still in the bill on the on the corporate on the section 48 side is a 10% tax credit adder for homes in certain census, tracts, which is a material chunk of our business.
And 20% for low to moderate income multifamily, which we also have a business and.
So there are a lot of interesting.
Things at work potentially in this bill that make us quite excited about it.
Okay. Thank you very much.
Our next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Sure.
Hi, Good afternoon. This is Eric on for Julian Thanks for the question.
On storage really quickly I know you reaffirmed full year 'twenty, one guide, but given the constraints you discuss driving lower than expected storage deployments for 2021 can you just discuss your strategy and overcoming dose hurdles for 2022 is that predominantly just adding additional equipment suppliers or how do you think about that.
Yes, so I think it's.
A few different factors one as Mary mentioned, we added a new supplier into the mix just recently.
So that certainly helps expand access to product and diversified our supply chain and some of the.
Challenges in the very short run just around logistics and port constraints and the like some of that is the thing that we expect to alleviate and then as more suppliers come online as everyone continues to ramp production, we expect that will catch up to the strong consumer demand that we've seen for the product. So.
I think it's a mix of things within our own control that we're moving on also continuing to build the backlog. So just because we are tight on supply today doesn't mean that we forgo a customer order that we think we can fulfill next year and we see that ramping and so that gives us a lot of confidence in the outlook in the year ahead.
Got it and just a quick follow up on the Smart panel partnership with span is that incremental cost of the smart electric panel on the features that are being added from that being priced into the customer PPA or is that just the cost.
Free cash flow to grow as fast or maybe slightly faster than megawatt growth.
Against that obviously you have we have to measure the increases in working capital that come from our building.
Large development pipeline of customers, who are waiting installation and then also the fact that are.
Financial transactions, which deliver the amount of proceeds that create a cash flow positive outcome.
Happened periodically and so you might see.
Barry Asian, and cash flow quarter to quarter based on the timing of those transactions.
Can you.
Prepared remarks, you said you were having radical collaboration with incumbent players and you.
I'm just wondering if you could elaborate more on that and is it referring potentially to a partnership with a local utility.
Yes, so I think what I referenced hi, nice to chat with you I think what I referenced was now is the time for radical collaboration without a shadow of a doubt.
Really the the services, we provide are so complementary to creating a more affordable and resilient grid for also.
Yes, we have a bunch of grid services contracts already as you know and yeah for sure I have started conversations with a number of utilities that are looking at the future and seeing opportunity around greater partnership.
So yes that is that is underway and happening.
Great.
And then just curious on the net subscriber value as we move into Q4.
Great. Thank you guys.
We'll take our next question from Colin Rusch with Oppenheimer. Please go ahead.
Hey, guys, it's Joe on for Colin Thanks for taking our questions.
I appreciate all the color Tonight on energy storage can you share a little bit.
<unk> on the density of capacity you feel like you would need in a given geography to offer virtual power plant services.
Well this is Ed so I actually feel like in most all jurisdictions, where virtual power plants are useful which is.
Easily 80% or more of our service territories were already there.
And that will grow.
Quickly over time through two factors first the.
Kilowatt hours per battery installation are and will grow over time, especially as battery prices come down.
And then two as we begin to roll in electric vehicles, the numbers scale very significantly.
Just as one example.
You had 3 million electric vehicles.
Our connected to the grid in the state of California, and each of them dispatched half their battery you'd eliminate all fossil fuel use in the state between six PM and 11 PM to midnight.
So thats the scale of the potential solution from DG is vast.
And we are excited to be able to partner with.
Year.
So would that suggest that your growth could come in higher than 'twenty, one or are you referring to the magnitude of megawatts. Thanks.
Okay.
Yes, it's going to be higher than market.
That's the bottom line.
Can you share what you expect market to be.
I think that what we're trying to say Phil is we can model market other people can model market.
And they're going to be a lot of puts and takes.
Nationally and locally and policy.
And capital costs, and all sorts of things what we're confident in is that the capabilities that we have as an organization both as a direct.
Originator of systems and also through our channel our superior on average to market and therefore will allow us to outgrow the market and are confident in that fact, 100%.
Okay. Thanks, guys as.
As it relates to subscriber value it looks like it's going to come in better in Q4.
Can you talk through how you expect subscriber value per customer.
Trend by quarter and 'twenty two.
Not at this time consistent with what everyone just said here.
We.
Wrap up the year and come back on the Q4 call in February we will have all the details underlying our view next year, but.
As Ed highlighted we got through the integration. This year, we've built out a lot of strong capabilities I.
I think operationally brand strength customer awareness.
Good inroads in a number of.
Newer and emerging channels for a set us up for really strong growth and margins in the year ahead, but.
We'll come out with those details when we provide the full annual outlook in February.
Okay, great. Thanks, very much I'll pass it on.
We will take our next question from Rohit <unk> with credit Suisse. Please go ahead.
Hey, good evening, thanks for taking my questions.
Ed maybe something for you in the last call. When we spoke about you spoke about potential share buybacks or changes too.
The reporting structure any update on that front.
What you're thinking right now or could we expect something of that on the next call.
Great question.
The near term focus is obviously on completing the integration and.
And getting us well positioned for next year.
And.
We also just adapting to whatever.
Benefits may come to pass in legislation.
Now and then.
We are very encouraged with the.
Growth opportunities that we face.
Both organically and on the electrification front.
And I think one of the places we've always had a good reputation as a company is in capital allocation.
As we continue to generate additional cash.
We will examine opportunities.
For our capital investment which could be.
To grow the business or our capabilities or it could be capital returned to shareholders and I think we'll probably touch on that a little bit more as we gave the full year guidance next year.
But it is definitely something we are increasingly thinking about us.
The cash balance on that the company has grows and as our confidence in the cash generation continues to increase.
Sure.
Yeah.
Got you and I look forward to more details on the next column Todd.
Maybe something for you.
I think it's always been a quarter since I joined Radian.
Been stalking you on Linkedin and seeing all the updates had put on meeting a lot of folks across the company. So after this kind of the Stewart if you will of the U S.
Do you plan any changes or what changes do you think.
Need to happen for the industry.
The solar residential solar and this is specifically thanks.
Thank you for that yes, I've been spending a lot of time out and about with all of our customer facing teams and with our customers.
And again, our strategy is all about becoming the beloved and being the beloved trusted partner of customers on whole home electrification and leading in the reinvention of the energy system integrators, we know it today so.
Certainly what you will see out of us is.
Again.
Really above market growth youre going to see us continue to focus on our obsession with customers and delivering new and innovative ways for them to strategically electrify and that is going to obviously then provide great opportunity for us as a company as well as.
A huge part of our focus is about how do we work with a lot of the incumbent players to really modernize the energy system and achieve those additional value streams as well so again youll hear a lot more from us.
The Q4 call as we talk about 2022 as well.
Alright, thanks for taking my questions. Thanks.
That concludes our question and answer session time for today and this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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