Edgar Filing: Sunrun Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)



☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-37511

Sunrun Inc.

(Exact name of Registrant as specified in its Charter)



Delaware		26-2841711
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

595 Market Street, 29th Floor San Francisco, California		94105
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (415) 580-6900

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.0001 Per Share; Common Stock traded on the NASDAQ Global Select Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on, December 31, 2018 was approximately $1.17 billion.

The number of shares of Registrant’s Common Stock outstanding as of February 25, 2019 was 113,899,831.

Portions of the information called for by Part III of this Form 10-K is hereby incorporated by reference from the definitive Proxy Statements for our annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018.

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K of Sunrun Inc. for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on February 28, 2019 (the “Original Form 10-K”), is being filed for the sole purpose of correcting a formatting error during the filing process in which two rows in the table in Note 23, Quarterly Results of Operations (Unaudited) were inadvertently not populated. Those rows are titled “Net (loss) income per share attributable to common stockholders, basic” and “Net (loss) income per share attributable to common stockholders, diluted.”

Except as otherwise expressly noted herein, this Amendment No. 1 does not modify or update in any way the financial position, results of operations, cash flows, or other disclosures in, or exhibits to, the Original Form 10-K, nor does it reflect events occurring after the filing of the Original Form 10-K. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Form 10-K.

PART II

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Reports of Independent Registered Public Accounting Firm		3

Consolidated Balance Sheets		6

Consolidated Statements of Operations		8

Consolidated Statements of Comprehensive Income		9

Consolidated Statements of Redeemable Noncontrolling Interests and Stockholders' Equity		10

Consolidated Statements of Cash Flows		11

Notes to Consolidated Financial Statements		12

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Sunrun Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sunrun Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, redeemable noncontrolling interests and stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2019 expressed an unqualified opinion thereon.

Change in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers and for accounting for leases due to the 2018 adoption of the new revenue standard and new lease standard, respectively. The Company adopted the new revenue standard using the full retrospective approach and adopted the new lease standard using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2010.

San Francisco, California

February 28, 2019

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Sunrun Inc.

Opinion on Internal Control over Financial Reporting

We have audited Sunrun Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sunrun Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated February 28, 2019 expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for revenue from contracts with customers and for accounting for leases due to the 2018 adoption of the new revenue standard and new lease standard, respectively.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2010.

San Francisco, California

February 28, 2019

Sunrun Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)



	As of December 31,
	2018			2017
				As Recast
Assets
Current assets:
Cash	$	226,625		$	202,525
Restricted cash	77,626			39,265
Accounts receivable (net of allowances for doubtful accounts of $2,228 and $1,665 as of December 31, 2018 and 2017, respectively)	66,435			60,359
State tax credits receivable	2,697			11,085
Inventories	79,467			94,427
Prepaid expenses and other current assets	8,563			9,202
Total current assets	461,413			416,863
Restricted cash	148			—
Solar energy systems, net	3,820,017			3,161,570
Property and equipment, net	34,893			36,402
Intangible assets, net	10,088			14,294
Goodwill	87,543			87,543
Other assets	335,685			246,464
Total assets ⁽¹⁾	$	4,749,787		$	3,963,136
Liabilities and total equity
Current liabilities:
Accounts payable	$	131,278		$	115,193
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	15,847			13,583
Accrued expenses and other liabilities	98,636			97,230
Deferred revenue, current portion	47,407			42,609
Deferred grants, current portion	7,885			8,193
Finance lease obligations, current portion	9,193			7,421
Non-recourse debt, current portion	35,484			21,529
Pass-through financing obligation, current portion	26,461			5,387
Total current liabilities	372,191			311,145
Deferred revenue, net of current portion	544,218			522,243
Deferred grants, net of current portion	221,739			227,519
Finance lease obligations, net of current portion	9,992			5,811
Recourse debt	247,000			247,000
Non-recourse debt, net of current portion	1,466,438			1,026,416
Pass-through financing obligation, net of current portion	337,282			132,823
Other liabilities	48,210			42,743
Deferred tax liabilities	93,633			83,119
Total liabilities ⁽¹⁾	3,340,703			2,598,819
Commitments and contingencies (Note 20)
Redeemable noncontrolling interests	126,302			123,801
Stockholders’ equity:
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of December 31, 2018 and 2017; no shares issued and outstanding as of December 31, 2018 and 2017	—			—
Common stock, $0.0001 par value—authorized, 2,000,000 shares as of December 31, 2018 and 2017; issued and outstanding, 113,149 and 107,350 shares as of December 31, 2018 and 2017, respectively	11			11
Additional paid-in capital	722,429			682,950
Accumulated other comprehensive loss	(3,124		)	(4,113		)
Retained earnings	229,391			202,734
Total stockholders’ equity	948,707			881,582
Noncontrolling interests	334,075			358,934
Total equity	1,282,782			1,240,516
Total liabilities, redeemable noncontrolling interests and total equity	$	4,749,787		$	3,963,136

⁽¹⁾

The Company’s consolidated assets as of December 31, 2018 and 2017 include $2,905,295 and $2,568,378, respectively, in assets of variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. Solar energy systems, net, as of December 31, 2018 and 2017 were $2,712,377 and $2,385,329, respectively; cash as of December 31, 2018 and 2017 were $105,494 and $118,352, respectively; restricted cash as of December 31, 2018 and 2017 were $2,071 and $2,699, respectively; accounts receivable, net as of December 31, 2018 and 2017 were $18,539 and $18,786, respectively; prepaid expenses and other current assets as of December 31, 2018 and 2017 were $387 and $917, respectively and other assets as of December 31, 2018 and 2017 were $66,427 and $42,295, respectively. The Company’s consolidated liabilities as of December 31, 2018 and 2017 include $660,758 and $677,955, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of December 31, 2018 and 2017 of $12,136 and $15,929, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of December 31, 2018 and 2017 of $15,797 and $13,526, respectively; accrued expenses and other liabilities as of December 31, 2018 and 2017 of $7,122 and $5,200, respectively; deferred revenue as of December 31, 2018 and 2017 of $396,920 and $409,761, respectively; deferred grants as of December 31, 2018 and 2017 of $29,229 and $30,406, respectively; non-recourse debt as of December 31, 2018 and 2017 of $190,711 and $201,285, respectively; and other liabilities as of December 31, 2018 and December 31, 2017 of $8,843 thousand and $1,848, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

Sunrun Inc.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)



	Year Ended December 31,
	2018			2017			2016
				As Recast			As Recast
Revenue:
Customer agreements and incentives	$	404,466		$	234,276		$	191,626
Solar energy systems and product sales	355,515			298,266			285,481
Total revenue	759,981			532,542			477,107
Operating expenses:
Cost of customer agreements and incentives	240,857			186,435			154,244
Cost of solar energy systems and product sales	294,066			254,131			239,381
Sales and marketing	207,232			146,426			168,737
Research and development	18,844			15,079			10,199
General and administrative	116,659			107,400			92,416
Amortization of intangible assets	4,204			4,204			4,206
Total operating expenses	881,862			713,675			669,183
Loss from operations	(121,881		)	(181,133		)	(192,076		)
Interest expense, net	131,771			92,255			73,340
Other (income) expenses, net	(2,788		)	1,874			(840		)
Loss before income taxes	(250,864		)	(275,262		)	(264,576		)
Income tax expense	9,322			12,353			56,263
Net loss	(260,186		)	(287,615		)	(320,839		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(286,843		)	(413,104		)	(395,968		)
Net income attributable to common stockholders	$	26,657		$	125,489		$	75,129
Net income per share attributable to common stockholders
Basic	$	0.24		$	1.19		$	0.73
Diluted	$	0.23		$	1.16		$	0.72
Weighted average shares used to compute net income per share attributable to common stockholders
Basic	110,089			105,432			102,367
Diluted	117,112			108,206			104,964

The accompanying notes are an integral part of these consolidated financial statements.

Sunrun Inc.

Consolidated Statements of Comprehensive Income

(In Thousands)



	Year Ended December 31,
	2018			2017			2016
				As Recast			As Recast
Net income attributable to common stockholders	$	26,657		$	125,489		$	75,129
Unrealized gain (loss) on derivatives, net of income taxes	6,187			(5,694		)	335
Interest (expense) income on derivatives recognized into earnings, net of income taxes	(5,198		)	1,144			1,023
Other comprehensive income (loss)	989			(4,550		)	1,358
Comprehensive income	$	27,646		$	120,939		$	76,487

The accompanying notes are an integral part of these consolidated financial statements.

Sunrun Inc.

Consolidated Statements of Redeemable Noncontrolling Interests and Stockholders' Equity

(In Thousands)



	Redeemable Noncontrolling Interests			Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders' Equity			Noncontrolling Interests			Total Equity
	Redeemable Noncontrolling Interests			Shares	Amount		Shares	Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders' Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2015 (as reported)	$	147,139		—	$	—	101,282	$	10	$	642,229		$	(921	)	$	(87,249	)	$	554,069		$	105,491		$	659,560
Cumulative effect of adoption of new ASUs (No. 2014-09 and No. 2016-02)	5,710			—	—		—	—		—			—			86,368			86,368			93			86,461
Balance at December 31, 2015 (as recast)	$	152,849		—	$	—	101,282	$	10	$	642,229		$	(921	)	$	(881	)	$	640,437		$	105,584		$	746,021
Exercise of stock options	—			—	—		1,852	—		5,416			—			—			5,416			—			5,416
Issuance of restricted stock units, net of tax withholdings	—			—	—		422	—		(381		)	—			—			(381		)	—			(381		)
Shares issued in connection with the Employee Stock Purchase Plan	—			—	—		515	—		2,432			—			—			2,432			—			2,432
Stock-based compensation	—			—	—		—	—		18,817			—			—			18,817			—			18,817
Contributions from noncontrolling interests and redeemable noncontrolling interests	123,023			—	—		—	—		—			—			—			—			450,519			450,519
Distributions to noncontrolling interests and redeemable noncontrolling interests	(13,606		)	—	—		—	—		—			—			—			—			(28,448		)	(28,448		)
Issuance of shares due to business acquisition in 2015	—			—	—		250	—		—			—			—			—			—			—
Offering costs in connection with underwritten public offering	—			—	—		—	—		(437		)	—			—			(437		)	—			(437		)
Net (loss) income	(121,270		)	—	—		—	—		—			—			75,129			75,129			(274,698		)	(199,569		)
Other comprehensive income, net of taxes	—			—	—		—	—		—			1,358			—			1,358			—			1,358
Balance - December 31, 2016 (as recast)	$	140,996		—	$	—	104,321	$	10	$	668,076		$	437		$	74,248		$	742,771		$	252,957		$	995,728
Cumulative effect of adoption of new ASU's (No. 2016-13 and No. 2016-16)	—			—	—		—	—		—			—			2,996			2,996			—			2,996
Exercise of stock options	—			—	—		686	—		1,984			—			—			1,984			—			1,984
Issuance of restricted stock units, net of tax withholdings	—			—	—		1,115	—		(3,569		)	—			—			(3,569		)	—			(3,569		)
Shares issued in connection with the Employee Stock Purchase Plan	—			—	—		628	1		2,619			—			—			2,620			—			2,620
Stock-based compensation	—			—	—		—	—		22,088			—			—			22,088			—			22,088
Acquisition of noncontrolling interests	(37,919		)	—	—		—	—		(8,248		)	—			—			(8,248		)	(405		)	(8,653		)
Contributions from noncontrolling interests and redeemable noncontrolling interests	128,052			—	—		—	—		—			—			—			—			469,617			469,617
Distributions to noncontrolling interests and redeemable noncontrolling interests	(14,769		)	—	—		—	—		—			—			—			—			(42,690		)	(42,690		)
Issuance of shares due to business acquisition in 2015	—			—	—		600	—		—			—			—			—			—			—
Net (loss) income	(92,559		)	—	—		—	—		—			—			125,490			125,490			(320,545		)	(195,055		)
Other comprehensive loss, net of taxes	—			—	—		—	—		—			(4,550		)	—			(4,550		)	—			(4,550		)
Balance - December 31, 2017 (as recast)	$	123,801		—	$	—	107,350	$	11	$	682,950		$	(4,113	)	$	202,734		$	881,582		$	358,934		$	1,240,516
Cumulative effect of adoption of new ASU (No. 2017-12)	—			—	—		—	—		—			1,992			—			1,992			—			1,992
Exercise of stock options	—			—	—		3,271	—		17,178			—			—			17,178			—			17,178
Issuance of restricted stock units, net of tax withholdings	—			—	—		1,614	—		(10,102		)	—			—			(10,102		)	—			(10,102		)
Shares issued in connection with the Employee Stock Purchase Plan	—			—	—		914	—		4,546			—			—			4,546			—			4,546
Stock-based compensation	—			—	—		—	—		27,857			—			—			27,857			—			27,857
Contributions from noncontrolling interests and redeemable noncontrolling interests	111,125			—	—		—	—		—			—			—			—			234,022			234,022
Distributions to noncontrolling interests and redeemable noncontrolling interests	(11,057		)	—	—		—	—		—			—			—			—			(69,605		)	(69,605		)
Net (loss) income	(97,567		)	—	—		—	—		—			—			26,657			26,657			(189,276		)	(162,619		)
Other comprehensive loss, net of taxes	—			—	—		—	—		—			(1,003		)	—			(1,003		)	—			(1,003		)
Balance - December 31, 2018	$	126,302		—	$	—	113,149	$	11	$	722,429		$	(3,124	)	$	229,391		$	948,707		$	334,075		$	1,282,782

The accompanying notes are an integral part of these consolidated financial statements

Sunrun Inc.

Consolidated Statements of Cash Flows

(In Thousands)



	Year Ended December 31,
	2018			2017			2016
				As Recast			As Recast
Operating activities:
Net loss	$	(260,186	)	$	(287,615	)	$	(320,839	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization, net of amortization of deferred grants	156,007			128,687			98,493
Deferred income taxes	9,322			12,353			56,263
Stock-based compensation expense	27,856			22,042			18,723
Interest on pass-through financing obligations	19,205			12,629			12,757
Reduction in pass-through financing obligations	(25,005		)	(18,295		)	(44,913		)
Other noncash losses and expenses	25,484			24,471			15,705
Changes in operating assets and liabilities:
Accounts receivable	(5,707		)	(9,409		)	(1,973		)
Inventories	14,960			(27,101		)	4,042
Prepaid and other assets	(75,924		)	(51,633		)	(52,226		)
Accounts payable	8,848			47,837			(40,336		)
Accrued expenses and other liabilities	15,286			9,219			24,868
Deferred revenue	27,393			40,712			29,295
Net cash used in operating activities	(62,461		)	(96,103		)	(200,141		)
Investing activities:
Payments for the costs of solar energy systems	(806,365		)	(769,363		)	(678,258		)
Purchases of property and equipment	(4,951		)	(7,956		)	(12,544		)
Business acquisition	—			—			(5,000		)
Net cash used in investing activities	(811,316		)	(777,319		)	(695,802		)
Financing activities:
Proceeds from state tax credits, net of recapture	10,887			13,773			9,081
Proceeds from issuance of recourse debt	17,000			170,400			458,400
Repayment of recourse debt	(17,000		)	(167,400		)	(411,400		)
Proceeds from issuance of non-recourse debt	980,544			748,806			335,666
Repayment of non-recourse debt	(517,594		)	(362,763		)	(23,076		)
Payment of debt fees	(24,849		)	(14,392		)	(13,741		)
Proceeds from pass-through financing and other obligations	217,082			6,221			16,047
Payment of finance lease obligations	(9,025		)	(9,836		)	(12,759		)
Contributions received from noncontrolling interests and redeemable noncontrolling interests	345,147			594,921			573,542
Distributions paid to noncontrolling interests and redeemable noncontrolling interests	(78,398		)	(54,530		)	(39,542		)
Acquisition of noncontrolling interests	—			(35,386		)	—
Proceeds from exercises of stock options, net of withholding taxes paid on restricted stock units	12,592			1,035			7,364
Offering costs paid related to initial public offering	—			—			(437		)
Net cash provided by financing activities	936,386			890,849			899,145
Net change in cash and restricted cash	62,609			17,427			3,202
Cash and restricted cash, beginning of period	241,790			224,363			221,161
Cash and restricted cash, end of period	$	304,399		$	241,790		$	224,363
Supplemental disclosures of cash flow information
Cash paid for interest	$	76,313		$	42,194		$	26,191
Cash paid for taxes	$	—		$	—		$	—
Supplemental disclosures of noncash investing and financing activities
Purchases of solar energy systems and property and equipment included in accounts payable and accrued expenses	$	27,169		$	19,625		$	18,547
Purchases of solar energy systems included in non-recourse debt	$	—		$	12,873		$	—
Right-of-use assets obtained in exchange for finance lease liabilities	$	14,302		$	650		$	12,961

The accompanying notes are an integral part of these consolidated financial statements.

Sunrun Inc.

Notes to Consolidated Financial Statements

Note 1. Organization

Sunrun Inc. (“Sunrun” or the “Company”) was originally formed in 2007 as a California limited liability company, and was converted into a Delaware corporation in 2008. The Company is engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems (“Projects”) in the United States.

Sunrun acquires customers directly and through relationships with various solar and strategic partners (“Partners”). The Projects are constructed either by Sunrun or by Sunrun’s Partners and are owned by the Company. Sunrun’s customers enter into an agreement to utilize the solar system (“Customer Agreement”) which typically has an initial term of 20 or 25 years. Sunrun monitors, maintains and insures the Projects. The Company also sells solar energy systems and products, such as panels and racking and solar leads generated to customers.

The Company has formed various subsidiaries (“Funds”) to finance the development of Projects. These Funds, structured as limited liability companies, obtain financing from outside investors and purchase or lease Projects from Sunrun under master purchase or master lease agreements. The Company currently utilizes three legal structures in its investment Funds, which are referred to as: (i) pass-through financing obligations, (ii) partnership-flips and (iii) joint venture (“JV”) inverted leases.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and reflect the accounts and operations of the Company and those of its subsidiaries, including Funds, in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities (“VIEs”), through arrangements that do not involve controlling voting interests. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation, the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in ASC 810, is 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 the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it continues to be the primary beneficiary. The consolidated financial statements reflect the assets and liabilities of VIEs that are consolidated. All intercompany transactions and balances have been eliminated in consolidation.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes estimates and assumptions, including, but not limited to, revenue recognition constraints that result in variable consideration, the discount rate used to adjust the promised amount of consideration for the effects of a significant financing component, the estimates that affect the collectability of accounts receivable, the valuation of inventories, the useful lives of solar energy systems, the useful lives of property and equipment, the valuation and useful lives of intangible assets, the effective interest rate used to amortize pass-through financing obligations, the discount rate uses for operating and financing leases, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, the fair value of debt instruments disclosed and the redemption value of redeemable noncontrolling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results may differ from such estimates.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Segment Information

The Company has one operating segment with one business activity, providing solar energy services and products to customers. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources. When evaluating performance and allocating resources, the CODM reviews financial information presented on a consolidated basis.

Revenues from external customers (including, but not limited to homeowners) for each group of similar products and services is as follows (in thousands):



	Year Ended December 31,
	2018		2017		2016
Customer agreements	$	272,672	$	210,753	$	155,870
Incentives	131,794		23,523		35,756
Customer agreements and incentives	404,466		234,276		191,626

Solar energy systems	186,512		113,953		127,727
Products	169,003		184,313		157,754
Solar energy systems and product sales	355,515		298,266		285,481
Total revenue	$	759,981	$	532,542	$	477,107

Revenue from Customer Agreements includes payments by customers for the use of the system as well as utility and other rebates assigned by the customer to the Company in the Customer Agreement. Revenue from incentives includes revenue from the sale of investment tax credits ("ITCs") and renewable energy credits (“SRECs”).

Cash and Restricted Cash

Cash consists of bank deposits held in checking and savings accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company has exposure to credit risk to the extent cash balances exceed amounts covered by federal deposit insurance. The Company believes that its credit risk is not significant.

Restricted cash represents amounts related to obligations under certain financing transactions and future replacement of solar energy system components.

The following table provides a reconciliation of cash, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows. Cash and restricted cash consists of the following (in thousands):



	December 31,
	2018		2017		2016
Cash	$	226,625	$	202,525	$	206,364
Restricted cash, current and long-term	77,774		39,265		17,999
Total	$	304,399	$	241,790	$	224,363

Accounts Receivable

Accounts receivable consist of amounts due from customers as well as state and utility rebates due from government agencies and utility companies. Under Customer Agreements, the customers typically assign incentive rebates to the Company.

Accounts receivable are recorded at net realizable value. The Company maintains allowances for the applicable portion of receivables when collection becomes doubtful. The Company estimates anticipated losses from doubtful accounts based upon the expected collectability of all accounts receivables, which takes into account the number of days past due, collection history, identification of specific customer exposure, and current economic

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

trends. Once a receivable is deemed to be uncollectible, it is written off. In 2018, 2017 and 2016, the Company recorded provisions for bad debt expense of $3.4 million, $2.1 million and $1.4 million, respectively, and wrote-off uncollectible receivables of $2.8 million, $1.6 million and $1.8 million, respectively.

Accounts receivable, net consists of the following (in thousands):



	December 31,
	2018			2017
Customer receivables	$	64,180		$	59,263
Other receivables	1,466			1,319
Rebates receivable	3,017			1,442
Allowance for doubtful accounts	(2,228		)	(1,665		)
Total	$	66,435		$	60,359

State Tax Credits Receivable

State tax credits receivable are recognized upon submission of the state income tax return.

Inventories

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventories consist of raw materials such as photovoltaic panels, inverters and mounting hardware as well as miscellaneous electrical components that are sold as-is by the distribution operations and used in installations and work-in-process. Work-in-process primarily relates to solar energy systems that will be sold to customers, which are partially installed and have yet to pass inspection by the responsible city or utility department. For solar energy systems where the Company performs the installation, the Company commences transferring component parts from inventories to construction-in-progress, a component of solar energy systems, once a lease contract with a lease customer has been executed and the component parts have been assigned to a specific project. Additional costs incurred including labor and overhead are recorded within construction in progress.

The Company periodically reviews inventories for unusable and obsolete items based on assumptions about future demand and market conditions. Based on this evaluation, provisions are made to write inventories down to their market value.

Solar Energy Systems, net

The Company records solar energy systems subject to signed Customer Agreements and solar energy systems that are under installation as solar energy systems, net on its consolidated balance sheet. Solar energy systems, net is comprised of system equipment costs related to solar energy systems, less accumulated depreciation and amortization. Depreciation on solar energy systems is calculated on a straight-line basis over the estimated useful lives of the systems of 35 years. Prior to the fourth quarter of 2016, the Company calculated depreciation on solar energy systems on a straight-line basis to their estimated residual values over the estimated useful lives of systems, which was expected to be 20 years. The Company revised the estimated useful life of solar energy systems in the fourth quarter of 2016, as the Company reviewed its assumptions and concluded that customers are more likely to renew their lease rather than purchase the solar energy system at the end of the lease term. The impact of the change in estimate was immaterial for 2016 and future periods. The Company periodically reviews its estimated useful life and recognizes changes in estimates by prospectively adjusting depreciation expense. Inverters and batteries are depreciated over their estimated useful life of 10 years.

Solar energy systems under construction will be depreciated as solar energy systems subject to signed Customer Agreements when the respective systems are completed and interconnected.

Property and Equipment, net

Property and equipment, net consists of leasehold improvements, furniture, computer hardware and software, machinery and equipment and automobiles. All property and equipment are stated at historical cost net of accumulated depreciation. Repairs and maintenance are expensed as incurred.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Property and equipment is depreciated on a straight-line basis over the following periods:



Leasehold improvements		Lesser of 6 years or lease term
Furniture		5 years
Computer hardware and software		3 years
Machinery and equipment		5 years or lease term
Automobiles		Lease term

Capitalization of Software Costs

For costs incurred in the development of internal use software, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life. Additional costs of $2.5 million, $6.1 million and $4.9 million were capitalized in 2018, 2017 and 2016, respectively.

Intangible Assets, net

Finite-lived intangible assets are initially recorded at fair value and are subsequently presented net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:



Customer relationships		6-10 years
Developed technology		5 years
Trade names		5-8 years

Impairment of Long-Lived Assets

The carrying amounts of the Company’s long-lived assets, including solar energy systems and intangible assets subject to depreciation and amortization, 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 are considered in deciding when to perform an impairment review would include significant negative industry or economic trends and significant changes or planned changes in the 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 group is expected to generate over its remaining life. If the asset group 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 group. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life. The Company has recognized no material impairments of its long-lived assets in any of the periods presented.

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. The Company has determined that it operates as one reporting unit and the Company’s goodwill is recorded at the enterprise level. The Company performs its 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, the Company uses qualitative and if necessary, quantitative methods in accordance with FASB ASC Topic 350, Goodwill. The Company also considers its enterprise value and if necessary, discounted cash flow model, which involves assumptions and estimates, including the Company’s future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.

Circumstances that could indicate impairment and require the Company to perform a quantitative impairment test include a significant decline in the Company’s financial results, a significant decline in the Company’s enterprise value relative to its net book value, an unanticipated change in competition or the Company’s market share and a

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

significant change in the Company’s strategic plans. As of October 1, 2018, the Company concluded that the fair value of the Company exceeded its carrying value.

Deferred Revenue

When the Company receives consideration, or when such consideration is unconditionally due, from a customer prior to delivering goods or services to the customer under the terms of a Customer Agreement, the Company records deferred revenue. Such deferred revenue consists of amounts for which the criteria for revenue recognition have not yet been met and includes amounts that are collected or assigned from customers, including upfront deposits and prepayments, and rebates. Deferred revenue relating to financing components represents the cumulative excess of interest expense recorded on financing component elements over the related revenue recognized to date and will eventually net to zero by the end of the initial term. Amounts received related to the sales of SRECs which have not yet been delivered to the counterparty are recorded as deferred revenue.

The opening balance of deferred revenue was $525.4 million as of December 31, 2016. Deferred revenue consists of the following (in thousands):



	December 31,
	2018		2017
Under Customer Agreements:
Payments received	$	538,926	$	517,544
Financing component balance	37,801		30,736
	576,727		548,280

Under SREC contracts:
Payments received	12,977		14,805
Financing component balance	1,921		1,767
	14,898		16,572

Total	$	591,625	$	564,852

In the years ended December 31, 2018, 2017 and 2016, the Company recognized revenue of $52.9 million, $47.7 million and $42.4 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized and includes deferred revenue as well as amounts that will be invoiced and recognized as revenue in future periods. Contracted but not yet recognized revenue was approximately $5.3 billion as of December 31, 2018, of which the Company expects to recognize approximately 6% over the next 12 months. The annual recognition is not expected to vary significantly over the next 10 years as the vast majority of existing Customer Agreements have at least 10 years remaining, given that the average age of the Company's fleet of residential solar energy systems under Customer Agreements is less than three years due to the Company being formed in 2007 and having experienced significant growth in the last few years. The annual recognition on these existing contracts will gradually decline over the midpoint of the Customer Agreements as the typically 20 or 25 year initial term expires.

Deferred Grants

Deferred grants consist of U.S. Treasury grants and state tax credits. The Company applied for a renewable energy technologies income tax credit offered by one of the states in the form of a cash payment and deferred the tax credit as a grant on the consolidated balance sheets. The Company records the grants as deferred grants and recognizes the benefit on a straight-line basis over the estimated depreciable life of the associated assets as a reduction in Cost of customer agreements and incentives. As described in the Solar Energy Systems, net section above, the estimated depreciable life of the associated assets was revised from 20 to 35 years in 2016.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Warranty Accrual

The Company accrues warranty costs when revenue is recognized for solar energy systems sales, based on the estimated future costs of meeting its warranty obligations. Warranty costs primarily consist of replacement costs for supplies and labor costs for service personnel since warranties for equipment and materials are covered by the original manufacturer’s warranty (other than a small deductible in certain cases). As such, the warranty reserve is immaterial in all periods presented. The Company makes and revises these estimates based on the number of solar energy systems under warranty, the Company’s historical experience with warranty claims, assumptions on warranty claims to occur over a systems’ warranty period and the Company’s estimated replacement costs.

Solar Energy Performance Guarantees

The Company guarantees to customers certain specified minimum solar energy production output for solar facilities over the initial term of the Customer Agreements. The Company monitors the solar energy systems to determine whether these specified minimum outputs are being achieved. Annually or every two years, depending on the terms of the Customer Agreement, the Company will refund a portion of electricity payments to a customer if his or her solar energy production output was less than the performance guarantee. The Company considers this a variable component that offsets the transaction price.

Derivative Financial Instruments

The Company recognizes all derivative instruments on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive loss if a derivative is designated as part of a hedge transaction. The ineffective portion of the hedge, if any, is immediately recognized in earnings and are included in other expenses (income), net in the consolidated statements of operations.

The Company uses derivative financial instruments, primarily interest rate swaps, to manage its exposure to interest rate risks on its syndicated term loans, which are recognized on the balance sheet at their fair values. On the date that the Company enters into a derivative contract, the Company formally documents all relationships between the hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability. Changes in the fair value of a derivative that is designated and qualifies as an effective cash flow hedge are recorded in accumulated other comprehensive loss, net of tax, until earnings are affected by the variability of cash flows of the hedged item. Any derivative gains and losses that are not effective in hedging the variability of expected cash flows of the hedged item or that do not qualify for hedge accounting treatment are recognized directly into income. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in cash flows of the derivative instrument have been highly effective in offsetting changes in the cash flows of the hedged items and whether they are expected to be highly effective in the future. The Company discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised; or (iii) management determines that designating the derivative as a hedging instrument is no longer appropriate. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the derivative instrument is carried at its fair market value on the balance sheet with the changes in fair value recognized in current period earnings. The remaining balance in accumulated other comprehensive loss associated with the derivative that has been discontinued is not recognized in the income statement unless it is probable that the forecasted transaction will not occur. Such amounts are recognized in earnings when earnings are affected by the hedged transaction.

Fair Value of Financial Instruments

The Company defines fair value as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation approaches to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued


•	Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;


•	Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and


•	Level 3—Inputs that are unobservable, significant to the measurement of the fair value of the assets or liabilities and are supported by little or no market data.

The Company’s financial instruments include cash, receivables, accounts payable, accrued expenses, distributions payable to noncontrolling interests, derivatives, and recourse and non-recourse debt.

Revenue Recognition

The Company recognizes revenue when control of goods or services is transferred to its customers, in an amount that reflects the consideration it expected to be entitled to in exchange for those goods or services.

Customer agreements and incentives

Customer agreements and incentives revenue is primarily comprised of revenue from Customer Agreements in which the Company provides continuous access to a functioning solar system and revenue from the sales of SRECs generated by the Company’s solar energy systems to third parties.

The Company begins to recognize revenue on Customer Agreements when permission to operate ("PTO") is given by the local utility company or on the date daily operation commences if utility approval is not required. Revenue recognition does not necessarily follow the receipt of cash. The Company recognizes revenue evenly over the time that it satisfies its performance obligations over the initial term of the Customer Agreements. 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 and the rate is initially set at up to a 10% discount to then prevailing power prices.

SREC revenue arises from the sale of environmental credits generated by solar energy systems and is generally recognized upon delivery of the SRECs to the counterparty. For pass-through financing obligation Funds, the value attributable to the monetization of ITCs are recognized in the period a solar system is granted PTO - see Note 14, Pass-through Financing Obligations.

In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money when the timing of payments provides it with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. When adjusting the promised amount of consideration for a significant financing component, the Company uses the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception and recognizes the revenue amount on a straight-line basis over the term of the Customer Agreement, and interest expense using the effective interest rate method.

Consideration from customers is considered variable due to the performance guarantee under Customer Agreements and liquidating damage provisions under SREC contracts in the event minimum deliveries are not achieved. Performance guarantees provide a credit to the customer if the system's cumulative production, as measured on various PTO anniversary dates, is below the Company's guarantee of a specified minimum. Revenue is recognized to the extent it is probable that a significant reversal of such revenue will not occur.

The Company capitalizes incremental costs incurred to obtain a contract in Other Assets in the consolidated balance sheets. These amounts are amortized on a straight-line basis over the term of the Customer Agreements, and are included in Sales and marketing in the consolidated statements of operations.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Solar energy systems and product sales

For solar energy systems sold to customers, the Company recognizes revenue when the solar energy system passes inspection by the authority having jurisdiction. The Company’s installation projects are typically completed in less than twelve months.

Product sales consist of solar panels, racking systems, inverters, other solar energy products sold to resellers and customer leads. Product sales revenue is recognized at the time when control is transferred, upon shipment. Customer lead revenue, included in product sales, is recognized at the time the lead is delivered.

Taxes assessed by government authorities that are directly imposed on revenue producing transactions are excluded from solar energy systems and product sales.

Cost of Revenue

Customer agreements and incentives

Cost of revenue for customer agreements and incentives is primarily comprised of (1) the depreciation of the cost of the solar energy systems, as reduced by amortization of deferred grants, (2) solar energy system operations, monitoring and maintenance costs including associated personnel costs, and (3) allocated corporate overhead costs. Upon adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("Topic 606"), the Company no longer records initial direct costs from the origination of Customer Agreements. Instead, the Company records costs to obtain a contract as described in Revenue Recognition - Customer agreements and incentives above.

Solar energy systems and product sales

Cost of revenue for solar energy systems and non-lead generation product sales consist of direct and indirect material and labor costs for solar energy systems installations and product sales. Also included are engineering and design costs, estimated warranty costs, freight costs, allocated corporate overhead costs, vehicle depreciation costs and personnel costs associated with supply chain, logistics, operations management, safety and quality control. Cost of revenue for lead generations consists of costs related to direct-response advertising activities associated with generating customer leads.

Research and development Expense

Research and development expenses include personnel costs, allocated overhead costs, and other costs related to the development of our proprietary technology.

Stock-Based Compensation

The Company grants stock options and restricted stock units (“RSUs”) for its equity incentive plan and employee stock purchase plan. Stock-based compensation to employees is measured based on the grant date fair value of the awards and recognized over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The Company estimates the fair value of stock options and employee stock purchase plans awards granted using the Black-Scholes option-valuation model. Compensation cost is recognized over the vesting period of the applicable award using the straight-line method for those options expected to vest.

The Company also grants RSUs to non-employees that vest upon the satisfaction of both performance and service conditions. For RSUs granted to non-employees that vest upon the satisfaction of a performance condition, the Company starts recognizing expense on the RSUs when the performance condition is met.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Noncontrolling Interests and Redeemable Noncontrolling Interests

Noncontrolling interests represent investors’ interests in the net assets of the Funds that the Company has created to finance the cost of its solar energy systems subject to the Company’s Customer Agreements. The Company has determined that the contractual provisions in the funding arrangements represent substantive profit sharing arrangements. The Company has further determined that the appropriate methodology for attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach referred to as the hypothetical liquidation at book value (“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 investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these arrangements, assuming the net assets of these funding structures were liquidated at recorded amounts. The Company’s initial calculation of the investor’s noncontrolling interest in the results of operations of these funding arrangements is determined as the difference in the noncontrolling interests’ claim under the HLBV method at the start and end of each reporting period, after taking into account any capital transactions, such as contributions or distributions, between the Fund and the investors.

The Company classifies certain noncontrolling interests with redemption features that are not solely within the control of the Company outside of permanent equity on its consolidated balance sheets. Redeemable noncontrolling interests are reported using the greater of their carrying value as determined by the HLBV method or their estimated redemption value at each reporting date.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided against deferred tax assets to the extent that it is more likely than not that the deferred tax asset will not be realized. The Company is subject to the provisions of ASC 740, Income Taxes, which establishes consistent thresholds as it relates to accounting for income taxes. It defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more likely than not” to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50% likely to be realized. Management has analyzed the Company’s inventory of tax positions with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction).

The Company sells solar energy systems to the Funds. As the Funds are consolidated by the Company, 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. Since these transactions are intercompany sales, prior to January 1, 2017, any tax expense incurred related to these intercompany sales is deferred and recorded as a prepaid tax asset and amortized over the depreciable life of the underlying solar energy systems which has been estimated to be 35 years in accordance with ASC Topic 810. With the adoption of ASU 2016-16 on January 1, 2017 the Company reversed net prepaid tax assets of $378.5 million and recorded the gross deferred tax assets associated with the historical intercompany sales of solar energy systems, which in turn reduced the deferred tax liabilities on investment in partnerships by $378.2 million with the remaining $0.3 million being recorded as a cumulative effect of adoption in the Company’s Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity. The adoption did not have an impact on the Company’s Consolidated Statement of Operations.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdiction.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

Concentrations of Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable, which includes rebates receivable. The associated risk of concentration for cash is mitigated by banking with institutions with high credit ratings. At certain times, amounts on deposit exceed Federal Deposit Insurance Corporation insurance limits. The Company does not require collateral or other security to support accounts receivable. To reduce credit risk, management performs periodic credit evaluations and ongoing evaluations of its customers’ financial condition. Rebates receivable are due from various states and local governments as well as various utility companies. The Company considers the collectability risk of such amounts to be low. The Company is not dependent on any single customer. The Company’s customers under Customer Agreements are primarily located in California, Arizona, New Jersey, Hawaii, New York and Massachusetts. The loss of a customer would not adversely impact the Company’s operating results or financial position. The Company depends on a limited number of suppliers of solar panels and other system components. During the years ended December 31, 2018 and 2017, the solar materials purchases from the top five suppliers were approximately $221.5 million and $188.8 million, respectively.

Recently Issued and Adopted Accounting Standards

Accounting standards adopted January 1, 2018 causing recast of prior periods:

In May 2014, the FASB issued Topic 606. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements, and expands disclosure requirements. The Company adopted Topic 606 effective January 1, 2018, using the full retrospective method, which required the Company to recast each prior reporting period presented. The Company has elected to use the practical expedient under Topic 606 and has excluded disclosures of transaction prices allocated to remaining performance obligations and when the Company expects to recognize such revenue for all periods prior to the date of initial application.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to replace existing lease guidance with Accounting Standards Codification Topic 842 ("Topic 842"). Topic 842 changes how the definition of a lease is applied and judgment may be required in applying the definition of a lease to certain arrangements. The Company elected to early adopt the standard effective January 1, 2018 concurrent with the adoption of Topic 606 related to revenue recognition, using the modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements, which required the Company to recast each prior reporting period presented. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. The clarifications address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. These amendments have the same effective date and transition requirements as the new leases standard, as such the Company adopted the new ASU and the impact of adopting this standard was not material to its financial statements with respect to leases where the Company is the lessee.

Upon the adoption of Topic 842, the Company's Customer Agreements are accounted for under Topic 606 due to changes in the definition of a lease under Topic 842 when the Company was considered a lessor. For operating leases in which the Company is the lessee, the Company concluded that all existing operating leases under Accounting Standards Codification Topic 840 ("Topic 840"), Leases, continue to be classified as operating leases under Topic 842, and all existing capital leases under Topic 840 are classified as finance leases under Topic 842. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. The Company accounts for short-term leases on a straight-line basis over the lease term.

Under Topic 606, total consideration for Customer Agreements, including price escalators and performance guarantees, is estimated and recognized over the term of the Customer Agreement. This accounting for price escalators creates an unbilled receivable balance for the first half of the Customer Agreement, which is then reduced over the second half. Customer Agreements and SRECs with a prepaid element are deemed to include a significant financing component, as defined under Topic 606, which increases both revenue and interest expense. For pass-through financing obligation funds that report investment tax credit revenue, the ITC revenue is now recognized in full at PTO. SREC revenue is estimated net of any variable consideration related to possible

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

liquidated damages, and recognized upon delivery of SRECs to the counterparty. The accounting did not materially differ for revenue currently recognized as solar energy systems and product sales. The adoption of Topic 606 also resulted in an adjustment to the Company's deferred tax liabilities, and impacted the analysis of the realizability of deferred tax assets, resulting in the release of valuation allowance related to state deferred tax assets.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows ("Topic 230"), Restricted Cash, which requires a statement of cash flows to present the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The Company adopted Topic 230 effective January 1, 2018, using the retrospective transition method, which required the Company to recast each prior reporting period presented. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated cash flow statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities, which expands an entity's ability to hedge nonfinancial and financial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, and aligned the recognition and presentation of the effects of hedging instruments in the financial statements. The Company adopted ASU 2017-12 effective October 1, 2018, with the retrospective adjustment applicable to prior periods included as a cumulative-effect adjustment to accumulated other comprehensive loss and retained earnings. The adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which adds the OIS rate based on the SOFR as a benchmark interest rate for hedge accounting purposes. The Company adopted ASU 2018-16 on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after October 1, 2018. The adoption of ASU 2018-16 did not have a material impact on the Company's consolidated financial statements.

Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Standards

The primary impact of adopting Topic 606 and Topic 842 is on the recognition of revenue from Customer Agreements, and certain incentives revenue, namely SRECs and ITCs. Previously, under Topic 840, the Company recognized revenue related to certain Customer Agreements as contingent rent. Under Topic 606, because the Company has a continuous obligation to provide fully functional systems that provide electricity over the term of the Customer Agreement, it recognizes revenue evenly over the term of the Customer Agreements taking into account price escalators and performance guarantees when estimating variable consideration. Previously, the Company recognized revenue related to the sale of SRECs to the extent the cumulative value of delivered SRECs per contract exceeded any possible liquidated damages for non-delivery, if any. Under Topic 606, the Company estimates revenue net of any variable consideration related to possible liquidated damages, and recognizes revenue upon delivery of SRECs to the counterparty. Under Topic 605 and Topic 840, the Company previously reported ITC revenue over five years: following the point at which the related solar system was granted PTO, with one-fifth of the monetized ITCs recognized on each anniversary of the solar energy systems' PTO date. Under Topic 606, the Company recognizes ITC revenue in full at PTO. Previously, under Topic 840, the Company capitalized direct and incremental costs as a component of Solar energy systems, net on the consolidated balance sheets. Under Topic 606, the Company capitalizes incremental costs incurred to obtain a contract in Other Assets in the consolidated balance sheets. These amounts are amortized on a straight-line basis over the term of the Customer Agreements, and are included in Sales and marketing in the consolidated statements of operations.

In addition to the impact of revenue recognition related to Customer Agreements, the impact of adopting Topic 842 includes a change in accounting for leases when the Company is the lessee, primarily the inclusion of right-of use ("ROU") assets included in other assets on the consolidated balance sheets, and operating lease liabilities included in accrued expenses and other liabilities and other liabilities on the consolidated balance sheets. The income tax impact as a result of the adoption of Topic 842 was immaterial.

The following table presents the effect of the adoption of Topic 606 and Topic 842 on the Company's condensed consolidated balance sheet as of December 31, 2017 (in thousands):

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued



	December 31, 2017
	As Reported		Adoption Impact			As Recast

Accounts receivable, net of allowances for doubtful accounts	$	76,198	$	(15,839	)	$	60,359
Solar energy systems, net	3,319,708		(158,138		)	3,161,570
Other assets	37,225		209,239			246,464
Accrued expenses and other liabilities	85,639		11,591			97,230
Deferred revenue, current portion	77,310		(34,701		)	42,609
Deferred grants, current portion	8,269		(76		)	8,193
Pass-through financing obligation, current portion	6,087		(700		)	5,387
Deferred revenue, net of current portion	584,427		(62,184		)	522,243
Deferred grants, net of current portion	228,603		(1,084		)	227,519
Pass-through financing obligation, net of current portion	138,124		(5,301		)	132,823
Other liabilities	13,520		29,223			42,743
Deferred tax liabilities	59,131		23,988			83,119
Redeemable noncontrolling interests	123,737		64			123,801
Additional paid-in capital	684,141		(1,191		)	682,950
Retained earnings	131,959		70,775			202,734
Noncontrolling interests	354,076		4,858			358,934

The following table presents the effect of the adoption of Topic 606 and Topic 842 on the Company's condensed consolidated statement of operations for the years ended December 31, 2017 and 2016 (in thousands except per share amounts):



	December 31, 2017									December 31, 2016
	As Reported			Adoption Impact			As Recast			As Reported			Adoption Impact			As Recast

Revenue: Customer agreements and incentives	$	231,433		$	2,843		$	234,276		$	168,417		$	23,209		$	191,626
Cost of customer agreements and incentives	193,954			(7,519		)	186,435			159,858			(5,614		)	154,244
Sales and marketing	137,115			9,311			146,426			162,781			5,956			168,737
General and administrative	107,420			(20		)	107,400			92,377			39			92,416
Interest expense, net	70,518			21,737			92,255			53,244			20,096			73,340
Income tax expense	32,138			(19,785		)	12,353			35,993			20,270			56,263
Net loss	(286,734		)	(881		)	(287,615		)	(303,301		)	(17,538		)	(320,839		)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests	(411,259		)	(1,845		)	(413,104		)	(394,988		)	(980		)	(395,968		)
Net income attributable to common stockholders	124,525			964			125,489			91,687			(16,558		)	75,129
Basic net income per share attributable to common stockholders	1.18			0.01			1.19			0.90			(0.17		)	0.73
Diluted net income per share attributable to common stockholders	1.15			0.01			1.16			0.87			(0.15		)	0.72

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

The following table presents the effect of the adoption of Topic 230, Topic 606 and Topic 842 on the Company's condensed consolidated statement of cash flows for the years ended December 31, 2017 and 2016 (in thousands):



	December 31, 2017									December 31, 2016
	As Reported			Adoption Impact			As Recast			As Reported			Adoption Impact			As Recast

Net loss	$	(286,734	)	$	(881	)	$	(287,615	)	$	(303,301	)	$	(17,538	)	$	(320,839	)
Net cash used in operating activities	(61,011		)	(35,092		)	(96,103		)	(150,580		)	(49,561		)	(200,141		)
Net cash used in investing activities	(812,327		)	35,008			(777,319		)	(745,112		)	49,310			(695,802		)
Net cash provided by financing activities	869,499			21,350			890,849			898,192			953			899,145
Net change in cash and restricted cash⁽¹⁾	(3,839		)	21,266			17,427			2,500			702			3,202
Cash and restricted cash, beginning of period⁽¹⁾	206,364			17,999			224,363			203,864			17,297			221,161
Cash and restricted cash, end of period⁽¹⁾	202,525			39,265			241,790			206,364			17,999			224,363


⁽¹⁾	Pursuant to Topic 230, restricted cash is included in the recasted balances in the statement of cash flows, as described above. The amounts in the previously reported column include only cash.

Accounting standards to be adopted:

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a current expected credit losses model. The amendment applies to entities which hold financial assets and net investment in leases that are not accounted for at fair value through net income as well as loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach, with certain aspects requiring a prospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments- Credit Losses, which clarifies that operating lease receivables are not within the scope of Topic 326, but rather operating lease receivables will be tested for impairment under Topic 842.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which is intended to align the accounting for share-based payment awards issued to employees and nonemployees, however, this amendment does not apply to instruments issued in a financing transaction nor to equity instruments granted to a customer under a contract in the scope of Topic 606. Currently, performance conditions are recognized once the performance conditions are met. Under this new amendment, equity-classified nonemployee share-based payments will be measured at the grant-date fair value and will be recognized based on the probable outcome of the performance conditions. This ASU is effective for fiscal periods beginning after December 15, 2018. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 are effective for periods beginning after December 15, 2018. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements as part of its disclosure framework project. Under this amendment, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. However, for Level 3 fair value measurements, disclosures around the range and weighted average used to develop significant unobservable inputs will be required. This ASU is effective for fiscal periods beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, Intangibles- Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

In August 2018, the Securities and Exchange Commission adopted a Disclosure Update and Simplification release, which outlines Regulation S-X amendments to eliminate outdated or duplicative disclosure requirements. The final rule also amends the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. These amendments are effective for all filings made 30 days after the amendments are published in the Federal Register, which was on October 4, 2018. The SEC announced that it would not object if the first presentation of the changes in stockholders’ equity for a calendar year end filer were made in the Company’s March 31, 2019 Form 10-Q. The Company plans to use the new presentation beginning in 2019.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, which aligns the evaluation of decision-making fees under the variable interest entity guidance. Under this new guidance, in order to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company is currently evaluating this guidance and the impact it may have on the Company's consolidated financial statements.

Note 3. Acquisition

Clean Energy Experts, LLC

In April 2015, the Company acquired Clean Energy Experts, LLC, a consumer demand and solar lead generation company, for $25.0 million in cash and 1.9 million shares of common stock valued at $19.1 million, net of settlement of a preexisting payable to CEE. Of this amount, $15.0 million in cash was paid and 1.4 million shares were issued in April 2015. The remaining $10.0 million in cash and 500,000 shares were paid and issued as follows: $5.0 million was paid and 250,000 shares were issued in October 2015 and $5.0 million was paid and 250,000 shares were issued in April 2016. An additional $8.8 million in cash and 599,999 shares of common stock were issued on April 1, 2017 due to the achievement of certain sales targets as well as continued employment of certain key employees acquired in the transaction, which was recorded as compensation expense. The acquisition is expected to enhance the Company’s efficient and consistent access to high-quality leads in existing and new markets.

Note 4. Fair Value Measurement

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued

At December 31, 2018 and 2017, the carrying value of receivables, accounts payable, accrued expenses and distributions payable to noncontrolling interests approximates fair value due to their short-term nature and falls under the Level 2 hierarchy. The carrying values and fair values of debt instruments are as follows (in thousands):



	December 31, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Bank line of credit	$	247,000	$	247,000	$	247,000	$	247,000
Senior debt	828,517		828,309		808,455		807,698
Subordinated debt	273,337		272,937		111,488		111,095
Securitization debt	400,068		394,756		95,821		96,999
SREC Loans	—		—		32,181		32,183
Total	$	1,748,922	$	1,743,002	$	1,294,945	$	1,294,975

At December 31, 2018 and 2017, the fair value of the Company’s lines of credit, and certain senior, subordinated, and SREC loans approximate their carrying values because their interest rates are variable rates that approximate rates currently available to the Company. At December 31, 2018 and 2017, the fair value of the Company’s other debt instruments are based on rates currently offered for debt with similar maturities and terms. The Company’s fair value of the debt instruments fell under the Level 2 hierarchy. These valuation approaches involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market.

The Company determines the fair value of its interest rate swaps using a discounted cash flow model that incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and an evaluation of the Company’s credit risk in valuing derivative instruments. The valuation model uses various inputs including contractual terms, interest rate curves, credit spreads and measures of volatility.

At December 31, 2018 and 2017, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):



	December 31, 2018
	Level 1		Level 2		Level 3		Total
Derivative assets:
Interest rate swaps	—		6,958		—		$	6,958
Total	$	—	$	6,958	$	—	$	6,958

Derivative liabilities:
Interest rate swaps	—		11,910		—		$	11,910
Total	$	—	$	11,910	$	—	$	11,910



	December 31, 2017
	Level 1		Level 2		Level 3		Total
Derivative assets:
Interest rate swaps	—		1,917		—		$	1,917
Total	$	—	$	1,917	$	—	$	1,917

Derivative liabilities:
Interest rate swaps	—		8,568		—		$	8,568
Total	$	—	$	8,568	$	—	$	8,568

Note 5. Inventories

Inventories consist of the following (in thousands):

Sunrun Inc.

Notes to Consolidated Financial Statements — Continued



	December 31,
	2018		2017
Raw materials	$	64,256	$	87,927
Work-in-process	15,211		6,500
Total	$	79,467	$	94,427

Note 6. Solar Energy Systems, net

Solar energy systems, net consists of the following (in thousands):



	December 31,
	2018			2017
Solar energy system equipment costs	$	3,823,853		$	3,124,407
Inverters	396,054			317,390
Total solar energy systems	4,219,907			3,441,797
Less: accumulated depreciation and amortization	(535,891		)	(399,280		)
Add: construction-in-progress	136,001			119,053