Good day, ladies and gentlemen, and welcome to the Sunrun Inc. Third Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Patrick Jobin, Vice President of Investor Relations. Sir you may begin.

Thank you, operator, and thank you to those on the call for joining us today. Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note that these statements are being made as of today, and we disclaim any obligation to update or revise them. On the call today are Lynn Jurich, Sunrun's Co-Founder and CEO; Bob Komin, Sunrun's CFO; and Ed Fenster, Sunrun's Co-Founder and Executive Chairman. The presentation today will use slides, which are available on our website at investors.sunrun.com. I’ll now turn the call over to Lynn.

Thanks, Patrick. We are pleased to share with you Sunrun's third quarter financial and operating results, along with progress against our strategic priorities. In the third we deployed 90 megawatts generating $93 million of net present value, up 21% year-over-year. We've now grown market share for multiple quarters while expanding our NPV margins. This has allowed us to generate cash and add value to our net earning asset. We created NPV per watt of $1.15, the highest margin result in the Company's history, highlighting the progress we have made to drive cost efficiencies while offering valuable products. Recording the highest NPV per watt is particularly rewarding considering the significant investments we are making in future growth and entry barriers through advanced products, grid services and new markets. Sunrun has well over 160,000 customers who are enjoying the benefits of going solar. We are proud of what this means for customers and the climate. Too many times this quarter, we were reminded of the great need to combat climate change to lessen extreme weather events, and we are humbled to be a part of the solution and excited by the strong consumer and regulatory demand for our solar-plus-storage, BrightBox offering. Our customers love their solar service and have a relationship with them for 20-plus years. The expansive value of these relationships is being recognized by our strategic partners. Our National Grid partnership will develop the upside in our customer value through grid services, and Comcast will develop value through additional home services, customer retention benefit and high satisfaction. First, storage and grid services in our partnership with National Grid. We can both help our customers save money and lower prices for the entire electric system. Demand for BrightBox is strong. Our customers are now choosing to add storage over 10% of…

Thanks, Lynn. In the third quarter, we exceeded our deployment guidance and recorded the highest NPV per watt in the Company's history. NPV was $1.15 per watt in Q3, resulting in aggregate NPV created of $93 million, representing 21% growth compared to the prior year. We're raising our full year target for NPV per watt to $1.05. While NPV per watt can fluctuate from quarter-to-quarter given business mix, Q3's strong results highlight our leading position and our continued focus on managing the business to drive NPV. We're particularly pleased with the unit economics we achieved this quarter, especially as we invest resources in additional product offerings such as BrightBox, our solar-plus-storage offering; grid services initiatives with National Grid; and in new market entries. We calculate NPV as project value less creation costs. Let's go through each of the components. Q3 project value was $4.49 per watt, just $0.02 higher than Q2 and $0.06 higher than last year. As a reminder, project value is very sensitive to modest changes in geographic channel and tax equity fund mix. We expect project value will decline slightly over time, but with costs declining more, although in the short run, there can be quarterly fluctuations. Turning now to creation costs on Slide 3. In Q3, total creation costs were $3.34 per watt, an improvement of $0.02 year-over-year. Similar to project value creation, costs can fluctuate quarter-to-quarter due to changes in geographic and channel mix. As a reminder, our cost deck is not directly comparable to those of our peers because of our channel partner business. Blended installation costs per watt, which includes the cost of solar projects deployed by our channel partners as well as installation costs incurred for Sunrun-built systems, increased slightly by $0.09 or 3% year-over-year to $2.72 per watt. The slight increase…

Thanks, Bob. Today, I want to touch on a few items. First, I'll review growth in gross and net earning assets; second, I will discuss our capital structure strategy; and third, I'll provide a brief update on the Section 201 trade case. Turning first to our installed asset base on Slide 12. We're that net earning assets increased by $97 million in Q3, ending the quarter at $1.2 billion, reflecting a 24% year-over-year increase. As a reminder, net earning assets represents the present value of cash flows that Sunrun Inc. expects to receive from our fleet of deployed solar systems after deducting estimated operating and maintenance costs, project level debt service and distributions to cash, equity and tax equity partners. For both tax equity and non-recourse debt, we continue to experience gradually declining capital costs and increasing depth of market. We have tax equity and back-leverage capacity well into Q2 of 2018. As always we consider options to balance our goals of maximizing long-term equity returns while delivering upfront cash flow while minimizing our exposure to changes in base interest rates. On Slide 13, we set forth the two strategies we employed this year to capitalize assets. Earlier this year, we completed a cash equity structure, which prioritizes upfront cash. This quarter, we closed a loan structure, which prioritizes long-term value. Because we aim to balance upfront cash with the creation of long-term value, we are employing a mix of the two strategies. Both structures continue to be available to us, and next year, we may again make use of both markets. For the curious, I will spend a few minutes discussing how we think about balancing these objectives. In a cash equity structure, we receive cash upfront equal to approximately 95% to 100% of contracted project value. In addition,…

I think that's it. Professor Ed closes the call, so let's please open the line for questions.

[Operator Instructions] Our first question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hi guys, thanks for taking the questions. I just had a couple here. Maybe first for you, Lynn. On the at-or-above 15% outlook for 2018 volume growth, how much of that do you expect to be Sunrun-specific, i.e., continuation of the share gains you saw this year? And then how much is going to be due to the overall market picking back up? And then related to that, I guess, what are some of the GOs or drivers or other factors that you're able to point to for the confidence in the reacceleration that you hear?

Sure. Thanks, Brian. The way we always model this is really bottoms-up. So we look market by market, channel by channel, which acquisition channels do we think deliver the best NPV, and that's the result we come to. I think, if we look at the next couple of quarters, there are some challenges due to the weather. Two of the new markets we entered into were Arizona and – or excuse me, Florida and Texas, as you know. And then there were the wildfires in Northern California. So that's a little bit of what's keeping that growth rate in Q4 at that 12%. But with the combination of the – just existing market being underpenetrated and us getting smarter on how to acquire customers, plus the fact that over the last couple of quarters we've doubled our available market size, plus the Comcast relationship that obviously has reach to six million customers in our current operating footprint, we're confident in that 15% growth number and really, again, stand by the fact that this is an industry that can grow 15% to 20% CAGR for a long time when you look at where penetration is. The other things that are very exciting on that longer-term frame is what's happening with storage. So we're – I think I've always looked at the per unit margin, and certainly Sunrun has been oriented around generating that and are pleased with our results. There's also just increasing value per customer to be had, and so that's another area we're going to be exploring in 2018 and beyond through the grid services, through the storage, through the partners with Comcast. And then one other highlight I want to offer is just that, for a while, a lot of the questions were around what's happening to California. And some of the popular discourse was, okay, is this market flattening off or tapering off? And we're really pleased that, in the quarter, we saw strong growth in California that seems to be rebounding. And especially as you throw storage into the mix, it really – with the time of day rate, there is a very compelling customer value proposition and so California looks like a very bright spot going forward.

Okay, great. And I appreciate the color. Just second question, I'll pass it on, was on cash flow. In the second quarter, you guys talked about $20 million of cash generation ex the acquisitions. And it looks like you did an incremental $10 million in 3Q on the National Grid-related cash flow. And then overall, that netted to positive cash flow of about $4 million. So question is, first, is my math apples-to-apples and in the right ballpark? And then if we look at Q4, I know you're making some comments around the pull forward in cash usage, but if we x out the module purchase and then the acquisitions-related cash again, what would net cash flow generation have been targeted to be for Q4? Thank you.

Sure, Brian. So this is Ed, so I will start. So the way that we think about the business, obviously, is that in each quarter, we earn a certain amount of net present value that sort of goes into the piggy bank. And then based on how we capitalize the assets in the quarter, some of that shows up on our balance sheet as cash and some of that adds to the net earning assets that we report as well. And so if you compare Q3 to Q2, you'll see Q3 was actually a significantly stronger quarter when you look at the change in net earning assets plus the change in total cash. Nevertheless, we did add to the cash balance in each of the two quarters. Bob had made the comment on the call that excluding the two one-time items discussed, we would expect total cash generation for the year of approximately $40 million. And so you could add that to the cash result for the first three quarters to estimate the Q4 change in cash that we anticipate.

And I would just say, you – so you are thinking about it right, Brian. And this is a big deal. We're excited for where we are right now. This is – again, we're taking share. Again, our margins have expanded, and we're generating positive cash flow while adding to this asset base that we can continue to tap and refinance. So it's – it was a big milestone last quarter when we crossed over that, and we're extremely thrilled to project that, that's going to be $40 million for the year.

Okay, that’s great. I’ll follow-up offline on some of the more specifics. Thank you.

Thank you. Our next question comes from Julien Smith with Bank of America. Your line is now open.

Hey everyone. This is actually Josephine [ph]. How are you guys?

Great, thank you.

So congrats on the recent financing. I was wondering, moving forward how should we think about cash equity Term Loan Bs on a per megawatt basis for deployment? Like are we going to see a greater shift in the advance rate?

Yes, so I think, as I was mentioning on the call – so that's a great question, Josephine [ph]. This is Ed. We are – we aim to balance these two uses of capital and generally want to achieve a return on equity on our own capital of at or above 15% where we're holding on to pieces ourselves. So the exact mix will be determined based on the prevailing market conditions in these two markets, but it's a reasonable expectation from where we sit today that we may execute on a mix of these two transactions next year similar to what we did this year.

Got it. So that you have either a little bit of cash equity or Term Loan B depending on where you – on how you want to use it?

Correct. I mean, we have – the good news is our unit economics are such that we have great flexibility with how we finance the business. And so really at this point, we're just optimizing on the capital structure and wanting to ensure that we're adding to cash while also building long-term value. Both of these markets are available to us in the future, and it'll really just be an on-the-margin analysis as to how we optimize. But we do expect to execute very likely in both markets.

And then on the battery storage, I know that's still in the early stages, but I was wondering, how do you think of terms about revenue contribution in the market that you are using batteries? And then also in terms of like what is the tax equity interest in funding the solar plus battery project?

Sure. Great question, and such an exciting growth area for us. I'll take the first piece, and then Ed can add on the tax equity piece. I think, again, the storage adoption rate at California at 10%, I think, is still growing and will grow pretty decently. When you just look at the customer value proposition with the time-of-day rate structures in many markets, a big portion of the state, it's more cost effective to install the battery plus the storage. And just like we were a leader in delivering solar as a service in the beginning, we are the company that's delivering the battery plus solar as a service. And so we like our position there. We like our ability to really take share in that market. So you're going to see higher project values and higher NPVs through that in California. We think, in other markets, the value proposition is more about backup at this stage, so I think you're going to see adoption rate closer to like what a generator adoption rate would be like for now. But as the grid services stuff comes online – and this has surprised us with how many RFPs there are out today that we're working on with National Grid, but the – if you're able to rely on capacity payments for that storage in many markets like New York and perhaps Massachusetts and California, now you're able to subsidize a bigger portion of that battery and drive more adoption. So we're still working through what the 2018 plan is, and as we talk with you guys next quarter, we'll have some more insight into that. But we like it structurally for our competitive position. We like it for our customer value. And we like it, frankly, because it really takes away a lot of the regulatory risks that people – that we've been hounded on around that metering over the years. And the growth – just to close, again, the growth in California was twice this quarter what it was. They – excuse me, twice this quarter what it was last quarter. So fast acceleration. So Ed, you want to talk about tax equity?

Sure. So maybe just to summarize first. We are absolutely not constrained by our capital sources in the deployment of batteries, and we do not expect that we will be constrained in the future. I think, like everyone who follows the industry, folks who provide project financing, no batteries are the future and that it's important to integrate them into systems. What lenders and tax equity investors want to know is that they work and that we've been thoughtful about it. So we've done enormous analysis, testing, projections, analysis of our existing installations. Like anything else, if you present the right, correct, thorough data, rational actors act rationally. And so we expect the market to be very supportive of the deployment of solar plus storage, and certainly, we experience that in our current transactions.

Got it, thank you, Ed. And then last one and I'll pass it on. I was just wondering, I know that you include the contracted portion of the abstract in your revenue, specifically for the northeast part of your like portfolio. But I was wondering, how do you think about like the uncontracted portion about that? And how much value is there that might not be captured right now?

Great question. So this is Ed again. So again, in keeping with reporting sort of conservative metrics, we have not included the value of uncontracted renewable energy credits in our reported metrics. There certainly are curves available from brokers and other parties that would allow someone to estimate that value. We don't think it's appropriate from where we sit to make those estimations, but we do agree that there's considerable upside in the value of our fleet that will arise from those renewable energy credits as they are contracted and sold in the future.

And then just maybe to quickly follow-up, like in terms of how much is contracted there, is that like a three-year period? Am I thinking about that correctly?

Typical contracts in solar renewable energy credits vary, but most contracts tend to be in the three to five year range.

Got it, awesome. That’s all on my end. Thank you very much for taking my questions.

Thank you.

Our next question comes from Vishal Shah with Deutsche Bank. Your line is now open.

Hey guys congrats on a results. This is Rachel on for Vishal.

Hi, Rachel.

So first question is a clarification. So for the project value, do you guys include any of this – the $2,000 customer value for solar plus storage and also the grid service payments?

No, those are not included. That would be outside.

So contracted payments – well, payments that customers are contractually obligated to pay us will show up in project value. But additional revenue from utilities or ancillary services would be an addition to that and are not reflected in project value.

Okay, okay. So if you – so the customer payment for your BrightBox products would be included?

Okay.

So just along those lines, do you guys have any color around, as the storage attachment rates goes up, what kind of upside – is $2,000 even conservative? What kind of upside are we expecting to see from a project value perspective?

It's really too early to say still. And that – and I'm glad you asked about the $2,000 too, because that is really directional, and it's going to be highly locational. And that's one of the real values of our asset as compared to more in front of a meter, utility scale-type storage is that the congestion in power prices vary hugely based on like neighborhood to neighborhood, right? And so like it can actually be extremely valuable in certain targeted ways, and I – we're just at the early, early days of figuring how to monetize that, and how do you pitch it to a consumer and who shares in the value? And that, again is one of the things we're exploring with National Grid. That's one of the reasons why we believe there will be a really strong entry barrier in this market as companies like Sunrun now we're amassing the largest fleet of customers, of happy customers, and we're able to figure this stuff out and take advantage. But I will tell you that there is a lot of real-time bidding happening on these RFPs and particularly in New York and California.

Great, great. That’s very helpful. So the second question is about the customer acquisition cost. So your direct business and also your channel partners, in terms of the customer acquisition cost, which is bundled in the install cost, we see that kind of trending up. And we also heard maybe in the industry there's a lot of – there's potentially more competition there on the dealer side. Can you maybe give us some color around that? Thank you.

So we focus on managing and the mix that we have, both among how we go to market and the channel versus what we do direct to optimize for NPV. So for us, as we look out quarter by quarter, it really depends on what we're seeing in the marketplace. Most recently, we've had more favorable – we've had favorable channel mix that has benefited the company. But going quarter-to-quarter that can change. And as we look into 2018 with new sources of demand, that mix could change. What we're finding is that the customer acquisition costs for us – for others, I think you have seen costs going up. For us, it really depends on channel mix. We have optimized over the last year or so and improved our customer acquisition approaches, and we'll just continue to do that and continue to manage to NPV. We just put up the best NPV quarter we've ever had, and we think we can continue to do that going forward.

So approximately, what percentage of the deployment is coming from channel partners?

Yes. We have not typically disclosed what the mix is, and it's because it does vary and because we do manage it. We don't try to manage to specific mix targets.

Okay, great, thank you. I’ll pass it on.

Thank you.

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. Can you guys talk a little bit about the drivers for the cost reduction on the built systems? It's a pretty material number. Are there technologies that you're using that are enabling quicker installs? How can we think about that?

Really, the year-over-year improvement was largely driven by us seeing material cost improvement. And then there has been a component that was smaller that was due to labor and other soft cost efficiencies, but the bulk of it was due to material costs year-over-year declining.

Okay. And given what we're hearing about module prices and in order prices at this point, how are you thinking about potential cost reductions as you exit this year and into 2018?

So I think, as far as the proposed trade actions and things like that, we think that the range of potential impact, if it was adopted, is very small on our overall cost structure. It's on the order of like 3% of our total creation costs. So we think that – and that would be at the high end. There's other components of that, that could be absorbed in the channel and in other ways. So we don't think it's going to be a material impact on our overall cost structure going forward.

Okay. And if I can sneak one last one in, it's a little bit more philosophical. With one of your biggest competitors really losing a substantial amount of market share and your velocity capital picking up here, why not think about growing at an accelerated rate versus what you have – you've done in the past?

I love the aggressiveness. I feel like we love our position right now. We think we're absolutely on offense, and the share gains that you see, we think, are pretty strong. And we, as always, and why we didn't get into trouble where other people did, is we focused on cash flow and value creation and so it's really a balance. And we were asked that same question three years ago and we're like we're growing for sustainability, and that's where it sits today. So you're going to – that's – we're doing this for the long run, and our view on this market is like you don't get markets as big as this in your career often. And we're at the very early stages, and we're going to be as prudent as possible to set up the right strategic framework so that we're still talking to you in 15 years and we're not a $600 million migration.

Okay, great. Thank you so much.

[Operator Instructions] Our next question comes from Sophie Karp with Guggenheim Securities. Your line is now open.

Hi, good afternoon guys. Thank you for taking my question. I have a couple of questions. Ed, you mentioned that the cost from the trade action that – as is proposed would not be that material to you. But with that said, do you plan to drop some markets where you're in right now in favor of the others as a result of this temporary dislocation in the market? Or is it just not material at all?

Hey, Sophie, it's Ed. So I think I want – and maybe to reiterate a couple of things that we were making – we were saying on the call is that the high end of the current recommended tariffs would be something like $0.12 a watt. If that occurs, you would expect it to be partly absorbed by suppliers, channel partners, customers, changes in renewable energy, credit pricing and the investment tax credit in addition. And so with that, and then also combined with the fact that we have secured consistently attractive pricing on modules well into next year, even if one of the recommended tariffs is implemented, I think we feel very good about our current position. The trade case generally, I think, has been a little bit of a distraction for the industry. The purpose of trade laws, as I mentioned, is to create employment, not to eliminate it. The coalition that has been amassed in opposition of these lenders to two bankrupt companies is unlike anything I've ever seen before. And we expect – we obviously manage risks prudently, but expect to push forward with the business.

Great, thank you. And then on the inverter side, are we going to see any meaningful innovation anytime soon? Several players promised – in the space promised, I guess, to deliver new products. Highway promised outright and Fusion home product. Is that something that you see coming soon? Or is it still kind of distant future?

Yes. I mean, we see hardware advantages are going to happen through everything, storage, in inverter in particular, over the coming period of time. And in particular, in storage on the string inverter – or excuse me, on – inverters on the string inverter side, we see increasing competition there, and that could be a nice source of lower costs coming forward.

Right, thank you.

All right. Well, thank you, everyone. We're really pleased again to share the record results and the share gains and are looking forward to speaking with you again next quarter with some more specifics on 2018.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.