Good day, ladies and gentlemen, and welcome to the Sunrun Incorporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Patrick Jobin from 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 the 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 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. And now, let me turn the call over to Lynn.

Thanks, Patrick. We are pleased to share with you Sunrun’s second quarter financial and operating results along with progress against our strategic priorities. In the second quarter, we added more than 12,000 customers representing 20% growth in megawatt deployments. This result exceeds guidance and represents the highest quarterly volume in the company’s history. In the first half of 2018, we generated $142 million in net present value and created NPV per watt of $1.03 or over $7700 per customer. We are excited to announce that we have surpassed 200,000 customers. For a company that is disrupting a multi-trillion dollar industry, we learned a lot from winning these first customers that will make the next million easier. Throughout the past 11 years, we have solidified our position as the industry leader with scale, brand, technology and financial strength. I am most excited by what the next decade means for Sunrun and the families that want a superior energy service. A service that is customized to their energy means is more resilient and offers back-up power and contributes to healthier communities. Sunrun makes going solar simple, and we are committed to creating an exceptional customer experience, because our customers have chosen to be with us for decades. We are reiterating our full year guidance of 15% growth in deployments and growth in cash generation above this rate. This growth, plus investments in customer acquisition and product innovation will be achieved while delivering NPV above a $1 per watt for the full year. The opportunities in front of us are increasing our confidence for growth acceleration and continued market leadership. As the leading solar company in the U.S., Sunrun has the largest national footprint. We are capitalizing on this position by investing in our direct-to-customer acquisition, onboarding platform and customer experience capabilities which…

Thanks, Lynn. Customer NPV in the second quarter was approximately $7400 or $0.98 per watt. In the first half of the year, NPV per watt was $1.03, in line with our target levels despite the headwinds from tariffs and tax reform, along with the investments we are making to accelerate our direct business and product leadership. Project value per customer was approximately $31,100or $4.10 per watt in Q2, and for the first half 2018, it was $4.32 per watt. 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 cost declining more, although in the short run there can’t be quarterly fluctuations. For instance, in Q2, we had a higher mix of lower value and also lower cost, projects in our channel business that affected our metrics. We expect project value will return to levels more consistent with recent trends in Q3. Turning now to creation cost on Slide 6. In Q2, total creation costs were approximately $23,700 per customer or $3.12 per watt and were $3.29 for the first half of the year. Similar to project value, creation cost can fluctuate quarter-to-quarter. Creation cost per watt were 7% lower year-over-year. We expect creation cost will return to levels more consistent with the last few quarters in Q3 and expect them to sow modest declines for the full year even with the module tariff impact and as we continue to invest in growth in our direct business as Lynn described. As a reminder, our cost deck is not directly comparable to those appears because of our channel partner business. Blended installation cost per watt, which includes the cost of solar projects deployed by our channel partners, as well as installation…

Thanks, Bob. Today, I plan to address three topics. The benefits in the next decade of June’s IRS guidance to margins, especially to providers of residential solar as a service; changes during the quarter to gross and net earning assets and finally, our near-term capital strategy and pipeline. First on Slide 9, I want to illustrate how the recent guidance issued by the IRS regarding the investment tax credits will make managing the step-downs of the investment tax credit, especially comfortable. And we believe will cause increased market share for solar as a service. This June, the IRS clarified that by incurring at least 5% of project cost in advance, for instance through advance purchase of inventory, a company can delay the step-downs in the investment tax credits. In the most extreme example by making a large advance purchase in December 2019, we can continue to claim a 30% investment tax credit through December 2023, rather than have it phase down to 26% in 2020, 22% in 2021 and 10% in 2022. While we’ve not finalized our strategy regarding this opportunity, the rule has clearly a favorable development for the company and it presents more options to extend the higher tax credit levels. Our strong balance sheet and relationship with capital providers position us well to benefit from this guidance. In addition, the ability to delay the step-downs of the investment tax credit through this guidance exists only for solar systems owned by businesses such as Sunrun. It does not exists for homeowners buying and owning systems themselves. Although businesses and homeowners both enjoy a 30% tax credit today, the business and individual tax credits exists in different sections of the code and are subject to different phase out schedules and rules. As such, we would expect to see an…

Thanks, Ed and just wanted to correct one thing quickly at about 18 minutes in, Ed said, in Q3, net earning assets grew slightly while cash increased and that he meant Q2. So, we are through. Let’s open the line for questions please.

Operator can you queue up the questions?

[Operator Instructions] And our first question comes from the line of Michael Weinstein with Credit Suisse. Your line is now open.

Hi guys.

Hello.

Good afternoon.

So, Ed, thank you very much for that explanation of pass-through financing and how that’s going to be changing things going forward and also in this quarter. I guess, if things are lagging and this isn’t the first quarter we are really seeing an increase and it has a lag effect. So we should expect, if you look at Slide 13, we expect net earning assets to increase in future quarters to catch-up basically with the lags that’s happening there?

Sure, good question. So there are two components to the lags. The first one is on the income statement which depressed net income in the quarter, that should normalize beginning approximately next quarter and in a period where you might discontinue using a pass-through, you would actually see excess income. In terms of how we are describing net earning assets, on the slide, we are making a pro forma adjustment for that $36 million which we describe a little bit more details in the foot note. And at the time that that fund completes deployment and the assets are placed in service, that pro forma adjustment will go away.

Okay, so basically, it’s already factored in there and that’s so we are seeing, at least on Slide 13 it’s factored in?

Correct.

Okay. And one other question I had was, the – your guidance for the third quarter for megawatts deployed would imply a pretty steep number for Q4. Is there any reason why Q4 would be higher than past Q4s?

Yes, absolutely. So, Q4, so, a couple things that the growth particularly in the direct business is really strong and it’s supporting strong growth. So as we talked about, that’s 40% year-over-year and if you look sequentially, the growth rate from Q3 from Q2 was 10% and then that would imply the 13% again into Q4, which we feel very confident in hitting. I think what you are seeing with the Q3 year-over-year comp is that, on the channel side, it’s a little bit of a tough comp because, last year we had a lot of installations in Arizona due to the pull-forward of the change in the rate structure that was happening. So the channel comp is tough for Q3. But this year, we are seeing such strong order flow that’s a long-term trajectory overcoming the normal seasonality we’d see in the business.

Okay. Thank you. I think that’s it for me now. I’ll pass it on to somebody else. Thanks.

Thanks.

Thank you. And our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Hey, it’s Rebecca again on for Brian. So, tariffs have impacted the cost structure negatively to some degree, but the supply chain is being a lot of oversupply. So I was just wondering with the interplay of these two forces, where you stand on inventory. And what magnitude of pricing decline do you be expecting from what’s embedded in current Q2 results for the next several quarters and if that extends into 2019 what cost declines do you expect to see in panels and maybe inverters as well as you see pressure there?

Great questions. So, I think in terms of equipment cost, we definitely are seeing spot prices sort of across the board declining, panel prices on a spot basis are probably approximately back where they were a year ago prior to the run up in price ahead of the section 201 tariffs. We likely, due to inventory wouldn’t see that rolling through the P&L until the fourth quarter of this year. We also are seeing, generally speaking, declines in inverter prices. Those could fluctuate a few pennies one way or the other depending on how the tariff situation plays out. But generally speaking, I think any price increase arising from tariffs ought to be temporary, because our – the suppliers in the industry are just playing a little bit of musical chairs on what factories and what market supply, what markets and we also just are in such a global world these days that supply chains can adapt. That said, the increased attachment rate of batteries will drive costs higher. Although we do believe that over the next year, battery cost power electronics related to batteries and labor cost related to the installation of batteries will all be declining. So those factors are all at play. Can you, let me know if there are other components to your question that I didn’t answer. I tried to reach all of them, but I may not have been writing fast than others.

Because from - like a – from a headline number that you are going to see slight declines in the overall installation cost through the rest of the year, but there is going to be these competing factors, so it’s like we are going to see the operating leverage from the strong growth offset by the pickup in the battery cost adding to this back.

Yes, okay. Thanks for the color and I think you got it all. So, and just as a follow-up, you have a number of growth avenues kicking here in here in 3Q with further leasing, the Comcast partnership and a battery entry and then new state with Illinois. Can you just rank order of those? And how they are going to contribute to volume growth in the near-term and any comments?

Sure, sure. We – again, we are really thrilled with the demand environment and our position here on the direct. So, you hit the big one. So, retail, we are really bullish on retail. That’s an area that, it’s a channel we like. We know how to operate it. We’ve been in cost and –for a while now and we are given that retailers are also recognizing that this is a really profitable category for them. We are in discussion with four national chains that we are talking to today. So, I mean, you won’t see that that short-term. You are not going to see that in Q3, but it sets us up for really nice position for next year. Similarly with Comcast. The Comcast partnership is also progressing very well. The thesis we entered into is really holding, meaning the acquisition cost is attractive for us. For Comcast it’s delivering the funnel expectations that they were expecting and so, as we said in the past, it’s something that is a multi-year partnership. They are a large company and we are learning into it together. But we are also encouraged by the potential for that partnership, again, not in Q3 by contributor, but something that sets us up for longer-term growth rates. And then the new markets as well. I think all the new markets we entered into over the last couple of quarters are strong and are proving to be good long-term markets. So they are meeting our expectations. We think they are durable and they also help – will certainly help contribute. So, that’s part of getting back to Michael’s question why we are so confident that the back half in aggregate will grow above 20% year-over-year and why we are confident that this growth acceleration is happening and should happen into 2019.

Okay, thanks. I’ll pass it on.

Thank you. And our next question comes from the line of Philip Shen with Roth Capital Partners. Your line is now open.

Hey guys. Thanks for the questions. The first one is a follow-up on the Q4 outlook. You just talked about the strength coming from your direct business. To what degree does that gives you confidence that you can see that strength going into 2019? And if you can quantify in anyway, I know you are not providing official guidance, but, and so far as you can kind of give us your view of how 2019 might be shaping up. That will be great?

Yes, absolutely. So, I think, we’ve – the question I just answered previously kind of hits on a lot of the driver that are going to help support that strong growth. But if you just look at again, with the Q3 guide, what that implies for Q4 is, I believe that would be north of, kind of 30% year-over-year growth rate. If you look at Q1, from last year versus what we expected in this year, certainly, we expect very, very strong year-over-year growth. And so, it’s too early for us to make a comment on officially the guidance for 2019. But it’s certainly accelerating the growth rate.

Great, thanks for the color there. Let’s shift to storage. You talked about, I think 20% attach rates in California and some regions within California being 60%. There is tightness of battery availability and we are hearing of lead times of six to seven months. So, my sense is that the release there might be in first half of next year in terms of supply anymore batteries come online. But assuming supply was not a constraint today, how much lean demand would there be? For example, what I mean by that is, how much are you not able to serve because of batteries, of supply constraints?

We are in a position where we are comfortable with battery supply through the end of the year and already have procurement in place for that. So, as we stated in the prepared comments, we will expect to install more than double the amount of Brightboxes back half of the year versus first half of the year. So, very strong growth with supply. And so, I do – we do agree with you that given how big this market is, there is we are seeing a lot of people come into the market and that should bode well for next year both on the cost side and on the supply side. But we are well positioned through the end of the year which should again give us an advantage when other people are going to take them.

And particularly, as more battery manufacturers come online, cost will decline making the value proposition more attractive. So those are all positive features, but to Lynn’s point, our supply situation for the year is secure.

Great, thank you both. I’ll pass it on.

Thank you. And our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. It’s Colin.

Hey Colin.

So, thinking about this advantage on the tax equity structure and rising rates, can you talk a little bit about the pricing strategy over the next three or four years? It seems like you might be in a position to accelerate some growth by not raising prices quite so much, especially free up the managed cost. So, I just want to think about the puts and takes that you guys are considering and how you might go through that decision-making process?

Yes, great question. I think if you are referring to my discussion around the investment tax credit, I think what we are just trying to illustrate is, the many degrees of freedoms and ways one can end up with a higher margin business in 2024 than today. And so, what we tried to chart here was just – what you have to believe for neutral and there we said, look, let’s conservatively assume 2%, that will charge 2% more per year to the customers. PA consulting performance studies, looking at our top markets and concluded a 10 year CAGR of approximately 3.6% in those markets. So, we thought like the 2% is conservative. We have a history of taking out about 9% from our cost structure every year. So the 4% number here is conservative. So we feel like we have a lot of degrees of freedom in that department. In terms of interest rates, obviously, we are continuing to see spreads decline. So far spreads have been declining faster than base rate has been increasing. If that trend works, you see we still have a nice tailwind which is that, we are not the only energy company that cares about interest rate. So, our major competitor is the electric utility. About two-thirds of the cost of a residential utility bill in the markets that we operate in is the amortizing capital cost of the utility and as utilities caused us debt and equity increases, regulators pass those cost through to customers and utility rate escalate. And if you look at a 50 year history of retail extra grade, you’ll see a very strong correlation between rate escalation and interest rates. So if we do end up in a higher interest rate environment, then the market expects which the future interest rate market does show it’s approximately flat around 3 or the low 3s for a 10% - sorry, for a ten year treasury. You would expect to see escalating retail rates. Finally, as it relates to our existing book of business, we are approximately 90% hedged on our existing fleet. So those rates are locked in and most of those are slots which are even independent of the specific loans that we have on the balance sheet.

And then, I would also - I think, I think, Colin, you had also just asked about, there is implicit in that question I think price elasticity and what we have found historically is that, there isn’t a huge difference in adoption when you – once you kind of hit a 20% savings threshold. If you go further there isn’t a real increase in adoption necessarily people are choosing for other reasons and particularly over the long run, our vision for this in over time, probably a 100% of systems that are going to have batteries attached to them which changes the value proposition, again, away from a savings type of methods to more of a control, reliability type of value prop to the consumer. So, we will always look at that price elasticity trade-off. But, we do believe that with the expected rate escalation, there is room to move the price up.

Great. And then, I guess the next question is related to the attach rates on the batteries and the portfolio impact to actually enter into the grid services market as an incremental source of cash flow. There is a fair amount of speculation around how prepared the technology is really enabled that functionality. I guess, my question is two-fold. One, can you talk about how much of your portfolio really is capable of that sort of modular control? And then, secondarily, how should we think about that just starting to enter into our future cash flows and from a timing perspective just initial cash flows and how it might scale up?

Great question. I think the short story is the capability all exists today, it’s a little bit more manual than I expected will be in a few years as it scales. We will be putting over top of it automation to make that simpler. But certainly the plumbing to provide grid services with batteries today exists.

And I would also add that, consumers are willing to do it as well. So the early indications around our consumers willing to what the utility drop in the battery have been positive. So, that’s obviously an important factor as well. But in terms of major contributing to cash flow, I mean, again a lot of these projects that we are working on these were, these are long-term planning cycles. So these are two, three years out, when you think about the projects in any sort of meaningful scale that we are looking at. But we feel confident that technology will work and will be there.

Perfect. Thanks so much to you guys.

Thanks, Colin.

Thank you. And our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.

Hey guys. This is actually Eric on for Julian. But, just a quick question on – you discussed further lower project value. In 2018 that there was some lower value higher cost projects in the quarter and do you expect it to be more normalized going forward? But what is driving that primarily? Is that entry into lower value markets? Just wanted to clarify.

Yes, we said, to be clear, we said, lower value also lower cost and remember, in our channel business, especially we price to NPV. So, the mix – there is a bunch of mix effects and when we look at those projects, it’s NPV-driven. So, the NPVs on those were fine, but they were lower in this quarter than in some previous quarters.

Gotcha, gotcha. And then, so, what was primarily driving that? Just choosing to go for maintaining the NPV in the unit economics presumably?

Yes, it really – it can fluctuate quarter-to-quarter. It’s sensitive and it fluctuates depending on just various mix effects that we have.

To mix, the pricing that the channel has on their contracts…

I mean, just very simplicity, if someone presents you a contract that you think is worth $4, you might pay $3 for it and if someone presents you one that’s worth $3, you might pay $2 for it.

Gotcha. And then, just going on touching upon the ITC Safe Harbor. What sort of strategy was that in terms of expanding? Are you planning to expand more aggressively into new markets as well with the ITC Safe Harbor in hand and that’s what’s changed like long-term deployment guidance expectations?

So the ITC Safe Harbor obviously provides us fantastic optionality and we have a good deal of time to decide exactly how we want to execute it. As we watch our own costs and political forces and other things unfold. It also certainly will drive, we think a mix shift towards solar as a service or leased product and away from homeowner owned or loan products. The exact size and execution strategy, we won’t be determining and so we get closer to the end of next year, but we have a lot of options and are starting to consider that in due course. Our balance sheet is strong. We have good relationships with capital providers as well. So, we have a lot of flexibility on how we might execute against that strategy.

Gotcha. So we should expect further commentary on the strategy in later calls.

Correct.

Correct.

Correct.

Okay, thank you.

Thanks, Eric.

Is that everything?

That’s everything.

All right. Well, thanks everybody and we’ll speak with you again soon. Take care.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.