Good afternoon, ladies and gentlemen, and welcome to the Q4 Sunrun Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Patrick Jobin, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator; and thank you for 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, 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 fourth quarter and full-year financial and operating results along with progress against our strategic priorities. In the fourth quarter, we added more than 14,700 customers, representing 115 megawatts of deployments; again, breaking the record for the highest quarterly volume in the Company’s history. We generated $116 million of net present value and created NPV per watt of $1.21 or over $9,600 per customer. In 2018, we executed our full year volume, NPV margin and cash generation targets. We grew deployments over 15% in the year. We added almost 50,000 customers growing our total customer base by 29% and closed out the year with about 233,000 customers. We are excited about the year ahead. We are introducing guidance for growth to accelerate in 2019, unit margins to expand further and cash generation to grow by more than 50% to over $100 million. These strong financial and operating results can be achieved while continuing to invest in our customer experience and product leadership. By the end of 2018, we had installed nearly 5,000 Brightbox systems and we expect Brightbox installations to grow in the triple-digits in 2019. We have already launched the service in eight states and it represents over 10% of our direct business and more than 25% in California. Brightbox provides customers with backup power, ability to manage time-of-use pricing and offers Sunrun additional revenue strength through energy services. It also protects us against attempts by incumbents to undermine the value of residential solar. Today, we announced a large expansion with the Home Depot, further demonstrating the advantages of being the category leader. We will offer our solar and Brightbox battery service at Home Depot stores in 15 states, including California. We expect installations arising from the new stores to…

Thanks, Lynn. Customer NPV in the fourth quarter was approximately $9,600 or $1.21 per watt. For the full year 2018, NPV per watt was $1.08, in line with our target levels despite the headwinds from tax reform and tariffs, with continuing investments in growth and product leadership. Project value per customer was approximately $34,900 or $4.38 per watt in Q4. As a reminder, project value is very sensitive to modest changes in geographic, channel and tax equity fund mix. Turning now to creation cost on Slide 9. In Q4, total creation costs were approximately $25,300 per customer or $3.17 per watt. Similar to project value, creation cost can fluctuate quarter-to-quarter. Creation costs per watt were down 4% year-over-year. We expect creation cost to show modest declines for the full year 2019, even as we deploy more Brightbox battery systems. As a reminder, our cost tax is not directly comparable to those of peers 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 costs incurred for Sunrun-built systems, improved by $0.13 year-over-year to $2.48 per watt. Install costs for systems built by Sunrun were $1.96 per watt. We expect the adoption rate of Brightbox batteries to continue to increase, which will carry a higher per watt cost, but also a higher project value. In Q4, our sales and marketing costs were $0.65 per watt. Our total sales and marketing unit costs are calculated by dividing costs in the period by total megawatts deployed. A higher mix of direct business results in higher reported sales and marketing cost per watt, and it also means that there will be lower blended installation costs per watt over time due to the higher mix of direct business…

Thanks, Bob. Today I plan to recap our December asset-backed security issuance and discuss our capital strategy for 2019. I will also review net earning assets and capital runway. Over the last decade, strong asset performance has led the cost of capital for residential solar assets to improve steadily. That said, general market turbulence in November and December, when we priced our $322 million ABS transaction, bucked the trend a little. Despite the imperfect market conditions, we are pleased to have exceeded our cash guidance for 2018. Although the cost of debt wasn’t all that we had hoped, we achieved the lower yields and a substantially higher advance rate than the other residential solar lease securitization in market at the time. The print suggests that our capital cost advantage versus competitors is amplified during imperfect market conditions. First for the industry, our transaction is also fully amortizing and in about five years callable, thereby both reducing risk and preserving refinancing upside for the future. The note priced at a yield of 5.55%, but by January it had already traded up in the secondary market to a yield of 5.16% and market conditions continue to improve. In December, we also closed a subordinated loan against the same asset pool as the ABS transaction. This loan is similar in nature to the National Grid project equity transaction, but structured as non-recourse debt. The loan is callable after the underlying tax equity fund slip affording us refinancing upside at that time. The total advance through tax equity, the ABS transaction and the subordinated loan implies an advance against 20-year project value in the 95% to 100% range, consistent with our prior comments. Looking forward, we still see the opportunity for higher advance rates and lower capital cost when refinancing seasoned assets. We expect to execute such a transaction by midyear. For the full year 2019, we remain confident we can achieve more than $100 million in cash flow. We also expect that number can grow in years to come. I note this view of our free cash flow is presented before considering the impact of any inventory pre-purchasing we may do to preserve access to the investment tax credit at 30% rate into 2020 and beyond, given the high expected return on capital associated with such purchase. As the year progresses and our financing plans take firmer shape, we will update our outlook for cash generation accordingly. Moving to Slide 11. At quarter-end, net earning assets was $1.4 billion, an increase of $222 million or 19% year-over-year. Cash was $304 million, an increase of $63 million or 26% year-over-year. Net earning assets is our way to describe the value of the cash flows to Sunrun shareholders after payments to financing counterparties. Turning finally to our pipeline, our debt and tax equity capital commitments already provide us runway well into Q3. And with that, I’ll turn the call back over to Lynn.

Thanks, Ed. Let’s please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Michael Weinstein with Credit Suisse. Your line is now open.

Hi, guys. Very good print on the growth for this year, that’s expected. One thing I wanted to ask you about was the Comcast deal. And maybe you can give us an update on how that’s going. I think you were expecting 6,000 to 8,000 customers this year through that. And I’m wondering if you can compare the cost per customer at Comcast to whatever the mechanics of the deal is or with Home Depot.

Sure. One of the things we’re excited about in terms of the guidance and what we think underscores that our acquisition mix is getting ever more attractive is that we’re expanding the margin. So we finished this year with $1.08 in NPV and we’re expecting north of $1.10 in 2019 and that’s despite a pretty heavy ramp in Home Depot. You might imagine that you spend early to get the stores up and ramp before you start to realize some of the benefit there. So despite that headwind for the beginning part of the year, we’re still going to exceed the margin. So, I think we like both channels, we like where the mix is, where the mix is coming out. In terms of Comcast in particular, not a ton of update from the last call. We restructured the deal in order to make it just be more specific and work better for both parties in 2019. It’s progressing as expected. If they end up hitting those numbers, then they will execute into the warrant and we look at the value of that and include that plus the lead fee and still think it’s a competitive acquisition channel for us. And Home Depot as well, just given the comments that I issued earlier around despite the early ramp, we’re still going to hit expanding the margins for the year.

Got it. And when I look at – those customer acquisition costs, is that showing up in the sales and marketing line on Slide 14? Is that where I should see that? I’m just curious.

Let me just make sure that the slide is – not looking at the slide – yes, correct, if you look at the acquisition costs on the key operating metrics, correct.

So at some point, we’ll see the lower customer acquisition costs in these two channels start to reduce those sales and marketing costs? And I think you said also during the call that there was interplay between that and installation costs.

Correct. Yes. let me explain that a bit. What will happen is that, the retail channels and the Comcast channels are fulfilled through our direct business. When we shift more to the direct business, you see the sales and marketing costs increase, but you see a similar decrease in the installation costs. The reason is because through the channel business, we capitalize everything, the channel spends money to acquire the customer and so we’re buying the project, it’s capitalized and that would go into the installation line. And so what you will actually see in that sales and marketing line is a slight increase in the year, because of that mix shift hit direct, but the overall, to Bob’s point, the overall creation cost tax should see a slight decline. So, there is a little bit of – versus our peers, there is a little bit of noise in that given our multi-channel model. Thanks for asking that question.

Yes. that’s very helpful. Thank you. I’ll see to the next person.

Thanks, Michael.

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

Thanks so much guys. Obviously, you’ve demonstrated some of the value being able to increase services from existing footprints. But can you talk a little bit about the growth opportunity and the cadence of opening new markets as you go through the balance of 2019?

Yes. new markets in terms of geographies, we – our current plan on hitting those growth targets does not anticipate entering any new markets. it’s just growth in our existing markets. The incremental revenue opportunities were really excited about for the long-term are the ability to both sell in the energy service to our customers, but then also sell energy services to the utility, and that was the announcement we made with the ISO New England capacity award just this quarter.

Yes, okay. So, you’re not expecting to enter any new markets in 2019 or you’re just not guiding to any growth from those markets? I just want to clarify that.

Yes. precisely, our guidance does not contemplate any new geographic market expansion.

Okay. And then just in terms of cost reduction on the non-module and non-equipment costs with installations, can you talk a little bit about where you’re seeing opportunities to start trimming and optimizing some of those costs as you go through the balance of this year?

Absolutely. So first, there’s puts and takes in that number. One that you’ll see we’re – as we’ve discussed in Bob’s section, we’re going to see a slight decline overall in that number and that is despite the fact that we’re increasing the attachment rate of the Brightbox. So, the cost of that battery is going into that line. So, where we expect to see the positives are really around operating efficiencies. We still – so the battery prices have really not come down much; they will, but right now, it’s still pretty immature supply chain. And so where we’re going to see the benefits is really around operating leverage and installation efficiencies.

Okay. I’ll take the rest of it off-line. Thanks so much.

Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, team. Thanks for taking the questions. Maybe, first one just on the quarter. The operating lease revenue was up healthy mid-teens percentage sequentially. It’s a bit better than we’ve seen seasonally over the past couple of years. Just wondering, can you help us fair it out how much of that driven by volume growth versus mix and wondering I guess how much of the [indiscernible] volumes are helping that revenue line item here?

So, if you’re including incentives in the lease revenue number, Brian, that number is higher, the ITC revenues recognized in Q4 and Q3 have been higher and they’ve been in the past. So that’s a big part of the reason that the lease revenue line has been increasing. And that’s just due to the type of fund structure that we have in place. So with the financing obligation funds, we get to recognize the ITC revenues and it comes through with lease and incentive revenue. So, I want to make sure that I know whether you’re looking at it including incentives or whether you’re looking at the revenue number excluding the incentive component.

Yes. Just looking at the GAAP reported numbers, so all-in. So that ITC color is helpful. Should we be thinking about that as being highly variable into 2019? You don’t know what you’ll actually monetize on what fund in Q3 and Q4 of next year. So, it could be a different dynamic or is this something that is a multi-year dynamic that we’ll see, extend out for the next couple of years?

Hey, Brian. It’s Ed. I think obviously, as the year progresses, we can add or change our financing strategy. So, it’s difficult to predict fund mix that far in advance. That said, the transaction that was driving the higher ITC revenue in Q3 and Q4 of this year is materially complete and I would expect the revenue to be between $15 million and $25 million over Q1 and Q2 of next year as that transaction comes to completion; at which point, I would expect it is most likely that we would return to the more traditional partnership flip structures, which result in increased income at the bottom of the P&L on the net loss attributable to the non-controlling interest line.

Okay. that’s helpful. Yes. that will help us fine-tune the revenue model for next year. Maybe, just the second question on the battery side of the business and then I’ll pass it on. Can you talk a little bit about the supply availability and sort of where you’re positioned supply chain wise? I know some of your peers have talked about component shortages and battery supply availability issues. It doesn’t sound like you’re necessarily too worried about that based on the triple-digit growth expectation or target you have for 2019. But maybe if you could just level set us there in terms of how you’re positioned from a supply availability perspective? And then related to that, just the strategy around Brightbox, is this all a new-build strategy at the moment or are you embracing a retrofit strategy as well against the installed base just given how many 200,000-plus homes you now installed that, just trying to get a sense for what the kind of mix is on the battery side of the business. Thanks, guys.

Thank you. Great question. There are – we do not anticipate any supply constraints. So, we believe we’re well positioned. A lot of that again is another advantage to be in the market leader. We can have good leverage with suppliers. So, it’s not something we’re currently experiencing, and we’re also really encouraged by all the innovation. You might expect, we’re in conversations with a number of different manufacturers and we’re optimistic that those innovations in that cost will come through. But again, this plan is anticipating supply that we’re confident we have and no real cost improvement in the battery. So, that’s all upside for the future. In terms of the retrofit versus the new build, it is exclusively new build in that number. We will offer retrofit. We have not announced that or launched it yet. And the reason is that it’s just much more cost effective and we’ve been on a new build. And so that’s where we’ve been focusing, but going back for the retrofit opportunity is a real opportunity for us in the future certainly.

Thank you. I’ll pass it on.

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

Hi. this is actually Eric on for Julien. Congrats on the quarter. First question, would you be able to talk about the year-on-year direct business growth both for fourth quarter 2018 and full-year 2018 and how you see that going forward?

We have not typically broken that out. And the reason that we don’t is because it’s just not how we manage the business. We manage the business regionally to what is the most cost effective and strategic value chain. So what we can say is that the direct business did grow quickly last year. We do expect that it will grow quicker, more quickly than the guidance – than the baseline guidance. But beyond that, we’re not going to break it out anymore, because it’s just not how we manage the business.

Understood. And in terms of the Home Depot partnership ramping over 2019, presumably that should have more of a growth contribution into 2020. is that the right way to think about this?

The partnership, I think, certainly, we expect 2020 would be – have solidly more volume than 2019. However, we are in the stores, it will take some time to ramp, but we should see a nice contribution from it in-year as well; they will just be more weighted towards the back-half.

Got you. So, we should still be expecting a portion of the guidance – growth guidance to come from Home Depot in 2019 just some more. Okay. And then last question in terms of the ITC Safe Harbor, would you view that as upside to the 16% to 18% growth range?

So, this is Ed, hoping to answer the question. So, if we – Safe Harbor equipment that will be to extend the margin and/or growth rate in 2020 or 2021. It wouldn’t have an effect on the 2019 megawatt growth rate. The comment, I think, I was trying to make in the prepared remarks was just that if we do execute a very large pre-purchase of equipment, it could consume some equity capital. And in the cash guidance, we’re not contemplating that at the moment.

Right. So, I’m just thinking more so 2020 and beyond. If you expect growth in the direct business to sustain from 2019 into 2020, so with 16% to 18%, would you see an ITC Safe Harbor supporting beyond that range of growth in 2022 through 2023 potentially from a broad perspective? I know you guys obviously have not provided guidance for those years.

Yes. certainly, we have strong belief that the long-term growth rate in this market can be 15% to 20% for a decade and we support that in our investor materials looking bottoms-up. And so we definitely certainly stand by that.

Okay. Thank you.

Maybe, one thing worth pointing out on that is that, the Safe Harbor is a distinct advantage for the solar-as-a-service model, as compared to the homeowner model, because only commercial entities are able to take advantage of that Safe Harbor program. So, we would expect that our competitive position would increase in subsequent years, vis-à-vis the long tail of solar providers that are enabled to offer that service, as well as the size of our balance sheet, which enables us to safe harbor potentially a larger amount than our peers.

Got it. Much appreciated. If I could get one last question, sorry for this. In terms of the battery retrofit opportunity, have you – do you have any view on potential pricing of that thus far? I know you’ve discussed upfront payments in Florida, but could we potentially see early – effectively early renewals of contracts?

So, your question was battery retrofit, market size and contract renewals. did I get that correctly? Can you repeat it?

Right. So, with the battery retrofit in terms of how you would price the battery retrofit, I know in Florida, you guys charge a portion of it upfront for the new installations. I was just wondering if there’s any potential opportunity for an effective early renewal of the contract win, including the battery like a 20-year contract on the date you retrofit.

We should get you on our product team. No. I think that’s certainly a great idea. One comment I wanted to make that I had neglected to make earlier on Brian Lee’s question on the retrofit. We do believe – because we’re in conversations with suppliers, we do believe that there will be shortly pretty cost period [ph] on a cost perspective ways to retrofit people’s batteries. So, from a customer value standpoint and the customer experience standpoint, we are waiting and eagerly tracking those technologies to come to market. In terms of the opportunity to add a battery and extend the contract, I think absolutely, I think that could be something we would – that we would certainly explore.

Got it. Thank you.

Thanks.

Thank you. And I’m showing no further questions in the queue at this time. I’d like to turn the call back over to Lynn Jurich, CEO, for any closing remarks.

Well, thank you, everyone. Thanks for listening and hope you have a great evening.

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