Greetings, and welcome to the Sunrun Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Patrick Jobin, Senior Vice President, Finance and Investor Relations. Please go ahead, sir.

Thanks, Kevin. And 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; Ed Fenster, Sunrun's Co-Founder and Executive Chairman; and Tom VonReichbauer, Sunrun's CFO. And now let me turn the call over to Lynn.

Thanks, Patrick. We are pleased to share Sunrun's fourth quarter results, progress against our strategic priorities and outlook for 2021. We ended the year with more than 550,000 customers, 18% year-over-year growth pro forma to include Vivint Solar. We adapted swiftly to the dynamic environment during the year, improving our cost structure, increasing our market position and strengthening our competitive advantages. Vivint Solar acquisition expands our scale and solidifies our position as the top owner of solar assets globally with nearly four gigawatts of networked solar energy capacity. I'm excited to share our results for the first time as a combined company. In the fourth quarter, we added 23,500 customers. We saw continued improvements in our margins and beat the targets we set last quarter. The integration is progressing well, with the team operating as a single organization. In 2021, we expect to significantly accelerate our growth rate to 20% to 25% from a baseline scale that's already twice the next competitor and with strong customer margins. At the same time, we will increase our competitive advantages through our unmatched sales reach, investment in customer experience, brand and talent, significant head start at batteries and grid services and an improved cost structure from scale and synergies, which exceed our initial expectations. The unprecedented winter storm in Texas last week that left more than three million people without power yet again exposed the current grid's vulnerability and the superiority of local solar and batteries. During the extreme demand on the power grid, our customers produced their own electricity from solar behind the meter and helped to offset the need for additional blackouts. For each customer with Sunrun solar, we helped keep another homeowner's power on. Furthermore, our customers with Brightbox were able to power through the blackouts and stayed warm. Even…

Thanks, Lynn. Today, I'll touch on some recent federal policy developments, our evolving capital structure strategy and recap our robust capital runway. Over the last year and quarter, we have advocated for and achieved numerous political victories, and we continue to enjoy tailwinds in this area. On December 21, the investment tax credit was extended for two more years. As before, this measure passed with bipartisan support, passing through a Republican-controlled Senate and signed by a Republican president. Taken in combination with our safe harbor capabilities, we now enjoy an investment tax credit of up to 26% through December 31, 2025. That said, we are pleased that the Biden administration is demonstrating genuine interest, not just in renewable energy, but also distributed energy and soft cost reduction. President Biden specifically cited home solar and batteries during last year's debates as critical investments for rebuilding our energy infrastructure with clean technology. Given its track record of success and bipartisan support, we think the longer-term extension of the solar investment tax credit is probable. Now the Biden administration is also taking steps to support soft cost reduction through continued DOE funding for training and software development. In addition, the Biden administration has begun releasing funds previously appropriated by Congress for use in repairing and modernizing Puerto Rico's electric grid. We believe this funding may open significant virtual power plant opportunities for us in the island along with an expanded market for home solar and battery installations. Meanwhile, a number of factors are combining to offer us several paths to reducing our capital costs even further. Our increased scale, market capitalization and profitability following the Vivint Solar acquisition are opening new doors for us. Lenders and ratings agencies have taken note that our collections actually improved during COVID. We're also seeing an unprecedented increase in lender interest in green bonds and just generally low cost of capital in most markets. We believe we can leverage these factors into an updated capital structure that will increase long-term cash flows available to our common shareholders. In part because the various strategies we are evaluating provide different combinations of cash upfront versus cash distributions over time, we are not providing 2021 cash flow guidance at this time. We will share updates on the strategy review over the next two quarters, however, as we finalize the course of action. We continue to maintain a robust project finance runway that affords us the ability to be selective in capital markets activities. As of February 25, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 500 megawatts for subscribers in 2021. We're clearing both the tax equity and credit markets at or near all-time low cost of capital. I'll now turn it over to Tom.

Thanks, Ed. The fourth quarter capped off a transformative year for Sunrun. The Sunrun team continued to deliver sequential volume growth and margin expansion while beginning the integration of Vivint Solar. The combination of continued operational improvements and strategic advantage from our increased scale have set up the company for a breakout 2021. As we previewed on the last call, this quarter, we have made various changes to our operating metrics, converging methodologies between Sunrun and Vivint Solar, and more clearly reflecting our business post-acquisition. On Slide 8 of our earnings presentation, you can see a summary of the updates to nomenclature and definitions of the key metrics we use. For example, we now refer to customers under lease or power purchase agreements as subscribers, given the long-term and recurring nature of our relationships. We now refer to the present value of upfront and recurring cash flows from customers as subscriber value instead of project value and present it on a per subscriber basis instead of per unit of solar energy capacity. Per watt figures are still available in the supplemental materials, but presenting metrics on a per customer basis better aligns to our cost and value drivers of the business. We now present subscriber value and gross earning assets using a 5% discount rate, reflecting the lower cost of capital environment and our continued ability to raise capital at rates well below 6%. Further, net subscriber value also includes uncapitalized operating expenses within creation cost, harmonizing with Vivint Solar's former reporting method and reflecting the increased mix of direct business as a result of the acquisition. NPV is now referred to as total value generated and represents the net subscriber value multiplied by subscriber additions. Net earning assets now includes both recourse and nonrecourse debt, along with total cash.…

[Operator Instructions] Thank you. Our first question today is coming from Michael Weinstein from Credit Suisse. Your line is now live.

Hi, thanks for the question. Hey Ed, I think you guys talked about some interest picking up in green bonds going forward. Is that something you could talk more about, maybe alternative forms of financing beyond the ABS issuances that we've all gotten – starting to get used to?

Sure. That's a great question. And what I think I was trying to say is that there's just a lot of investor and just generally on the lender side in loans from ESG companies and in renewable energy. I think our company is so obviously an ESG company that actually getting a green rating of a bond may not make a difference to the cost of capital. But given the scale of the business and the market cap, we have a lot of opportunities for ways to raise capital, including subordinated debt that might be – as various different places in the capital structure might be rated and would probably be likely significantly cheaper than the places we've been going historically for that capital. So that's a process of investigation and discovery that we're going through. We do have a number of interesting options there. And as I teased, I think we'll be updating you all with further information in the next quarter or two there.

All right. And I think you said you're still working on your cash flow strategy or cash use strategy for this year. Can you give us a little more color on that? And what the timing is that you – timing of when you think you'll be able to give guidance.

Sure. So I think, again, in the next couple of quarters, we'll know more. As I was trying to suggest on the call, we could capitalize the business with two different – take an example, two different credit instruments. One might cost x percent, one might cost a little bit more than x percent, and they would have different advance rates. So what we're trying to do is figure out what's the optimal long-term strategy for the company, how much do we want to borrow today versus leave for cash flows for distribution tomorrow. And as we maximize those two sort of co-solve for the best possible solution on those two dynamics, it may have some impact in the amount of cash that shows up today. But if there was less cash showing up today, it will be offset, obviously, by significantly more cash coming over time. And we'd like to further flesh that out before giving particular guidance on it.

That makes sense. And one last one from me. And that's – what are you hearing from the Biden administration or from the Democrats in terms of timing of when we might see additional – an additional ITC extension? Or – and maybe some of the other initiatives you're thinking about, I mean, battery, tax credits, perhaps tax credit refundability, et cetera?

That's a great question. I do think it is more likely to be in the second half. There are obviously a lot of different ways these sorts of bills can move forward. They can move forward in spending bills, infrastructure bills, dedicated bills. Sometimes you use the bill that's in front of you rather than the bill you want. So I think like we've often said when it comes to predicting federal policy, it's difficult to make a prediction based on any particular piece of legislation in any very discrete moment in time. But we definitely do think that over the next three to 14 months, there's a really good possibility of some interesting developments.

Great. Thanks guys.

Thank you.

Thank you. Next question today is coming from Brian Lee from Goldman Sachs. Your line is now live.

Hey guys, thanks for taking the questions, good afternoon. Maybe first off, just a clarification, because I know you're changing some of the naming conventions and different things based on the release. The 20% to 25% growth targeted in installed capacity for 2021, that's off of the 603 megawatts in 2020. So roughly low to mid-700 megawatts new growth in installed capacity for 2021? Just wanted to clarify if anything is changed in that convention.

Yes – no, Brian, you're correct. The 20% to 25% is off the 603 baseline.

Okay. Great. So you haven't changed that. Great. And then, I guess, second question related to that is, maybe my math is wrong, or again, I might have the wrong maybe convention. But you mentioned $700 million or greater than $700 million of value generation against this over 700 megawatts of new subscribers in 2021. So on a dollar per watt basis, I know you don't want to stick with that convention, but it's less than $1 or would seem to be around that range. Why would that be falling given the cost synergies are being raised here, the new PV5 versus PV6 convention? Again, maybe I'm missing something here, but you did $1.23 here in 4Q. So wondering why that number might be coming down in 2021.

Yes. Good question, Brian. So first, we're providing full year guidance here on aggregate margin dollars. And we think that total value generator of more than $700 million is a really strong result. That's more than our Q4 results annualized, which seasonally Q4 is – tends to be our best performing quarter of the year. 2020 also had the benefit of sort of full year of 30% ITC from our safe harbor investments. And so you've got some shift there. Obviously, there's a range of outcomes there on volume. And then we're saying more than $700 million. So also a range of possible outcomes above that. We're also seeing an acceleration in total growth here, moving to 20% to 25% year-over-year performance, which will be one of our fastest growing years in recent history. So part of this we're investing in some of that growth while also being able to maintain a really strong margin profile. And then the last that I'll note is that the 20% to 25% is total megawatt growth. But when you turn it into per customer, the mix between lease and cash loan may move around the mix across different channels and move around a bit too. So really thinking about it on a per subscriber basis, not a per customer basis, if that's helpful.

Okay. So that's…

Yes. So just to put a fine point on it, the calculation would be – definitely would not be under $1 a watt. It would not apply under $1 a watt.

It won't come out under $1 a watt. Okay.

Correct.

Okay. And maybe, Tom, on that, you did $9,000 – a little over $9,000 per subscriber in Q4. Is that – I might have missed it during the early part of the call. But is there a guidance range for – is it $9,000 through the balance of 2021? Is it going up to $10,000? What number or range should we be thinking about for per subscriber value generation?

Yes – no, we didn't provide any color on the per subscriber amount, but rather the aggregate dollars of margin generated, which we think is really the best way to think about it. I did mention that because of the timing of realization of some of those synergies as well as the natural seasonality that we have that will be lower than the average in the first half, a little bit higher than the average in the second half and accelerating, especially as we see those synergies realized throughout the year.

Okay. Thanks a lot. I appreciate the color. I’ll pass it on.

Thanks, Brian.

Thank you. Next question today is coming from Mark Strouse from JPMorgan. Your line is now live.

Yes, good afternoon, thank you very much for taking our questions. Just following up on Brian's question there, kind of more longer-term on the value per subscriber. Under PV6, you had talked about the $8,000 per household growing from different buckets, the cost synergies from Vivint, grid services, energy storage, which I think in the past, you had talked about that number getting somewhere in the low to mid-teens over time. Now under PV5 and a little bit higher starting point from 4Q with over $9,000, I'm just curious if you can give an update on that bridge.

Yes. So a couple of things I'll note here. As I mentioned in the comments to Brian there, Q4 tends to seasonally be our highest performing quarter of the year on margin. So not the direct linear point to extrapolate from. But definitely proud of the improvements we made there and being above $8,500 – or around $8,500 under the prior methodology. Then as we moved to PV5, as I mentioned, that has positive impacts. Then the inclusion of these noncapitalized costs that Vivint had included previously, which is more reflective of our direct businesses, those are all really incurred on that side, bring that number back down a bit. I think the walk from there, we won – I believe that we're able to continue to hold really strong margins here while also investing and accelerating our growth at scale. So we're now providing guidance on growth of higher than what we had previously estimated. And so some investments there and continuing to invest in our brand and technology and differentiated from the pack. Long-term, I think also the other things we've talked about continue to hold quite well. So as we deploy more batteries into the mix, those are margin accretive for us. The grid services opportunities also continue to be margin accretive as we win more agreements and deploy contracts there. And then cost synergies as well. And those will be heavily realized throughout 2021 here. So certainly expect our year-end 2021 margins to be better than the average year and exiting in a continued, really strong position.

Okay. That's helpful. And then just a quick follow-up to that. I mean the Vivint synergies at $120 million now instead of $90 million, just confirming those are still entirely cost synergies. And then if so, can you just give a bit more color into what's driving that?

Yes. So those are cost synergies that we're referring to here. As we dug in deeper and now have going on almost five months of integration under our belts, we're able to get a lot more confidence in what we're going to be able to deliver. And we saw improvements really up and down the entire cost stack there, sales, operations, G&A. Definitely a bit more in some of the corporate overheads. And then also our higher growth expectations for 2021 provide additional leverage against fixed costs in some of our negotiations that are taking place to drive more cost synergies. So seeing it sprinkled across, but happy to have given the update here from $90 million up to $120 million.

All right. Okay, I’ll take the rest offline. Thank you.

Thank you. Next question is coming from Stephen Byrd from Morgan Stanley. Your line is now live.

Hi, good afternoon. Thanks for taking my questions.

Of course.

Just going back to the questions around federal legislation, and we're fairly bullish about storage getting a separate tax credit. Would you mind just talking a little bit further to sort of the impacts, whether it be from the customer side in terms of adoption rates, because I guess, already the demand appears to be very high, Lynn, as per your commentary. But just would you mind just providing a little more color. If we did see a stand-alone tax credit for storage, how would you sort of think about that impacting your business? I presume the value per customer could – so the net subscriber value, I guess, could go up. But would you mind just talking further to that?

Sure. And let me open with – so we do believe that the growth rate of 100% installed this year is – we will be easily able to achieve that. And from a demand standpoint, it would be even higher. This – we are absolutely seeing some battery constraints. I think that's no surprise to anybody with the semiconductor shortage and just manufacturing generally. So we're – we do think that we're well positioned, given just the competitive environment with the long-term contracts that we have and with the fact that suppliers, the U.S. as the market leader, that's going to put in a good long-term order profile. But what we've really seen is that because of the constraint in supply, the battery prices to the end consumer really haven't dropped to match where the input prices are. So in the short-term, I think that demand would far exceed 100% growth. But even if – the challenge really is would we get more providers into the mix, which I think we will, but I think that's not a next quarter or two issue. It will take a few quarters for that to happen, and then that will be primed to really unleash growth. I think as we mentioned in the call, in Texas just as one kind of early anecdotes, the website traffic increased 350% just overnight, just to give you some indication of what we're seeing on the ground.

That's very helpful. And I guess stepping way back over a multiyear period of time, let's put the constraints on storage aside, which I know is as easy to say, and I know there are a lot of practical issues. But as you think about the importance of storage over time, what do you think is likely to be kind of the consumer preference for storage? You've talked a lot in the past about attach rates. I just want to make sure I'm thinking over a multi period of time. What kind of trends are you seeing there in terms of likely adoption rates. I'm guessing very high, but just to make sure I thought about that correctly.

Very high. It will roll out a bit different geographically based on just local value proposition. And in a place like Hawaii or California or Northern California, it's 80%-plus. And places where there is real resiliency issues and/or really high power prices and/or kind of these type rates. So that will drive very high attach rates. It is our belief that as you can get the unit cost down to $4,000 or $5,000, it's going to be pretty ubiquitous, because if you – the early indications around how much revenue you can get off of grid services is $2,000-plus. The net kind of outlay for that battery of just a couple of thousand dollars, we think, will be extremely attractive for the benefits that it brings for resiliency. So our – internally, it is our vision that pretty much every single one of our solar systems should have battery attached to it over the medium term.

Yes. That's helpful. And the data from the grid in a place like Texas certainly does seem to reinforce that view. That's all I had. Thank you.

Great, thank you.

Thank you. The next question is coming from Tristan Richardson from Truist Securities. Your line is now live.

Good evening, appreciate the opportunity for questions. Just a quick question with respect to your comments on activity in Texas. Should we think of that opportunity near term as primarily a storage stand-alone service offering? I think we generally think Texas is a low-cost retail power state. Is it still generally the case? Or should we generally expect penetration to accelerate there?

You mean of that solar plus the battery?

Right.

Yes. I would – no, I believe that it makes more sense to pair the solar with battery. So just to use an example, we had many multiple customers who had multi-day outages. And so the battery was able to run through the night and then recharge the next day with solar. So we had customers who lost power and worked uninterrupted for 50 hours. So you want the solar aspect to – for the rechargeability. And the pricing on that solar piece is really quite competitive now. I mean I think we've sold about $0.10 to $0.11 a kilowatt-hour in Texas. That's already competitive with many of the traditional rate plans. Plus, I think the fact that it's a fixed price will also be that much more attractive now, given that people who really were – so really felt the pain on some of these pass-through variable rate plans.

That's helpful. And then just with respect to the weather in Texas, could we see anything from a disruption perspective to the downside, whether it just be temporary outages? Or I know the installed base is relatively low there. But anything that we could expect to see disruption-wise in the first quarter?

No. That's the [Audio Dip] resilient. I mean, even if you look back to – Ed, you may remember this more than I do. But even with super high winds and Hurricane Sandy, I mean, we had zero maintenance issue.

And this is Ed, and maybe just to expressly state it, none of our customers are on floating rate plans and we have no exposure as a company to wholesale power rates as well.

Yes, correct.

That’s helpful. Thank you guys very much. Appreciate it.

Thank you. Next question today is coming from Aric Li from Bank of America. Your line is now live.

Good afternoon and thanks for taking the questions. So just wanted to touch upon the growth guidance again. So with 20%, 25% growth in megawatts for full year 2021, could you, one, talk about your expectations for broader resi solar market growth; and two, your long-term annual growth expectations, is that still 15%, 20% as we step into 2022?

Great question. I think it's – this year is so dynamic, just given the COVID situation and cost of capital and new entrants and things. I think it is our – so I think we believe it's too early to call what the market growth rate will be. We feel confident in our market position and that we will be a share-taker. We feel confident that we're able to hit 20% to 25% growth. So I think those are the statements we would make on that. I do think that one of the other things we're very encouraged by is this growth rate is clearly an acceleration for us. And we're doing it at such a large scale now. So if you look at the scale of Sunrun, we're twice as large as the next competitor doing an integration, and yet we're accelerating growth, which makes us – gives us a lot of confidence that potentially the growth rate could exceed what we had put historically. But too early to call out right now.

Got it. And for storage, just to clarify on expectations, how many Brightbox units would your greater than 100% growth guide equate to? Is it like greater than x units and also on storage? Sorry, I'll let you clarify first.

Sure. We've had – we disclosed that we have 16,000 in operation. But we have not given the last year's specific number. So the 16,000 installed are cumulative.

Got you. And then just in terms of – I know you mentioned equipment supply constraints for storage. But how much of a constraint is the longer lead times to install storage currently? We're hearing that it's taking a good amount longer to – for an installer to get the storage in, and that's meaning some installers to prioritize solar only.

Yes. I think that's – thank you for pointing that out. I think that's why we really like to have a light channel go-to-market strategy. I think it's – we have been very effective. And I think we're the only company that has both dealers as well as our own direct sales and installation workforce. I think part of being able to have that direct sales and install channel is that you're able to train your people, get up the learning curve, suffer maybe a few growing pains that happen. And that's, I think, why we are out to such a fast start on storage versus the long tail. So yes, it's a more complicated product. It does – you have to educate installers. You have to educate permitting departments. But we've already been through that, which is why, again, when we win battery constraints loosens up when prices come down to where they should be. We believe we're really primed to accelerate our lead there.

Got it. And one last question from me, and then I'll take the rest offline. But just in terms of the shift that you talked about towards expanding customer advantages with over 550,000 customers to upsell to now, what is your time line for pursuing these upsell opportunities? Is this something that we should expect to see in the middle of the year?

In terms of specifically going back in, retrofitting batteries or other things? Is that what you mean?

Yes. Batteries and other things that you've mentioned.

Yes. That is certainly an opportunity. We have not prioritized that. Today, we've prioritized new Brightbox installation, one because, again, there's some constraints and it's just way more efficient to do it all at the same time and because we believe that technology is improving so much that the retrofit option that will be available to consumers will be much better in the coming quarters. So we do expect that, that will be a part of our plan this year but – the retrofit, but it has not been the corporate priority so far.

Got it, thank you.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from Colin Rusch from Oppenheimer. Your line is now live.

Hi, there. It's Joe on for Colin. Circling back on the policy discussion. Are you seeing any potential for cash in lieu of tax credits that could potentially be included in any of the federal spending bills this year?

Great question. This is Ed. Yes, this is a topic that some have been lobbying intensely on, and we've not really been part of that effort. I would be surprised if that sort of policy is enacted into law, but it's certainly possible.

Got it. And then on the new geographies, it sounds like the Texas rollout is going really well. Does it make sense to move into any additional geographies looking into 2021?

Good question. I do think you will see that. The ones we announced this quarter, again, we're – San Antonio and Miami were two expansions that we have recently announced. And just as you continue to – the fact that utility rates are continuing to rise and the fact that our costs are continuing to decrease, more and more markets are opening up and getting competitive. So I do think 2021 will be a year where you will see more new market expansions than we thought previously. Now our – the growth targets that we put out there do not require us to – any sort of massive geographic expansion. It's more sort of same-store, so that would be incremental to the stated growth target.

Got it. And if I could sneak one more in on the storage side. Are you seeing anything on the technology development front that would enhance the virtual power plant capabilities?

Just the fact that the grid keeps going down, okay, that's the primary one. I mean I think it's just the – as we announced earlier in the quarter, the program, for example, that we announced in Southern California Edison, I mean that is, I think, borne out of these rolling blackouts. And so I think there's just more regulator interest and more necessity for utilities to be coordinated to be able to dispatch the battery at a moment's notice when the grid is taxed.

Great, thanks so much.

Thank you.

Thank you. Next question today is coming from Philip Shen from ROTH Capital Partners. Your line is now live.

Hey, guys. Thanks for taking the questions. From an absolute dollar standpoint, how much grid service revenue do you think you could generate in 2021? And then how do you think that trends as we get into 2022 and 2023?

So the – we've announced 12 grid services programs, which we believe we're far – we know we're far and away lead on. And we've really been working on, hey, how do we open up as many grids services markets in as many geographies as we can open up so that we're able to get access. So sort of like we're kind of building the foundation and building the market. The programs that we have announced for the most part have been in terms of just at our scale now, they're not huge contributors to the near-term financial results. So when they do become big contributors, which we expect they will, we will definitely start to provide more color there. But for now, it's really a – it's still more in sort of – I mean, I would say beyond pilot, because we have a decent amount of assets committed. But it's still in its sort of early innings.

Okay. And as you think about the first…

Let me clarify. Let me clarify one point there, because in the past, we have talked about an additional $2,000 per customer being directionally the value that we think would net to Sunrun after any sort of customer enticement or any sort of other fees that you have to pay to operate, and that still has – there has been no change to that outlook.

Okay. Great. And just as a kind of question of refinement, in terms of your contracts that you have with your clients' leased PPA contracts, what percentage of those have the capability to allow you to provide grid services and generate that revenue? Are we talking about half of the contracts or the vast majority? Because you guys have definitely demonstrated leadership here. And want to just understand over time, how does this ramp and if you have that legal capability to – is that box checked, for example, to give you the ability to ramp up nicely?

I – Ed, Tom, maybe you were – I wasn't quite following the question.

Yes. I think the question is it without express subsequent customer permission, about what percentage of our customer contracts would allow for enrollment in grid services. And I think the answer to that is certainly over the last several years on the legacy Sunrun side of the house, they all have. I think we still feel like working with our customers is maybe the better course of action. But it's a very, very material number of customers.

Correct.

Great, okay. Thanks guys. I’ll pass it on.

Thanks, Phil.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

All right. Well, thank you, everybody, and we'll talk to you again in another quarter. Take care.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.