Sunrun Inc. (RUN) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full-Year 2016 Sunrun, Inc. 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, today’s conference may be recorded. I would like to introduce your host for today’s conference, Mr. Patrick Jobin. Sir, please go ahead.

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. These include, but are not limited to, statements related to our financial operating guidance and expectations regarding our business, future growth rates and key operating metrics. 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. If this call is reviewed after today, the information presented during this call may not contain current or accurate information. 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 also use slides, which are available on our website, at investors.sunrun.com. And now let me turn the call over to Lynn.

Thank you, Patrick, and good afternoon. I’m pleased to share with you Sunrun’s fourth quarter and full-year 2016 financial and operating results and to celebrate International Women’s Day and Sunrun’s anniversary. It’s now been 10 years since Ed and I were classmates in grad school at Stanford, pioneering residential solar as a service at three times today’s cost structure. We’re excited to help lead innovation in the decade to come. In the fourth quarter, we deployed 77 megawatts, up 13% year-over-year and closed out 2016 with 39% full-year growth in deployments and over 60% growth in customer net present value. In Q4, we were able to gain market share, increase deployments, reduce our creation cost by 8%, and generate $67 million in net present value. In the year, we grew at double the industry growth rate and improved our unit economics, all while maintaining our cash position. We are not pleased that our full-year deployments were 3 megawatts, or 1% below our guidance from November and in early 2016, but we believe we still led the industry, a testament to the strength of our multi-channel business model. Our model makes use of the fragmented local solar industry paired with activities that benefit from our scale. And as we mentioned, we are now in our 10th-year of maintaining steady access to capital and a conservative capital structure. We continue to offer a portfolio of products customers want, leases, loans, cash sales and storage, and we’ve leveraged our infrastructure to cost effectively reach the most customers. During the quarter, we did see demand soften, particularly in the second-half of the quarter and in California. We believe the fatiguing election season and weather were significant factors and resulted in weaker than expected bookings and slightly fewer megawatts being installed. We are confident, however, that a rebound is occurring, as lead volumes in California registered by our lead gen business Clean Energy Experts have increased each month from the December lows. In January, for instance, lead volumes increased 75% month-over-month and volumes continued to gain in February. There are still five times more solar-ready homes in California that are currently installed and the emergence of storage will be a significant growth market in the state. More importantly, key industry trends taking hold this quarter allowed our business model to outperform and to position us to thrive in the future. We remain confident the residential solar industry can sustain a growth rate of 20% over the long-term. There were some significant strategic developments that are buried under the noise of the industry’s short-term demand challenges. Let’s run through what happened in the quarter. First, further validation of solar plus storage. We launched our BrightBox Solar Plus storage solution at the beginning of the year. In Q4, it gained momentum. Customers have placed more than 1,000 orders for our BrightBox product in Hawaii and California alone. The numbers are not small. These systems represent over 20 megawatt hours of storage. This will be a massive growth market for us and the industry. Greentech Media estimates that behind the meter storage will grow at a CAGR of over 2% – 200%, excuse me, that’s an important one to get right for the next four years. And once again, we have been innovators by offering the first zero down solar plus storage as a service package to residential customers. This technology holds incredible promise for value creation when paired with time-of-use electric rates and creates further monetization opportunities. It is the future and significantly shifts the energy sector’s regulatory profile in our favor. The burden of proof will shift to utilities to justify increased CapEx when solar plus storage is often a more efficient solution. And note that utility CapEx was $58 billion market in 2015. Second, we believe we are moving from utilities trying to block rooftop solar to them accepting its inevitability and investing time and capital in the sector. We are working with National Grid to co-market solar power to homeowners and develop business lines that further demonstrate the societal value of distributed energy. In addition to this partnership, 42 utilities have invested in distributed energy companies with investment dollars increasing substantially over the past two years and totaling over $1 billion in 2016 according to Greentech Media. Just as utilities are switching tactics to embrace distributed energy, so are policymakers. We saw policy advances in Nevada, where the regulator ordered the reinstatement of net metering in Northern Nevada and raised the aggregate cap for such systems by 40%. This proves that a too much, too fast retreat from net metering won’t hold up against public scrutiny. Third, we have proven our customer net present values. As part of the partnership, National Grid is making a $100 million project equity investment. This investment supports the 6% unlevered discount rate for our long-term contracted cash flows. Fourth, in Arizona, widely known to be the most hostile major market for rooftop solar, we reached a settlement with the utility APS that further establishes precedent for grandfathering and rebukes mandatory demand charges. We believe this settlement agreement clearly undervalues the benefits of rooftop solar and I encourage everyone to read our blog post on the subject at sunrun.com/value. But because Arizona has a low-cost operating environment and high solar irradiance, a viable offering can exist under the new rate structure. The combination of the new TOU rate structure and full retail credit for on-site consumption also presents further opportunity for our BrightBox storage solution. Finally, with the combination of SolarCity and Tesla, we have emerged as the leading standalone company in the industry. And with our balance sheet strength, we remain on offense in a consolidating and somewhat tentative market. We plan to accelerate our lead in 2016 by executing on the priorities outlined on Slide 7. With 10 years of operating history now under our belt and the long-term healthy industry dynamics that are taking hold, I’m more confident than ever that Sunrun will emerge the leader and an important contributor in modernizing our $1 trillion energy infrastructure. I’ll now turn the call over to Bob Komin, our CFO to review Q4 performance and discuss guidance for Q1 and the year.

Thanks, Lynn. While not all indicators were positive in this quarter, the ones that matter were particularly the ones that we believe drive long-term value creation. In the fourth quarter, and for the year, we achieved nearly all of our key financial and operating targets and we are well-positioned in 2017. Before I describe our performance in more detail, I wanted to discuss changes we are making to our reported metrics. We continuously evaluate and improve how we measure and operate the business and look to do the same with how we communicate our goals and performance. We strive to be the leader in the industry, including the quality and usefulness of our disclosures. When we went public in August 2015, we introduced NPV reporting to measure value creation, but our other reporting conformed to metrics commonly used by existing public company peers. Based on our growing operating experience, unique business model, and changes that are occurring in the industry, we believe there are refinements to how we report a few metrics that will provide investors with improved indicators of our performance and trends, and they are also better aligned with our current sales compensation and key operating objectives. Instead of recording bookings at the point when a customer initially signs an agreement, we now wait until we have also received confirmation that the system has satisfied our requirements for size, equipment and design, or what is commonly referred to as having reached notice to proceed or NTP. We believe this will improve simplicity, allowing investors to gain a better understanding of our near-term growth and trends. Because we now report bookings closer to installation, there’s a meaningfully higher realization of these systems as deployments and bookings are now a closer leading indicator for installations and less susceptible to reported seasonal fluctuations. Under the previous method, bookings were highest in peak quarters, but related cancellations were reported later often during seasonally slower quarters. The revised booking method will continue to be computed as gross bookings net of the cancellations occurring in the period. This quarter, we also modified our creation cost deck, so that the single component that was not previously based on either least or total deployments now will be. The portion of period sales and marketing expenses previously calculated by dividing net bookings will now be divided by total deployments instead. We believe this change is more appropriate for our business, focused on actions that lead to deployments with shorter cycle times and higher realization. The changes to creation costs and NPV for the quarter – for the current and prior quarters are available in the appendix of the earnings presentation. Also beginning this quarter, we are discontinuing the reporting of estimated retained value, estimated retained value per watt, and nominal contracted payments remaining and replacing them. We will be replacing the estimated retained value with a metric we introduced on the Q1 2016 earnings call, gross earning assets, which we believe is similar and more effective. Ed will discuss this metric during his section in a few minutes. Now moving to Slide 9 to discuss the performance of the quarter, please note, all metrics that follow reflect the changes I’ve just described. NPV was $1 per watt in Q4 and $0.87 per watt for the year reaching $213 million in aggregate for 2016. This represents 64% growth in NPV generated compared to the prior year. We achieved our target of $1 per watt in the second half of 2016, as lower costs more than offset the modest declines in project value as we expected. In 2017, we expect to generate $1 per watt in NPV, a 15% improvement to our unit level economics compared to 2016, as we remain focused on cost efficiencies. We do expect the seasonal pattern of NPV to remain consistent with prior years with the low point of NPV per watt in Q1, but gradually increasing throughout the year, in-step with volumes. As you know, NPV is calculated as project value less creation costs, so let’s go through each of the components next. Q4 project value of $4.41 per watt was approximately flat from Q3 and we achieved a full-year project value of $4.48, roughly in line with our annual guidance of approximately $4.50 per watt. This quarter, we have also begun to separately provide the portion of project value from the renewal period. In Q4, $0.60 of the $4.41 per watt came from the renewal period. While we continue to believe there is significant value over the life of the asset, which we expect to extend beyond the initial contract period, we aim to increase disclosure and transparency into the value drivers of our business. As a reminder, project value is very sensitive to modest changes in geographic, channel and tax equity fund mix. We continue to expect project value will decline slightly over time, but costs should decline more although in the short run there can be quarterly fluctuations. Turning now to creation costs on Slide 11. In Q4, total creation costs were $3.41 per watt, an improvement of $0.31, or 8% year-over-year. As a reminder, our cost stack is not directly comparable to those of peers, because of our channel partner business. Blended installation cost per watt, which includes both solar projects deployed by our channel partners, as well by Sunrun decreased by $0.10 year-over-year to $2.71 per watt. Install cost for systems built by Sunrun remained roughly flat with Q3, as expected, at $2.04 per watt, a reduction of $0.29, or 12% year-over-year. We expect installation costs will continue to decline as we realize the benefits of lower panel and inverter prices. For context, the pricing we are seeing on modules and inverters alone is likely to deliver more than $0.15 per watt of equipment cost savings in 2017. In Q4, our sales and marketing costs were $0.58 per watt, a $0.09 decline from Q3 and a $0.20 – 20% decline from the prior year, as we reduced our sales and marketing expenses as part of deliberate efforts to focus on the most cost effective customer acquisition channels. Next, G&A cost per watt was $0.28, or a $0.04, or 17% increase from Q3. We continue to tightly manage costs in this area, which have been largely flat for the last several quarters. In 2017, we expect to realize further operating leverage with volume growth exceeding G&A cost increases. Finally, when we calculate creation costs, we subtract the GAAP gross margin contribution realized from our platform services. This includes our distribution, racking and lead generation businesses, as well as solar systems we sell for cash or with a third-party loan. We achieved platform services gross margin of $0.16 per watt roughly flat with Q3. In the fourth quarter, deployments increased 13% year-over-year to 77 megawatts, resulting in total deployments of 282 megawatts for 2016, a 39% annual growth rate, which indicates that we have been able to significantly increase our market share. Deployments were 3 megawatts, or 1% shy of our annual guidance, driven primarily by weaker than expected demand in late Q4, which given improved cycle times had an impact on installations late in Q4. Even with these headwinds, the strength of our multi-channel business model and healthy capital position were evident, with others in the industry faring much worse based on our market observations. Our channel partner mix grew in the fourth quarter and we expect it to remain at a similar level in the first quarter of 2017. We had previously expected a moderate decline in channel partner deployment mix during last year. but in the current market environment, we are seeing more opportunities that are favorable to work with partners while meeting our NPV and cash contribution goal. As we have previously described, this trajectory can fluctuate quarter-to-quarter since we do not manage to a mix target, we instead prioritize unit level margins. Our cash and third-party loan mix was 13% in Q4, relatively flat with Q3. We expect this to remain at about this level for the year. As discussed previously, we believe our PPA and lease product mix of over 80% better matches consumer preferences and delivers our customers significant value, which is one of the reasons we have been able to grow faster than the market in 2016. In Q4, our net bookings were 72 megawatts, down 13% from Q3 and 13% from the prior year, a strong achievement, in our view, given challenging marketing conditions and the difficult comparison with Q4 2015 due to Nevada and the ITC-related pull forward. We’ve also made deliberate efforts over the last year to focus on the most attractive markets shifting away from lower cash contributing markets and higher cost acquisition channels. We believe four factors influenced the lower bookings this quarter. First, the intense election season was fatiguing for customers making them less receptive across most of our acquisition channels. Second, the holiday calendar this year was suboptimal, leading to fewer high productivity sales days. While many enjoyed the full week between Christmas and New Year’s, that also meant fewer people were learning how to save money by going solar. Third, in California, our largest market, we experienced significant rain. While a welcome relief from the historic drought conditions, the inclement weather likely reduced new customer engagement levels. Lastly, the transition to time-of-use rates in two of the three largest utilities in California likely resulted in some demand pull in, but we are seeing strong signs that customers are engaging with us and a rebound is beginning. Turning now to our liquidity, balance sheet and cash flow. Our liquidity position remains strong. We ended 2016 with $206 million in unrestricted cash, an increase from 2015 and the 6th consecutive quarter we have been above $200 million. We believe we will be able to maintain or potentially increase our cash position by the end of 2017 without issuing additional equity. This excludes any strategic opportunities, or accelerated market entries beyond our current plan. I’ll note, however, that the timing of project finance proceeds can vary quarter-to-quarter, and our ultimate objective is to optimize for the lowest cost of capital, and as such, we will focus first and foremost on the best execution of financing, which could impact the timing of our cash balance throughout the year. Moving on to guidance on Slide 12. We remain confident in our growth trajectory, with strong visibility to our Q1 guidance of 69 megawatts, which reflects 15% growth year-over-year. For the full year, we’re guiding to 325 megawatts, reflecting a 15% growth rate. We expect the year will show higher deployments in Q3 and Q4, similar to seasonal influences we’ve experienced in the past. Our primary focus will remain on NPV generation of about $1 per watt. We believe we can generate more than $290 million in NPV in 2017, a more than 35% increase from the prior year. We know the market will have ups and downs. Our strategy is to use our vertically integrated business to maximize efficiencies in core markets, while also using a channel model to extend our reach. The trends in the fourth quarter highlight the strength of our model. Our creation costs fell, our NPV increased, and our market share grew. Now, let me turn it over to Ed.

Thanks, Bob. Today, I want to touch on four items. First, I will introduce some additional information we are now disclosing regarding gross earning assets and explain why we are phasing out retained value. Second, I will recap certain financial implications of the transaction we entered into with National Grid. Third, I plan to discuss the broader financial strategy for how we optimize our capital structure to maximize value over time and minimize interest rate risk. Lastly, I want to report out on what we see as a strong project finance environment in general. Turning first to our installed asset base, we are pleased to report that as of December 31, net earning assets exceeded $1 billion, or more than $9 a share. On slide 13, you will see that we have included additional disclosure of both the contracted and renewal portion of gross earning assets, along with a discount rate sensitivity table. Unlike retained value, which included the value of our backlog, gross earning assets includes only the value of deployed systems. Gross earning assets represents the state of our deployed assets as of the reporting date. On Slide 14, you will see that we now provide a table that calculates the present value of our renewal cash flows as a function of the number of years of renewal payments received and the per kilowatt hour rate realized in the renewal period. For instance, if you assume 10 years of renewal cash flows with a $0.16 power rate in 2016 dollars, the renewal value of our portfolio would be $608 million at a 6% discount rate. As you can tell from the table, even very low real PPA prices, below even wholesale power rates provide significant unlevered NPV to Sunrun, given our large and growing fleet. Turning to Slide 15, I want quickly to touch on the multifaceted partnership we closed with National Grid in December. As Lynn mentioned, a key financial component of our partnership is a $100 million cash equity investment that National Grid will make in a portfolio of approximately 200 megawatts of residential solar assets. Taken together with back-leverage, customer prepayments and utility rebates, we expect total proceeds raised against the assets in this transaction of approximately 95% to 100% of contracted project value. As such, the transaction is supportive of discounting our long-term contracted cash flows at 6%. Looking at our Q4 2016 results, we recorded a contracted project value of $3.80 per watt. Illustratively using this quarter as a guide, we would expect cash proceeds of approximately $3.61 to $3.80 per watt on assets placed into this partnership. Assuming no timing differences in upfront cash flows, such as creation costs and receipt of project finance proceeds, which are naturally lumpy, we would generate approximately $30 million in ultimate contribution margin per 100 leased megawatts, given the reported cost stack of $3.41 per watt in the quarter. Our priority is still, however, to maximize NPV while maintaining a healthy balance sheet as we go. In addition, we share 50/50 in refinance upside with National Grid in this partnership. In a few minutes, I will explain further the value of this term. Historically, our strategy has been to retain this equity value for Sunrun rather than to place it with a third-party. However, in this case we partnered, especially given the strategic value of National Grid to Sunrun. We’ve also received unsolicited offers from financial buyers on substantially similar terms and we continuously evaluate using such project equity, in whole or in part, as a tool in our business. Project equity adds about $0.45 to $0.55 per watt in upfront proceeds over our historical capital structure. This brings me to my third topic, which is our debt finance strategy. Our general objective is to minimize risk from potential interest rate changes while maximizing opportunity for future upside. We have also staggered maturity dates and avoided using recourse debt for long-term asset finance. Our customer contracts have an initial contracted term of approximately 20 years. Because we expect to refinance assets several times over the time period of these contracts, we use interest rate swaps to fix the underlying rate, LIBOR, for the approximate initial term of the customer contract. Over 20 years, we may refinance a single set of systems several times, but the swaps we enter into today effectively fix LIBOR for all of those future potential credit facilities. Given the quirks of tax equity, there’s substantial opportunity for refinance proceeds after our tax equity funds flip Here’s how that works. Our credit facilities are expected to amortize down to less than 60% loan-to-value by the time our tax equity funds flip down, which takes about six years. We’ve also already demonstrated that without tax equity, we can achieve a 76% loan-to-value at even a triple D or investment grade credit rating. The upside from refinancing to 76% from 60% is substantial. On a 1 gigawatt portfolio, we could generate refinance proceeds post flip of approximately $215 million. In addition, by using bank loans that we can call without prepayment penalty, we have the ability to enjoy lower spreads as the asset class matures and when the repayment of our tax equity investors allows us to offer a first lien to our lenders, which protection back leverage lenders do not enjoy today. You can see why, in our National Grid transaction, we believe there is real value in the fact that we share refinance proceeds with them 50/50. I’ll turn now to my final topic, capital availability. Our tax equity pipeline remains robust, with closed transactions and executed term sheets that provide us runway well into the fourth quarter of 2017. The potential changes to tax rates have not impacted the availability of tax equity for Sunrun, in fact, because the depreciation benefit of solar is not as large as it is for wind, we are seeing more interest than usual, especially from tax equity investors who traditionally focus on wind finance. Our current committed back-leverage and project equity provides us runway into the third quarter of 2017. I’ll now turn the call over to Lynn for closing remarks.

Thanks, Ed. We’re really excited about the tremendous opportunity in front of us and how Sunrun is positioned. With our continued focus on cost efficiencies, disciplined growth and an unwavering commitment to our customers, we are confident we can continue to generate significant shareholder value while helping to modernize our electric grid. Thank you. And operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brian Lee with Goldman Sachs. Your line is open. Please go ahead.

Hey, team, thanks for taking the questions. Just a couple actually, on some of the growth trends, if I could. Maybe first one, just on the quarter itself. Lynn, you mentioned the Q4 weakness you saw some of that election, some of that weather, some of that California, and then the rebound you started to see. Any quantification you can provide as to how lead volumes are recovering here through March, just so we can get a sense as you start off here 2017 towards your full-year target?

Sure. Happy to take that one. I think we gave you – we did give you the data point on our lead gen business. So that’s our Clean Energy Expert business, which is our third-party, primarily digital and affiliate marketing business, where we saw pretty significant rebound as much as 75% up in January versus December. I think but your best indication for the growth I think is our guidance, which is 15%, 15% in that quarter.

Okay, great. So then maybe just a second question and I’ll pass it on, on the guidance for 2017. You mentioned that you guys outgrew the market by two times last year. So wondering, as you think about the 2017 outlook here for another plus 15% growth, what are – maybe two-part question here. What are the growth assumptions you have for California and Arizona specifically? Do you have some challenges there? And then also, what sort of industry growth rate do you think we’ll see in 2017? Maybe just another way of asking, are you assuming some amount of share gain embedded in that view of up 15% on the year? Thanks.

Thanks, Brian. Thank you for noticing the share gains. We are pleased. We think we really delivered this year in terms of breaking out and proving that our business model is the most long-term sustainable. In terms of the year’s growth, I imagine people are asking questions, okay, you are saying 20% long-term structural growth of the market, but you are only growing 15% next year, and so fair question. And I think when we look at this market again, celebrating our first decade into it and thinking it’s a decades long business. And so what we do when we look at the growth coming up in the specific year is we really need to look bottoms up market by market. And so as we know, there are specifics at each market, what’s happening with rate cases, what’s happening with any sort of local subsidy, how – what are those local demand drivers. And so when we look out and build that bottoms up growth rate, we are getting the 15%. Now do we expect that that could be even stronger going forward and hit that 10% to 20% structural growth rate? We do, but 15% is our outlook next year. To answer your specific questions about California and Arizona. So in California, we – the forecast appears to the third-party GPM forecast and others are showing a slight growth here in California, I believe 3% growth versus 2016. We do expect that we will take share in that market. We are not expecting a huge growth rate in that market. We are expecting to take share. We are expecting to see strong growth in the Northeast due to some specified acquisition channels we have and some growth in those that we have there. And then in Arizona, I think we do – we are seeing – starting to see some pull forward of demand in that market. And so we would expect to see that through the summer period, as we reach the new change in the rate structure, but we have in our plan effectively zeroed that out after the change. And that’s not because we don’t think there’s not a viable product in Arizona post change. It’s because again, the dynamics are demand can get pulled forward when there’s this message of urgency in the market, and so we want to be cautious around that. So it’s really a pretty thoughtful bottoms up analysis, informed by many years of doing this and understanding the local market characteristics. I also would say that the growth rate – the overall market growth rate is really distorted based on a couple of the market leaders changing strategies. And so I think we just have to be really careful when we look at these short-term growth rates in California and others, when the market leader had 30% share and is changing strategy, that can distort the overall picture. So I would encourage people to actually strip that out and then you can get a better picture for what the market growth rate is.

Okay, great. No, thanks, that’s super helpful. Lynn, just maybe a clarifying question on Arizona. It sounds like you are expecting a pull forward here in the beginning part of the year and then you are assuming it flat lines after that, or that it goes to zero after that? And then for the full year, what would that imply for kind of the growth on a year-on-year basis for the full year?

Sure. No, we certainly are expecting that pull forward. And I believe that we have in the past said no market outside of Arizona has exceeded a 10%, excuse me, outside of California has exceeded a 10% share. We would expect Arizona, given that pull forward will tick above that. But in the plan, we effectively built it pretty conservatively and have it shutting down to almost nothing. So it’s not flat lining, it’s shutting down to almost nothing in that market.

Okay. Thanks a lot.

Thanks.

Thank you. And our next question comes from the line of Andrew Hughes with Credit Suisse. Your line is open. Please go ahead.

Hi, everyone. Thanks for the questions. I got one on cash and then one on tax reform. On the cash front, Bob, your comments about cash balances through the year and exiting the year potentially above where you are now, just curious what the financing the mix the project level that assumes, and in particular, if there’s any additional cash equity deals you are projecting in that forecast?

Hi, it’s Ed actually. I think maybe I can – I’m going to suspect I can answer both questions for you. But I’ll answer the first one right now. We continuously evaluate our options to maintain the most appropriate capital structure and we are optimizing our financing mix as we go to achieve these objectives. And so we’re not providing guidance on the exact mix of our cash equity for 2017.

Okay, fair enough. And then on tax reform, Ed, I appreciated your comments on what you’re seeing in the tax equity market. Setting that aside, there is obviously a number of broader tax reform proposals out there. I’m curious if you guys have sort of sensitized the business model to various different plans, whether it’s a 15% rate, or a 20% rate and some of the changes with CapEx expensing and interest deductibility?

Sure. And maybe one quick comment on the cash equity question. We would expect to end the year with more net and earning assets than we start irrespective of our cash equity strategy. So I do want to clarify that. In terms of the tax rate reform, we actually don’t see a very material impact on our business. On our existing fleet, we actually expect that a reduction in the marginal income tax rate to say, 20% at January 1, 2018, that was the sensitivity we ran would provide us, at least, a $10 million benefit. But at the same time, that $10 million benefit would be approximately offset by adjustments going the other direction from systems we would expect to deploy this year. So that effect, net-net is about neutral. A decrease in the marginal income tax rate would also reduce the value of our deferred tax liabilities, which draws a one-time P&L benefit, and it would reduce our income tax provision in the future increasing net income, although those are obviously – those are non-cash effects, because we have such a significant NOL. Finally, reduction in the marginal income tax rate all the way to 20% would reduce the project value of assets developed after that change occurs. So we estimate that a reduction all the way down to 20% would reduce future project values by up to 3%. As I mentioned also in the prepared remarks, changes and uncertainties over tax rates have resulted in more tax equity investors preferring, I think the solar asset class, particularly residential floor to other asset classes and in terms of the availability of tax equity again, particularly with rising interest rates and the fact that our tax equity investors today aren’t constrained by their tax capacity, we don’t foresee headwinds in that department, either.

Great. I appreciate it. Thanks.

Thanks, Andrew.

Thank you. And our next question comes from the line of Julien Dumoulin-Smith with UBS. Your line is open. Please go ahead.

Hey, good afternoon to you all.

Good afternoon, Julien.

Good afternoon, Julien.

Hey. So quick question to kick it off on the Nat Grid deal. Can you elaborate a little bit more on sort of the longevity of the deal and how you can see this grow? I’d be curious, is this a one-off, or to the extent to which it could be continuous, how do you anticipate this scaling, both in terms of the marketing side, as well as the tax equity or the – or equity investment side? And then maybe just a broader question, also, why not take in and/or contemplate other private transactions at the same time too, given the interest at the level indicated?

Sure. So first, just to recap of the National Grid transaction, that’s a 200 megawatt transaction, which we expect is materially deployed this calendar year. In terms of our tax equity and our back-leverage, we’ve raised that independent of cash equity. So we just continued to pursue our existing strategy of minimizing costs and maximizing flexibility in those portions of the capital stack. We are, as we mentioned, continuously evaluating other options with the capital structure as to whether we would just pursue our historical strategy or augment it with current tax equity, sorry, with future cash equity transactions, but we have nothing specifically to share at this time.

Okay. But maybe can you elaborate a little bit in terms of where you see the 200 megawatts going over time? And is it something you think that could scale in future years?

So that, again, so the transaction is for this calendar year. We entered into this transaction with National Grid for a number of strategic reasons. If we were to do additional cash equity in the future, it could be with any number of parties. And so I just wouldn’t want to comment on that at this time.

Got it. Separate direction here on the cost side of the story. Can you elaborate a little bit more on the $0.15 savings and what – when will we see that start to materialize? Is that sort of an average for 2017, or could we actually see that materialize here in the first quarter versus the balance?

That number is across the year. But we will start to see benefits from module and inverter pricing coming down in Q1.

Got it. [Multiple Speakers] as well?

No, and it’s a little interactive too, because there’s some mix shift in terms of where you need rapid shut off on the inverter and high-efficiency panels. And so there is a lot of mix shift that’s kind of happening in there that’s going both directions. So it wouldn’t be totally meaningful to pull that out.

Got it. All right. Thank you.

Thank you. And our next question comes from the line of Sophia Karp with Guggenheim Financials. Your line is open. Please go ahead.

Hi, good evening. Thank you for taking my question. Just real quick on the National Grid transaction, what sort of seasonality do you expect this year in deploying the assets under this deal, because obviously, it’s a slightly different climate in Northeast from your existing maybe territories?

Yes. So thanks for asking that question. It’s a point that I want to make sure, I clarify. The transactions that we entered into with National Grid are really national in scope, except for the one co-marketing arrangement which we’re currently targeting in downstate New York. So the work that we’re doing with National Grid on grid services and then also in this partnership are national in scope. And so are more likely to follow our overall business progression than reflect any sort of seasonality.

Got it. And then on the industry consolidation, I think you mentioned that you were able to take advantage of some opportunities in some of the markets. I wonder if there’s a desire on your side guys to maybe be a little more aggressive there and go proactively after acquiring maybe smaller players or consolidate new channel partners or maybe something like that?

Yes, good question, and our general strategy is to always be on offense when everyone else is on defense. So we like the question. I think in terms of M&A, though, we – what we look at is, does somebody have a capability that we don’t have that we can benefit from? And so that’s why our acquisition history, that’s why we made the acquisition to get into the vertically integrated business when we acquired the mainstream assets and then with the lead generation business that provided a new, a differentiated lead channel for us. And I think we feel today is that we have the capabilities to succeed. We think our market share gains prove out that we have the winning business model in the industry. So if we were to do anything, it would be – it would have a very high financial threshold to it. And but we do feel that we’re well-positioned with the capabilities we have today.

Great. Thank you.

Thank you. And our next question comes from the line of Vishal Shah with Deutsche Bank. Your line is open. Please go ahead.

Hey, this is Rachel on for Vishal. Thank you for taking our question. We have two questions. The first one is just for the California market. Thank you for providing the colors before. Just for the non-metering transition to timing-of-use rate, can you give us a little bit more color on that? And the second question is, in terms of the NPV per watt and overall system cost besides the hardware cost reduction, do you guys have any other plans to drive the cost down there? Thank you.

Sure. Why don’t I – I’ll take that and if Bob wants to add any more specificity, he can chime in. So first on California and the shift to time-of-use rate structure, I want to make sure that people know the value proposition post the time-of-use change is still very strong. So from a Sunrun standpoint, we are still earning substantially the same NPVs that we were before. So there’s not a margin change to Sunrun based on the shift to time-of-use. It’s still an attractive and similarly priced margin to us. Secondly, the customer savings profile is so extremely attractive. I believe we shared numbers on the last call, but the customers are still saving well over 20% on our leases, so the savings is still there. The reason why it just gets confusing is it just adds another new training process into it. There’s noise around it. People whenever there’s change, it stalls them in making a decision, so it’s really more of a transitional thing. There’s nothing that we’re worried about in terms of the new structural setup. So, in fact, you’ve seen in a market like a San Diego Gas and Electric that hit the cap first, did see during that transition period the megawatt reservations go down, but then they climbed up in the subsequent month. So we think that will all work its way through the system. And then on the cost side, the guidance Bob offered was that, we do expect a sort of 15% year increase in our NPVs, so that would be our margins, and that would be primarily – we do expect project value to come down a bit, so there are pretty significant cost reductions in that forecast. So, yes, in addition to what we’ll see on the material side, we will continue to see scale efficiencies in actions that we’re taking to be very disciplined across the board.

Great. Thank you.

Thank you. And our next question comes from the line of Krish Sankar with Bank of America. Your line is open. Please go ahead.

This is [indiscernible] on for Krish. Could you comment a little bit more on how you see direct sales versus leased helds trending going forward? And also, what percent of sales did you say were direct sales in the December quarter versus September?

Yes. So in the quarter, it was 13% cash and loan sales was the percentage. And that’s pretty much held and we do expect it to stay at around that rate going forward. And I will note and there is a lot of noise around this, we still believe it’s a better consumer value prop and consumers overwhelmingly prefer the loan and lease. And we’re not contorting what we offer as a product based on our capital needs. And so I do believe that we have the purest view of what does a customer want, because we’re customer-first oriented. And so it’s also to us no surprise that we grew at double the market share of the rest of the market, despite people arguing that the future is sort of the loans and leases. So the – finally, the last point I would make is, I think that, what we call the third-party under the service model will continue to maybe even increase in share over time as storage becomes a bigger piece of the equation. We are, as we mentioned, over 1,000 orders there, almost all of those are through a lease or PPA structure. And as you start to work these new business models with a grid, for example, about how do you monetize these assets and aggregate them, it will increasingly be a scale advantage to the larger players who are owning and operating the assets.

Got it. Thanks.

Thank you.

Thank you. And our next question comes from the line of Joseph Osha with JMP Group. Your line is open. Please go ahead.

Hello there.

Hi.

Hi. Yes, two questions. First, to return to the net metering question for a little bit, I’m wondering if you were able to give any color on how things have progressed at DG&E, given the relatively recent timing of that cap? And then the second question would be, you look over the past couple of years and there has been this Q1 to Q2 pretty dramatic step function which I’ve kind of got to build in in order to get 325 for the whole year for you guys. And so is it fair to assume that you are still kind of looking for that same dramatic Q1 to Q2 seasonality this year as part of getting to that 325? Thank you.

Sure. So thank you for the question. On the first, in PG&E, we are still selling through the TOU there. So I don’t think anything of note to really report. As we mentioned, the value prop to the consumer still remains very strong and we think we are taking share in that market. In terms of your second question, which was around Q2 growth rate, right. The shape of the year has always had a larger back-half of the year shape. And that’s because there are more sales in the summer when people see the high bills. There’s like longer hours to work and install. And so for all the reasons, there’s a little bit of seasonality in the business. But if you just look at our growth forecast of 15% growth, we are hitting 15% growth in Q1. So we are not coming up with, from behind when we think about the year.

Okay. May I ask one follow-up and then I’ll go away?. If you look at GTM, they’ve got 12% for residential this year, which builds in a flat California seems a little aggressive to me. So I guess when you are looking at things, are you thinking that 15% is just a bit above the market, or do your own – does your own take on the market maybe perhaps have a slightly more conservative assumption and assume that you continue to outgrow the market by a more substantial margin? I’m just kind of looking for your reaction to that sort of 12% market growth number.

Yes. I think it seems like a sensible number. I imagine they did much of the same work that we did, which was look really look bottoms up, and that’s where we’re coming to the 15% growth and why we think we’ll take share gains with that. So, it feels sensible to me.

Okay. Thank you so much.

And again, we have to think about how the SolarCity numbers are distorting it too. So if you – you would want to look with them and without them, just given the strategy change that has occurred over there, because it materially moves the numbers.

That is true. Thank you very much.

Yes. Okay. Thank you.

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

Hi. This is Shivani Sood on for Colin Rusch. Would you mind just discussing pricing dynamics in the context of the shifting net metering rules?

So good afternoon. So first, I should mention, we haven’t had shifting net metering rules really in any of our markets other than in California, where the change in customer savings was not significant, less than 5%, and where the savings after that effect are still approaching 30%, in that approximate range. And so there has been no change really in our lease pricing as a result of changes in net metering policy in California. Is that the question? Am I answering your question?

Exactly, yes. And then just sort of what change are you guys seeing on installation time? And thanks so much for taking our questions.

Yes. I mean, throughout the year, we saw pretty good improvements on that. And so we are at about 60 days on our own Sunrun managed business and through our channel partners probably a little bit longer on that. We think that’s a good amount of time. It balances backlog with what the consumer expects.

Thanks so much.

Okay.

Thank you. And our next question comes from the line of Jon Windham with Barclays. Your line is open. Please go ahead.

Hi. Good evening, everyone. Thanks for taking questions. Maybe we covered a lot of ground already, we could talk about BrightBox and the 1,000 orders for storage. Can you give me a sense of, it’s 1,000 orders over the first quarter, or over the whole year? How should we think of it in terms of proportion of your customers that are doing storage going forward?

Yes, sure. So we launched it about a year ago, but the momentum – the bulk of it came at this back-half and in this Q4 time period. So we are pleased about that momentum. In terms of the forecast for 2017, it’s still low single-digit for us in the forecast. So it’s not – it doesn’t represent a huge amount of the megawatts. I think there will be, while it will be a tremendous growth market, there are – there is a learning curve. And so there are short-term things we work through, building departments have to get used to it. There’s – it’s new installation techniques to train your workforce. So there are real kind of physical learning curve constraints that you see. But – so that’s why we have it at about 5% of the volumes, or less, in the year. And but we believe and are very confident that that growth rate is going to be substantial going forward.

Okay, perfect. Thanks. Maybe if I can sneak in one more, it’s been talked around a little bit already. But now obviously, the market share leader historically, in Tesla’s fourth quarter results, they specifically mentioned scaling back marketing spend, which you can sort of think of that two ways. One is a negative that there’s just less money being spent to make customers aware of the product offering in general for the whole category. But two, obviously a huge chance for you guys to differentiate yourself and take even more share. I’m just trying to get a handle on how I should think about your marketing spend this year? Will you try to be aggressive into the void, or should we think of it as generally flat year-on-year?

Yes, it’s an important and good question and something that we debate. I do think that part of the California softening is colored by lack of, lower spend and people being more disciplined in terms of that demand creation. So I think that’s real. And as we’ve always said in general, each of us have lifted each other’s business. But on balance, we will take the leadership position, that’s for sure. And we have always been NPV oriented. And so it’s – for us, it’s very market by market decision, which channels hit those thresholds, let’s invest more in those channels. So we’re not – we’re more – we’re not going to be forward leaning and hoping, spending and hoping it comes. We’re pretty experienced in knowing which channels work. We’re going to invest more in the ones that we think are working. But you’re not going to see us step up and spend quite a bit and hope the share gains follow.

Great. Thanks, Lynn.

Sure.

Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to Lynn Jurich for any closing remarks.

That’s it, guys. Thanks for all the great questions and the support as always, and we look forward to being in touch. Back to work for us. Take care.

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