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,…

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…

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…

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…

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.