Sunrun Inc. (RUN) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q1 2018 Sunrun Inc. Earnings Conference Call. At this time all our participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference over to your host Mr. Patrick Jobin Vice President of Investor Relations. Sir, you may begin.

Thank you, operator and thank you to those on the call for joining us today. Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on the factors currently known to us, actual results may differ materially and adversely. Please refer to the company’s filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note these statements are being made as of today and we disclaim any obligation to update or revise them. On the call today are Lynn Jurich, Sunrun’s Co-Founder and CEO; Bob Komin, Sunrun’s CFO; and Ed Fenster, Sunrun’s Co-Founder and Executive Chairman. The presentation today will use slides, which are available on our website at investors.sunrun.com. And now, let me turn the call over to Lynn.

Thanks, Patrick. We are pleased to share with you Sunrun’s first quarter financial and operating results along with progress against our strategic priorities. People willing to freedom to take control of their energy and improve their family's lives. We are proud to have delivered reliable clean energy and more than $200 million in savings to our nearly 200,000 customers. We put our customers first, helping them worrying about solar, find solutions they want and pave the way for a meaningful relationship with home energy for decades. In the first quarter we added 9400 customers representing 68 megawatts of deployment and generated 65 million of net present value, up 16% year-over-year. We created NPV per watt of a $1.10 or over $800,000 per customer. The last few quarters have solidified Sunrun's leadership position in the industry. Our massive market opportunity continues to expand to support strong growth and increasing customer value. We are entering new geographies and BrightBox home solar and battery service increases our value proposition by providing stored energy to our customers to reduce cost and service reliability as well as two utilities during peak times when store energy is a cost-effective way to provide resiliency to the grid. We are reiterating our full year guidance of 15% growth in deployments and growth in cash generation above this rate. Our annual growth and continued innovation will be achieved while keeping NPV targets above $1 for watt. Technology and cost improvements allows us to serve more customers and even more sales. Last month we launched in Illinois proving that solar service isn’t just for coastal cities. We are growing in the heartland of America. This marks our eight-market entry since early last year. Also, just a few weeks ago we received the green light from regulators in Florida to offer a solar lease. As many other markets have demonstrated allowing third party ownership for solar service makes solar accessible to millions of additional home owners. Today the California energy commission unanimously approved the mandate for all new homes to have solar starting in 2020. California builds over 100,000 new homes annually. For context there were approximately 124,000 new solar customers added in California in 2017. The solar as a service model is particularly well suited to this market because it can help homeowners and builders add solar for no upfront cost. Our Brightbox home solar and battery service continues to gain traction. This superior energy service has been launched in six states and customer demand continues to exceed expectations. We launched Brightbox in Massachusetts less than three months ago, and already nearly 10% of the time customers we served to directly are opting to add a battery. With a low upturn cost Brightbox is a fraction of the cost of the alternative, dirty, noisy diesel generators. In California over 20% of the time our direct customers are choosing to add a Brightbox. In certain markets in southern California this rate is now above 50%. Our grid services initiatives are paving the way to deliver even more value per customer. Regulators and utilities are recognizing that home batteries are clean, quick to market, targeted and responsive and can be superior to spending on traditional infrastructure. Sunrun has created a customer base that nurtures long-term loyalty. This base along with our customer acquisition strength make us the natural partner to unlock the full value of residential fuller for these efforts. To accelerate our lease today I’m pleased to announce an expansion of our grid services partnership with National Grid. National Grid. National Grid has provided Sunrun approximately $8 million for shared and revenues that arrive from arrive from the new grid services contracts that we jointly bid prior to June 2019. National Grid's increasing investment is a signal that this market is strong and near-term opportunities await. I will now turn the call over to Bob, our CFO to review Q1 performance and discuss guidance in more details.

Thanks Lynn, in the first quarter we increased aggregate NPV by $65 million or 16% year-over-year. We also increased our cash position while adding to net earning assets our metric for value to Sunrun shareholders for systems over their remaining lives. This quarter we are including NPV, project value and creation cost by customer in addition to unit economics per watt. We believe this is also a meaningful way to express the value and cost of our decade-long customer relationships. NPV per customer was nearly $8,100 or $1.10 per watt, reflecting an improvement of over $2,000 per customer compared to the prior year. Q1 project value is approximately $33,800 per customer or $4.61 per watt. As a reminder, project value is very sensitive to modest changes in geographic channel and tax equity fund mix. We expect project value will decline slightly over time but with costs declining more, although in the short run there can be quarterly fluctuations. Turning now to creation costs on Slide 8. In Q1, total creation cost was approximately $25,700 per customer or $3.51 per watt. Similar to project value creation costs can fluctuate quarter to quarter due to changes in geographic and channel mix. Creation cost per watt were 4% higher year-over-year primarily driven by sales activity in Q1 that supports strong C2 installation growth. We expect creation cost will show modest declines for this year, even with the module tariff impact and as we continue to invest in new geographies and grid services. We also expect the adoption rate of home batteries to continue to increase, which carries a higher per watt cost, but also delivers strong NPV. 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 the cost of solar projects deployed by our channel partners as well as installation cost incurred for Sunrun built systems, improved by $0.02 year-over-year to $2.65 per watt. Installation costs for systems built by Sunrun were $1.92 per watt, reflecting $0.22 or 10% year-over-year improvement. In Q1 our sales and marketing costs were $0.75 per watt, we calculate sales and marketing unit cost based on deployed volume in the current period. The increase in sales activities this quarter will lead to a significant increase in deployment in Q2 while the majority of the selling and marketing expenses was recorded in Q1. We expect sales and marketing unit costs to decline in Q2 as deployment increase. In Q1, G&A costs were $0.30 per watt approximately flat compared to 2017. In Q1, G&A cost per watt excluded to non-recurring items totaling approximately 7 million for charges related to establishing a reserve for litigation and an impairment of solar assets that were under construction by a channel partners that ceased operations. Finally, when we calculate creation cost, we subtract a gas 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 to third-party loan. We achieved platform services gross margin of $0.19 per watt, compared to $0.9 in Q1 2017. In the first quarter we deployed 68 MW slightly above our guidance of 67 MW, while we don’t manage the business for a particular mix between channel partner and direct, our direct business is in the platform behind the Comcast partnership volume ramp and where we have focused our initial Brightbox sales and installation efforts and is growing faster than our overall growth rate. Our cash and third-party loan mix was 13% in Q1, in line with recent levels and consistent with our outlook of low to mid-teens. Turning now to our balance sheet. Our liquidity position remains strong. We ended Q1 with 243 million in total cash, a slight increase from last quarter. We continue to estimate our cash generation will grow faster than our deployments in 2018. In 2017, we generated $43 million in cash on an adjusted basis. As Ed will describe later on the call we're working to optimize our existing project debt and expect our cash generation to accelerate as the year progresses. We define cash generation as the change in our total cash less the change in recourse debt. Also, please note that our cash generation outlook excludes any strategic opportunities or accelerated market entries beyond our current plan. Ed will discuss our capital structure strategy in more detail later on this call. This quarter, we adopted new accounting standards for revenue recognition and lease accounting, which also required us to recast prior reported GAAP financial results to conform with these new standards. While the standards are mandatory beginning next year, we chose to implement both this year to limit the amount of change to our reported financials. The changes primarily effects revenue recognition and interest expense, with no impact on cash. Our recap 2017 financials resulted in only $3 million higher revenue, which represents less than 1% impact. EPS improved by only $0.01. For a deeper discussion of these impacts, we have provided a supplemental presentation on our investor relations website. Moving onto guidance on Slide 10. We remain confident in our growth trajectory and are reiterating are guidance of 15% deployment growth for the full year. In Q2 we expect to deploy 88 MW, reflecting a 16% increase year-over-year. As I mentioned earlier, we expect to maintain our unit economics above our target of $1 per watt of NPV for the full year. Now, let me turn it over to Ed.

Thanks Bob. Today I plan to address four topics. Our general approach to generating cash flow, our interest rate strategy, our near-term capital strategy and pipeline, and finally changes during the quarter to gross and net earning assets. As Bob mentioned, we report average customer value for the quarter as project volume. We turn project value into upfront cash by raising tax equity, project debt and sometimes project equity against these newly constructed solar systems. Tax equity primarily monetizes investment tax credit. Project debt and project equity monetize recurring cash flows. When the sum of customers upfront payments, rebates and these project finance items exceeds our overall cash expenditures we generate cash. Net earning assets represents the overall estimate of the value expected to be received by Sunrun shareholders after servicing this project level capital. As shown on Slide 11, when we employ a tax equity and project debt alone, we realize upfront roughly 90% of contracted project value, when we add project equity we realize 95% to 100%. These numbers remain stable over the last year despite an increase in long-term interest rates. This is because the strong performance of residential solar asset continues to deepen investor conviction in the high quality, lowering the spreads to US treasuries that capital providers require. As such overall capital costs are flat to improving slightly. So far this year, we've amended three projects debt facilities, to lower debt cost, increase loan to value extend maturities and/or increased capital commitments. In one instance, we lowered the interest rate and increased the loan to value, resulting in both more proceeds upfront and more cash flow after debt service over time. Despite these early accomplishments we are hopeful we can do better yet in the second half of the year when we expect to pivot on the commercial bank market to public debt markets. In the past we have financed our assets principally with callable bank debt in anticipation that capital costs would decline. They have and these call options are now valuable. We currently have about $1 billion in callable debt that are over 2018 and 2019 could see a reduction in cost of between 15 and 100 basis points overall. We’re taking early steps to approach the public debt markets in a scalable fashion. For instance, in Q2, we closed an insurance policy as is customary in asset-backed securities transactions to ensure without deductible the tax bases in most all of our existing assets, as well as those we expect to place in service over the coming several years. We believe we are well-positioned related to interest rates. Although long-term interest rates have increased since the presidential election the market no longer expects that trend to continue. The forward interest rate curve indicates that long-term interest rates that matter to our business will rise less than 10 basis points over the next three years. Meanwhile, as I mentioned earlier the spreads we pay to treasuries are declining. If contrary to current market expectations long-term interest rates were to rise meaningfully we note that there is a very strong historical correlation between growth in residential, retail electric rates and interest rates. This correlation exists because most of the cost of residential electricity is the amortizing capital cost of transmission and distribution rather than energy generation and regulators customarily pass through to customers changes in utility capital cost. Increasing retail electric rates will allow us to rise customer pricing. As to our existing assets we typically lock in interest rate using 18 to 20 years swaps. We've also used fixed rate debt. Our swap provides 18 to 20 years of interest rate protection even when individual credit facilities mature earlier, more than 80% of our expected debt service over the next 20 years is subject to swaps or fixed rate loans. Switching gears to our upcoming capital strategy. We believe we will achieve the best possible execution by sequencing our transactions first in the public senior debt market. Next is applicable in the subordinated debt market. And finally, to the extent desired in the project equity market. As such we wouldn't expect to execute a project equity transaction any earlier than Q4 of this year. This may concentrate cash generation in the fourth quarter of the year. We still don’t expect to refinance into the public markets any seasoned assets, meaning those operating for at least 5 years, and so early 2019. Our capital commitments more than support our 2018 growth plans and we have tax equity capacity into 2019 and project debt capacity into Q4 of this year. We have now closed or signed term sheets for three tax equity financing since the new year at terms consistent with our previously shared expectations. Finally, I return to our installed asset base as shown on Slide 12. Net earning assets was 9% from Q4, to $1.3 billion, reflecting a 20% year-over-year increase. Last quarter I mentioned that the timing of cash received on tax and private equity financings impacted net earning assets. as those timing issues have not resolved but similar quarter to quarter variations may occur in the future. With that I’ll turn the call back over to Lynn.

Thanks Ed. Let's open up the line for questions.

[Operator Instructions] Our first question comes from Michael Weinstein of Credit Suisse. Your line is open.

Could you quantify a little bit better the opportunity in California from the new rules that are in effect like what portion of your business is in California, what's your expectations for increase in volumes at that point and how it will affect the business as a whole?

We are thrilled about the results. I put a little context into the script just from a market level the amount of new solar homes that were installed last year bought the new home and retrofit, it was just over 100,000 and there were just over 100,000 new home permits. So that’s a little over last year but its roughly doubling. So, it’s a huge vote confidence for the market I think. Strategically it also is really important because it's showing that California is serious about home solar and batteries and what I can do to build a cleaner more cost-effective customer centric system generally. So that’s a huge point there. The other reason Sunrun is particularly well-positioned in this market is because the new home market works very well for the solar as a service or solar leasing business model. One of the hesitation for builders or consumers on new homes in the past has been, if I have to add another 10,000 or so to the house that conflicts with my new kitchen that I want. And so, with the solar as a service model neither the home builder nor the buyer have to spend any amount of money upfront to get the solar and the rates are cheaper than what the utility offers. So, there is really no compromise it is just a better service. So, I think there has been some discussion recently about the share of loan versus lease in California and I do think that this could be something where the share of the service model increases as part of the market generally. The other interesting thing about the mandate is that it does also offer some compliance credit for storage, again, we’re seeing in California already with the kind of use rates that consumers are very interested in adopting storage. So, as I said in the prepared comments in many places in Southern California it's already more than 50% of people getting for adding a battery. And so similarly, I think this market will be an attractive market to help accelerate those efforts. And then finally California is really leading the way in terms of the grid services opportunities and we were excited to announce the National Grid partnerships today where that partnership they invested $8 million and that's to get a return on contract we bid on over the next year. So that means that the vote of confidence that there is near-term opportunity, a lot of those are in California for aggregating the battery and sign the services to the utility. So, this new home market is going to be another great market and help to accelerate those currency service efforts, its early our share -- the answer to your question are sharing we don't break out specific state-by-state -- I think if you look at the overall market California is somewhere around 40ish percent of the market, we are somewhere in that zone. But I think this is very encouraging and it's just one of many different markets that open up for us this quarter and over the last year.

And can you disclose what percentage of the grid services partnership was sold to National Grid for the earnings?

No, it's structured as just a share of the revenues, for any contracts that are signed over the next year, so it's not any sort of ownership or long-term ownership or formal JV or anything like that.

Is it a percent, can you talk about the percent of revenues there being?

That’s not.

Got you and just one last question, if a homebuilder agrees to do a deal with Sunrun, who is actually signing the lease at the time of the building the house.

So, I believe that the homeowner may take the lease for a portion of the time but it's really the home buyer. I mean the other thing I will -- the other that’s important to note about this too is, just the normalization of solar will be a huge proof point for the market, so the fact that every home has this, this is just going to help resale value, it's going to help awareness across the whole business. So, it will be a big lift in term of overall customer acquisition.

Our next question comes Joe Osha of JMP Securities. Your line is open.

Two questions. First, Ed when you talk about going to the public markets on debt for assets is the LTV going to go up as part of that transaction or are you just dropping the cost of debt, I just want to make sure I understand what you are discussing there.

Great question Joe, so we’re seeing the public markets mature as relates to newly placed in service assets. So, where the issues around tax equity and leasing previously caused a more significant change in interest rates or advance rates. We are seeing that compress and in fact in many respects the public debt markets are now at comparable LTV and lower interest cost. So, our expectation is at or even near current market data points, we are expecting to be moving heavily towards public debt security at this point.

So, it's really more about newly placed in service assets as opposed to much refinancing?

So, the market is strong for both. The point I was just trying to make in the call is just to reiterate that the opportunities that we have refinancing are seasoned assets, for instance the post with assets that you're asking about we expect to be attacking that in 2019.

And then a question for Lynn following on the previous questions. If I’m a homeowner or a homebuyer am I potentially going to have the option of either buying this system outright as part of the house or signing a lease? Or am I just going to be -- if the home builder has decided that the lease is that what I get? I’m just curious about how much optionality homebuyers are going to have?

It's done both ways today, and so it will be really builder by builder specific. It is my understanding that the majority of the new homes market today is done through the third party owned model. So, I think that recent statistics I have seen quoted in the press are that last year about 15,000 new homes had solar and again I believe the majority of those were done through the third-party home model.

Our next question comes from Sophie Karp of Guggenheim Securities. Your line is open.

Two questions, one is a follow up on the new rule in California. I’m wondering is that an option for new homebuyers to opt out of solar usage or purchases or is that sort of imposed on them?

No, I believe it’s a mandate that the home has to have solar. I mean I think that technically I think it's about how much emission the home creates so it's possible that there are alternatives like geothermal or residential wind or other kind of more niche offerings that has a practical matter most believe that this is mandated so almost every new home will have solar on it.

And then again in California, a couple of your competitors who have reported so far renew in their 4% California and maybe trying to refocus more on the DG and residential and another competitor seems to have aggressively moved in their salesforce into the state. Are you seeing the competition getting more aggressive? And so even into the costs or what is it true like on the ground?

Yes, I think it's the story as to industry is returning to growth, so it's fantastic to see that, as we mention often we are still underpenetrated and more awareness generally helps all companies. So, we are encouraging. We think that the renewed focus on DG and their focus in California is really a testament that the consumer interest is there and the demand is there, so we're excited about it.

But you’re not seeing any pressure from the acquisition cost so far from this dynamic, so the market is big enough for everybody?

Absolutely, if you just to look at the project value that we recorded in the period was very strong. That tends to be a reflection of what the end consumer pricing looks like and as Bob discussed the acquisition cost, was right on it, it with a little higher this quarter because the denominator is smaller given at that deployments are seasonally slower in Q1 and we have really strong growth coming in Q2 but acquisition costs are staying fairly consistent on a like for like basis. So, we’re not seeing that and again I do believe that more advertising, more consumer awareness in the category, generally on that stage of the industry and for a while to go will lower everyone's acquisition cost.

One last one if I may, as you have more and more batteries than BrightBox attachment rate, as pointed out that increases the cost for what basis likely, so how should we think about this increase maybe, what does it cost for a system without a BrightBox versus a system with a BrightBox on a per watt basis? What's the differential there for our modeling purposes.

For your modeling purpose, I think that the high guideline we have given you still hold again, across the nationwide portfolio, the BrightBox penetration is not a hugely significant number for the year. So, the guidance again and around project value slightly declining through the year on cost, slightly declining through the year with a lot of that coming out of the installation. Those are all operating leverage and efficiencies we’re going to see offset by some of this cost increase on the battery but those patterns are generally going to hold and that dollar plus of NPV will hold as well. Again, just to repeat that slight declines in the project value, slight declines in the creation cost back and the dollar plus.

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

Did I miss the bookings numbers somewhere someplace and if you’re not disclosing them anymore could you walk us through why not and give us some metrics around close rates and what's going on with the sales team?

Hi this is Bob. So, we have decided to stop providing the bookings number because it basically was converging to the installation number as we been able to collapse the time from NPP to install, so we didn't think that it was a good leading indicator and was not really providing additional information. As far as close rates and things like that. That's not something that that we've been disclosing.

And then the Q2 guidance gives you an indication of where we’re going to end up.

Okay and then the sales and marketing expenses is growing a couple of quarter around here and I know that you guys have a very tight grip on your spending and what the impact can be. When you move into new markets are deployed additional resources are you seeing three months, six months, kind nine months impacts and how should we think the cadence of that?

The sales and marketing costs are when we look like Lynn said, when we look at kind of same-store, same channel performance we are actually seeing that the tax, when we look at it over time and when the deployment actually happen and compare the cost to that and then the volume that’s related to that we are actually seeing that they are consistent for our own Sunrun managed direct kind of sales channel. We are actually seeing them improve slightly. So, I think that's one thing to consider. When we report the total sales and marketing costs for the firm we describe that, it's sensitive to channel mix, so because of our multichannel strategy when we report overall cost it's a blend of what we actually sell and deploy versus what we do through channel partners. And that actually can have an effect because we mix more towards Sunrun, the channel partner costs for systems that we purchase, include selling and marketing costs. So, as we mix and we suggested in my comments that we are growing faster than the Sunrun direct piece is growing faster as we mix in that direction that makes sales and marketing costs blended a little bit higher.

Our next question comes from Brian Lee of Goldman Sachs. Your line is open.

A lot of focus on California with the ruling being fresh year but just maybe you could refocus on Florida for a moment, because it seems like you can move the needle faster for you guys. Maybe some color on that market. How big an opportunity you think it could be? How quickly it can ramp? And then maybe what has to happen in your view for it to drive upside to your volume guidance for this year that’s going to be the scenario where that plays out?

So, the deployment guidance for the year does not contemplate big contribution from Florida. So, as you have seen we will be active there soon and the third party owned model approved. We are optimistic and have seen in other markets that we entered party owned becomes available. It does unlock growth but we do believe that it's premature to bake that into the plan that certainly wasn’t in the initial plan. So we think about this again as helping set the stage for this long term and it’s a growth rate of 15% 20% that we are targeting over the next decade. But I think it takes a little while to get these markets up and running. We haven’t officially launched the product yet in Florida so it's not anticipated to be a huge contributor that's there.

Second question just on grid services, the national grid investment can you help us understand that a little bit better. So is that in the cash flows for Q1? And then how is it being structured? Is this potentially a recurring investment? And does that count toward the -- does the 8 million toward your cash flow target for the year?

Good question, so one, it is not in the -- it's just closed today, so we announced it today, so it's not in Q1 it’s a Q2, it’s a Q2 event. The way that it is -- because it's relatively small all things considered we have not disclosed the specifics of it. But what it does is based on this 8 million and any of these grid services contract that we bid over the next year so it technically end of June 2019 and there is a revenue share around that. And it ends at that period. So thats how its currently contemplated and it's really an expansion of what we have been doing and a testament that we have done a bunch of work on this over the last year together to size the market and the opportunity and as a vote of confidence out that the market's real and there are some opportunity over the next year. In terms of how it effects the financial profile for the year, the 8 million funds the grid services business that we are building out, so there is a lot of cost in our creation cost right now for the goods services. So yes the 8 million is in the cash flow guidance but technically I guess but we also are spending on R&D to ramp that business amount in the creation cost outlook.

Okay and there is no contingency on the investment where let’s say over the 12 months through June 2019, you bid on grid services opportunity, you don’t win anything, there is zero revenue share that we had does anything happen to the investment that they have made, I guess how is it being carried on the balance sheet?

Its Ed here, what we do is a very unlikely scenario that there are no grid service contracts. One, we would not have to refund the amount to national grid, in fact part of the reason we’re not disclosing the shares, the better we do, the smaller there share is so its variable. In terms of the accounting for it, we’re still finalizing that. I suspect it won't be in very good revenue but we’re talking we can adjust that later next quarter.

Okay and then maybe last one for me, I will pass it on again on grid services bigger picture here. There has been a push publicly from some of the inverter companies and battery companies to kind of be the aggregator and offer these platforms, so curious how you’re think about the ecosystem. I know it's early days but what your view is in terms of how it's going to involve, why Sunrun or the servicing entity would be the right one to leave good services versus others in the supply chain that seem to be targeting as an opportunity as well. Thank you.

Sure great question, it's all about the customers relationship and the customers acquisition capabilities and that there are customers and I think that's also why Sunrun has a strong position vis-à-vis the utilities in addition to others supply chain is that, for someone to use their own personal real estate and have somebody part of their assets. They have to trust you, you have the long-term relationship with the customers and that’s what we are building, we are investing in that will be a very strong and durable competitive advantage for us we believe over the year.

Thank you. Our next question comes from Philip Shen of Roth Capital Partners. Your line is now open.

The first one going to guidance with Q1 results and your Q2 guide, this is just back half grew 23% year-over-year. Can you just provide us some additional color as to where you see the strength coming from. I know you talked during the last call but now that we’re close to the back half give us a feel for a number of geographies, but if you can give some details around the deployment growth there. That would be great. Thanks.

Sure, absolutely we are seeing strong growth across the board really, our longer-term markets of California and the northeast are showing very strong growth. We also entered seven new markets last year, as we described including big markets like Texas and Florida that didn’t contribute significantly last year but are starting to be a ramped this year. Nevada also is coming back quite strong so we have that one brief window in Nevada where metering wasn’t offered and that market is coming back strong. Arizona as we described the last call, part of the Q1 results was due to Arizona being pulled forward into last year but that market is coming back as the pipeline rebuilds. And in Illinois had a very successful launch last March. So we are really seeing a very nicely distributed across the whole country and good contributions from all the foundational work we have been through and entering now eight new markets over the last year and a half.

Just one, might be more for Ed. As it relates to AVS market its becoming more mature, spreads are coming down. There may be a chance in addition to refinancing assets on your balance sheet that you might be able to do this before the flip. I think last quarter you guys talked about potentially giving 200 million of ABS post flip. Can you give us an update on whether that has changed at all and then also if there is an anticipation or expectation that you might do preflip assets with ABS. some color on that would be great.

Great question. And what I was hinting at in the prepared remarks is current market condition hold we could potentially term out a refinance almost all of our existing assets into the ABS or other public debt markets. The current callable debt balance is about $1 billion that is mostly all preflipped assets at this point. So that is likely to be a 2018 and 2019 project and with the significant portion in 2019. But at this point given current market pricing that would be the base case.

Digging a little bit deeper there Ed. I think you said in your remarks that could be a 50 to 100 basis points improvements, so it's kind of back to the outlook what kind of interest rate or interest expense improvement could we actually see as a result of refinancing potentially that $1 billion.

So 100 basis points on a $1 billion would be $10 million a year as a rule of thumb. And then obviously that would amortized out over the 20 year period. One thing I should caution obviously is if we simply replace a credit facility that doesn't create to your point immediate cash, that would create cash obviously over the life of the 20 year assets unless of course replace project equity against that asset which will then pull forward that interest cost savings.

So thinking about 10 million rest about over 20 year period and then some of the cash that you just mentioned as well.

The 10 million was at a 100 basis points. So as we said 50 to 100 basis points, so I was just trying to use the round numbers and that’s per year.

Per year. And so maybe just another way to think about for folks so that we have been fortunate that there are a lot of the people paying attention to us, which is exciting and we still believe that in terms of modeling and thinking about the cash flow generation. So in the slide that we offer we still believe that the leverage with the tax equity and debt we are getting upfront 90% of the contracted value and then with project equity we get that up to 100. So that is still -- you know the strategy is to employ a mix of that and one of things we’re communicating is that's holding, many people ask questions to us about the interest rate environment and we’re actually seeing improvement in the interest rate environment as articulated and we’re also seeing this whole new asset class become available earlier which is the public debt market because its matured, because we have things like the insurance policy that we bought. So it gives us more flexibility is what we’re saying and then I also wanted to be clear to that the refinancing of the season assets that Joe asked about as well. We still anticipate that that will happen in Q19, so it's not -- our not plan is not to generate the cash flow guidance by refinancing all of our assets this year, our plan is to generate it by operating well the assets that we’re developing in period but we have a lot of optionality available to us.

Certainly seems like it and one last question about this topic. If call -- about 1 billion can you give us a sense of what the first tranche might be, what kind of timing could we see something this quarter or next quarter, some kind of sense of magnitude of time and timing would be great. Thank you.

Fair question, so yes, so as I said, I think we’re looking to sequence the activities first in the senior market then potentially in a subordinated market with potentially project equity thereafter. You know I made the comment that the project, if we play project equity, it likely wouldn't be before Q4. So I would assume that would -- they would therefore probably you more likely see these sorts of transactions happening in the second half of the year.

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

I wanted to come back to a couple of things that's mentioned already. First on the latest developments in California. Can you help us understand a little bit of the market opportunity. I know you mentioned the 15,000 homes metric earlier and perhaps some opting to choose the third party option, but how do you think about entering the remainder there. Because I would imagine that to certain extent you would be dealing more with the home developers as the market. Perhaps maybe want to asking is like what’s the go to market strategy on tapping into that new kind of customer counterparty if you will.

So great question you’re exactly right. So again just to size a new home permits we are about to several 100,000 last year, so that gives you a sense for where this is going to go. And you’re right it’s a different customer base, the customer base is the homebuilder and we already -- its not a huge peak of our business, so we already sell to homebuilders have those relationship, have the business fast, have the contract appropriate for that channel and so we’re well positioned for it, it hasn’t been a huge focus area because we have pursued other what we felt were more attractive markets and lines but with this new news its certainly something that we are well positioned to take advantage of. So you are correct and we are well positioned we believe.

And just to clarify that do you have any kind of exclusivity deals with any of them as it goes already and/or to the extent which you are engaging with them would this be -- if you think about it like as a business segment would this be under like a services element as you think about it?

I think you wouldn’t see -- I don’t think you would see it play out as a term segment because the product will look fairly similar to our current PPAs. It would be -- the way it would reflect in the financials it certainly we believe it’s a lower cost way to acquire customers so that’s attractive. Likely the PPA rates we are able to offer to homeowners because of that lower cost will be a bit lower so you will probably see a little bit lower project value, a little bit lower type of cost. Again we were pretty committed to our strategy of pricing the dollar of NPV. We see no reason why we can't hold that and that type of margin in this business line. But we wouldn’t anticipate that it looks much different or would be carved out in any way. And again, we are going to ramp this, this is 2020. So it certainly billers are going to go ahead of it and there will be market opportunities now, but there is a couple of years before it, goes into the bank. In terms of the exclusive relationship, that’s not something we disclose but we have strong interesting relationships.

I’m not sure who to direct this one to, I think in the comments you guys alluded to 1Q versus 2Q discrepancy on the marketing costs you talked about the customer acquisition. How much of an corresponding offset can we see in 2Q given sort of the timing, what seems like a timing related issues here at this quarter on cost structure?

So we do think with the return to kind of more normalized volumes like we've had in the recent past that the sales and marketing costs will come down pretty significantly from where they were in Q1.

And then maybe just finally, if I could quickly, how do you feel about the full-year annualized cash target? If I were to think about you have talked about growth at or above the deployment trends and last year you did about 40 million in cash. So if you were to think about that that would imply about 50 million give or take in cash flow generation this year. How are you tracking against that? I know you mentioned interest savings here, how much of a component would that be as well vis-à-vis your own thinking and planning.

I think I’ll talk about operating and Ed can chime in on the finance there. You know we are talking well to that. The best metric to see how much value we are creating how much margins we are creating in our development efforts really is that NPV target so you see the NPV targets are strong and holding and that’s plus operating leverage that we are going to see and the volume growth we are going to see. It's just its going to drive. And growth rate in cash above that 15% growth rate so above the 50 that we quote. And then there is financing opportunity on top of that.

And to be clear that is the interest savings what we were talking about earlier would not be material this year for two reasons. One the initial transaction would occur in the second half of the year and then two, a very, very substantial portion of the overall refinancing activities, certainly well more than half, substantially more than half would occur in 2019, so that's something that will definitely accrue to Sunrun and common shareholders over time but those savings and interest expense. I wouldn't see as a material driver to the ’18 cash flow.

I want to make sure that this is an important point, we’re thrilled with the cash generation in the business and the potential we make sure that we’re been clear on it. We continue to estimate that the cash generation is going to grow faster than the deployments in the year and that’s not going to be due to any sort of part of one time financing heroics, this is due to strong operating and growth in the business and the project finance market is strong as it has been pretty consistently for 11 years. So we do expect that. As Ed mentioned on the call because of the order of operations of how we’re attacking the capital structure, a lot of that cash flow generation is going to come in that end of the year, towards the end of year, because we’re going to place the senior debt first and then pursue the private equity type structure and generates more upfront cash. So the shape of it may have more in the end of the year but we are feeling positive that we will hit that. Of course the Q4 has a two great effects that the deployment, we’re getting real operating leverage because we’re growing well and deployments should be significantly higher in Q4 than they are today, plus the time of it.

Got it excellent, it seems like you’re been well on your way in 2019, against that similar growth or cash growth target just because of the financing tailwind, is that kind fair? I know obviously it's not annualizing at that full 10 million in '19 itself, but there is some kind of tailwind.

Well, I mean yes that helps. But we’re also having a business that's structurally cash flow positive and growing at a nice rate. And again we’re expecting to grow 15% this year, given where the first quarter ended up you can see that growth rate is higher even, closure to 20 and we see no reason why that growth can’t be sustain, we’re setting the foundation for it with our market expansion and service offering expansions. So that’s the big story and then refinancing is on top of it.

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

Well that said thanks for the great question and we look forward to seeing you guys next quarter.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.